American Express 2009 Annual Report Download - page 28

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2009 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
FAIR VALUE MEASUREMENT (CONTINUED)
Description Assumptions/Approach Used
Effect if Actual Results Differ
from Assumptions
Retained Subordinated Securities
Accounting for the retained subordinated
securities aligns with that described under
investment securities above.
Interest-Only Strip
The interest-only strip is reported at fair value
in other assets on the Company’s Consolidated
Balance Sheets. Changes in the fair value of the
interest-only strip are also recorded in
securitization income, net in the Company’s
Consolidated Statements of Income.
Due to changes in GAAP governing the
accounting for transfers of financial assets,
effective January 1, 2010, the Company’s
retained subordinated securities and interest-
only strip will be eliminated in consolidation
and no longer measured at fair value.
Defined Benefit Pension Plan Assets
Defined benefit pension plan (the Plan) assets
are measured at fair value, changes in which are
included in the determination of the Plan’s net
funded status which is reported in other
liabilities on the Company’s Consolidated
Balance Sheets.
from different pricing sources as well as
comparing prices to the sale prices received
from sold securities. As of December 31,
2009 and 2008, all of the Company’s
investment securities are classified in either
Level 1 or Level 2 of the fair value hierarchy.
Refer to Note 3 to the Company’s
Consolidated Financial Statements.
Retained Subordinated Securities and
Interest-Only Strip
The fair value of the Company’s retained
subordinated securities and interest-only
strip are determined using discounted cash
flow models.
The discount rate for the retained
subordinated securities is estimated based
on an interest rate curve that is observable in
the marketplace plus an unobservable credit
spread commensurate with the risk of the
securities and similar financial instruments.
The fair value of the Company’s
interest-only strip is the present value of
estimated future positive excess spread
expected to be generated by the securitized
loans over the estimated remaining life of
those loans. Management utilizes certain
estimates and assumptions to determine the
fair value of the interest-only strip asset
including estimates for finance charge yield,
credit losses, LIBOR (which determines
future certificate interest costs), monthly
payment rate and the discount rate.
The Company’s retained subordinated
securities and interest-only strip are
classified in Level 3 of the fair value
hierarchy. Refer to Note 3 to the Company’s
Consolidated Financial Statements.
Other-Than-Temporary Impairment
Realized losses are recognized when
management determines that a decline in
value is other-than-temporary, which
requires judgment regarding the amount
and timing of recovery. The Company
reviews and evaluates its investment
securities, including retained subordinated
securities at least quarterly, and more often
as market conditions may require, to
(continued on next page)
Other-Than-Temporary Impairment
In determining whether any of the
Company’s investment securities
(including retained subordinated
securities) are other-than-temporarily
impaired, a change in facts and
circumstances could lead to a change in
management judgment around the
Company’s view on collectability and
credit quality of the issuer, or the
Company’s intent to sell the investment
securities, and whether it is more likely
than not that the Company will not be
required to sell the investment securities
before recovery of any unrealized losses.
Therefore, it is at least reasonably
possible that a change in estimate will
occur in the near term relating to other-
than-temporary impairment. This could
result in the Company recording an
other-than-temporary impairment loss
through earnings with a corresponding
offset to accumulated other
comprehensive (loss) income. As of
December 31, 2009 and 2008, the
Company had approximately $0.3 billion
and $1.6 billion, respectively, in gross
unrealized losses in its investment
securities portfolio (including its retained
subordinated securities) which were
deemed not to be other-than-temporarily
impaired.
Defined Benefit Pension Plan Assets
The fair value measurements for the Plan
assets contain a similar amount of
subjectivity as described under
investment securities above, and
therefore differing judgments in how the
underlying inputs are modeled could
result in different estimates of fair value.
26