American Express 2010 Annual Report Download - page 53

BUSINESS SEGMENT RESULTS
The Company is a global service company principally engaged in
businesses comprising four reportable operating segments:
U.S. Card Services (USCS), International Card Services (ICS),
Global Commercial Services (GCS) and Global Network &
Merchant Services (GNMS).
The Company considers a combination of factors when
evaluating the composition of its reportable operating
segments, including the results reviewed by the chief
operating decision maker, economic characteristics, products
and services offered, classes of customers, product distribution
channels, geographic considerations (primarily U.S. versus
non-U.S.) and regulatory environment considerations. Refer
to Note 25 to the Consolidated Financial Statements for
additional discussion of products and services by segment.
Results of the business segments essentially treat each
segment as a stand-alone business. The management
reporting process that derives these results allocates income
and expense using various methodologies as described below.
Beginning in the fourth quarter of 2010, the Company
completed its conversion to a new general ledger platform.
This conversion enabled the Company to streamline its ledger
reporting unit structure, resulting in a reconfiguration of
intercompany accounts. These changes have the effect of
altering intercompany balances among segments, thus altering
reported total segment assets. Total segment assets as of
December 31, 2010 and 2009 presented below reflect the
changes described above. This conversion has no impact on
segment results, segment capital or return on segment
capital metrics.
Beginning in the first quarter of 2010, the Company made
changes to the manner in which it allocates capital and the
related interest expense charged to its reportable operating
segments. The changes reflect modifications in allocation
methodology that the Company believes more accurately
reflect the funding and capital characteristics of its segments.
The change to interest allocation also impacted the consolidated
and segment reported net interest yield on cardmember loans.
The segment results and net interest yield on cardmember loans
for 2009 and 2008 have been revised for this change.
Beginning in 2009, the Company changed the manner by
which it assesses the performance of its reportable operating
segments to exclude the impact of its excess liquidity funding
levels. Accordingly, the debt, cash and investment balances
associated with the Company’s excess liquidity funding and
the related net negative interest spread are not included
within the reportable operating segment results (primarily
USCS and GCS segments) and are reported in the
Corporate & Other segment for 2010 and 2009. The segment
results for 2008 have not been revised for this change.
As discussed more fully below, results are presented on a
GAAP basis unless otherwise stated. Refer to “Glossary of
Selected Terminology” for the definitions of certain key terms
and related information appearing in the tables below.
TOTAL REVENUES NET OF INTEREST EXPENSE
The Company allocates discount revenue and certain other
revenues among segments using a transfer pricing
methodology. Segments earn discount revenue based on the
volume of merchant business generated by cardmembers.
Within the USCS, ICS and GCS segments, discount revenue
reflects the issuer component of the overall discount rate; within
the GNMS segment, discount revenue reflects the network and
merchant component of the overall discount rate. Total interest
income and net card fees are directly attributable to the segment
in which they are reported.
PROVISIONS FOR LOSSES
The provisions for losses are directly attributable to the segment
in which they are reported.
EXPENSES
Marketing and promotion expenses are reflected in each
segment based on actual expenses incurred, with the
exception of brand advertising, which is primarily reflected in
the GNMS and USCS segments. Rewards and cardmember
services expenses are reflected in each segment based on
actual expenses incurred within each segment.
Salaries and employee benefits and other operating expenses,
such as professional services, occupancy and equipment and
communications, reflect expenses incurred directly within each
segment. In addition, expenses related to the Company’s support
services, such as technology costs, are allocated to each segment
based on support service activities directly attributable to the
segment. Other overhead expenses, such as staff group support
functions, are allocated to segments based on each segment’s
relative level of pretax income. Financing requirements are
managed on a consolidated basis. Funding costs are allocated
based on segment funding requirements.
CAPITAL
Each business segment is allocated capital based on established
business model operating requirements, risk measures and
regulatory capital requirements. Business model operating
requirements include capital needed to support operations
and specific balance sheet items. The risk measures include
considerations for credit, market and operational risk.
INCOME TAXES
Income tax provision (benefit) is allocated to each business
segment based on the effective tax rates applicable to various
businesses that make up the segment.
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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW