American Express 2012 Annual Report Download - page 92

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company also recognized a net reduction in interest expense
on long-term debt of $491 million, $503 million and $522
million for the years ended December 31, 2012, 2011 and 2010,
respectively, primarily related to the net settlements (interest
accruals) on the Company’s interest rate derivatives designated
as fair value hedges.
CASH FLOW HEDGES
A cash flow hedge involves a derivative designated to hedge the
Company’s exposure to variable future cash flows attributable to
a particular risk. Such exposures may relate to either an existing
recognized asset or liability or a forecasted transaction. The
Company hedges existing long-term variable-rate debt, the
rollover of short-term borrowings and the anticipated forecasted
issuance of additional funding through the use of derivatives,
primarily interest rate swaps. These derivative instruments
economically convert floating-rate debt obligations to fixed-rate
obligations for the duration of the instrument. As of
December 31, 2012 and 2011, the Company hedged nil and $305
million, respectively, of its floating-rate debt using interest rate
swaps.
For derivatives designated as cash flow hedges, the effective
portion of the gain or loss on the derivatives is recorded in AOCI
and reclassified into earnings when the hedged cash flows are
recognized in earnings. The amount that is reclassified into
earnings is presented in the Consolidated Statements of Income
inthesamelineiteminwhichthehedgedinstrumentor
transaction is recognized, primarily in interest expense. Any
ineffective portion of the gain or loss on the derivatives is
reported as a component of other expenses. If a cash flow hedge
is de-designated or terminated prior to maturity, the amount
previously recorded in AOCI is recognized into earnings over the
period that the hedged item impacts earnings. If a hedge
relationship is discontinued because it is probable that the
forecasted transaction will not occur according to the original
strategy, any related amounts previously recorded in AOCI are
recognized into earnings immediately.
In the normal course of business, as the hedged cash flows are
recognized into earnings, the Company does not expect to
reclassify any amount 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, net of taxes, recorded in
AOCI as part of the cumulative translation adjustment, was
$(288) million, $(26) million and $32 million for the years ended
2012, 2011 and 2010, respectively. Any ineffective portion of the
gain or (loss) on net investment hedges is recognized in other
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
Income Statement Line Item
Net hedge
ineffectiveness
Description (Millions) Income Statement Line Item 2012 2011 2010 2012 2011 2010
Cash flow hedges:(a)
Interest rate contracts Interest expense $ (1) $ (13) $ (36) Other, net expenses $—$—$—
Net investment hedges:
Foreign exchange contracts Other, net expenses $—$—$ 2Other,netexpenses $—$(3)$(3)
(a) During the years ended December 31, 2012, 2011 and 2010, 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 containing
payments that 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,
in which case 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 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.
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