American Express 2015 Annual Report Download - page 152

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VALUATION TECHNIQUES USED IN THE FAIR VALUE MEASUREMENT OF FINANCIAL ASSETS AND
FINANCIAL LIABILITIES CARRIED AT OTHER THAN FAIR VALUE
For the financial assets and liabilities that are not required to be carried at fair value on a recurring basis
(categorized in the valuation hierarchy table) the Company applies the following valuation techniques to measure fair
value:
Financial Assets For Which Carrying Values Equal Or Approximate Fair Value
Financial assets for which carrying values equal or approximate fair value include cash and cash equivalents, Card
Member receivables, accrued interest and certain other assets. For these assets, the carrying values approximate fair
value because they are short term in duration, have no defined maturity or have a market-based interest rate.
Financial Assets Carried At Other Than Fair Value
Card Member loans and receivables HFS
As described in Note 2, Card Member loans and receivables HFS are recorded at the lower of cost or fair value on
the Consolidated Balance Sheets. As a result, the estimation of fair value included in the previous table does not reflect
any fair value associated with the Card Member account relationships and follows the technique described under
Loans, net below.
Loans, net
Loans are recorded at historical cost, less reserves, on the Consolidated Balance Sheets. In estimating the fair
value for the Company’s loans the Company uses a discounted cash flow model. Due to the lack of a comparable whole
loan sales market for similar credit card loans and the lack of observable pricing inputs thereof, the Company uses
various inputs derived from an equivalent securitization market to estimate fair value. Such inputs include projected
income (inclusive of future interest payments and late fee revenue), estimated pay-down rates, discount rates and
relevant credit costs. The valuation does not include economic value attributable to future receivables generated by
the accounts associated with the loans.
Financial Liabilities For Which Carrying Values Equal Or Approximate Fair Value
Financial liabilities for which carrying values equal or approximate fair value include accrued interest, customer
deposits (excluding certificates of deposit, which are described further below), Travelers Cheques and other prepaid
products outstanding, accounts payable, short-term borrowings and certain other liabilities for which the carrying
values approximate fair value because they are short term in duration, have no defined maturity or have a market-
based interest rate.
Financial Liabilities Carried At Other Than Fair Value
Certificates of Deposit
Certificates of deposit (CDs) are recorded at their historical issuance cost on the Consolidated Balance Sheets.
Fair value is estimated using a discounted cash flow methodology based on the future cash flows and the discount rate
that reflects the Company’s current rates for similar types of CDs within similar markets.
Long-term Debt
Long-term debt is recorded at historical issuance cost on the Consolidated Balance Sheets adjusted for the
impact of fair value hedge accounting on certain fixed-rate notes and current translation rates for foreign-
denominated debt. The fair value of the Company’s long-term debt is measured using quoted offer prices when quoted
market prices are available. If quoted market prices are not available, the fair value is determined by discounting the
future cash flows of each instrument at rates currently observed in publicly-traded debt markets for debt of similar
terms and credit risk. For long-term debt, where there are no rates currently observable in publicly traded debt
markets of similar terms and comparable credit risk, the Company uses market interest rates and adjusts those rates
for necessary risks, including its own credit risk. In determining an appropriate spread to reflect its credit standing, the
Company considers credit default swap spreads, bond yields of other long-term debt offered by the Company, and
interest rates currently offered to the Company for similar debt instruments of comparable maturities.
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