American Express 2011 Annual Report Download - page 82

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11
OTHER LIABILITIES
The following is a summary of other liabilities as of
December 31:
(Millions) 2011 2010
Membership Rewards reserves $ 5,066 $ 4,500
Book overdraft balances 3,091 1,185
Employee-related liabilities(a) 2,192 2,026
Rebate and reward accruals(b) 1,866 1,555
Deferred charge card fees, net 1,063 1,036
Other(c) 4,792 5,291
Total $ 18,070 $ 15,593
(a) Employee-related liabilities include employee benefit plan obligations and
incentive compensation.
(b) Rebate and reward accruals include payments to third-party card-issuing
partners and cash-back reward costs.
(c) Other includes accruals for general operating expenses, litigation, client
incentives, advertising and promotion, derivatives, restructuring and
reengineering reserves.
MEMBERSHIP REWARDS
The Membership Rewards program allows enrolled cardmembers
to earn points that can be redeemed for a broad range of rewards
including travel, entertainment, retail certificates and
merchandise. The Company establishes balance sheet reserves
which represent management’s best estimate of the future cost of
points earned that are expected to be redeemed. An ultimate
redemption rate and weighted average cost per point are key
factors used to approximate Membership Rewards reserves.
Management uses statistical and actuarial models to estimate
ultimate redemption rates based on historical redemption trends,
current enrollee redemption behavior, card product type, year of
program enrollment, enrollment tenure and card spend levels.
The weighted-average cost per point is determined using actual
redemptions during the previous 12 months, revised as
appropriate for recent changes in redemption costs.
The provision for the cost of Membership Rewards points is
included in marketing, promotion, rewards and cardmember
services expenses. The Company continually evaluates its reserve
methodology and assumptions based on developments in
redemption patterns, cost per point redeemed, contract changes
and other factors.
DEFERRED CHARGE CARD FEES
The carrying amount of deferred charge card and other fees, net
of direct acquisition costs and reserves for membership
cancellations as of December 31 were as follows:
(Millions) 2011 2010
Deferred charge card and other fees(a) $ 1,228 $ 1,194
Deferred direct acquisition costs (75) (67)
Reserves for membership cancellations (90) (91)
Deferred charge card fees and other, net of direct
acquisition costs and reserves $ 1,063 $ 1,036
(a) Includes deferred fees for Membership Rewards program participants.
NOTE 12
DERIVATIVES AND HEDGING ACTIVITIES
The Company uses derivative financial instruments (derivatives)
to manage exposure to various market risks. Derivatives derive
their value from an underlying variable or multiple variables,
including interest rate, foreign exchange, and equity indices or
prices. These instruments enable end users to increase, reduce or
alter exposure to various market risks and, for that reason, are an
integral component of the Company’s market risk management.
The Company does not engage in derivatives for trading
purposes.
Market risk is the risk to earnings or value resulting from
movements in market prices. The Company’s market risk
exposure is primarily generated by:
폷Interest rate risk in its card, insurance and Travelers Cheque
businesses, as well as its investment portfolios; and
폷Foreign exchange risk in its operations outside the United
States.
The Company centrally monitors market risks using market risk
limits and escalation triggers as defined in its market risk policy.
The Company’s market exposures are in large part byproducts
of the delivery of its products and services. Interest rate risk
arises through the funding of cardmember receivables and fixed-
rate loans with variable-rate borrowings as well as through the
risk to net interest margin from changes in the relationship
between benchmark rates such as Prime and LIBOR.
Interest rate exposure within the Company’s charge card and
fixed-rate lending products is managed by varying the
proportion of total funding provided by short-term and variable-
rate debt and deposits compared to fixed-rate debt and deposits.
Inaddition,interestrateswapsareusedfromtimetotimeto
economically convert fixed-rate debt obligations to variable-rate
obligations or to convert variable-rate debt obligations to fixed-
rate obligations. The Company may change the mix between
variable-rate and fixed-rate funding based on changes in business
volumes and mix, among other factors.
Foreign exchange risk is generated by cardmember cross-
currency charges, foreign currency balance sheet exposures,
foreign subsidiary equity and foreign currency earnings in
entities outside the United States. The Company’s foreign
exchange risk is managed primarily by entering into agreements
to buy and sell currencies on a spot basis or by hedging this
market exposure to the extent it is economically justified through
various means, including the use of derivatives such as foreign
exchange forwards, and cross-currency swap contracts, which
can help “lock in” the value of the Company’s exposure to
specific currencies.
In addition to the exposures identified above, effective
August 1, 2011, the Company entered into a total return contract
(TRC) to hedge its exposure to changes in the fair value of its
equity investment in ICBC in local currency. Under the terms of
the TRC, the Company receives from the TRC counterparty an
amount equivalent to any reduction in the fair value of its
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