American Express 2011 Annual Report Download - page 85

Download and view the complete annual report

Please find page 85 of the 2011 American Express annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 113

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the normal course of business, as the hedged cash flows are
recognized into earnings, the Company expects to reclassify $1
million of net pretax losses on derivatives from AOCI into
earnings during the next 12 months.
NET INVESTMENT HEDGES
A net investment hedge is used to hedge future changes in
currency exposure of a net investment in a foreign operation.
The Company primarily designates foreign currency derivatives,
typically foreign exchange forwards, and on occasion foreign
currency denominated debt, as hedges of net investments in
certain foreign operations.
These instruments reduce exposure to changes in currency
exchange rates on the Company’s investments in non-U.S.
subsidiaries. The effective portion of the gain or loss on net
investment hedges is recorded in AOCI as part of the cumulative
translation adjustment. Any ineffective portion of the gain or
loss on net investment hedges is recognized in other, net
expenses during the period of change.
The following table summarizes the impact of cash flow hedges and net investment hedges on the Consolidated Statements of Income
for the years ended December 31:
Gains (losses) recognized in income
Amount reclassified
from AOCI into
income
Net hedge
ineffectiveness
(Millions) Location 2011 2010 2009 Location 2011 2010 2009
Cash flow hedges:(a)
Interest rate contracts Interest expense $ (13) $ (36) $ (115) Other, net expenses $–$–$–
Net investment hedges:
Foreign exchange contracts Other, net expenses $–$2$–Other,netexpenses $ (3) $(3)$(1)
(a) During the years ended December 31, 2011, 2010 and 2009, there were no forecasted transactions that were considered no longer probable to occur.
DERIVATIVES NOT DESIGNATED AS HEDGES
The Company has derivatives that act as economic hedges, but
are not designated as such for hedge accounting purposes.
Foreign currency transactions and non-U.S. dollar cash flow
exposures from time to time may be partially or fully
economically hedged through foreign currency contracts,
primarily foreign exchange forwards, options and cross-currency
swaps. These hedges generally mature within one year. Foreign
currency contracts involve the purchase and sale of a designated
currency at an agreed upon rate for settlement on a specified
date. The changes in the fair value of the derivatives effectively
offset the related foreign exchange gains or losses on the
underlying balance sheet exposures. From time to time, the
Company may enter into interest rate swaps to specifically
manage funding costs related to its proprietary card business.
The Company has certain operating agreements whose
payments may be linked to a market rate or price, primarily
foreign currency rates. The payment components of these
agreements may meet the definition of an embedded derivative,
which is assessed to determine if it requires separate accounting
and reporting. If so, the embedded derivative is accounted for
separately and is classified as a foreign exchange contract based
on its primary risk exposure. In addition, the Company also
holds an investment security containing an embedded equity-
linked derivative.
For derivatives that are not designated as hedges, changes in
fair value are reported in current period earnings.
The following table summarizes the impact of derivatives not designated as hedges on the Consolidated Statements of Income for the
years ended December 31:
Gains (losses) recognized in income
Amount
(Millions) Location 2011 2010 2009
Interest rate contracts Other, net expenses $3$(8)$17
Foreign exchange contracts(a) Other non-interest revenues ––(1)
Interest and dividends on investment securities 944
Interest expense on short-term borrowings 375
Interest expense on long-term debt and other 130 93 35
Other, net expenses 51 (3) (8)
Equity-linked contract Other non-interest revenues –(6) 1
Total $ 196 $87$53
(a) For the years ended December 31, 2011, 2010 and 2009, foreign exchange contracts include embedded foreign currency derivatives. Gains (losses) on these embedded
derivatives are included in other, net expenses.
83