American Express 2010 Annual Report Download - page 26

CRITICAL ACCOUNTING POLICIES
Refer to Note 1 to the Consolidated Financial Statements for a summary of the Company’s significant accounting policies referenced, as
applicable, to other notes. The following chart provides information about five critical accounting policies that are important to the
Consolidated Financial Statements and that require significant management assumptions and judgments.
RESERVES FOR CARDMEMBER LOSSES
Description Assumptions/Approach Used
Effect if Actual Results Differ
from Assumptions
Reserves for cardmember losses relating to
cardmember loans and receivables
represent management’s best estimate of
the losses inherent in the Company’s
outstanding portfolio of loans and
receivables.
Reserves for cardmember loans and
receivables 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 may increase or decrease the
reserves for losses on cardmember loans
for other external environmental factors
including leading economic and market
indicators such as the unemployment rate,
Gross Domestic Product (GDP), home
price indices, non-farm payrolls, personal
consumption expenditures index, consumer
confidence index, purchasing managers
index, bankruptcy filings and the legal and
regulatory environment. 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 loans and receivables, and net
write-off coverage.
Cardmember loans and receivables are
written off when management deems
amounts to be uncollectible and is
generally determined by the number of
days past due. Cardmember loans and
receivables are generally written off no
later than 180 days past due.
Cardmember loans and receivables in
bankruptcy or owed by deceased
individuals are written off upon
notification.
Recoveries of both cardmember loans
and receivables are recognized on a cash
basis.
To the extent historical credit experience
updated for emerging market trends in
credit is not indicative of future
performance, actual losses could differ
significantly from management’s judgments
and expectations, resulting in either higher
or lower future provisions for losses, as
applicable.
As of December 31, 2010, an increase
(decrease) in write-offs equivalent to
20 basis points of cardmember loan and
receivable balances at such date would
increase (decrease) the provision for
cardmember losses by approximately $196
million. This sensitivity analysis does not
represent management’s expectations for
write-offs but is provided as a hypothetical
scenario to assess the sensitivity of the
provision for cardmember losses to
changes in key inputs.
The process of determining the reserve
for cardmember losses requires a high
degree of judgment. It is possible that
others, given the same information, may at
any point in time reach different
reasonable conclusions.
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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW