American Express 2009 Annual Report Download - page 31

2009 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
GOODWILL
Description Assumptions/Approach Used
Effect if Actual Results Differ
from Assumptions
Goodwill represents the excess of acquisition
cost of an acquired company over the fair value
of assets acquired and liabilities assumed. In
accordance with GAAP, goodwill is not
amortized but is tested for impairment, at the
reporting unit level, annually at June 30 and
between annual tests if events or circumstances
arise, such as adverse changes in the business
climate, that would more likely than not reduce
the fair value of the reporting unit below its
carrying value.
The Company assigns goodwill to its
reporting units for the purpose of impairment
testing. A reporting unit is defined as either an
operating segment, or a business one level
below an operating segment for which discrete
financial information is available that
management regularly reviews.
The goodwill impairment test utilizes a
two-step approach. The first step identifies
whether there is potential impairment by
comparing the fair value of a reporting unit to
its carrying amount, including goodwill. If the
fair value of a reporting unit is less than its
carrying amount, the second step of the
impairment test is required to measure the
amount of any impairment loss.
Goodwill impairment testing involves
management judgment, requiring an
assessment of whether the carrying value of
the reporting unit can be supported by its
fair value using widely accepted valuation
techniques, such as the market approach
(earnings multiples or transaction multiples
for the industry in which the reporting unit
operates) or the income approach
(discounted cash flow methods). The fair
values of the reporting units were
determined using a combination of
valuation techniques consistent with the
market approach and the income approach.
When preparing discounted cash flow
models under the income approach, the
Company estimates future cash flows using
the reporting unit’s internal five year
forecast and a terminal value calculated
using a growth rate that management
believes is appropriate in view of current
and expected future economic conditions.
The Company then applies a discount rate
to discount these future cash flows to arrive
at a net present value amount, which
represents the estimated fair value of the
reporting unit. The discount rate applied
approximates the expected cost of equity
financing, determined using a capital asset
pricing model. The model generates an
appropriate discount rate using internal and
external inputs to value future cash flows
based on the time value of money and the
price for bearing the uncertainty inherent in
an investment. The Company believes the
resulting rate, 11.4 percent, appropriately
reflects the risks and uncertainties in the
financial markets generally and in the
Company’s internally developed forecasts.
The Company has approximately $2.3
billion of goodwill as of December 31,
2009. The fair value of each of the
Company’s reporting units is above its
carrying value; accordingly, the Company
has concluded its goodwill is not impaired
at December 31, 2009. The Company
could be exposed to increased risk of
goodwill impairment if future operating
results or macroeconomic conditions
differ significantly from management’s
current assumptions.
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