American Express 2007 Annual Report Download - page 76

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
reclassified to earnings upon the sale or substantial liquidation
of investments in foreign operations. Revenues and expenses
are translated at the average month-end exchange rates
during the year. Gains and losses related to non-functional
currency transactions, including non-U.S. operations where the
functional currency is the U.S. dollar, are reported net in other
revenue or other, net expense, depending on the nature of the
activity, in the Company’s Consolidated Statements of Income.
Net non-functional currency transaction gains amounted to
approximately $27 million, $11 million, and $5 million in 2007,
2006, and 2005, respectively.
AMOUNTS BASED ON ESTIMATES AND ASSUMPTIONS
Accounting estimates are an integral part of the Consolidated
Financial Statements. These estimates are based, in part, on
management’s assumptions concerning future events. Among
the more significant assumptions are those that relate to reserves
for cardmember losses relating to loans and charge receivables,
asset securitizations, Membership Rewards, and income taxes,
as discussed below.These accounting estimates reflect the best
judgment of management, but actual results could differ.
REVENUES NET OF INTEREST EXPENSE
The Company generates revenue from a variety of sources
including global payments, such as charge and credit cards,
travel services and investments funded by the sale of stored
value products, such as Travelers Cheques.
Discount Revenue
The Company earns discount revenue from fees charged to
merchants with which the Company has entered into card
acceptance agreements for processing cardmember transactions.
The discount generally is deducted from the payment to the
merchant and recorded as discount revenue at the time the
charge is captured.
Net Card Fees
Card fees are deferred and recognized as revenue on a straight-
line basis over the 12-month card membership period, net of
deferred direct card acquisition costs and a reserve for projected
membership cancellations.
Travel Commissions and Fees
The Company earns customer revenue by charging a transaction
or management fee for airline or other transactions. Customer-
related fees and other revenues are recognized at the time a client
books travel arrangements. Travel suppliers pay commissions
on airline tickets issued and on sales and transaction volumes,
based on contractual agreements. These revenues are recognized
at the time a ticket is purchased. Other travel suppliers that pay
commissions on hotels and car rentals generally are not under
firm contractual agreements, and therefore, revenue is not
recognized until cash is received.
Other Commissions and Fees
Other commissions and fees include foreign exchange
conversion fees and other card-related assessments, which are
recognized primarily in the period in which they are charged to
the cardmember. Fees related to the Company’s Membership
Rewards program are deferred and recognized over the period
covered by the fee and included in deferred card fees and other,
net of deferred acquisition costs, as discussed above.
Securitization Income, Net
Securitization income, net includes non-credit provision
components of the net gains from securitization activities, excess
spread related to securitized cardmember loans, changes in the
fair value of the interest-only strip, and servicing income, net
of related discounts or fees. Excess spread, which is recognized
as earned, is the net positive cash flow from interest and fee
collections allocated to the third-party investors’ interests in the
securitization after deducting the interest paid on the investor
certificates, credit losses, contractual servicing fees and other
expenses.
Other Revenue
Other revenue includes insurance premiums earned from
cardmember travel and other insurance programs, revenues
arising from contracts with Global Network Services’ partners
including royalties and signing fees, publishing revenues, and
other miscellaneous revenue and fees.
Contra-revenue
The Company regularly makes payments through contractual
arrangements with merchants, Corporate Card Clients and all
other customers. Payments to any customer are classified as
contra-revenue unless a specifically identifiable benefit (e.g.,
goods or services) is received by the Company in consideration
for that payment and the fair value of such benefit is determinable
and measurable.If no such benefit is identified, then the
entire payment is classified as contra-revenue, and included
within revenues net of interest expense in the Consolidated
Statements of Income in the line item where the related
transaction revenues are recorded (e.g., discount revenue, travel
commissions and fees, and other commissions and fees). If such
a benefit is identified, then the payment is classified as expense
up to the estimated fair value of the benefit.
Interest Income
Cardmember lending finance revenues are assessed using the
average daily balance method for receivables owned. These
amounts are recognized based upon the principal amount
outstanding in accordance with the terms of the applicable
account agreement until the outstanding balance is paid or
written-off.
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