American Express 2013 Annual Report Download - page 51

AMERICAN EXPRESS COMPANY
2013 FINANCIAL REVIEW
conditions. To discount these cash flows the Company uses its
expected cost of equity, determined using a capital asset pricing
model. When using the market method under the market approach,
the Company applies comparable publically traded companies’
multiples (e.g., earnings, revenues) to its reporting units’ actual
results. The judgment in estimating forecasted cash flows, discount
rates and market comparables is significant, and imprecision could
materially affect the fair value of the Company’s reporting units.
Based upon the updated valuations for the Company’s reporting
units, the Company has concluded goodwill is not impaired as of
December 31, 2013, nor was any goodwill written off during 2013.
However, the Company could be exposed to increased risk of goodwill
impairment if future operating results or macroeconomic conditions
differ significantly from management’s current assumptions.
INCOME TAXES
The Company is subject to the income tax laws of the U.S., its states
and municipalities and those of the foreign jurisdictions in which the
Company operates. These tax laws are complex, and the manner in
which they apply to the taxpayer’s facts is sometimes open to
interpretation. In establishing a provision for income tax expense, the
Company must make judgments about the application of inherently
complex tax laws.
Unrecognized Tax Benefits
The Company establishes a liability for unrecognized tax benefits,
which are the differences between a tax position taken or expected to
be taken in a tax return and the benefit recognized in the financial
statements.
In establishing a liability for an unrecognized tax benefit,
assumptions may be made in determining whether, and the extent to
which, a tax position should be sustained. A tax position is recognized
only when it is more likely than not to be sustained upon examination
by the relevant taxing authority based on its technical merits. The
amount of tax benefit recognized is the largest benefit that
management believes is more likely than not to be realized on ultimate
settlement. As new information becomes available, the Company
evaluates its tax positions, and adjusts its unrecognized tax benefits, as
appropriate.
Tax benefits ultimately realized can differ from amounts previously
recognized due to uncertainties, with any such differences generally
impacting the provision for income tax.
Deferred Tax Asset Realization
Deferred tax assets and liabilities are determined based on the
differences between the financial statement and tax bases of assets and
liabilities using the enacted tax rates expected to be in effect for the
years in which the differences are expected to reverse.
Since deferred taxes measure the future tax effects of items
recognized in the Consolidated Financial Statements, certain estimates
and assumptions are required to determine whether it is more likely
than not that all or some portion of the benefit of a deferred tax asset
will not be realized. In making this assessment, management analyzes
and estimates the impact of future taxable income, reversing
temporary differences and available tax planning strategies. These
assessments are performed quarterly, taking into account any new
information.
Changes in facts or circumstances can lead to changes in the
ultimate realization of deferred tax assets due to uncertainties.
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