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AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3
FAIR VALUES
Fair value is defined as the price that would be received to sell an
asset or paid to transfer a liability (an exit price) in an orderly
transaction between market participants at the measurement
date, and is based on the Company’s principal or most
advantageous market for the specific asset or liability.
GAAP provides for a three-level hierarchy of inputs to
valuation techniques used to measure fair value, defined as
follows:
폷Level 1 — Inputs that are quoted prices (unadjusted) for
identical assets or liabilities in active markets.
폷Level 2 — Inputs other than quoted prices included within
Level 1 that are observable for the asset or liability, either
directly or indirectly, for substantially the full term of the asset
or liability, including:
– Quoted prices for similar assets or liabilities in active
markets
– Quoted prices for identical or similar assets or liabilities in
markets that are not active
– Inputs other than quoted prices that are observable for the
asset or liability
– Inputs that are derived principally from or corroborated by
observable market data by correlation or other means
폷Level 3 — Inputs that are unobservable and reflect the
Company’s own assumptions about the assumptions market
participants would use in pricing the asset or liability based on
the best information available in the circumstances (e.g.,
internally derived assumptions surrounding the timing and
amount of expected cash flows).
Financial Assets and Financial Liabilities Carried at Fair Value
The following table summarizes the Company’s financial assets and financial liabilities measured at fair value on a recurring basis,
categorized by GAAP’s valuation hierarchy (as described in the preceding paragraphs), as of December 31:
2011 2010
(Millions) Total Level 1 Level 2 Total Level 1 Level 2
Assets:
Investment securities:(a)
Equity securities $ 360 $ 360 $ – $ 475 $ 475 $ –
Debt securities and other(b) 6,787 340 6,447 13,535 – 13,535
Derivatives(c) 1,516 – 1,516 1,089 – 1,089
Total assets $ 8,663 $ 700 $ 7,963 $ 15,099 $ 475 $ 14,624
Liabilities:
Derivatives(c) $ 108 $ – $ 108 $ 419 $ – $ 419
Total liabilities $ 108 $ – $ 108 $ 419 $ – $ 419
(a) Refer to Note 6 for the fair values of investment securities on a further disaggregated basis.
(b) Effective October 1, 2011, the significant transfers into Level 1 were $340 million of investment securities related to U.S. Government treasury obligations. This was
driven by the Company’s quantitative assessment that these investment securities are actively traded in the market and therefore the pricing inputs reflect quoted
prices for similar assets within an active market. There were no transfers out of Level 1.
(c) Refer to Note 12 for the fair values of derivative assets and liabilities on a further disaggregated basis, as well as the netting of both (i) cash collateral received or posted
under credit support agreements and (ii) derivative assets and derivative liabilities under master netting agreements. These balances have been presented gross in the
table above.
The Company did not measure any financial instruments at fair
value using significantly unobservable inputs (Level 3) during
the years ended December 31, 2011 and 2010.
GAAP requires disclosure of the estimated fair value of all
financial instruments. A financial instrument is defined as cash,
evidence of an ownership in an entity, or a contract between two
entities to deliver cash or another financial instrument or to
exchange other financial instruments. The disclosure
requirements for the fair value of financial instruments exclude
leases, equity method investments, affiliate investments, pension
and benefit obligations, insurance contracts and all non-financial
instruments.
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