American Express 2009 Annual Report Download - page 63

2009 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
OTHER REPORTING MATTERS
ACCOUNTING DEVELOPMENTS
See the Recently Issued Accounting Standards section of Note
1 to the Consolidated Financial Statements.
GLOSSARY OF SELECTED TERMINOLOGY
Adjusted average loans — Represents average cardmember
loans on an owned or managed basis, as applicable, excluding
the impact of deferred card fees, net of deferred direct
acquisition costs of cardmember loans on an owned or
managed basis, as applicable.
Adjusted net interest income — Represents net interest
income allocated to the Company’s cardmember loans
portfolio on an owned or managed basis, as applicable, which
excludes the impact of card fees on loans and balance transfer
fees attributable to the Company’s cardmember loans
portfolio on an owned or managed basis, as applicable.
Asset securitizations — Asset securitization involves the
transfer and sale of receivables or loans to a special purpose
entity created for the securitization activity, typically a trust.
The trust, in turn, issues securities, commonly referred to as
asset-backed securities that are secured by the transferred
receivables or loans. The trust uses the proceeds from the sale
of such securities to pay the purchase price for the underlying
receivables or loans.
Average discount rate — This calculation is designed to
approximate merchant pricing. It represents the percentage of
billed business (both proprietary and GNS) retained by the
Company from merchants it acquires, prior to payments to
third parties unrelated to merchant acceptance.
Basic cards-in-force — Proprietary basic consumer
cards-in-force includes basic cards issued to the primary
account owner and does not include additional supplemental
cards issued on that account. Proprietary basic small business
and corporate cards-in-force include basic and supplemental
cards issued to employee cardmembers. Non-proprietary
basic cards-in-force includes all cards that are issued and
outstanding under network partnership agreements.
Billed business — Represents the dollar amount of charges
on all American Express cards; also referred to as spend or
charge volume. Proprietary billed business includes charges
made on the Company’s proprietary cards-in-force, cash
advances on proprietary cards and certain insurance fees
charged on proprietary cards. Non-proprietary billed business
represents the charges through the Company’s global network
on cards issued by the Company’s network partners. Billed
business is reflected in the United States or outside the United
States based on where the cardmember is domiciled.
Capital asset pricing 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 uncertainty inherent in an investment.
Capital ratios — Represents the minimum standards
established by the regulatory agencies as a measure to
determine whether the regulated entity has sufficient capital
to absorb on and off-balance sheet losses beyond current loss
accrual estimates.
Card acquisition — Primarily represents the issuance of
new cards to either new or existing cardmembers through
marketing and promotion efforts.
Cardmember — The individual holder of an issued
American Express branded charge or credit card.
Cardmember loans — Represents the outstanding amount
due from cardmembers for charges made on their American
Express credit cards, as well as any interest charges and card-
related fees. Cardmember loans also include balances with
extended payment terms on certain charge card products and
are net of unearned revenue.
Cardmember receivables — Represents the outstanding
amount due from cardmembers for charges made on their
American Express charge cards as well as any card-related
fees.
Charge cards — Represents cards that carry no pre-set
spending limits and are primarily designed as a method of
payment and not as a means of financing purchases.
Cardmembers generally must pay the full amount billed each
month. No finance charges are assessed on charge cards.
Credit cards — Represents cards that have a range of
revolving payment terms, grace periods, and rate and fee
structures.
Discount revenue — Represents revenue earned from fees
charged to merchants with whom the Company has entered
into a card acceptance agreement for processing cardmember
transactions. The discount fee generally is deducted from the
Company’s payment reimbursing the merchant for
cardmember purchases. Such amounts are reduced by contra-
revenue such as payments to third-party card issuing partners,
cash-back reward costs and corporate incentive payments.
Interest expense — Interest expense includes interest
incurred primarily to fund cardmember loans, charge card
product receivables, general corporate purposes, and liquidity
needs, and is recognized as incurred. Interest expense is
divided principally into three categories (i) deposits, which
primarily relates to interest expense on deposits taken from
customers and institutions, (ii) short-term borrowings, which
primarily relates to interest expense on commercial paper,
federal funds purchased, bank overdrafts and other short-
term borrowings, and (iii) long-term debt, which primarily
relates to interest expense on the Company’s long-term debt.
Interest income — Interest and fees on loans includes
interest on loans which is assessed using the average daily
balance method for loans owned. These amounts are
recognized based upon the principal amount outstanding in
accordance with the terms of the applicable account
agreement until the outstanding balance is paid or written-
off. Loan fees are deferred and recognized in interest income
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