American Express 2008 Annual Report Download - page 75

notes to consolidated financial statements
american express company
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are depreciated based upon their estimated useful life at the
acquisition date, which generally ranges from 40 to 60 years.
Leasehold improvements are depreciated using the straight-
line method over the lesser of the remaining term of the leased
facility or the economic life of the improvement, which ranges
from 5 to 10 years. The Company maintains operating leases
worldwide for facilities and equipment. Rent expense for facility
leases is recognized ratably over the lease term, and is calculated
to include adjustments for rent concessions, all non-market
based rent escalations, and leasehold improvement allowances.
The Company accounts for lease restoration obligations
in accordance with SFAS No. 143, “Accounting for Asset
Retirement Obligations” which requires recognition of the fair
value of restoration liabilities when incurred, and amortization
of capitalized restoration costs over the lease term.
Software development costs
The Company capitalizes certain costs associated with the
acquisition or development of internal-use software. Once the
software is ready for its intended use, these costs are amortized
on a straight-line basis over the software’s estimated useful life,
generally 5 years.
Goodwill and Other Intangible Assets
Goodwill
Goodwill represents the excess of acquisition cost of an
acquired company over the fair value of assets acquired and
liabilities assumed. Goodwill is included in other assets on the
Consolidated Balance Sheets. The Company assigns goodwill
to its reporting units for the purpose of impairment testing. A
reporting unit is defined as an operating segment, or a business
one level below an operating segment. The Company evaluates
goodwill for impairment annually and between annual tests if
events occur or circumstances change that more likely than not
reduce the fair value of reporting units below their carrying
amounts. In determining whether impairment has occurred,
the Company generally uses a comparative market multiples
approach for calculating fair value.
Intangible assets
Intangible assets, primarily customer relationships, are
amortized over their estimated useful lives of 1 to 22 years on a
straight-line basis. Intangible assets are included in other assets
on the Consolidated Balance Sheets. The Company reviews
intangible assets for impairment quarterly and whenever events
and circumstances indicate that their carrying amounts may not
be recoverable. In addition, on an annual basis, the Company
performs an impairment evaluation of all intangible assets
based upon fair value generally using a discounted cash flow
approach. An impairment is recognized if the carrying amount
is not recoverable and exceeds the asset’s fair value.
Other Liabilities
Membership Rewards
The Membership Rewards program allows enrolled
cardmembers to earn points that can be redeemed for a
broad range of rewards, including travel, entertainment, retail
certificates, and merchandise. The Company establishes balance
sheet reserves which represent the estimated cost of points
earned to date that are ultimately expected to be redeemed.
These reserves reflect management’s judgment regarding
overall adequacy. A weighted average cost per point redeemed
during the previous 12 months, adjusted as appropriate for
recent changes in redemption costs, is used to approximate
future redemption costs and is affected by the mix of rewards
redeemed. Management uses models to estimate ultimate
redemption rates based on historical redemption statistics, card
product type, year of program enrollment, enrollment tenure,
and card spend levels.
The provision for the cost of Membership Rewards points
is included in marketing, promotion, rewards and cardmember
services and the balance sheet reserves are included in other
liabilities. The Company continually evaluates its reserve
methodology and assumptions based on developments in
redemption patterns, cost per point redeemed, contract changes,
and other factors.
Derivative Financial Instruments and Hedging Activities
All derivatives are recognized on balance sheet at fair value
as either assets or liabilities. The fair value of the Company’s
derivative financial instruments are determined using either
market quotes or valuation models that are based upon the net
present value of estimated future cash flows and incorporate
current market data inputs. The Company reports its derivative
assets and liabilities in other assets and other liabilities,
respectively, on a net by counterparty basis where management
believes it has the legal right of offset under enforceable netting
arrangements. The accounting for the change in the fair value
of a derivative financial instrument depends on its intended use
and the resulting hedge designation, if any, as discussed below.
Cash flow hedges
A cash flow hedge is a derivative designated to hedge the exposure
of variable future cash flows that is attributable to a particular
risk associated with an existing recognized asset or liability, or a
forecasted transaction. For derivative financial instruments that
qualify as cash flow hedges, the effective portions of the gain
or loss on the derivatives are recorded in accumulated other
comprehensive (loss) income and reclassified into earnings
when the hedged cash flows are recognized into earnings.
The amount that is reclassified into earnings is presented in
the Consolidated Statements of Income with the hedged
instrument or transaction impact, primarily in interest expense.
Any ineffective portion of the gain or loss, as determined by the