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 and the price at which receivables are sold to Credco be at fair value.

Credco maintains its fixed charge coverage ratio (FCCR) at a minimum of 1.25. The FCCR 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 FCCR, whilst complying with the parties’ intention for these transactions to occur on an arm’s-length basis. Should it be required, TRS would provide Credco with financial support in the form of capital contributions with respect to maintenance of its 1.25 minimum FCCR as required in its committed bank credit facility. 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.

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.

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.

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

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 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 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.

Cash and cash equivalents include cash and amounts due from banks, interest-bearing bank balances including restricted cash, and other highly liquid investments with original maturities of 90 days or less. Interest-bearing restricted cash primarily represents cash deposited with Amex Bank of Canada relating to the purchase of Card Member receivables and the collateralized loan arrangement for transfer of Card Member loans.

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 Credit Losses

Note 3

Reserves for Credit 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

Certain reclassifications of prior period amounts have been made to conform to the current period presentation, including reclassification of restricted cash from Other assets to Cash and cash equivalents on the Consolidated Balance Sheets.

In March 2020, the Financial Accounting Standards Board issued new accounting guidance related to the effects of reference rate reform on financial reporting. The guidance, effective for reporting periods through December 31, 2022, provides accounting relief for contract modifications that replace an interest rate impacted by reference rate reform (e.g., LIBOR) with a new alternative reference rate. The guidance is applicable to investment securities, receivables, loans, debt, leases, derivatives and hedge accounting elections and other contractual arrangements. Credco adopted the guidance as of March 31, 2020, with no material impact on Credco’s financial position, results of operations and cash flows. There were no significant changes to Credco’s accounting policies, business processes or internal controls as a result of adopting the new guidance.

Effective January 1, 2020, Credco adopted the new credit reserving methodology, applicable to certain financial instruments, known as the Current Expected Credit Loss (CECL) methodology under a modified retrospective transition. 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. Upon implementation, Card Member receivable reserves decreased by $147 million and Card Member loan reserves increased by $7 million, along with the associated current and deferred tax impact of $21 million, and cumulative effect adjustment to the opening balance of retained earnings, net of tax, of $119 million. There were no material changes to Credco’s business processes or internal controls as a result of adopting the new guidance. Refer to Note 3 for additional information on how Credco’s management estimates reserves for credit losses in accordance with the CECL methodology.

Effective February 1, 2020, TRS removed U.S. Consumer and Small Business Card Member receivables from the Charge Trust and substantially replaced them with U.S. Corporate Card Member receivables in two phases. On February 1, 2020 and April 20, 2020, TRS transferred $5.2 billion and $1.7 billion, respectively, of U.S. Corporate Card Member receivables to the Charge Trust. Since Credco maintains participation interests in the Charge Trust, these transactions resulted in Credco (i) no longer having a $7.2 billion interest in U.S. Consumer and Small Business Card Member receivables and (ii) having an interest in the U.S. Corporate Card Member receivables in the Charge Trust. The settlement of $7.2 billion related to the U.S. Consumer and Small Business portfolio was used to repay borrowings from American Express Company leading to a reduction in Long-term debt to affiliates of $7.2 billion.

In the month of June 2020, Credco restructured a number of its intercompany loan arrangements to further enhance funding flexibility and effectiveness. Credco borrowed $7.1 billion from TRS to repay borrowings from AE Exposure Management Limited of $4.7 billion. The excess of $2.2 billion was deposited with AENB, which was reported as part of Cash and cash equivalents as of June 30, 2020. During the second half of the year, amounts were withdrawn from AENB to meet business funding requirements resulting in $0.5 billion in deposits remaining with AENB.