American Express 2008 Annual Report Download - page 101

notes to consolidated financial statements
american express company
99
note 15
guarantees
The Company provides cardmember protection plans that cover
losses associated with purchased products, as well as certain 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:
•฀ Credit Card Registry – cancels and requests replacement of
lost or stolen cards, and provides for fraud liability coverage;
•฀ Return Protection – refunds the price of eligible purchases
made with the card where the merchant will not accept the
return for up to 90 days from the date of purchase;
•฀ Account Protection – provides account protection in the
event that a cardmember is unable to make payments on the
account due to unforeseen hardship; and,
•฀ Merchant Protection – protects cardmembers against billing
disputes with the merchant, primarily for non-delivery of
goods and services (i.e., 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.)
In relation to its maximum amount of undiscounted payments
as seen below, to date the Company has not experienced any
significant losses related to its FIN 45 guarantees.
The Company’s initial recognition of guarantees within
the scope of FIN 45 is at fair market value, which has been
determined in accordance with the fair value measurement
provisions of SFAS No. 157.
The following table provides information related to such
guarantees at December 31, 2008 and December 31, 2007:
Maximum amount
of undiscounted
future payments(a)
(Billions)
Amount of related
liability(b)
(Millions)
Type of Guarantee 2008 2007 2008 2007
Card and travel operations(c) $69 $70 $ 99 $ 64
Other(d) 1193 44
Total $70 $71 $192 $108
(a) Represents the notional amounts that could be lost under the guarantees
and indemnifications if there were a total default by the guaranteed parties.
The Merchant Protection guarantee is calculated using management’s best
estimate of maximum exposure based on all eligible claims as measured
against annual billed business volumes.
(b) Included as part of other liabilities on the Company’s Consolidated
Balance Sheets. The increase in the liability from December 31, 2007 to
December 31, 2008, results substantially from guarantees related to the
Company’s business dispositions and an increase in merchant protection-
related reserves primarily related to the airline industry.
(c) Includes Credit Card Registry, Return Protection, Account Protection and
Merchant Protection, which the Company offers directly to cardmembers.
The Company generally has no collateral or other recourse provisions related
to these guarantees.
(d) Other primarily includes guarantees related to the Company’s business
dispositions, real estate, and tax, as well as contingent consideration obligations.
note 16
commitments and
contingencies
The Company and its subsidiaries are involved in a number
of legal and arbitration proceedings, including class actions,
concerning matters arising in connection with the conduct of
their respective business activities. The Company believes it
has meritorious defenses to each of these actions and intends
to defend them vigorously. In the course of its business, the
Company and its subsidiaries are also subject to governmental
examinations, information gathering requests, subpoenas,
inquiries, and investigations. The Company believes that it
is not a party to, nor are any of its properties the subject of,
any pending legal, arbitration, regulatory, tax or investigative
proceedings that would have a material adverse effect on
the Company’s consolidated financial condition or liquidity.
However, it is possible that the outcome of any such proceedings
could have a material impact on results of operations in any
particular reporting period as the proceedings are resolved.
visa and mastercard settlements
On November 7, 2007 and June 25, 2008, as previously
disclosed, the Company announced that it had reached
settlement agreements with Visa and MasterCard, respectively.
Under the terms of the settlement agreements, the Company
will receive aggregate maximum payments of $4.05 billion.
The settlement with Visa comprised an initial payment of
$1.13 billion ($700 million after-tax) that was recorded as
a gain in the fourth quarter of 2007. Having met quarterly
performance criteria, the Company recognized $70 million
($43 million after-tax) from Visa in each of the four quarters of
2008 and $150 million ($93 million after-tax) from MasterCard
in the third and fourth quarters of 2008. The remaining Visa
and MasterCard quarterly payments, subject to the Company
achieving certain quarterly performance criteria continue
through the fourth and second quarters of 2011, respectively,
and are included in other, net expenses within the Corporate
& Other segment.