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[ 97 ]
notes to consolidated fi nancial statements
american express company
NOTE 12 CONTINGENCIES
In the ordinary course of their business, the Company
and its subsidiaries are involved in a number of legal
and arbitration proceedings. These include several
class actions involving the Company’s card businesses.
The Company believes it has meritorious defenses
to each of the actions it faces and intends to defend
them vigorously.
The Company believes that it is not a party to, nor
are any of its properties the subject of, any pending
legal, arbitration, regulatory, or tax proceedings that
would have a material adverse effect on the Company’s
consolidated financial condition, results of operations,
or liquidity. However, it is possible that the outcome of
any proceeding could have a material impact on results
of operations in the particular reporting period in which
it is resolved.
NOTE 13 FAIR VALUES OF FINANCIAL
INSTRUMENTS
The following table discloses fair value information
of the Company’s financial assets and liabilities as of
December 31:
(Billions) 2006 2005
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
Financial Assets:
Assets for which carrying
values equal or
approximate fair value $69 $69 $65 $65
Loans $50 $50 $41 $41
Financial Liabilities:
Liabilities for which
carrying values equal or
approximate fair value $67 $66 $57 $57
Long-term debt $43 $43 $31 $31
The fair values of these financial instruments are
estimates based upon market conditions and perceived
risks as of December 31, 2006 and 2005 and require
management judgment. These figures may not be
indicative of their future fair values. The fair value of the
Company, therefore, cannot be estimated by aggregating
the amounts presented. The following methods were
used to determine fair values.
Financial assets and liabilities for which carrying
values equal or approximate fair values include cash
and cash equivalents, cardmember receivables, accrued
interest, investments, customers’ deposits, Travelers
Cheques outstanding, investment certificate reserves,
short-term debt, and certain other assets and liabilities.
For these assets and liabilities, the carrying value
approximates fair value because these are short-term in
duration, variable rate in nature or recorded at fair value
on the Consolidated Balance Sheets.
INVESTMENTS
Generally, investments are carried at fair value on the
Consolidated Balance Sheets and gains and losses are
recognized in the Consolidated Statements of Income
upon disposition of the securities or when management
determines that a decline in value is other-than-
temporary. See Note 3 for carrying and fair value
information regarding investments.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are also carried at fair
value on the Consolidated Balance Sheets, with gains
and losses recognized in the Consolidated Statements
of Income or Consolidated Balance Sheets based upon
the nature of the derivative. See Note 10 for fair value
information regarding derivative financial instruments.
LOANS
For variable-rate loans that reprice within one year
and for which there has been no significant change in
counterparties’ creditworthiness, fair values approximate
carrying values. The fair values of all other loans, except
those with significant credit deterioration, are estimated
using discounted cash flow analysis, based on current
interest rates for loans with similar terms to borrowers
of similar credit quality. For loans with significant
credit deterioration, fair values are based on estimates
of future cash flows discounted at rates commensurate
with the inherent risk in the revised cash projections.
For collateral-dependent loans with significant credit
deterioration, fair values are based on estimates of
collateral values.
LONG-TERM DEBT
For variable-rate long-term debt that reprices within
one year, fair value approximates carrying value. For
other long-term debt, fair value is estimated using either
quoted market prices or discounted cash flows based on
the Company’s current borrowing rates for similar types
of borrowing.
See Note 11 for discussion of carrying and fair
value information regarding guarantees and certain off-
balance sheet items.