American Express 2012 Annual Report Download - page 67

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
THE COMPANY
American Express Company (the Company) is a global services
company that provides customers with access to products,
insights and experiences that enrich lives and build business
success. The Company’s principal products and services are
charge and credit payment card products and travel-related
services offered to consumers and businesses around the world.
The Company also focuses on generating alternative sources of
revenue on a global basis in areas such as online and mobile
payments and fee-based services. The Company’s various
products and services are sold globally to diverse customer
groups, including consumers, small businesses, mid-sized
companies and large corporations. These products and services
are sold through various channels, including direct mail, online
applications, targeted direct and third-party sales forces and
direct response advertising.
PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements of the Company are
prepared in conformity with U.S. generally accepted accounting
principles (GAAP). All significant intercompany transactions are
eliminated.
The Company consolidates all entities in which the Company
holds a “controlling financial interest.” For voting interest
entities, the Company is considered to hold a controlling
financial interest when the Company is able to exercise control
over the investees’ operating and financial decisions. For variable
interest entities (VIEs), the Company is considered to hold a
controlling financial interest when it is determined to be the
primary beneficiary. A primary beneficiary is a party that has
both: (1) the power to direct the activities of a VIE that most
significantly impact that entity’s economic performance, and
(2) the obligation to absorb losses, or the right to receive
benefits, from the VIE that could potentially be significant to the
VIE. The determination of whether an entity is a VIE is based on
the amount and characteristics of the entity’s equity.
Entities in which the Company’s voting interest in common
equity does not provide the Company with control, but allows
the Company to exert significant influence over their financial
and operating decisions, are accounted for under the equity
method. All other investments in equity securities, to the extent
that they are not considered marketable securities, are accounted
for under the cost method.
FOREIGN CURRENCY
Assets and liabilities denominated in foreign currencies are
translated into U.S. dollars based upon exchange rates prevailing
at the end of each year. The resulting translation adjustments,
along with any related qualifying hedge and tax effects, are
included in accumulated other comprehensive (loss) income
(AOCI), a component of shareholders’ equity. Translation
adjustments, including qualifying hedge and tax effects, are
reclassified to earnings upon the sale or substantial liquidation of
investments in foreign operations. Revenues and expenses are
translated at the average month-end exchange rates during the
year. Gains and losses related to transactions in a currency other
than the functional currency, including operations outside the
United States where the functional currency is the U.S. dollar,
are reported net in the Company’s Consolidated Statements of
Income, in other non-interest revenue, interest income, interest
expense, or other, net expense, depending on the nature of the
activity. Net foreign currency transaction gains amounted to
approximately $120 million, $145 million and $138 million in
2012, 2011 and 2010, respectively.
AMOUNTS BASED ON ESTIMATES AND
ASSUMPTIONS
Accounting estimates are an integral part of the Consolidated
Financial Statements. These estimates are based, in part, on
management’s assumptions concerning future events. Among
the more significant assumptions are those that relate to reserves
for cardmember losses relating to loans and charge card
receivables, proprietary point liability for Membership Rewards
costs, fair value measurement, goodwill and income taxes. These
accounting estimates reflect the best judgment of management,
but actual results could differ.
TOTAL REVENUES NET OF INTEREST EXPENSE
Discount Revenue
Discount revenue represents fees generally charged to merchants
with which the Company, or its GNS partners, has entered into
card acceptance agreements for facilitating transactions between
the merchants and the Company’s cardmembers. The discount
generally is deducted from the payment to the merchant and
recorded as discount revenue at the time the charge is captured.
Net Card Fees
Card fees, net of direct card acquisition costs and a reserve for
projected membership cancellations, are deferred and recognized
on a straight-line basis over the 12-month card membership
period as Net Card Fees in the Consolidated Statements of
Income. The unamortized net card fee balance is reported net in
Other Liabilities on the Consolidated Balance Sheets (refer to
Note 11).
Travel Commissions and Fees
The Company earns travel commissions and fees by charging
clients transaction or management fees for selling and arranging
travel and for travel management services. Client transaction fee
revenue is recognized at the time the client books the travel
arrangements. Travel management services revenue is recognized
over the contractual term of the agreement. The Company’s
travel suppliers (e.g., airlines, hotels and car rental companies)
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