American Express 2011 Annual Report Download - page 61

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
THE COMPANY
American Express Company is a global service company that
provides customers with access to products, insights and
experiences that enrich lives and build business success. The
Company’s principal products and services are charge and credit
payment card products and travel-related services offered to
consumers and businesses around the world. The Company has
also recently focused on generating alternative sources of
revenue on a global basis in areas such as online and mobile
payments and fee-based services. The Company’s various
products and services are sold globally to diverse customer
groups, including consumers, small businesses, mid-sized
companies and large corporations. These products and services
are sold through various channels, including direct mail, online
applications, targeted direct and third-party sales forces and
direct response advertising.
PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements of the Company are
prepared in conformity with U.S. generally accepted accounting
principles (GAAP). All significant intercompany transactions are
eliminated.
Effective January 1, 2010, the Company adopted ASU
No. 2009-16, Transfers and Servicing (Topic 860): Accounting
for Transfers of Financial Assets, and ASU No. 2009-17,
Consolidations (Topic 810): Improvements to Financial
Reporting by Enterprises Involved with Variable Interest Entities,
which required the Company to include the securitized
cardmember loans and related debt securities issued to third
parties by the American Express Credit Account Master Trust
(the Lending Trust) in the Consolidated Balance Sheets.
Adoption of these standards (generally referred to herein as new
GAAP governing consolidations and VIEs) reduced shareholders’
equity in the amount of $1.8 billion as of January 1, 2010,
primarily for the after-tax effect of establishing the additional
reserve for losses on cardmember loans and for reversing the
unrealized gains on the retained subordinated securities. The
components of securitization income, net for the cardmember
loans and long-term debt, are now recorded in other
commissions and fees, interest income and interest expense.
Results for 2009 and prior periods have not been revised.
The Company consolidates all entities in which the Company
holds a “controlling financial interest.” For voting interest
entities, the Company is considered to hold a controlling
financial interest when the Company is able to exercise control
over the investees’ operating and financial decisions. For variable
interest entities (VIEs), the Company is considered to hold a
controlling financial interest when it is determined to be the
primary beneficiary. A primary beneficiary is a party that has
both: (1) the power to direct the activities of a VIE that most
significantly impact that entity’s economic performance, and
(2) the obligation to absorb losses, or the right to receive
benefits, from the VIE that could potentially be significant to the
VIE. The determination of whether an entity is a VIE is based on
the amount and characteristics of the entity’s equity.
Entities in which the Company’s voting interest in common
equity does not provide the Company with control, but allows
the Company to exert significant influence over their financial
and operating decisions, are accounted for under the equity
method. All other investments in equity securities, to the extent
that they are not considered marketable securities, are accounted
for under the cost method.
FOREIGN CURRENCY
Assets and liabilities denominated in foreign currencies are
translated into U.S. dollars based upon exchange rates prevailing
at the end of each year. The resulting translation adjustments,
along with any related qualifying hedge and tax effects, are
included in accumulated other comprehensive (loss) income
(AOCI), a component of shareholders’ equity. Translation
adjustments, including qualifying hedge and tax effects, are
reclassified to earnings upon the sale or substantial liquidation of
investments in foreign operations. Revenues and expenses are
translated at the average month-end exchange rates during the
year. Gains and losses related to transactions in a currency other
than the functional currency, including operations outside the
United States where the functional currency is the U.S. dollar,
are reported net in the Company’s Consolidated Statements of
Income, in other non-interest revenue, interest income, interest
expense, or other, net expense, depending on the nature of the
activity. Net foreign currency transaction gains amounted to
approximately $145 million, $138 million and $205 million in
2011, 2010 and 2009, respectively.
AMOUNTS BASED ON ESTIMATES AND
ASSUMPTIONS
Accounting estimates are an integral part of the Consolidated
Financial Statements. These estimates are based, in part, on
management’s assumptions concerning future events. Among
the more significant assumptions are those that relate to reserves
for cardmember losses relating to loans and charge card
receivables, reserves for Membership Rewards costs, fair value
measurement, goodwill and income taxes. These accounting
estimates reflect the best judgment of management, but actual
results could differ.
TOTAL REVENUES NET OF INTEREST EXPENSE
Discount Revenue
Discount revenue represents fees charged to merchants with
which the Company, or its GNS partners, has entered into card
acceptance agreements for facilitating transactions between the
merchants and the Company’s cardmembers. The discount
generally is deducted from the payment to the merchant and
recorded as discount revenue at the time the charge is captured.
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