American Express 2010 Annual Report Download - page 28

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FAIR VALUE MEASUREMENT
Description Assumptions/Approach Used
Effect if Actual Results Differ
from Assumptions
The Company holds investment securities
and derivative instruments. These financial
instruments are reflected at fair value on
the Company’s Consolidated Balance
Sheets. Management makes significant
assumptions and judgments when
estimating fair value for these financial
instruments.
In accordance with fair value measurement
and disclosure guidance, the objective of a
fair value measurement is to determine the
price that would be received to sell an
asset or paid to transfer a liability in an
orderly transaction between market
participants at the measurement date (an
exit price). The disclosure guidance
establishes a three-level hierarchy of inputs
to valuation techniques used to measure
fair value. The fair value hierarchy gives
the highest priority to the measurement of
fair value based on unadjusted quoted
prices in active markets for identical assets
or liabilities (Level 1), followed by the
measurement of fair value based on pricing
models with significant observable inputs
(Level 2), with the lowest priority given to
the measurement of fair value based on
pricing models with significant
unobservable inputs (Level 3).
Investment Securities
The Company’s investment securities are
predominantly comprised of fixed-income
securities issued by states and
municipalities as well as the U.S.
Government and Agencies (e.g., Fannie
Mae, Freddie Mac or Ginnie Mae). The
investment securities are classified as
available-for-sale with changes in fair value
recorded in accumulated other
comprehensive (loss) income within
shareholders’ equity on the Company’s
Consolidated Balance Sheets.
Investment Securities
The fair market values for the Company’s
investment securities are obtained
primarily from pricing services engaged by
the Company, and the Company receives
one price for each security. The fair values
provided by the pricing services are
estimated using pricing models where the
inputs to those models are based on
observable market inputs. The inputs to
the valuation techniques applied by the
pricing services vary depending on the type
of security being priced but are typically
benchmark yields, benchmark security
prices, credit spreads, prepayment speeds,
reported trades and broker-dealer quotes,
all with reasonable levels of transparency.
The pricing services did not apply any
adjustments to the pricing models used. In
addition, the Company did not apply any
adjustments to prices received from the
pricing services. The Company reaffirms its
understanding of the valuation techniques
used by its pricing services at least
annually. In addition, the Company
corroborates the prices provided by its
pricing services to test their reasonableness
by comparing their prices to valuations
from different pricing sources as well as
comparing prices to the sale prices
received from sold securities. As of
December 31, 2010, all of the Company’s
investment securities are classified in
either Level 1 or Level 2 of the fair value
hierarchy. Refer to Note 3 to the
Company’s Consolidated Financial
Statements.
Investment Securities
In the measurement of fair value for the
Company’s investment securities, even
though the underlying inputs used in the
pricing models are directly observable from
active markets or recent trades of similar
securities in inactive markets, the pricing
models do entail a certain amount of
subjectivity and therefore differing
judgments in how the underlying inputs
are modeled could result in different
estimates of fair value.
26
AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW