American Express 2011 Annual Report Download - page 66

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AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
VALUATION TECHNIQUES USED IN MEASURING
FAIR VALUE
For the financial assets and liabilities measured at fair value on a
recurring basis (categorized in the valuation hierarchy table on
the previous page) the Company applies the following valuation
techniques to measure fair value:
Investment Securities
폷When available, quoted market prices in active markets are
used to determine fair value. Such investment securities are
classified within Level 1 of the fair value hierarchy.
폷When quoted prices in an active market are not available, the
fair 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
classifies the prices obtained from the pricing services within
Level 1 or Level 2 of the fair value hierarchy because the
underlying inputs are directly observable from active markets
or recent trades of similar securities in inactive markets.
However, the pricing models used 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.
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.
Refer to Note 6 for additional fair value information.
Derivative Financial Instruments
The fair value of the Company’s derivative financial instruments,
which could be assets or liabilities on the Consolidated Balance
Sheets, is estimated by a third-party valuation service that uses
proprietary pricing models or by internal pricing models, where
the inputs to those models are readily observable from actively
quoted markets. The pricing models used are consistently
applied and reflect the contractual terms of the derivatives,
including the period of maturity, and market-based parameters
such as interest rates, foreign exchange rates, equity indices or
prices, and volatility. The Company reaffirms its understanding
of the valuation techniques used by its pricing services at least
annually.
Credit valuation adjustments are necessary when the market
parameters, such as a benchmark curve, used to value derivatives
are not indicative of the credit quality of the Company or its
counterparties. The Company considers the counterparty credit
risk by applying an observable forecasted default rate to the
current exposure. Refer to Note 12 for additional fair value
information.
Financial Assets and Financial Liabilities Carried at
Other Than Fair Value
Thefollowingtabledisclosestheestimatedfairvalueforthe
Company’s financial assets and financial liabilities that are not
carried at fair value, as of December 31:
2011 2010
(Billions)
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
Financial Assets:
Assets for which carrying
values equal or approximate
fair value $70$70
(a) $61$61
(b)
Loans, net $61$62
(a) $58$58
(b)
Financial Liabilities:
Liabilities for which carrying
values equal or approximate
fair value $51$51$43$43
Certificates of deposit $12$12$13$13
Long-term debt $59$62
(a) $66$69
(b)
(a) Includes fair values of cardmember receivables, loans and long-term debt of
$8.0 billion, $33.3 billion and $21.1 billion, respectively, held by
consolidated VIEs as of December 31, 2011. Refer to the Consolidated
Balance Sheets for the related carrying values.
(b) Includes fair values of cardmember receivables, loans and long-term debt of
$8.1 billion, $33.2 billion and $23.6 billion, respectively, held by
consolidated VIEs as of December 31, 2010. Refer to the Consolidated
Balance Sheets for the related carrying values.
The fair values of these financial instruments are estimates based
upon the market conditions and perceived risks as of
December 31, 2011 and 2010, and require management
judgment. These figures may not be indicative of their future fair
values. The fair value of the Company cannot be reliably
estimated by aggregating the amounts presented.
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