American Express 2007 Annual Report Download - page 97

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
CASH FLOW HEDGES
A cash flow hedge is a derivative designated to hedge the
exposure of variable future cash flows attributable to a particular
risk of an existing recognized asset or liability, or a forecasted
transaction. The Company hedges existing long-term variable-
rate debt, the rollover of short-term debt and the anticipated
forecasted issuance of additional funding through the use of
derivative instruments, primarily interest rate swaps. These
derivative instruments effectively fix the interest expense for
the duration of the swap.
In the normal course of business, as derivatives mature, the
Company expects to reclassify $79 million of net pretax losses on
derivative instruments from accumulated other comprehensive
(loss) income to earnings during the next 12 months. In the
event that cash flow hedge accounting is no longer applied (i.e.,
the Company de-designates a derivative as a hedge, a hedge is
no longer considered to be highly effective, or the forecasted
transaction being hedged is no longer probable of occurring),
the reclassification from accumulated other comprehensive
(loss) income into earnings may be accelerated and all future
market value fluctuations of the derivative will be reflected in
earnings.
Currently, the longest period of time over which the Company
is hedging exposure to variability in future cash flows for forecasted
transactions is approximately two years, which is related to bank
notes.
FAIR VALUE HEDGES
A fair value hedge is a derivative designated to hedge the
exposure of future changes in the fair value of an asset or a
liability, or an identified portion thereof that is attributable
to a particular risk. The Company is exposed to interest rate
risk associated with its fixed-rate long-term debt and fixed-
rate corporate debt securities. The Company uses interest rate
swaps to convert certain fixed-rate long-term debt to floating
rate at the time of issuance. From time to time, the Company
may enter into interest rate swaps to hedge its exposure related
to fixed-rate corporate debt securities.
NET INVESTMENT HEDGES
A net investment hedge in a foreign operation is a derivative
used to hedge future changes in currency exposure of a net
investment in a foreign operation. The Company designates
foreign currency derivatives, primarily forward agreements, as
hedges of net investments in certain foreign operations. These
derivatives reduce exposure to changes in currency exchange
rates on the Company’s investments in non-U.S. subsidiaries.
DERIVATIVES NOT DESIGNATED AS HEDGES
The Company has derivatives that act as economic hedges
and that either do not qualify or are not designated for hedge
accounting treatment. Foreign currency transactions and non-
U.S. dollar cash flow exposures may from time to time be
partially or fully economically hedged through foreign currency
contracts, primarily forward contracts, foreign currency
options, and cross-currency swaps. These hedges generally
mature within one year. Foreign currency contracts involve the
purchase and sale of a designated currency at an agreed upon
rate for settlement on a specified date. From time to time, the
Company may enter into interest rate swaps to specifically
manage funding costs related to its proprietary card business.
The following table provides the total fair value, excluding
accruals, of these derivative products assets and liabilities as of
December 31:
(Millions) 2007 2006
Assets Liabilities Assets Liabilities
Foreign currency
transactions $32 $38 $13 $ 3
Interest rate swaps $29 $ 8 $12 $10
NOTE 13 GUARANTEES
The Company provides cardmember protection plans that
cover losses associated with purchased products, as well as
other guarantees in the ordinary course of business that are
within the scope of FASB Financial Interpretation No. 45,
“Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness
of Others,” (FIN 45). For the Company, FIN 45 guarantees
primarily consist of card and travel protection programs,
including those that (1) cancel and request replacements of lost
or stolen cards, and provide for fraud liability coverage (Credit
Card Registry); (2) protect eligible purchases made with the
card against accidental damage or theft for up to 90 days from
the date of purchase (Purchase Protection); (3) provide account
protection in the event that a cardmember is unable to make
payments on the account due to unforeseen hardship (Account
Protection); (4) protect cardmembers against billing disputes
with the merchant, primarily for non-delivery of goods and
services (Merchant Protection) (e.g., usually in the event of
bankruptcy or liquidation of the merchant. In the event that a
dispute is resolved in the cardmember’s favor, the Company will
credit the cardmember account for the amount of the purchase
and will seek recovery from the merchant. If the Company is
unable to collect the amount from the merchant, it will bear
the loss for the amount credited to the cardmember.); and (5)
indemnify cardmembers against losses due to lost baggage
while traveling (Baggage Protection).
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