American Express 2013 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). Significant intercompany transactions are eliminated.
The Company consolidates entities in which it holds a “controlling
financial interest.” For voting interest entities, the Company is
considered to hold a controlling financial interest when it is able to
exercise control over the investees’ operating and financial decisions.
For variable interest entities (VIEs), it is considered to hold a
controlling financial interest when it is determined to be the primary
beneficiary. A primary beneficiary is the party that has both: (1) the
power to direct the activities that most significantly impact that
entity’s economic performance, and (2) the obligation to absorb losses
of, 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 it with control, but allows the Company to exert
significant influence over the operating and financial 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
U.S. 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 expenses,
depending on the nature of the activity. Net foreign currency
transaction gains amounted to approximately $108 million, $120
million and $145 million in 2013, 2012 and 2011, 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 Card
Member losses on loans and receivables, the 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 a Global Network Services (GNS) partner, has
entered into card acceptance agreements for facilitating transactions
between the merchants and the Company’s Card Members. The
discount fee 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) 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.
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