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Fair Values | 3 Months Ended
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Mar. 31, 2012
Fair Value Disclosures [Abstract] |
Fair Values | 3. Fair Values Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, based on the Company's principal or, in the absence of a principal, most advantageous market for t he specific asset or liability. GAAP provide s for a three-level hierarchy of inputs to valuation techniques used to measure fair value, defined as follows: Level 1 ― Inputs that are quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 ― Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability, including: - Quoted prices for similar assets or liabilities in active markets - Quoted prices for identical or similar assets or liabilities in markets that are not active - I nputs other than quoted prices that are observable for the asset or liability - Inputs that are derived principally from or corroborated by observable market data by correlation or other means Level 3 ― Inputs that are unobservable and reflect the Company's own assumptions about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances (e.g., internally derived assumptions surrounding the timing and a mount of expected cash flows). The Company did not measure any financial instruments presented on the Consolidated Balance Sheets at fair value on a recurring basis using significantly unobservable inputs (Level 3) during the three months ended March 31, 2012 or during the year ended December 31, 2011, although the disclosed fair value of certain assets that are not carried at fair value, as presented later in this Note, are classified within Level 3. The Company monitors the market conditions and evaluates the fair value hierarchy levels at least quarterly. For any transfers in and out of the levels of the fair value hierarchy, the Company elects to disclose the fair value measurement at the beginning of the reporting period during which the transfer occurred. Financial Assets and Financial Liabilities Carried at Fair Value The following table summarizes the Company's financial assets and financial liabilities measured at fair value on a recurring basis, categorized by GAAP's valuation hierarchy (as described in the preceding paragraphs), as of March 31, 2012 and December 31, 2011:
|  |  |  | 2012 |  | 2011
(Millions) |  | Total |  | Level 1 |  | Level 2 |  | Total |  | Level 1 |  | Level 2
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investment securities:(a) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Equity securities |  | $ | 371 |  | $ | 371 |  | $ | ― |  | $ | 360 |  | $ | 360 |  | $ | ―
| Debt securities and other(b) |  |  | 6,308 |  |  | 338 |  |  | 5,970 |  |  | 6,787 |  |  | 340 |  |  | 6,447
Derivatives(a) |  |  | 1,070 |  |  | ― |  |  | 1,070 |  |  | 1,516 |  |  | ― |  |  | 1,516
Total assets |  | $ | 7,749 |  | $ | 709 |  | $ | 7,040 |  | $ | 8,663 |  | $ | 700 |  | $ | 7,963
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives(a) |  | $ | 290 |  | $ | ― |  | $ | 290 |  | $ | 108 |  | $ | ― |  | $ | 108
Total liabilities |  | $ | 290 |  | $ | ― |  | $ | 290 |  | $ | 108 |  | $ | ― |  | $ | 108
Refer to Note 6 for the fair values of investment securities and to Note 9 for the fair values of derivative assets and liabilities, both on a further disaggregated basis. T he Level 1 amounts represent the Company's holding s of U.S. Government treasury obligations at March 31, 2012 and December 31, 2011, respectively. Valuation Techniques Used in the Fair Value Measurement of Financial Assets and Financial Liabilities Carried at Fair Value For the financial assets and liabilities measured at fair value on a recurring basis (categorized in the valuation hierarchy table above) the Company applies the following valuation techniques: Investment Securities When available, quoted prices of identical investment securities in active markets are used to determine fair value. Such investment securities are classified within Level 1 of the fair value hierarchy. When quoted prices of identical investment secur i ties in active market s are not available, the fair values for the Company's investment securities are obtained primarily from pricing services engaged by the Company, and the Company receives one price for each security. The fair values provided by the pricing services are estimated using pricing models, where the inputs to those models are based on observable market inputs or recent trades of similar securities. Such investment securities are classified within Level 2 of the fair value hierarchy. The inputs to the valuation techniques applied by the pricing services vary depending on the type of security being priced but are typically benchmark yields, benchmark security prices, credit spreads, prepayment speeds, reported trades and broker-dealer quotes, all with reasonable levels of transparency. The pricing services did not apply any adjustments to the pricing models used. In addition, the Company did not apply any adjustments to prices received from the pricing services. The Company reaffirms its understanding of the valuatio n techniques used by its pricing services at least annually. In addition, the Company corroborates the prices provided by its pricing services for r easonableness by comparing the prices from the respective pricing service s to valuations obtained from different pricing sources as well as comparing prices to the sale prices received from sold securities at least quarterly. In i nstances where price discrepancies are identified between different pricing sources, the Company evaluates such discrepancies to ensure that the prices used for its valuation represent the fair value of the und erlying investment securities. Refer to Note 6 for additional fair value information. Derivative Financial Instrumen ts The fair value of the Company's derivative financial instruments is estimated by a third-party valuation service that uses proprietary pricing models or by internal pricing models, where the inputs to those models are readily observable from actively quoted markets. The pricing models used are consistently applied and reflect the contractual ter ms of the derivatives as described below. The Company reaffirms its understanding of the valuation techniques used by the third-party valuation service at least annually. The Company's derivative instruments are classified within Level 2 of the fair value hierarchy. The fair value of the Company's interest rate swaps is determined based on a discounted cash flow method using the following significant inputs: the contractual terms of the swap such as the notional amount, fixed coupon rate, floating coupon rate (based on interbank rates consistent with the frequency and currency of the interest cash flows) and tenor, as well as discount rates consistent with the underlying economic factors of the currency in which the cash flows are denominated. The fair value of the Company's total retu rn contract, which serves as a hedge against the Hong Kong d ollar (HKD) change in fair value associated with the Company's investment in the Industrial and Commercial Bank of China (ICBC), is determined based on a discounted cash flow method using the following significant inputs as of the valuation date: number of shares of the Company's underlying ICBC investment, the qu oted market price of the shares in HKD and the monthly settlement terms of the contract inclusive of price and tenor. The fair value of foreign exchange forward contracts is determined based on a discounted cash flow method using the following significant inputs: the contractual terms of the forward contracts such as the notional amount, maturity dates and contract rate, as well as relevant foreign currency forward curves, and discount rates consistent with the underlying economic factors of the currency in which the cash flows are denominated. Credit valuation adjustments are necessary when the market parameters, such as a benchmark curve, used to value derivatives are not indicative of the credit quality of the Company or its counterparties. The Company considers the counterparty credit risk by applying an observable forecasted defau lt rate to the current exposure. Refer to Note 9 for additional fair value information. Financial Assets and Financial Liabilities Carried at Other Than Fair Value The following table discloses the estimated fair value for the Company's financial assets and financial liabilities that are not required to be carried at fair value on a recurring basis, as of March 31, 2012
|  |  |  |  |  | Carrying |  |  | Corresponding Fair Value Amount
(Billions) |  |  | Value |  | Total |  |  | Level 1 |  |  | Level 2 |  |  |  | Level 3
Financial Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Financial assets for which carrying values |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | equal or approximate fair value |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  | Cash and cash equivalents |  | $ | 27 |  | $ | 27 |  | $ | 23 |  | $ | 4 | (a) |  | $ | ―
|  |  | Other financial assets(b) |  | $ | 45 |  | $ | 45 |  | $ | ― |  | $ | 45 |  |  | $ | ―
| Financial assets carried at other than fair |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  | value |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  | Loans, net |  | $ | 59 |  | $ | 59 | (c) | $ | ― |  | $ | ― |  |  | $ | 59
Financial Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Financial liabilities for which carrying values |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | equal or approximate fair value |  | $ | 54 |  | $ | 54 |  | $ | ― |  | $ | 54 |  |  | $ | ―
| Financial liabilities carried at other than fair |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  | value |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  | Certificates of deposit(d) |  | $ | 11 |  | $ | 11 |  | $ | ― |  | $ | 11 |  |  | $ | ―
|  |  | Long-term debt |  | $ | 57 |  | $ | 60 | (c) | $ | ― |  | $ | 60 |  |  | $ | ―
(a) Reflects time deposits. (b) Includes accounts receivables (including fair values of cardmember receivables of $7.1 billion held by consolidated variable interest entities (VIEs) as of March 31, 2012), restricted cash and other miscellaneous assets. (c) Includes fair values of loans and long-term debt of $30.9 billion and $17.7 billion, res pectively, held by consolidated VIEs as of March 31, 2012. (d) Presented as a component of customer deposits on the Consolidated Balance Sheets. The fair values of these financial instruments are estimates based upon the market conditions and perceived risks as of March 31, 2012, and require management judgment. These figures may not be indicative of their future fair values. The fair value of the Company cannot be re l i ably estimated by agg regating the amounts presented. 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 measured at fair value on a recurring basis (categorized in the valuation hierarchy table above) the Company applies the following valuation techniques to measure fair value: F inancial A ssets for W hich C arrying V alues E qual or A pproximate F air V alue Financial assets for which carrying values equal or approximate fair value include cash and cash equivalents, cardmember 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. F inancial A ssets C arried at O ther T han F air V alue Loans L oans 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 m od el. Due to the lack of a comparable whole loan sales market for similar credit card receivables and a lack of observable pricing inputs thereof, the Company uses various inputs derived from an equivalent se curitization 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. F inancial L iabilities for W hich C arrying V alues E qual or A pproximate F air V alue 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 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. F inancial L iabilities C arried at O ther T han F air V alue 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. 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 rat es and adjusts that rate 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. Nonrecurring Fair Value Measurements The Company did not have an y material assets that were measured at fair value for impairment on a nonrecurring basis during the three months ended March 31, 2012 or during the year ended December 31, 2011.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=6925170&loc=d3e19296-110258 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 159 -Paragraph 17-22, 27, 28 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=6947722&loc=d3e13433-108611 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 15C, 15D -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=6947722&loc=d3e13504-108611 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 15A -Subparagraph a-d -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=6947722&loc=d3e13537-108611 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 133 -Paragraph 44A, 44B -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6925170&loc=d3e19207-110258 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 3, 10, 14, 15 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 15B -Subparagraph a, b -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 14: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 157 -Paragraph 32, 33, 34 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. + Details
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