American Express 2012 Annual Report Download - page 73

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AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair values of these financial instruments are estimates based
upon the market conditions and perceived risks as of
December 31, 2012, and require management judgment. These
figures may not be indicative of their future fair values. The fair
value of the Company cannot be reliably estimated by
aggregating the amounts presented.
VALUATION TECHNIQUES USED IN THE FAIR VALUE
MEASUREMENT OF FINANCIAL ASSETS AND
FINANCIAL LIABILITIES CARRIED AT OTHER THAN
FAIR VALUE
For the financial assets and liabilities that are not required to be
measured at fair value on a recurring basis (categorized in the
valuation hierarchy table above) the Company applies the
following valuation techniques to measure fair value:
FINANCIAL ASSETS FOR WHICH CARRYING VALUES
EQUAL OR APPROXIMATE FAIR VALUE
Financial assets for which carrying values equal or approximate
fair value include cash and cash equivalents, cardmember
receivables, accrued interest and certain other assets. For these
assets, the carrying values approximate fair value because they
are short term in duration, have no defined maturity or have a
market-based interest rate.
FINANCIAL ASSETS CARRIED AT OTHER THAN FAIR
VALUE
Loans
Loans are recorded at historical cost, less reserves, on the
Consolidated Balance Sheets. In estimating the fair value for the
Company’s loans the Company uses a discounted cash flow
model. Due to the lack of a comparable whole loan sales market
for similar credit card receivables and a lack of observable
pricing inputs thereof, the Company uses various inputs derived
from an equivalent securitization market to estimate fair value.
Such inputs include projected income (inclusive of future
interest payments and late fee revenue), estimated pay-down
rates, discount rates and relevant credit costs.
FINANCIAL LIABILITIES FOR WHICH CARRYING
VALUES EQUAL OR APPROXIMATE FAIR VALUE
Financial liabilities for which carrying values equal or
approximate fair value include accrued interest, customer
deposits (excluding certificates of deposit, which are described
further below), Travelers Cheques outstanding, accounts
payable, short-term borrowings and certain other liabilities for
which the carrying values approximate fair value because they
are short term in duration, have no defined maturity or have a
market-based interest rate.
FINANCIAL LIABILITIES CARRIED AT OTHER THAN
FAIR VALUE
Certificates of Deposit
Certificates of deposit (CDs) are recorded at their historical
issuance cost on the Consolidated Balance Sheets. Fair value is
estimated using a discounted cash flow methodology based on
the future cash flows and the discount rate that reflects the
Company’s current rates for similar types of CDs within similar
markets.
Long-term Debt
Long-term debt is recorded at historical issuance cost on the
Consolidated Balance Sheets adjusted for the impact of fair value
hedge accounting on certain fixed-rate notes and current
translation rates for foreign-denominated debt. The fair value of
the Company’s long-term debt is measured using quoted offer
prices when quoted market prices are available. If quoted market
prices are not available, the fair value is determined by
discounting the future cash flows of each instrument at rates
currently observed in publicly traded debt markets for debt of
similar terms and credit risk. For long-term debt, where there are
no rates currently observable in publicly traded debt markets of
similar terms and comparable credit risk, the Company uses
market interest rates and adjusts those rates for necessary risks,
including its own credit risk. In determining an appropriate
spread to reflect its credit standing, the Company considers
credit default swap spreads, bond yields of other long-term debt
offered by the Company, and interest rates currently offered to
the Company for similar debt instruments of comparable
maturities.
NONRECURRING FAIR VALUE MEASUREMENTS
The Company did not have any material assets that were
measured at fair value for impairment on a nonrecurring basis
during the years ended December 31, 2012 and 2011.
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