Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2019

Summary of Significant Accounting Policies

The Company

Credco is a wholly owned subsidiary of American Express Travel Related Services Company, Inc. (TRS), which is a wholly owned subsidiary of American Express Company (American Express).

Credco is engaged in the business of financing certain non-interest-earning Card Member receivables arising from the use of the American Express charge cards issued in the United States and in certain countries outside the United States. Credco also finances certain interest-earning revolving loans generated by Card Member spending on American Express credit cards issued in non-U.S. markets.

Credco executes material transactions with its affiliates. The agreements between Credco and its affiliates provide that the parties intend that the transactions thereunder be conducted on an arm’s-length basis; however, there can be no assurance that the terms of these arrangements are the same as would be negotiated between independent, unrelated parties.

Credco is required to maintain its fixed charge coverage ratio at a minimum of 1.25, which is achieved by charging appropriate discount rates on the purchase of receivables Credco makes from, and the interest rates on the loans Credco provides to, TRS and other American Express subsidiaries. Each monthly period, the discount and interest rates are determined to generate income for Credco that is sufficient to maintain its minimum fixed charge coverage ratio, whilst maintaining the intention for these transactions to occur on an arm's-length basis. Should it be required, American Express would provide Credco with financial support with respect to maintenance of its minimum fixed charge coverage ratio. The revenue earned by Credco from purchasing Card Member receivables and Card Member loans at a discount is reported as Discount revenue earned from purchased Card Member receivables and Card Member loans on the Consolidated Statements of Income.

Principles of Consolidation

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

Credco consolidates entities in which Credco holds a "controlling financial interest." For voting interest entities, Credco is considered to hold a controlling financial interest when it is able to exercise control over the investees’ operating and financial decisions.

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 shareholder’s 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, net expenses, in Credco’s Consolidated Statements of Income.

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 receivables and loans and income taxes. These accounting estimates reflect the best judgment of management, but actual results could differ.

Discount Revenue Earned from Purchased Card Member Receivables and Card Member Loans

Credco earns discount revenue from purchasing Card Member receivables and Card Member loans at a discount to par value. The discount is deferred and recognized as revenue over the period that the receivables and loans are estimated to be outstanding or funded. Estimates are based on the historical average life of Card Member receivables and Card Member loans.

Interest Income from Affiliates

Interest income from affiliates is earned on interest-bearing loans made by Credco to affiliates. Interest income is accrued primarily using the average daily balance method on loans and is recognized based on the outstanding loan principal amount and interest rates specified in the agreements until the outstanding loan balance is paid.

Finance Revenue

Finance revenue is assessed using the average daily balance method for Card Member loans and is recognized based upon the loan principal amount outstanding in accordance with the terms of the applicable account agreement until the outstanding balance is paid or written off.

Interest Expense

Interest expense includes interest incurred primarily to fund Card Member receivables and Card Member loans, general corporate purposes and liquidity needs, and is recognized as incurred.

Cash and Cash Equivalents

Cash and cash equivalents include cash and amounts due from banks, interest-bearing bank balances, and other highly liquid investments with original maturities of 90 days or less.

Other Significant Accounting Policies

The following table identifies Credco’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

Card Member Receivables and Card Member Loans

Note 2

Card Member Receivables and Card Member Loans

Reserves for Losses

Note 3

Reserves for Losses

Derivative Financial Instruments and Hedging Activities

Note 6

Derivatives and Hedging Activities

Fair Value Measurements

Note 7

Fair Values

Income Taxes

Note 10

Income Taxes

RECENTLY ISSUED ACCOUNTING STANDARDS

Recently Issued Accounting Standards

In June 2016, the Financial Accounting Standards Board issued new accounting guidance for the recognition of credit losses on certain financial instruments. The guidance, as amended and effective January 1, 2020, introduces a new credit reserving methodology known as the Current Expected Credit Loss (CECL) approach, which differs significantly from the incurred loss approach used through December 31, 2019 and alters the estimation process, inputs and assumptions used in estimating credit losses. The CECL methodology requires measurement of expected credit losses for the estimated life of the financial instrument, not only based on historical experience and current conditions, but also by including reasonable and supportable forecasts incorporating forward-looking information. Credco's approach incorporates separate reasonable and supportable periods for Card Member receivables and Card Member loans and uses a weighted average of multiple future economic scenarios. Additionally, the guidance requires a modified retrospective transition, which records the difference between the reserves measured using the CECL methodology and the reserves using the incurred loss approach, tax effected, as a cumulative effect adjustment upon adoption through retained earnings. As a result, Credco's financial position and results of operations for periods prior to January 1, 2020 will not be restated.

Credco currently estimates a decrease to Card Member receivable reserves of approximately $147 million and an increase to Card Member loan reserves of approximately $7 million, along with the associated current and deferred tax impact of approximately $24 million, and cumulative effect adjustment to the opening balance of retained earnings, net of tax, of approximately $116 million as of January 1, 2020. Credco's cross-functional implementation team is finalizing its operational processes, controls and governance.