American Express 2007 Annual Report Download - page 32

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[ 30 ]
2007 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
CRITICAL ACCOUNTING POLICIES
The Company’s significant accounting policies are described in Note 1 to the Consolidated Financial Statements. The following
chart provides information about four critical accounting policies that are important to the Consolidated Financial Statements and
that require significant management assumptions and judgments.
RESERVES FOR CARDMEMBER LOSSES
Description Assumptions/Approach Used Effect if Actual Results Differ
from Assumptions
Reserves for losses relating to cardmember
loans and receivables represent management’s
best estimate of the losses inherent in the
Company’s outstanding portfolio of loans
and receivables.
Reserves for these losses are primarily based
upon models that analyze specific portfolio
statistics, including average write-off rates
for various stages of receivable aging (i.e.,
current, 30 days, 60 days, 90 days) over a
24-month period and average bankruptcy
and recovery rates. Cardmember loans
and receivables are generally written off
when they are past due 180 and 360 days,
respectively. Also, these reserves reflect
management’s judgment regarding overall
adequacy. Management considers whether
to adjust reserves that are calculated by
the analytic models based on other factors,
such as the level of coverage of past-due
accounts, as well as leading economic and
market indicators, such as the unemployment
rate, the consumer confidence index, the
purchasing manager’s index, bankruptcy
filings, concentration of credit risk based on
tenure, industry or geographic regions, and
the legal and regulatory environment.
To the extent historical credit experience
updated for emerging market trends in credit
are not indicative of future performance,
actual losses could differ significantly from
management’s judgments and expectations,
resulting in either higher or lower future
provisions for losses, as applicable.
As of December 31, 2007, an increase
in write-offs equivalent to 20 basis points of
cardmember loan and receivable balances at
such date would increase the provision for
cardmember losses by approximately $189
million. This sensitivity analysis does not
represent management’s expectations of the
deterioration in write-offs but is provided
as a hypothetical scenario to assess the
sensitivity of the provision for cardmember
losses to changes in key inputs.
The process of determining the reserve
for cardmember losses requires a high degree
of judgment. It is possible that others, given
the same information, may at any point in
time reach different reasonable conclusions.
30