Annual Report - American Balanced Fund - American Funds

to changes in foreign currency exchange rates against the U.S. dollar and/or currencies of other countries. Issuers of these securities maybe more susceptible to actions of foreign governments, such as the imposition of price controls or punitive taxes, that could adverselyimpact revenues. Securities markets in certain countries may be more volatile and/or less liquid than those in the U.S. Investments outsidethe U.S. may also be subject to different accounting practices and different regulatory, legal and reporting standards and practices, andmay be more difficult to value, than those in the U.S. In addition, the value of investments outside the U.S. may be reduced by foreigntaxes, including foreign withholding taxes on interest and dividends. Further, there may be increased risks of delayed settlement ofsecurities purchased or sold by the fund. The risks of investing outside the U.S. may be heightened in connection with investments inemerging markets.Management — The investment adviser to the fund actively manages the fund’s investments. Consequently, the fund is subject to the riskthat the methods and analyses employed by the investment adviser in this process may not produce the desired results. This could causethe fund to lose value or its investment results to lag relevant benchmarks or other funds with similar objectives. Index-linked bonds — The fund has invested in index-linked bonds, which are fixed-income securities whose principal value is periodicallyadjusted to a government price index. Over the life of an index-linked bond, interest is paid on the adjusted principal value. Increases ordecreases in the principal value of index-linked bonds are recorded as interest income in the fund’s statement of operations.Mortgage dollar rolls — The fund has entered into mortgage dollar roll transactions in which the fund sells a mortgage-backed security toa counterparty and simultaneously enters into an agreement with the same counterparty to buy back a similar security on a specific futuredate at a predetermined price. Mortgage dollar rolls are accounted for as purchase and sale transactions, which may increase the fund’sportfolio turnover rate.Loan transactions — The fund has entered into loan transactions in which the fund acquires a loan either through an agent, by assignmentfrom another holder, or as a participation interest in another holder's portion of a loan. The loan is often administered by a financialinstitution that acts as agent for the holders of the loan, and the fund may be required to receive approval from the agent and/orborrower prior to the sale of the investment. The loan’s interest rate and maturity date may change based on the terms of the loan,including potential early payments of principal. Federal income taxation — The fund complies with the requirements under Subchapter M of the Internal Revenue Code applicable tomutual funds and intends to distribute substantially all of its net taxable income and net capital gains each year. The fund is not subject toincome taxes to the extent such distributions are made. Therefore, no federal income tax provision is required.As of and during the period ended December 31, 2014, the fund did not have a liability for any unrecognized tax benefits. The fundrecognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the statement of operations.During the period, the fund did not incur any interest or penalties.The fund is not subject to examination by U.S. federal tax authorities for tax years before 2011 and by state tax authorities for tax yearsbefore 2010.Non-U.S. taxation — Dividend and interest income are recorded net of non-U.S. taxes paid.Distributions — Distributions paid to shareholders are based on net investment income and net realized gains determined on a tax basis,which may differ from net investment income and net realized gains for financial reporting purposes. These differences are due primarilyto different treatment for items such as currency gains and losses; short-term capital gains and losses; capital losses related to sales ofcertain securities within 30 days of purchase; deferred expenses; cost of investments sold; and paydowns on fixed-income securities. Thefiscal year in which amounts are distributed may differ from the year in which the net investment income and net realized gains arerecorded by the fund for financial reporting purposes. The fund may also designate a portion of the amount paid to redeemingshareholders as a distribution for tax purposes.During the year ended December 31, 2014, the fund reclassified $53,000 from undistributed net investment income to capital paid in onshares of beneficial interest, $10,356,000 from undistributed net realized gain to undistributed net investment income and $330,520,000from undistributed net realized gain to capital paid in on shares of beneficial interest to align financial reporting with tax reporting.22 American Balanced Fund