American Express 2011 Annual Report Download - page 62

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net Card Fees
Card fees are deferred and recognized on a straight-line basis
over the 12-month card membership period, net of deferred
direct card acquisition costs and a reserve for projected
membership cancellations. Charge card fees are recognized in net
card fees in the Consolidated Statements of Income and the
unamortized net card fee balance is reported in other liabilities
on the Consolidated Balance Sheets (refer to Note 11). Loan
product fees are considered an enhancement to the yield on the
product, and are recognized in interest and fees on loans in the
Consolidated Statements of Income. The unamortized net card
fee balance for lending products is reported net in cardmember
loans on the Consolidated Balance Sheets (refer to Note 4).
Travel Commissions and Fees
The Company earns travel commissions and fees by charging
clients transaction or management fees for selling and arranging
travel and for travel management services. Client transaction fee
revenue is recognized at the time the client books the travel
arrangements. Travel management services revenue is recognized
over the contractual term of the agreement. The Company’s travel
suppliers (for example, airlines, hotels and car rental companies)
pay commissions and fees on tickets issued, sales and other
services based on contractual agreements. Commissions and fees
from travel suppliers are generally recognized at the time a ticket
is purchased or over the term of the contract. Commissions and
fees that are based on services rendered (for example, hotel stays
and car rentals) are recognized based on usage.
Other Commissions and Fees
Other commissions and fees include foreign currency conversion
fees, delinquency fees, service fees and other card related
assessments, which are recognized primarily in the period in
which they are charged to the cardmember (refer to Note 19).
Also included are fees related to the Company’s Membership
Rewards program, which are deferred and recognized over the
period covered by the fee. The unamortized Membership
Rewards fee balance is included in other liabilities on the
Consolidated Balance Sheets (refer to Note 11).
Contra-revenue
The Company regularly makes payments through contractual
arrangements with merchants, corporate payments clients and
certain other customers. Payments to customers, including cash
rebates paid to cardmembers, are generally classified as contra-
revenue unless a specifically identifiable benefit (e.g., goods or
services) is received by the Company or its cardmembers in
consideration for that payment and the fair value of such benefit
is determinable and measurable. If no such benefit is identified,
then the entire payment is classified as contra-revenue and
included within total non-interest revenues in the Consolidated
Statements of Income in the line item where the related
transaction revenues are recorded (e.g., discount revenue, travel
commissions and fees and other commissions and fees). If such a
benefit is identified, then the payment is classified as expense up
to the estimated fair value of the benefit.
Interest Income
Interest on owned loans is assessed using the average daily balance
method. Unless the loan is classified as non-accrual, interest is
recognized based upon the loan principal amount outstanding in
accordance with the terms of the applicable account agreement
until the outstanding balance is paid or written off.
Interest and dividends on investment securities primarily
relates to the Company’s performing fixed-income securities.
Interest income is accrued as earned using the effective interest
method, which adjusts the yield for security premiums and
discounts, fees and other payments, so that a constant rate of
return is recognized on the investment security’s outstanding
balance. Amounts are recognized until such time as a security is
indefaultorwhenitislikelythatfutureinterestpaymentswill
not be received as scheduled.
Interest on deposits with banks and other is recognized as
earned, and primarily relates to the placement of cash in interest-
bearing time deposits, overnight sweep accounts, and other
interest-bearing demand and call accounts.
Interest Expense
Interest expense includes interest incurred primarily to fund
cardmember loans, charge card product receivables, general
corporate purposes, and liquidity needs, and is recognized as
incurred. Interest expense is divided principally into three
categories: (i) deposits, which primarily relates to interest
expense on deposits taken from customers and institutions,
(ii) short-term borrowings, which primarily relates to interest
expense on commercial paper, federal funds purchased, bank
overdrafts and other short-term borrowings, and (iii) long-term
debt, which primarily relates to interest expense on the
Company’s long-term financing.
BALANCE SHEET
Cash and Cash Equivalents
Cash and cash equivalents include cash and amounts due from
banks, interest-bearing bank balances, including securities
purchased under resale agreements, and other highly liquid
investments with original maturities of 90 days or less.
Premises and Equipment
Premises and equipment, including leasehold improvements, are
carried at cost less accumulated depreciation. Costs incurred
during construction are capitalized and are depreciated once an
asset is placed in service. Depreciation is generally computed
using the straight-line method over the estimated useful lives of
assets, which range from 3 to 10 years for equipment, furniture
and building improvements. Premises are depreciated based
upon their estimated useful life at the acquisition date, which
generally ranges from 30 to 50 years.
Leasehold improvements are depreciated using the straight-
line method over the lesser of the remaining term of the leased
facility or the economic life of the improvement, which ranges
from 5 to 10 years. The Company maintains operating leases
worldwide for facilities and equipment. Rent expense for facility
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