American Express 2013 Annual Report Download - page 71

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL ASSETS AND FINANCIAL LIABILITIES CARRIED AT FAIR VALUE
The following table summarizes the Company’s financial assets and financial liabilities measured at fair value on a recurring basis, categorized by
GAAP’s valuation hierarchy (as described in the preceding paragraphs), as of December 31:
2013 2012
(Millions) Total Level 1 Level 2 Total Level 1 Level 2
Assets:
Investment securities:(a)
Equity securities $ 124 $ 124 $ — $ 296 $ 296 $ —
Debt securities and other 4,892 320 4,572 5,318 338 4,980
Derivatives(a) 701 — 701 942 — 942
Total assets 5,717 444 5,273 6,556 634 5,922
Liabilities:
Derivatives(a) 213 — 213 329 — 329
Total liabilities $ 213 $ — $ 213 $ 329 $ — $ 329
(a) Refer to Note 6 for the fair values of investment securities and to Note 12 for the fair values of derivative assets and liabilities, on a further disaggregated basis.
VALUATION TECHNIQUES USED IN THE FAIR VALUE
MEASUREMENT OF FINANCIAL ASSETS AND FINANCIAL
LIABILITIES CARRIED AT FAIR VALUE
For the financial assets and liabilities measured at fair value on a
recurring basis (categorized in the valuation hierarchy table above) the
Company applies the following valuation techniques:
Investment Securities
When available, quoted prices of identical investment securities in
active markets are used to estimate fair value. Such investment
securities are classified within Level 1 of the fair value hierarchy.
When quoted prices of identical investment securities in active
markets are not available, the fair values for the Company’s
investment securities are obtained primarily from pricing services
engaged by the Company, and the Company receives one price for
each security. The fair values provided by the pricing services are
estimated using pricing models, where the inputs to those models are
based on observable market inputs or recent trades of similar
securities. Such investment securities are classified within Level 2 of
the fair value hierarchy. The inputs to the valuation techniques
applied by the pricing services vary depending on the type of security
being priced but are typically benchmark yields, benchmark security
prices, credit spreads, prepayment speeds, reported trades and broker-
dealer quotes, all with reasonable levels of transparency. The pricing
services did not apply any adjustments to the pricing models used. In
addition, the Company did not apply any adjustments to prices
received from the pricing services.
The Company reaffirms its understanding of the valuation
techniques used by its pricing services at least annually. In addition,
the Company corroborates the prices provided by its pricing services
for reasonableness by comparing the prices from the respective pricing
services to valuations obtained from different pricing sources as well
as comparing prices to the sale prices received from sold securities at
least quarterly. In instances where price discrepancies are identified
between different pricing sources, the Company evaluates such
discrepancies to ensure that the prices used for its valuation represent
the fair value of the underlying investment securities. Refer to Note 6
for additional fair value information.
Derivative Financial Instruments
The fair value of the Company’s derivative financial instruments is
estimated by third-party valuation services that use proprietary
pricing models or by internal pricing models, where the inputs to
those models are readily observable from actively quoted markets. The
pricing models used are consistently applied and reflect the
contractual terms of the derivatives as described below. The Company
reaffirms its understanding of the valuation techniques used by the
third-party valuation services at least annually. The Company’s
derivative instruments are classified within Level 2 of the fair value
hierarchy.
The fair value of the Company’s interest rate swaps is determined
based on a discounted cash flow method using the following
significant inputs: the contractual terms of the swap such as the
notional amount, fixed coupon rate, floating coupon rate (based on
interbank rates consistent with the frequency and currency of the
interest cash flows) and tenor, as well as discount rates consistent with
the underlying economic factors of the currency in which the cash
flows are denominated.
The fair value of the Company’s total return contract, which serves
as a hedge against the Hong Kong dollar (HKD) change in fair value
associated with the Company’s investment in the Industrial and
Commercial Bank of China (ICBC), is determined based on a
discounted cash flow method using the following significant inputs as
of the valuation date: number of shares of the Company’s underlying
ICBC investment, the quoted market price of the shares in HKD and
the monthly settlement terms of the contract inclusive of price and
tenor.
The fair value of foreign exchange forward contracts is determined
based on a discounted cash flow method using the following
significant inputs: the contractual terms of the forward contracts such
as the notional amount, maturity dates and contract rate, as well as
relevant foreign currency forward curves, and discount rates
consistent with the underlying economic factors of the currency in
which the cash flows are denominated.
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