Business Context and Reporting Period
This Form 8-K, filed on March 30, 2007, by American Express Company, announces significant revisions to the presentation of its Consolidated Statements of Income effective with the first quarter of 2007. The changes were made following discussions with the SEC staff regarding the Company's Form 10-K for the year ended December 31, 2005.
Key Financial Metrics and Presentation Changes
The filing details a shift from net to gross presentation for specific line items. While the text does not provide specific dollar values for revenue, profit, or cash flow in this summary, it outlines the following structural changes to financial reporting:
- Interest Income and Expense: Gross cardmember lending finance charge revenue and related gross interest expense will now be presented separately, rather than on a net basis. Similarly, gross investment and other interest income/expense will be separated.
- Provisions for Losses: "Provisions for losses and benefits" will be presented in a new separate section, previously reported within the "Expenses" section.
- Revenue Measures: "Total revenues" and "Revenues net of interest expense" will be presented separately. The latter remains the measure for the Company's long-term revenue growth rate target (at least 8 percent growth on average).
- Impact on Bottom Line: The Company explicitly states these revisions have no impact on previously reported consolidated pretax income, income taxes, net income, total assets, total liabilities, or total shareholders' equity.
Material Changes Versus Prior Period
The primary material change is the method of reporting, not the underlying financial performance. Key adjustments include:
- Credit Statistics: The method for reporting credit statistics for the charge card business is being revised. Historically, statistics used the portion of the account balance 90 days past due or more. The new method considers the entire amount of customer accounts where any portion is 90 days past due or more, aligning with internal risk management practices.
- Reserves: The level of reserves has not changed as a result of the new credit statistics methodology.
- Computational Corrections: A computational error in the calculation of net finance charge revenue divided by average loans for consolidated reporting and the International Card & Global Commercial Services segment has been corrected. The impact on historic trends is described as minimal.
- Ratio of Earnings to Fixed Charges: The calculation for this ratio will be updated to reflect the revised gross interest expense presentation.
Guidance, Outlook, and Risks
Outlook and Targets: The Company's long-term revenue growth rate target of at least 8 percent on average remains unchanged despite the presentation revisions.
Segment Reporting Risks: The Company is continuing discussions with the SEC regarding the aggregation of segment data under Statement of Financial Accounting Standards No. 131. While the attached exhibit does not reflect changes to segment composition, the Company notes that if a different reportable operating segment presentation (including disaggregation) is concluded to be appropriate, segments would be reported differently in future filings. Consolidated results would not be impacted.
Credit Quality: Management states the new credit statistics do not indicate a change in the view of underlying credit quality, risk profile, or adequacy of reserves.
Important Facts for Investor Verification
- Verify the specific numerical impact of the gross vs. net presentation changes by reviewing the revised Consolidated Statements of Income in Exhibit 99.1.
- Confirm the revised credit statistics for the charge card business to ensure alignment with the new reporting methodology.
- Monitor future filings for potential changes to reportable operating segments resulting from ongoing SEC discussions regarding SFAS No. 131.
- Note that while presentation has changed, net income and total equity figures remain consistent with prior reports.