Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2017

NOTE 1

Summary of Significant Accounting Policies

The Company

American Express Company (the Company) is a global services company that provides customers with access to products, insights and experiences that enrich lives and build business success. The Company’s principal products and services are charge and credit payment card products and travel-related services offered to consumers and businesses around the world. Business travel-related services are offered through the non-consolidated joint venture, American Express Global Business Travel (the GBT JV). The Company’s various products and services are sold globally to diverse customer groups, including consumers, small businesses, mid-sized companies and large corporations. These products and services are sold through various channels, including direct mail, online applications, in-house and third-party sales forces and direct response advertising.

Effective for the first quarter of 2016, the Company realigned its segment presentation to reflect the organizational changes announced during the fourth quarter of 2015. Prior periods have been restated to conform to the new reportable operating segments. Refer to Note 25 for additional discussion of the products and services that comprise each segment. Corporate functions and certain other businesses and operations are included in Corporate & Other.

Principles of Consolidation

The Consolidated Financial Statements of the Company are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). Significant intercompany transactions are eliminated.

The Company consolidates entities in which it holds a “controlling financial interest.” For voting interest entities, the Company is considered to hold a controlling financial interest when it is able to exercise control over the investees’ operating and financial decisions. For variable interest entities (VIEs), the determination of which is based on the amount and characteristics of the entity’s equity, the Company is considered to hold a controlling financial interest when it is determined to be the primary beneficiary. A primary beneficiary is the party that has both: (1) the power to direct the activities that most significantly impact that VIE’s economic performance, and (2) the obligation to absorb the losses of, or the right to receive the benefits from, the VIE that could potentially be significant to that VIE.

Entities in which the Company’s voting interest in common equity does not provide it with control, but allows the Company to exert significant influence over operating and financial decisions, are accounted for under the equity method. All other investments in equity securities, to the extent they are not considered marketable securities, are accounted for under the cost method.

Foreign Currency

Monetary assets and liabilities denominated in foreign currencies are translated into U.S. dollars based upon exchange rates prevailing at the end of the reporting period; non-monetary assets and liabilities are translated at the historic exchange rate at the date of the transaction; revenues and expenses are translated at the average month-end exchange rates during the year. Resulting translation adjustments, along with any related qualifying hedge and tax effects, are included in accumulated other comprehensive income (loss) (AOCI), a component of shareholders’ equity. Translation adjustments, including qualifying hedge and tax effects, are reclassified to earnings upon the sale or substantial liquidation of investments in foreign operations. Gains and losses related to transactions in a currency other than the functional currency are reported net in Other expenses, in the Company’s Consolidated Statements of Income. Net foreign currency transaction gains amounted to approximately $7 million and $68 million in 2017 and 2015, respectively, and net foreign currency transaction losses amounted to $18 million in 2016.

Amounts Based on Estimates and Assumptions

Accounting estimates are an integral part of the Consolidated Financial Statements. These estimates are based, in part, on management’s assumptions concerning future events. Among the more significant assumptions are those that relate to reserves for Card Member losses on loans and receivables, the proprietary point liability for Membership Rewards costs, fair value measurements, goodwill and income taxes. These accounting estimates reflect the best judgment of management, but actual results could differ.

Income statement

Discount Revenue

Discount revenue generally represents the amount earned by the Company on transactions occurring at merchants with which the Company, or a Global Network Services (GNS) partner, has entered into a card acceptance agreement for facilitating transactions between the merchants and the Company’s Card Members. The amount of fees charged, or merchant discount, is generally deducted from the payment to the merchant and recorded as discount revenue at the time a Card Member enters into a point-of-sale transaction with a merchant.

Where the Company acts as the merchant acquirer and the card presented at a merchant is issued by a third-party financial institution, such as in the case of GNS partners, the Company makes financial settlement to the merchant and receives the discount revenue. In the Company’s role as the operator of the card network, it also receives financial settlement from the GNS card issuer, which in turn receives an issuer rate that is individually negotiated between that issuer and the Company. The difference between the merchant discount the Company receives from the merchant (which is directly agreed between a merchant and the Company, and is not based on the issuer rate) and the issuer rate received by the GNS card issuer is recorded as discount revenue.

In cases where the Company is the card issuer and the merchant acquirer is a third party (which can be the case in a country in which an Independent Operator partner is the local merchant acquirer or in the United States under our OptBlue program with certain third-party merchant acquirers), the Company receives a network rate in its settlement with the merchant acquirer, which is individually negotiated between the Company and that merchant acquirer and is recorded as discount revenue. In contrast with networks such as those operated by Visa Inc. and MasterCard Incorporated, there are no collectively set interchange rates on the American Express network, issuer rates do not serve as a basis for merchant discount rates and no fees are agreed or due between the third-party financial institution participants on the network.

Net Card Fees

Net card fees represent revenue earned from annual card membership fees, which vary based on the type of card and the number of cards for each account. These fees, net of acquisition costs and a reserve for projected refunds for Card Member cancellations, are deferred and recognized on a straight-line basis over the twelve-month card membership period as Net Card Fees in the Consolidated Statements of Income. The unamortized net card fee balance is reported in Other Liabilities on the Consolidated Balance Sheets (refer to Note 10).

Other Fees and Commissions

Other fees and commissions represent Card Member delinquency fees, foreign currency conversion fees, loyalty coalition-related fees, travel commissions and fees and service fees, which are primarily recognized in the period in which they are charged to the Card Member (refer to Note 19). In addition, service fees are also earned from other customers (e.g., merchants) for a variety of services and are recognized when the service is performed, which is generally in the period the fee is charged. Also included are fees related to the Company’s Membership Rewards program, which are deferred and recognized over the period covered by the fee, typically one year; the unamortized portion of which is included in Other Liabilities on the Consolidated Balance Sheets (refer to Note 10).

Contra-revenue

The Company regularly makes payments through contractual arrangements with merchants, corporate payments clients, Card Members, third-party issuing partners and certain other customers. These payments, including cash rebates and statement credits provided to Card Members, are generally classified as contra-revenue unless a specifically identifiable benefit (e.g., goods or services) is received by the Company or its Card Members in consideration for that payment, and the fair value of such benefit is determinable and measurable. If such conditions are met, then the payment is classified as expense up to the estimated fair value of the benefit. If no such benefit is identified, then the entire payment is classified as contra-revenue and included in the Consolidated Statements of Income in the revenue line item where the related transactions are recorded (e.g., Discount revenue or Other fees and commissions).

Interest Income

Interest on Card Member loans is assessed using the average daily balance method. Unless the loan is classified as non-accrual, interest is recognized based upon the principal amount outstanding, in accordance with the terms of the applicable account agreement, until the outstanding balance is paid, or written off.

Interest and dividends on investment securities primarily relate to the Company’s performing fixed-income securities. Interest income is recognized as earned using the effective interest method, which adjusts the yield for security premiums and discounts, fees and other payments, so that a constant rate of return is recognized on the investment security’s outstanding balance. Amounts are recognized until securities are in default or when it becomes likely that future interest payments will not be made as scheduled.

Interest on deposits with banks and other is recognized as earned, and primarily relates to the placement of cash, in excess of near-term funding requirements, in interest-bearing time deposits, overnight sweep accounts, and other interest-bearing demand and call accounts.

Interest Expense

Interest expense includes interest incurred primarily to fund Card Member loans and receivables, 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 debt and short-term borrowings, as well as the realized impact of derivatives used to hedge interest rate risk on the Company’s long-term debt.

Expenses

Marketing and promotion expense includes costs incurred in the development and initial placement of advertising, 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. Prior to completing the assessment of goodwill for impairment, the Company also performs a recoverability test of certain long-lived assets. The Company has the option to perform a qualitative assessment of goodwill impairment to determine whether it is more likely than not that the fair value of its reporting units is less than the carrying values. Alternatively, the Company performs a more detailed quantitative assessment of goodwill impairment.

This qualitative assessment entails the evaluation of factors such as economic conditions, industry and market considerations, cost factors, overall financial performance of the reporting unit and other company and reporting unit-specific events. If the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, it then performs the impairment evaluation using the quantitative assessment.

Under the quantitative assessment, 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, then a 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.

When measuring the fair value of its reporting units in the quantitative assessment, the Company uses widely accepted valuation techniques, applying 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 or revenues) to its reporting units’ actual results.

For the year ended December 31, 2017, the Company performed a qualitative assessment and determined that it was more likely than not that the fair values of its reporting units exceeded their carrying values. For the year ended December 31, 2016, the Company performed the quantitative assessment for all of its reporting units and determined that there was no impairment of goodwill.

Other Intangible Assets

Intangible assets, primarily customer relationships, are amortized on a straight-line basis over their estimated useful lives of 1 to 22 years. 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.

Premises and Equipment

Premises and equipment, including leasehold improvements, are carried at cost less accumulated depreciation. Costs incurred during construction are capitalized and are depreciated once an asset is placed in service. Depreciation is generally computed using the straight-line method over the estimated useful lives of the assets, which range from 3 to 10 years for equipment, furniture and building improvements, and from 40 to 50 years for premises, which are depreciated based upon their estimated useful life at the acquisition date.

Leasehold improvements are depreciated using the straight-line method over the lesser of the remaining term of the leased facility, or the economic life of the improvement, and ranges from 5 to 10 years. The Company maintains operating leases worldwide for facilities and equipment. Rent expense for facility leases is recognized ratably over the lease term, and includes adjustments for rent concessions, rent escalations and leasehold improvement allowances. The Company recognizes lease restoration obligations at the fair value of the restoration liabilities when incurred and amortizes the restoration assets over the lease term.

Certain costs associated with the acquisition or development of internal-use software are also capitalized and recorded in Premises and equipment. Once the software is ready for its intended use, these costs are amortized on a straight-line basis over the software’s estimated useful life, generally 5 years. The Company reviews these assets for impairment using the same impairment methodology used for its intangible assets.

Other Significant Accounting Policies

The following table identifies the Company’s other significant accounting policies, along with the related Note and page number where the Note can be found.

Significant Accounting Policy	Note Number	Note Title	Page
Accounts Receivable	Note 3	Loans and Accounts Receivable	Page 94
Loans	Note 3	Loans and Accounts Receivable	Page 94
Reserves for Losses	Note 4	Reserves for Losses	Page 101
Investment Securities	Note 5	Investment Securities	Page 103
Asset Securitizations	Note 6	Asset Securitizations	Page 104
Membership Rewards	Note 10	Other Liabilities	Page 110
Stock-based Compensation	Note 11	Stock Plans	Page 111
Retirement Plans	Note 12	Retirement Plans	Page 113
Legal Contingencies	Note 13	Contingencies and Commitments	Page 113
Derivative Financial Instruments and Hedging Activities	Note 14	Derivatives and Hedging Activities	Page 115
Fair Value Measurements	Note 15	Fair Values	Page 118
Income Taxes	Note 21	Income Taxes	Page 127
Regulatory Matters and Capital Adequacy	Note 23	Regulatory Matters and Capital Adequacy	Page 130
Reportable Operating Segments	Note 25	Reportable Operating Segments and Geographic Operations	Page 133

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (FASB) issued new accounting guidance on revenue recognition. The accounting standard establishes the principles to apply to determine the amount and timing of revenue recognition, specifying the accounting for certain costs related to revenue, and requiring additional disclosures about the nature, amount, timing and uncertainty of revenues and related cash flows. The guidance, as amended and effective January 1, 2018, supersedes most of the revenue recognition requirements in effect prior to that date.

Beginning with the quarter ending March 31, 2018, the Company’s consolidated financial statements will reflect the adoption of the standard using the full retrospective method, which applies the new standard to each prior reporting period presented. The most significant impacts of the adoption are changes to the presentation of certain credit and charge card related costs that previously were netted against Discount revenue, including Card Member cash-back reward costs and statement credits, corporate client incentive payments, as well as payments to third-party card issuing partners. Under the new standard, these costs are not considered components of the transaction price of our card acceptance agreements with merchants and thus are not netted against Discount revenue, but instead recognized as expenses. Our payments to third-party card issuing partners will be presented net of related Other revenues earned from the partners.

These reclassifications are expected to have the following impacts to the reported results for the fiscal years ended:

		Increase (Decrease)
December 31 (Millions)			2017		2016
Revenues
	Discount revenue	$	3,707	$	3,699
	Other		(278)		(253)
Expenses
	Marketing and promotion		2,350		2,420
	Card Member rewards	$	1,079	$	1,026

The adoption of the new guidance also results in changes to the recognition timing of certain revenues, the impact of which is not material to net income. Similarly, the adoption does not have a material impact on the Company’s consolidated balance sheets or statements of cash flows. The Company is in the process of implementing changes to its accounting policies, business processes, systems and internal controls to support the recognition, measurement and disclosure requirements under the new standard.

In January 2016, the FASB issued new accounting guidance on the recognition and measurement of financial assets and financial liabilities, which was effective and adopted by the Company as of January 1, 2018. The guidance makes targeted changes to GAAP; specifically to the classification and measurement of equity securities, and to certain disclosure requirements associated with the fair value of financial assets and liabilities. In the ordinary course of business, the Company makes investments in non-public companies, which historically were recognized under the cost method of accounting. Under the new guidance, these investments are prospectively adjusted for observable price changes through earnings upon the identification of identical or similar transactions of the same issuer. The adoption of the guidance, as of January 1, 2018, did not have a material impact on the Company’s financial position, results of operations and cash flows. The Company implemented changes to its accounting policies, business processes and internal controls in support of the new guidance.

In February 2016, the FASB issued new accounting guidance on leases. The guidance, effective January 1, 2019, with early adoption permitted, requires virtually all leases to be recognized on the Consolidated Balance Sheets. The Company will adopt the standard effective January 1, 2019, and is currently planning on using the modified retrospective approach, which requires recording existing operating leases on the Consolidated Balance Sheets upon adoption and in the comparative period. The Company is in the process of upgrading its lease administration software and changing business processes and internal controls in preparation for the adoption. Specifically, the Company is currently reviewing its lease portfolio and is evaluating and interpreting the requirements under the guidance, including the available accounting policy elections, in order to determine the impacts on the Company’s financial position, results of operations and cash flows upon adoption.

In June 2016, the FASB issued new accounting guidance for recognition of credit losses on financial instruments, effective January 1, 2020, with early adoption permitted on January 1, 2019. The guidance introduces a new credit reserving model known as the Current Expected Credit Loss (CECL) model, which is based on expected losses, and differs significantly from the incurred loss approach used today. The CECL model requires measurement of expected credit losses not only based on historical experience and current conditions, but also by including reasonable and supportable forecasts incorporating forward-looking information. In addition, for available-for-sale debt securities, the new guidance replaces the other-than-temporary impairment model, and requires the recognition of an allowance for reductions in a security’s fair value attributable to declines in credit quality, instead of a direct write-down of the security when a valuation decline was determined to be other-than-temporary. The guidance also requires a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of adoption. The Company does not intend to adopt the new standard early and is currently evaluating the impact the new guidance will have on its financial position, results of operations and cash flows; however, it is expected that the CECL model will alter the assumptions used in estimating credit losses on Card Member loans and receivables, and may result in material increases to the Company’s credit reserves as the new guidance involves earlier recognition of expected losses for the life of the assets. The Company has established an enterprise-wide, cross-discipline governance structure to implement the new standard, and continues to identify and conclude on key interpretive issues along with evaluating its existing credit loss forecasting models and processes in relation to the new guidance to determine what modifications may be required.

In August 2017, the FASB issued new accounting guidance providing targeted improvements to the accounting for hedging activities, effective January 1, 2019, with early adoption permitted in any interim period or fiscal year before the effective date. The guidance introduces a number of amendments, several of which are optional, that are designed to simplify the application of hedge accounting, improve financial statement transparency and more closely align hedge accounting with an entity’s risk management strategies. Effective January 1, 2018, the Company adopted the guidance, with no material impact on its financial position, results of operations and cash flows, along with associated changes to its accounting policies, business processes and internal controls in support of the new guidance.

In February 2018, as a result of the enactment of the Tax Cuts and Jobs Act (the Tax Act), the FASB issued new accounting guidance on the reclassification of certain tax effects from AOCI to retained earnings. The optional guidance is effective January 1, 2019, with early adoption permitted. The Company is evaluating whether it will adopt the new guidance along with any impacts on the Company’s financial position, results of operations and cash flows, none of which are expected to be material.

Classification of Various Items

Certain reclassifications of prior period amounts have been made to conform to the current period presentation. Specifically, during 2016, the Company determined that in the Consolidated Statements of Cash Flows for the comparative periods ended June 30, 2015, September 30, 2015 and December 31, 2015, certain activities related to long-term debt repayments were misclassified between financing activities and operating activities. There is no impact to the Consolidated Statements of Income or Consolidated Balance Sheets. The Company evaluated the effects of these misclassifications and concluded that none are material to any of its previously issued Consolidated Financial Statements. Nevertheless, the Company elected to revise prospectively the comparative periods mentioned above. For the year ended December 31, 2015, this revision resulted in a $361 million decrease to both Net cash used in financing activities and Net cash provided by operating activities. In addition, travel commissions and fees, which were previously disclosed separately on the Consolidated Statements of Income, are now included within Other fees and commissions.