American Express 2015 Annual Report Download - page 102

FAIR VALUE MEASUREMENT
We hold investment securities and derivative instruments that are carried at fair value on the Consolidated Balance
Sheets. Management makes assumptions and judgments when estimating the fair values of these financial instruments.
In accordance with fair value measurement and disclosure guidance, the objective of a fair value measurement is to
determine the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date based on the principal or, in the absence of a principal, most advantageous
market for the specific asset or liability. The disclosure guidance establishes a three-level hierarchy of inputs to valuation
techniques used to measure fair value. The fair value hierarchy gives the highest priority to the measurement of fair value
based on unadjusted quoted prices in active markets for identical assets or liabilities (Level 1), followed by the measurement of
fair value based on pricing models with significant observable inputs (Level 2), with the lowest priority given to the
measurement of fair value based on pricing models with significant unobservable inputs (Level 3). We did not have any Level 3
financial instruments measured on a recurring basis during the year ended December 31, 2015.
Investment Securities
Our investment securities are mostly composed of fixed-income securities issued by states and municipalities, as well as
the U.S. Government and Agencies.
The fair market values for our investment securities, including investments comprising defined benefit pension plan
assets, are obtained primarily from pricing services we engage and for each security, we receive one price from that pricing
service. 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. The pricing services did not apply any
adjustments to the pricing models used as of December 31, 2015 and 2014. In addition, we did not apply any adjustments to
prices received from the pricing services. We reaffirm our understanding of the valuation techniques used by our pricing
services at least annually. In addition, we corroborate the prices provided by our 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 the measurement of fair value for our investment securities, even though the underlying inputs used in the pricing
models are directly observable from active markets or recent trades of similar securities in inactive markets, the pricing
models do entail a certain amount of subjectivity, and therefore differing judgments in the underlying inputs, or how they are
modeled, could result in a different estimate of fair value.
Other-Than-Temporary Impairment of Investment Securities
Realized losses are recognized when management determines that a decline in the fair value of investment securities is
other-than-temporary. Such determination requires judgment regarding the amount and timing of recovery. We review and
evaluate our investment securities at least quarterly, and more often as market conditions may require, to identify investment
securities that have indications of other-than-temporary impairments. We consider several factors when evaluating debt
securities for other-than-temporary impairment, including the determination of the extent to which a decline in the fair value of
a security is due to increased default risk for the specific issuer, or market interest rate risk. With respect to market interest
rate risk, we assess whether we have the intent to sell the investment securities and whether we are more likely than not to be
required to sell the investment securities before recovery of any unrealized losses.
In determining whether any of our investment securities are other-than-temporarily impaired, a change in facts and
circumstances could lead to a change in management judgment about our view on collectability and credit quality of the
issuer, or the impact of market interest rates on the investment securities. Any such changes could result in us recognizing an
other-than-temporary impairment loss through earnings.
Derivative Instruments
Our primary derivative instruments are interest rate swaps and foreign currency forward agreements.
The fair value of our derivative instruments is estimated by using either a third-party valuation service that uses proprietary
pricing models, or by internal pricing models, where the inputs to those models are readily observable from actively quoted
markets. We reaffirm our understanding of the valuation techniques used by a third-party valuation service at least annually.
To mitigate credit risk arising from our derivative instruments, counterparties are required to be pre-approved and rated
as investment grade. In addition, we manage certain counterparty credit risks by exchanging cash and non-cash collateral
under executed credit support agreements. The non-cash collateral does not reduce the derivative balance included in Other
assets on the Consolidated Balance Sheets, but effectively reduces risk exposure as it is available in the event of counterparty
default. Based on the assessment of credit risk of our derivative counterparties, we do not have derivative positions that
warrant credit valuation adjustments.
In the measurement of fair value for our derivative instruments, although the underlying inputs used in the pricing models
are readily observable from actively quoted markets, the pricing models do entail a certain amount of subjectivity, and therefore
differing judgments in the underlying inputs, or how they are modeled, could result in a different estimate of fair value.
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