American Express 2009 Annual Report Download - page 75

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
THE COMPANY
American Express is a global service company that provides
customers with access to products, insights and experiences
that enrich lives and build business success. The Company’s
principal products and services are charge and credit payment
card products and travel-related services offered to consumers
and businesses around the world. The Company’s various
products and services are sold globally to diverse customer
groups, including consumers, small businesses, middle-
market companies, and large corporations. These products
and services are sold through various channels, including
direct mail, on-line applications, targeted direct and third-
party sales forces and direct response advertising.
PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements of the Company are
prepared in conformity with U.S. generally accepted
accounting principles (GAAP). All significant intercompany
transactions are eliminated. The Company has performed an
evaluation of subsequent events through February 25, 2010,
which is the date the financial statements were issued.
The Company consolidates all voting interest entities in
which the Company holds a controlling financial interest
through which the Company is able to exercise control over
those entities’ operating and financial decisions. Entities in
which the Company’s voting interest does not provide the
Company with control, but allows the Company to exert
significant influence over their financial and operating
decisions are accounted for under the equity method. All
other investments in equity securities, to the extent that they
are not considered marketable securities, are accounted for
under the cost method.
Investments with variable interest entities (VIEs) are
limited. The Company consolidates any VIEs for which it is
considered to be the primary beneficiary. The determination
of whether an entity is a VIE is based on the amount and
characteristics of the entity’s equity. An enterprise is required
to consolidate a VIE when it has a variable interest for which
it is deemed to be the primary beneficiary, that is, it will
absorb a majority of the VIE’s expected losses or receive a
majority of the VIE’s expected residual returns.
Certain reclassifications of prior period amounts have
been made to conform to the current presentation. These
reclassifications did not have an impact on the Company’s
results of operations.
FOREIGN CURRENCY
Assets and liabilities denominated in foreign currencies are
translated into U.S. dollars based upon exchange rates
prevailing at the end of each year. The resulting translation
adjustments, along with any related qualifying hedge and tax
effects, are included in accumulated other comprehensive
(loss) income, a component of shareholders’ equity.
Translation adjustments, including qualifying hedge and tax
effects, are reclassified to earnings upon the sale or substantial
liquidation of investments in foreign operations. Revenues
and expenses are translated at the average month-end
exchange rates during the year. Gains and losses related to
transactions in a currency other than the functional currency,
including operations outside the U.S. where the functional
currency is the U.S. dollar, are reported net, in the Company’s
Consolidated Statements of Income, in other non-interest
revenue, interest income, interest expense, or other, net
expense, depending on the nature of the activity. Net foreign
currency transaction gains amounted to approximately
$205 million, $15 million and $27 million in 2009, 2008 and
2007, respectively. Refer to Note 19 for further discussion of
certain items that impacted these gains in 2009.
AMOUNTS BASED ON ESTIMATES AND ASSUMPTIONS
Accounting estimates are an integral part of the Consolidated
Financial Statements. These estimates are based, in part, on
management’s assumptions concerning future events. Among
the more significant assumptions are those that relate to
reserves for cardmember losses relating to loans and charge
card receivables, reserves for Membership Rewards cost, fair
value measurements, goodwill and income taxes. These
accounting estimates reflect the best judgment of
management, but actual results could differ.
TOTAL REVENUES NET OF INTEREST EXPENSE
Discount Revenue
Discount revenue represents fees charged to merchants with
which the Company, or its franchise partners, has entered
into card acceptance agreements for facilitating transactions
between the merchants and the Company’s cardmembers.
The discount generally is deducted from the payment to the
merchant and recorded as discount revenue at the time the
charge is captured.
Net Card Fees
Card fees are deferred and recognized on a straight-line basis
over the 12-month card membership period, net of deferred
direct card acquisition costs and a reserve for projected
membership cancellations. Charge card fees are recognized in
net card fees in the Consolidated Statements of Income and
the unamortized net card fee balance is reported in other
liabilities on the Consolidated Balance Sheets (refer to Note
11). Loan product fees are considered an enhancement to the
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