American Express 2012 Annual Report Download - page 68

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
pay commissions and fees on tickets issued, sales and other
services based on contractual agreements. Commissions and fees
from travel suppliers are generally recognized at the time a ticket
is purchased or over the term of the contract. Commissions and
fees that are based on services rendered (e.g., hotel stays and car
rentals) are recognized based on usage.
Other Commissions and Fees
Other commissions and fees include foreign currency conversion
fees, delinquency fees, service fees and other card related
assessments, which are recognized primarily in the period in
which they are charged to the cardmember (refer to Note 19).
Also included are fees related to the Company’s Membership
Rewards program, which are deferred and recognized over the
period covered by the fee. The unamortized Membership
Rewards fee balance is included in other liabilities on the
Consolidated Balance Sheets (refer to Note 11).
Contra-revenue
The Company regularly makes payments through contractual
arrangements with merchants, corporate payments clients,
cardmembers and certain other customers. Payments to such
customers, including cash rebates paid to cardmembers, are
generally classified as contra-revenue unless a specifically
identifiable benefit (e.g., goods or services) is received by the
Company or its cardmembers in consideration for that payment
and the fair value of such benefit is determinable and
measurable. If no such benefit is identified, then the entire
payment is classified as contra-revenue and included in the
Consolidated Statements of Income in the line item where the
related transaction revenues are recorded (e.g., discount revenue,
travel commissions and fees and other commissions and fees). If
such a benefit is identified, then the payment is classified as
expense up to the estimated fair value of the benefit.
Interest Income
Interest on cardmember loans is assessed using the average daily
balance method. Unless the loan is classified as non-accrual,
interest is recognized based upon the outstanding balance, in
accordance with the terms of the applicable account agreement,
until the outstanding balance is paid or written off.
Interest and dividends on investment securities primarily
relates to the Company’s performing fixed-income securities.
Interest income is accrued as earned using the effective interest
method, which adjusts the yield for security premiums and
discounts, fees and other payments, so that a constant rate of
return is recognized on the investment security’s outstanding
balance. Amounts are recognized until such time as a security is
indefaultorwhenitislikelythatfutureinterestpaymentswill
not be received as scheduled.
Interest on deposits with banks and other is recognized as
earned, and primarily relates to the placement of cash in interest-
bearing time deposits, overnight sweep accounts, and other
interest-bearing demand and call accounts.
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 and other, which primarily relates to interest
expense on the Company’s long-term financing and short-term
borrowings, and the realized impact of derivatives hedging
interest rate risk.
BALANCE SHEET
Cash and Cash Equivalents
Cash and cash equivalents include cash and amounts due from
banks, interest-bearing bank balances, including securities
purchased under resale agreements, and other highly liquid
investments with original maturities of 90 days or less.
Premises and Equipment
Premises and equipment, including leasehold improvements, are
carried at cost less accumulated depreciation. Costs incurred
during construction are capitalized and are depreciated once an
asset is placed in service. Depreciation is generally computed
using the straight-line method over the estimated useful lives of
assets, which range from 3 to 10 years for equipment, furniture
and building improvements. Premises are depreciated based
upon their estimated useful life at the acquisition date, which
generally ranges from 30 to 50 years.
Leasehold improvements are depreciated using the straight-
line method over the lesser of the remaining term of the leased
facility or the economic life of the improvement, which ranges
from 5 to 10 years. The Company maintains operating leases
worldwide for facilities and equipment. Rent expense for facility
leases is recognized ratably over the lease term, and includes
adjustments for rent concessions, rent escalations and leasehold
improvement allowances. The Company recognizes lease
restoration obligations at the fair value of the restoration
liabilities when incurred, and amortizes the restoration assets
over the lease term.
The Company capitalizes certain costs associated with the
acquisition or development of internal-use software. Once the
software is ready for its intended use, these costs are amortized
on a straight-line basis over the software’s estimated useful life,
generally 5 years.
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