American Express 2009 Annual Report Download - page 82

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
FINANCIAL ASSETS CARRIED AT OTHER THAN FAIR
VALUE
Loans
Loans are recorded at historical cost, less reserves, on the
Consolidated Balance Sheets. In estimating the fair value for
the Company’s loans, the principal market is assumed to be
the securitization market, and the Company uses the
hypothetical securitization price to determine the fair value of
the portfolio. The securitization price is estimated from the
assumed proceeds of the hypothetical securitization in the
current market, adjusted for securitization uncertainties such
as market conditions and liquidity.
FINANCIAL LIABILITIES FOR WHICH CARRYING
VALUES EQUAL OR APPROXIMATE FAIR VALUE
Financial liabilities for which carrying values equal or
approximate fair value include accrued interest, customer
deposits (excluding certificates of deposit, which are described
further below), Travelers Cheques outstanding, short-term
borrowings and certain other liabilities for which the carrying
values approximate fair value because they are short-term in
duration, variable rate in nature, or have no defined maturity.
FINANCIAL LIABILITIES CARRIED AT OTHER THAN
FAIR VALUE
Certificates of Deposit
Certificates of deposit (CDs) are recorded at their historical
issuance cost on the Consolidated Balance Sheets. Fair value is
estimated using a discounted cash flow methodology based on
the Company’s current borrowing rates for similar types of
CDs.
Long-term Debt
Long-term debt is recorded at historical issuance cost on the
Consolidated Balance Sheets. Fair value is estimated using
either quoted market prices or discounted cash flows based on
the Company’s current borrowing rates for similar types of
borrowing.
NOTE 4
ACCOUNTS RECEIVABLE
CARDMEMBER RECEIVABLES
Cardmember receivables represent amounts due from charge
card customers. These receivables are recorded at the time a
cardmember enters into a point-of-sale transaction with a
merchant. Cardmember receivable balances are presented on
the Consolidated Balance Sheets net of reserves for losses,
discussed below, and includes principal and any related
accrued fees.
RESERVES FOR LOSSES – CARDMEMBER RECEIVABLES
Reserves for losses relating to cardmember receivables
represent management’s best estimate of the losses inherent in
the Company’s outstanding portfolio of receivables.
Management’s evaluation process requires certain estimates
and judgments. Reserves for these losses are primarily based
upon models that analyze portfolio performance and reflect
management’s judgment regarding overall reserve adequacy.
The analytic models take into account several factors,
including average losses and recoveries over an appropriate
historical period. Management considers whether to adjust
the analytic models for specific factors such as increased risk
in certain portfolios, impact of risk management initiatives on
portfolio performance and concentration of credit risk based
on factors such as tenure, industry or geographic regions. In
addition, management adjusts the reserves for losses for other
external environmental factors such as leading economic and
market indicators, and the legal and regulatory environment.
Generally, due to the short-term nature of cardmember
receivables, the impact of the other external environmental
factors on the inherent losses within the cardmember
receivable portfolio is not significant. As part of this
evaluation process, management also considers various
reserve coverage metrics, such as reserves as a percentage of
past-due amounts, reserves as a percentage of cardmember
receivables and net write-off coverage.
Cardmember receivables balances are written off when
management deems amounts to be uncollectible and is
generally determined by the number of days past due.
Cardmember receivables within the U.S. Card Services
(USCS) segment are generally written off when 180 days past
due and cardmember receivables within the International
Card Services (ICS) and Global Commercial Services (GCS)
segments are generally written off when 360 days past billing.
Receivables in bankruptcy or owed by deceased individuals
are written off upon notification. Recoveries are recognized
on a cash basis.
Prior to the fourth quarter of 2008, cardmember
receivables in the USCS segment were written off when 360
days past billing. During 2008, consistent with applicable
bank regulatory guidance, the Company modified its write-off
methodology to write off cardmember receivables in the
USCS segment when 180 days past due. Net cardmember
80