American Express 2008 Annual Report Download - page 76

notes to consolidated financial statements
american express company
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accounting requirements, is reported as a component of other,
net expense. If a hedge is de-designated or terminated prior
to maturity, the amount previously recorded in accumulated
other comprehensive (loss) income is recognized into earnings
over the period that the hedged item impacts earnings. If a
hedge relationship is discontinued because it is probable that
the forecasted transaction will not occur according to the
original strategy, any related amounts previously recorded in
accumulated other comprehensive (loss) income are recognized
into earnings immediately.
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. For derivative financial instruments that qualify
as a fair value hedge, changes in the fair value of the derivatives,
as well as of the corresponding hedged assets and liabilities
are recorded in earnings as a component of other, net expense,
resulting in the ineffectiveness from the hedging relationship.
If a fair value hedge is de-designated or no longer considered
to be effective, changes in fair value of the derivative continue to
be recorded through earnings but the hedged asset or liability is
no longer adjusted for changes in fair value. The existing basis
adjustment of the hedged asset or liability is then amortized or
accreted as an adjustment to yield over the remaining life of the
asset or liability.
Net investment hedges in foreign operations
A net investment hedge in foreign operations is a derivative used
to hedge future changes in currency exposure of a net investment
in a foreign operation. For derivative financial instruments that
qualify as net investment hedges in foreign operations, the
effective portions of the change in fair value of the derivatives
are recorded in accumulated other comprehensive (loss) income
as part of the cumulative translation adjustment. Any ineffective
portions of net investment hedges are recognized in other, net
expense during the period of change.
Derivative financial instruments that qualify for hedge accounting
Derivative financial instruments that are entered into for
hedging purposes are designated as such when the Company
enters into the contract. For all derivative financial instruments
that are designated for hedging activities, the Company
formally documents all of the hedging relationships between
the hedge instruments and the hedged items at the inception of
the relationships. Management also formally documents its risk
management objectives and strategies for entering into the hedge
transactions. The Company formally assesses, at inception and
on a quarterly basis, whether derivatives designated as hedges
are highly effective in offsetting the fair value or cash flows of
hedged items. These assessments usually are made through the
application of the dollar-offset method.
In accordance with its risk management policies, the
Company generally structures its hedges with very similar
terms to the hedged items. When applying the accounting
requirements, the Company recognizes ineffectiveness
through earnings. If it is determined that a derivative is not
highly effective as a hedge, the Company will discontinue the
application of hedge accounting.
Non-designated derivatives and trading activities
For derivative financial instruments that do not qualify for
hedge accounting, or are not designated as hedges, changes in
fair value are reported in current period earnings generally as
a component of other revenue, interest expense, or other, net
expenses depending on the type of derivative instrument and
the nature of the transaction.
Income Taxes
The Company, its wholly-owned U.S. subsidiaries, and certain
non-U.S. subsidiaries file a consolidated federal income tax
return. The Company is subject to the income tax laws of the
United States, its states and municipalities and those of the
foreign jurisdictions in which the Company operates. These tax
laws are complex, and the manner in which they apply to the
taxpayer’s facts is sometimes open to interpretation. Given these
inherent complexities, the Company must make judgments in
assessing the likelihood that a tax position will be sustained
upon examination by the taxing authorities based on the
technical merits of the tax position. A tax position is recognized
only when, based on management’s judgment regarding the
application of income tax laws, it is more likely than not that the
tax position will be sustained upon examination. The amount
of benefit recognized for financial reporting purposes is based
on management’s best judgment of the most likely outcome
resulting from examination given the facts, circumstances and
information available at the reporting date. The Company
adjusts the level of unrecognized tax benefits when there is new
information available to assess the likelihood of the outcome.
Interest and penalties relating to unrecognized tax benefits are
reported in the income tax provision.
Deferred tax assets and liabilities are determined based on
the differences between the GAAP financial statements and
tax bases of assets and liabilities using the enacted tax rates
expected to be in effect for the years in which the differences
are expected to reverse. A valuation allowance is established
when management determines that it is more likely than not
that all or some portion of the benefit of the deferred tax assets
will not be realized.
The Company does not provide for federal income taxes on
foreign earnings intended to be permanently reinvested outside
the United States.