American Express 2009 Annual Report Download - page 104

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
NOTE 13
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
which are within the scope of GAAP governing the
accounting for guarantees. For the Company, guarantees
primarily consist of card and travel protection programs,
including:
폷Credit Card Registry — cancels and requests replacement
of lost or stolen cards, and provides for fraud liability
coverage;
폷Return 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;
폷Account Protection — provides account protection in the
event that a cardmember is unable to make payments on
the account due to unforeseen hardship; and,
폷Merchant Protection — protects cardmembers primarily
against non-delivery of goods and services, usually in the
event of bankruptcy or liquidation of a 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. The Company mitigates this
risk by withholding settlement from the merchant or
obtaining deposits and other guarantees from merchants
considered higher risk due to various factors. The amounts
being held by the Company are not significant when
compared to the maximum potential amount of future
payments under this guarantee.
In relation to its maximum amount of undiscounted future
payments as seen in the table that follows, to date the
Company has not experienced any significant losses related to
guarantees. The Company’s initial recognition of guarantees
is at fair value, which has been determined in accordance with
GAAP governing fair value measurement. In addition, the
Company establishes reserves when an unfavorable outcome
is probable and the amount of the loss can be reasonably
estimated.
The following table provides information related to such
guarantees as of December 31:
Maximum amount
of undiscounted
future payments(a)
(Billions)
Amount of related
liability(b)
(Millions)
Type of Guarantee 2009 2008 2009 2008
Card and travel operations(c) $66 $69 $ 112 $99
Other(d) 1174 93
Total $67 $70 $ 186 $ 192
(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.
(c) Includes Credit Card Registry, Return Protection, Account
Protection and Merchant Protection, which the Company offers
directly to cardmembers.
(d) Other primarily includes guarantees related to the Company’s
business dispositions, real estate, and tax, as well as contingent
consideration obligations, each of which are individually smaller
indemnifications.
Refer to Note 26 for a discussion of additional guarantees of
the Company as of December 31, 2009 and 2008.
102