American Express 2012 Annual Report Download - page 54

AMERICAN EXPRESS COMPANY
2012 FINANCIAL REVIEW
OTHER REPORTING MATTERS
ACCOUNTING DEVELOPMENTS
Refer to the Recently Issued Accounting Standards section of
Note 1 to the Consolidated Financial Statements.
GLOSSARY OF SELECTED TERMINOLOGY
Adjusted average loans — Represents average cardmember
loans excluding the impact of deferred card fees, net of direct
acquisition costs of cardmember loans and certain other
immaterial items.
Adjusted net interest income — Represents net interest income
attributable to the Company’s cardmember loans portfolio
excluding the impact of interest expense and interest income not
attributable to the Company’s cardmember loan portfolio.
Asset securitizations — Asset securitization involves the
transfer and sale of receivables or loans to a special-purpose
entity created for the securitization activity, typically a trust. The
trust, in turn, issues securities, commonly referred to as asset-
backed securities, that are secured by the transferred receivables
or loans. The trust uses the proceeds from the sale of such
securities to pay the purchase price for the underlying receivables
or loans. The receivables and loans of the Company’s Charge and
Lending Trusts being securitized are reported as assets on the
Company’s Consolidated Balance Sheets, while the related
securities issued to third-party investors are reported as long-
term debt.
Average discount rate — This calculation is designed to reflect
pricing at merchants accepting general purpose American
Express cards. It represents the percentage of billed business
(both proprietary and GNS) retained by the Company from
merchants it acquires, prior to payments to third parties
unrelated to merchant acceptance.
Basel III supplementary leverage ratio — Refer to the Capital
Strategy section under “Consolidated Capital Resources and
Liquidity” for the definition.
Basic cards-in-force — Proprietary basic consumer cards-in-
force includes basic cards issued to the primary account owner
and does not include additional supplemental cards issued on
that account. Proprietary basic small business and corporate
cards-in-force include basic and supplemental cards issued to
employee cardmembers. Non-proprietary basic cards-in-force
includes cards that are issued and outstanding under network
partnership agreements, except for supplemental cards and retail
co-brand cardmember accounts which have no out-of-store
spend activity during the prior 12-month period.
Billed business — Includes activities (including cash advances)
related to proprietary cards, cards issued under network
partnership agreements (non-proprietary billed business),
corporate payments and certain insurance fees charged on
proprietary cards. In-store spend activity within retail co-brand
portfolios in GNS, from which the Company earns no revenue, is
not included in non-proprietary billed business. Card billed
business is reflected in the United States or outside the United
States based on where the cardmember is domiciled.
Capital asset pricing model — Generates an appropriate
discount rate using internal and external inputs to value future
cash flows based on the time value of money and the price for
bearing uncertainty inherent in an investment.
Capital ratios — Represents the minimum standards
established by the regulatory agencies as a measure to determine
whether the regulated entity has sufficient capital to absorb on-
and off-balance sheet losses beyond current loss accrual
estimates.
Card acquisition — Primarily represents the issuance of new
cards to either new or existing cardmembers through marketing
and promotion efforts.
Cardmember — The individual holder of an issued American
Express branded charge or credit card.
Cardmember loans — Represents the outstanding amount due
from cardmembers for charges made on their American Express
credit cards, as well as any interest charges and card-related fees.
Cardmember loans also include balances with extended payment
terms on certain American Express charge card products and are
net of deferred card fees.
Cardmember receivables — Represents the outstanding amount
due from cardmembers for charges made on their American
Express charge cards as well as any card-related fees.
Charge cards — Represents cards that generally carry no pre-
set spending limits and are primarily designed as a method of
payment and not as a means of financing purchases. Charge
cardmembers generally must pay the full amount billed each
month. No finance charges are assessed on charge cards. Each
charge card transaction is authorized based on its likely
economics reflecting a customer’s most recent credit information
and spend patterns. Some charge card accounts have an
additional lending-on-charge feature that allows revolving
certain balances.
Credit cards — Represents cards that have a range of revolving
payment terms, grace periods, and rate and fee structures.
Discount revenue — Represents revenue earned from fees
generally charged to merchants with whom the Company has
entered into a card acceptance agreement for processing
cardmember transactions. The discount fee generally is deducted
from the Company’s payment reimbursing the merchant for
cardmember purchases. Discount revenue is reduced by
payments made to third-party card issuing partners, cash-back
reward costs, corporate incentive payments and other contra-
revenue items.
Four-party network — A payment network, such as Visa or
MasterCard, in which the card issuer and merchant acquirer are
different entities and the network does not have direct
relationships with merchants or cardholders.
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 two categories: (i) deposits, which primarily relates to
interest expense on deposits taken from customers and
institutions and (ii) long-term debt, which primarily relates to
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