American Express 2008 Annual Report Download - page 77

notes to consolidated financial statements
american express company
75
Fair Value Measurements
Effective January 1, 2008, the Company partially adopted
the Financial Accounting Standards Board (FASB) SFAS
No. 157, “Fair Value Measurements” (SFAS No. 157). SFAS
No. 157 applies broadly to financial and non-financial
assets and liabilities reported or disclosed at fair value under
existing authoritative accounting pronouncements. FASB
Staff Position (FSP) FAS 157-2, “Effective Date of FASB
Statement No. 157” (FSP FAS 157-2), delays the effective date
of SFAS No. 157 for non-financial assets and non-financial
liabilities, except for items that are recognized or disclosed at
fair value in the Company’s financial statements on a recurring
basis (at least annually), until its fiscal year beginning after
November 15, 2008, including interim periods within that
fiscal year ( January 1, 2009 for the Company). In accordance
with FSP FAS 157-2, the Company has partially adopted
SFAS No. 157 and has not applied the provisions of SFAS
No. 157 to its non-financial assets that are not measured at
fair value on a recurring basis.
The Company’s partial adoption of SFAS No. 157 did
not result in significant changes to the valuation techniques it
had previously used to measure the fair value of its financial
instruments. Fair value is defined as the price that would be
received to sell an asset or paid to transfer a liability (an exit
price) in an orderly transaction between market participants at
the measurement date, and is based on the Company’s principal
or most advantageous market for the specific asset or liability.
The adoption did not have a material impact on the Company’s
financial position or results of operations.
SFAS No. 157 established a three-level hierarchy of valuation
techniques used to measure fair value, defined as follows:
•฀ Unadjusted Quoted Prices – The fair value of an asset or
liability is based on unadjusted quoted prices, in active
markets for identical assets or liabilities. An example would
be a marketable equity security that is actively traded on the
New York Stock Exchange. (Level 1) The Company does
not have any assets or liabilities classified within Level 1 of
the fair value hierarchy.
•฀ Pricing Models with Significant Observable Inputs – The
fair value of an asset or liability is based on information
derived from either an active market quoted price, which
may require further adjustment based on the attributes of
the financial asset or liability being measured, or an inactive
market transaction. Circumstances when adjustments to
market quoted prices may be appropriate include (i) a
quoted price for an actively traded equity investment that is
adjusted for a contractual trading restriction, or (ii) the fair
value derived from a trade of an identical or similar security
in an inactive market. (Level 2) The Company’s investment
securities and derivatives are classified within Level 2 of the
fair value hierarchy. Refer to Notes 2, 5, and 14.
•฀ Pricing Models with Significant Unobservable Inputs –
The fair value of an asset or liability is primarily based on
internally derived assumptions surrounding the timing and
amount of expected cash flows for the financial instrument.
Therefore, these assumptions are unobservable in either an
active or inactive market. An example would be the retained
subordinated interest in a securitization trust. (Level 3) The
Company’s retained subordinated securities and interest-
only strip, from its securitization programs, are classified
within Level 3 of the fair value hierarchy. Refer to Note 6.
The level in the fair value hierarchy to which an asset or
liability is classified is based upon the lowest level of input
that is significant to the fair value measurement. For example,
if an asset or liability is valued based on observable inputs
(e.g., Level 2) as well as unobservable inputs (e.g., Level 3),
and the unobservable inputs significantly contributed to the
determination of fair value, it is classified in Level 3 of the fair
value hierarchy.
recently issued accounting standards
The FASB recently issued the following accounting standards,
which are effective beginning January 1, 2009.
•฀ FSP No. EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions are
Participating Securities” (FSP EITF 03-6-1) states unvested
share-based payment awards that contain non-forfeitable
rights to dividends or dividend equivalents (e.g., Restricted
Stock Awards) whether paid or unpaid, are participating
securities and should be included in the computation of basic
and diluted earnings per share pursuant to the two-class
method. FSP EITF 03-6-1 requires all prior-period EPS data
presented to be adjusted retrospectively (including interim
financial statements, summaries of earnings, and selected
financial data) to conform to its provisions. The retrospective
adoption of FSP EITF 03-6-1 is expected to have an annual
decrease of between $.01 and $.03 on basic and diluted
earnings per share for the years 2005 through 2008.
The adoption of the accounting standards listed below will not
have a material impact on the Company’s financial position or
results of operations.
• SFAS No. 141 (revised 2007), “Business Combinations”
(SFAS No. 141(R)) replaces the previous business
combination accounting guidance under SFAS No. 141.
SFAS No. 141(R) primarily requires the following changes
in applying the purchase method of accounting to the
acquisition of a business. (1) All acquisitions of controlling
interests are fully measured at fair value, including purchases
of a less-than-100 percent stake, (2) direct acquisition costs
(e.g., investment banking, legal and accounting costs) are
expensed, (3) contingent consideration is recognized and
measured at fair value as of the acquisition date, with post-