American Express 2015 Annual Report Download - page 103

GOODWILL RECOVERABILITY
Goodwill represents the excess of acquisition cost of an acquired business over the fair value of assets acquired
and liabilities assumed. Goodwill is not amortized but is tested for impairment at the reporting unit level annually or
when events or circumstances arise, such as adverse changes in the business climate, that would more likely than not
reduce the fair value of the reporting unit below its carrying value. Our approach and methodology for conducting our
goodwill impairment testing is fundamentally based on the measurement of fair value for our reporting units, which
inherently entails the use of significant judgment.
For valuation, we use a combination of the income approach (discounted cash flows) and market approach
(market multiples) in estimating the fair value of our reporting units.
When preparing discounted cash flow models under the income approach, we estimate future cash flows using
the reporting unit’s internal multi-year forecast, and a terminal value calculated using a growth rate that we believe is
appropriate in light of current and expected future economic conditions. To discount these cash flows we use our
expected cost of equity, determined using a capital asset pricing model. When using the market method under the
market approach, we apply comparable publicly traded companies’ multiples (e.g., earnings, revenues) to our
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 our reporting units.
Refer to Note 2 of the “Consolidated Financial Statements” for additional information regarding the EG goodwill
impairment in 2015.
We could be exposed to an increased risk of further goodwill impairment if future operating results or
macroeconomic conditions differ significantly from management’s current assumptions.
INCOME TAXES
We are subject to the income tax laws of the United States, its states and municipalities and those of the foreign
jurisdictions in which we operate. 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, we must make
judgments about the application of inherently complex tax laws.
Unrecognized Tax Benefits
We establish 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 we believe is more likely than not to be realized on ultimate settlement. As
new information becomes available, we evaluate our tax positions and adjust our 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, we analyze and estimate 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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