American Express 2009 Annual Report Download - page 79

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
NOTE 3
FAIR VALUES
As permitted under GAAP, the Company adopted new fair
value measurement and disclosure requirements in two
phases. The first phase, effective for the Company January 1,
2008, establishes requirements for fair value measurements of
financial assets and liabilities, and other recurring fair value
measurements reported or disclosed at fair value. The second
phase, effective for the Company January 1, 2009, establishes
requirements for all other assets and liabilities recognized or
disclosed at fair value on a nonrecurring basis.
Fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability (an exit price) in an
orderly transaction between market participants at the
measurement date, and is based on the Company’s principal
or most advantageous market for the specific asset or liability.
GAAP established a three-level hierarchy of inputs to
valuation techniques used to measure fair value, defined as
follows:
폷Level 1 – inputs that are quoted prices (unadjusted) for
identical assets or liabilities in active markets.
폷Level 2 – inputs other than quoted prices included within
Level 1 that are observable for the asset or liability, either
directly or indirectly, for substantially the full term of the
asset or liability, including:
- Quoted prices for similar assets or liabilities in active
markets
- Quoted prices for identical or similar assets or liabilities
in markets that are not active
- Inputs other than quoted prices that are observable for
the asset or liability
- Inputs that are derived principally from or corroborated
by observable market data by correlation or other means
폷Level 3 – inputs that are unobservable and reflect the
Company’s own assumptions about the assumptions
market participants would use in pricing the asset or
liability based on the best information available in the
circumstances (e.g. internally derived assumptions
surrounding the timing and amount of expected cash
flows).
As summarized in the table below, the Company has financial
assets and liabilities that are measured at fair value on a
recurring basis. For the year ended December 31, 2009, the
Company did not have any significant assets or liabilities that
were measured at fair value on a nonrecurring basis in periods
subsequent to initial recognition.
The following table provides a summary of the estimated fair values for the Company’s financial assets and financial liabilities
measured at fair value on a recurring basis by GAAP’s valuation hierarchy (as described above), as of December 31:
(Millions) 2009 2008
Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
Assets
Investment securities(a) $20,738 $530 $20,208 $ — $11,782 $ — $11,782 $ —
Retained subordinated securities 3,599 — — 3,599 744 — — 744
Interest-only strip 20 — — 20 32 — — 32
Derivatives(b) 833 — 833 — 1,782 — 1,782 —
Total assets(c) $25,190 $530 $21,041 $3,619 $14,340 $ — $13,564 $776
Liabilities
Derivatives(b) $ 283 $ — $ 283 $ — $ 483 $ — $ 483 $ —
Total liabilities $ 283 $ — $ 283 $ — $ 483 $ — $ 483 $ —
(a) Excludes retained subordinated securities and interest-only strip.
(b) GAAP permits the netting of derivative assets and derivative liabilities when a legally enforceable master netting agreement exists between the
Company and its derivative counterparty. As of December 31, 2009 and 2008, $33 million and $39 million, respectively, of derivative assets
and liabilities have been offset and presented net on the Consolidated Balance Sheets.
(c) The Company’s defined benefit pension plan (the Plan) assets are included in the determination of the Plan’s net funded status, which is
reported in other liabilities in the Consolidated Balance Sheets. The Plan assets are also measured at fair value on an annual basis, applying
inputs in the fair value hierarchy as described above. Refer to Note 21 for further details.
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