American Express 2015 Annual Report Download - page 119

Interest Expense
Interest expense includes interest incurred primarily to fund Card Member receivables and loans, general corporate
purposes and liquidity needs, and is recognized as incurred. Interest expense is divided principally into two categories:
(i) deposits, which primarily relates to interest expense on deposits taken from customers and institutions, and (ii) debt,
which primarily relates to interest expense on the Company’s long-term financing and short-term borrowings, as well as
the realized impact of derivatives hedging interest rate risk on the Company’s long-term debt.
Expenses
Marketing and promotion expense includes advertising costs, which are expensed in the year in which the
advertising first takes place.
BALANCE SHEET
Cash and Cash Equivalents
Cash and cash equivalents include cash and amounts due from banks, interest-bearing bank balances, including
securities purchased under resale agreements, and other highly liquid investments with original maturities of 90 days
or less.
Goodwill
Goodwill represents the excess of acquisition cost of an acquired business over the fair value of assets acquired and
liabilities assumed. The Company allocates goodwill to its reporting units for the purpose of impairment testing. A
reporting unit is defined as an operating segment, or a business that is one level below an operating segment for which
discrete financial information is regularly reviewed by the operating segment manager.
The Company evaluates goodwill for impairment annually as of June 30, or more frequently if events occur or
circumstances change that would more likely than not reduce the fair value of one or more of the Company’s reporting
units below its carrying value. The Company performs an impairment evaluation of goodwill using a two-step process.
The first step identifies whether there is a potential impairment by comparing the fair value of a reporting unit to the
carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds the fair value, the second step of
the impairment test is performed to determine the implied fair value of goodwill. An impairment loss is recognized based
on the amount that the carrying amount of goodwill exceeds the implied fair value. Prior to completing the interim
assessment of goodwill for impairment under the second step, the Company performs a recoverability test of certain
long-lived assets by assessing the recoverability of the asset values based on the cash flows generated by the relevant
assets or asset groups. If the assets are not recoverable, an impairment loss is recognized based on the amount that the
carrying value of the asset or asset group exceeds its fair value. See further details in Other Intangible Assets herein.
Goodwill impairment testing involves management judgment, requiring an assessment of whether the carrying value
of the reporting unit can be supported by its fair value using widely accepted valuation techniques. The Company uses a
combination of the income approach (discounted cash flows) and market approach (market multiples).
When preparing discounted cash flow models under the income approach, the Company uses internal forecasts to
estimate future cash flows expected to be generated by the reporting units. To discount these cash flows, the Company
uses the expected cost of equity, determined by using a capital asset pricing model. The Company believes the discount
rates used appropriately reflect the risks and uncertainties in the financial markets generally and specifically in the
Company’s internally developed forecasts. When using market multiples under the market approach, the Company
applies comparable publicly traded companies’ multiples (e.g., earnings, revenues) to its reporting units’ actual results.
Other Intangible Assets
Intangible assets, primarily customer relationships, are amortized over their estimated useful lives of 1 to 22 years
on a straight-line basis. The Company reviews long-lived assets and asset groups, including intangible assets, for
impairment whenever events and circumstances indicate their carrying amounts may not be recoverable. An impairment
is recognized if the carrying amount is not recoverable and exceeds the asset or asset group’s fair value.
Certain long-lived assets, such as capitalized software development costs, are included in Premises and equipment.
The Company reviews these assets for impairment using the same impairment methodology used for intangible assets.
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