American Express 2007 Annual Report Download - page 35

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2007 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
INCOME TAXES
Description Assumptions/Approach Used Effect if Actual Results Differ from Assumptions
The Company is subject to the income tax
laws of the U.S., its states and municipalities
and those of the foreign jurisdictions in
which the Company operates. These tax laws
are complex, and the manner in which they
apply to the taxpayer’s facts is sometimes
open to interpretation. In establishing
a provision for income tax expense, the
Company must make judgments about the
application of these inherently complex tax
laws. The Company establishes a liability
for unrecognized tax benefits, which are the
differences between a tax position taken or
expected to be taken in a tax return and the
benefit recognized in the financial statements.
Deferred tax assets and liabilities are
determined based on the differences between
the financial statement and tax bases of
assets and liabilities using the enacted tax
rates expected to be in effect for the years in
which the differences are expected to reverse.
A valuation allowance is established when
management determines that it is more
likely than not that all or some portion of the
benefit of the deferred tax asset will not be
realized.
In establishing a liability for an unrecognized
tax benefit, assumptions may be made
in determining whether a tax position is
more likely than not to be sustained upon
examination by the taxing authority and
also in determining the ultimate amount
that is likely to be realized. A tax position is
recognized when, based on management’s
judgment regarding the application of income
tax laws, it is more likely than not that the tax
position will be sustained upon examination.
The amount of tax benefit recognized is
based on the Company’s assessment of the
most likely outcome on ultimate settlement
with the taxing authority. This measurement
is based on many factors, including whether
a tax dispute may be settled through
negotiation with the taxing authority or is
only subject to review in the courts. As new
information becomes available, the Company
evaluates its tax positions, and adjusts its
unrecognized tax benefits, as appropriate.
Since deferred taxes measure the future
tax effects of items recognized in the financial
statements, certain estimates and assumptions
are required to determine whether it is more
likely than not that all or some portion of
the benefit of a deferred tax asset will not
be realized. In making this assessment,
management analyzes and estimates the
impact of future taxable income, reversing
temporary differences and available tax
planning strategies. These assessments are
performed quarterly, taking into account any
new information.
If the tax benefit ultimately realized differs
from the amount previously recognized in
the income tax provision, the Company
recognizes an adjustment to the provision.
Should a change in facts or circumstances
lead to a change in judgment about the
ultimate realizability of a deferred tax asset,
the Company records or adjusts the related
valuation allowance in the period that the
change in facts or circumstances occurs, along
with a corresponding increase or decrease to
the income tax provision.
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