American Express 2008 Annual Report Download - page 72

notes to consolidated financial statements
american express company
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Qualifying Special Purpose Entities (QSPEs) under
Statement of Financial Accounting Standards (SFAS) No. 140,
“Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities”, are not consolidated. The
Company utilizes QSPEs in connection with cardmember
lending securitizations within the USCS segment.
Certain reclassifications of prior period amounts have
been made to conform to the current presentation. These
reclassifications did not have an impact on the Company’s
results of operations or cash flows, and primarily include those
described in the Bank Holding Company section above and in
the Company’s Form 8-K filed September 12, 2008.
In addition, beginning prospectively as of July 1, 2006,
certain card acquisition related costs were reclassified from
other expenses to a reduction in net card fees.
foreign currency
Assets and liabilities denominated in foreign currencies
are translated into U.S. dollars based upon exchange rates
prevailing at the end of each year. The resulting translation
adjustments, along with any related qualifying hedge and tax
effects, are included in accumulated other comprehensive
(loss) income, a component of shareholders’ equity. Translation
adjustments, including qualifying hedge and tax effects, are
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 $15 million, $27 million, and $11 million in
2008, 2007, and 2006, 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,
Membership Rewards, income taxes and fair value measurements,
as discussed below. These accounting estimates reflect the best
judgment of management, but actual results could differ.
total 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
Discount revenue represents fees charged to merchants
with which the Company has entered into card acceptance
agreements for facilitating transactions between the merchants
and the Company’s cardmembers. 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 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. Charge card fees are recognized in net card fees
in the Consolidated Statements of Income. Lending product
fees are considered an enhancement to the yield on the product,
and therefore are recognized in interest and fees on loans in the
Consolidated Statements of Income.
Travel Commissions and Fees
The Company earns travel commissions and fees by charging
clients transaction or management fees for selling and arranging
travel and travel management services. Client transaction
fee revenue is recognized at the time the client books the
travel arrangements. Travel management services revenue is
recognized over the contractual term of the agreement. The
Company’s travel suppliers (for example, airlines, hotels, car
rental companies) pay commissions and fees on tickets issued,
sales and other services based on contractual agreements.
Commissions and fees from travel suppliers are generally
recognized at the time a ticket is purchased or over the term
of the contract. Commissions and fees that are based on actual
usage that is unknown at time of purchase (for example, hotel
and car rentals), are recognized when cash is received.
Other Commissions and Fees
Other commissions and fees, which are recognized primarily
in the period in which they are charged to the cardmember,
include delinquency fees and other card related assessments,
and foreign currency conversion fees. Also included are fees
related to the Company’s Membership Rewards program,
which are deferred and recognized over the period covered by
the fee and are included in deferred charge card fees and other,
net of deferred acquisition costs.
Securitization Income, Net
Securitization income, net includes non-credit provision
components of the net gains or losses 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 cash flow from interest and
fee collections allocated to the third-party investors’ interests