INTL FCStone 2011 Annual Report Download - page 61

INTL FCSTONE INC.Form10K 47
PARTII
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
and unrealized trading income is recorded on a trade date basis.
Securities owned and securities sold, not yet purchased and
foreign currencies sold, not yet purchased, are stated at fair value
with related changes in unrealized appreciation or depreciation
refl ected within ‘trading gains’ in the consolidated income
statements. Fee and interest income are recorded on the accrual
basis and dividend income is recognized on the ex-dividend date.
Revenue on commodities that are purchased for physical delivery
to customers and that are not readily convertible into cash is
recognized at the point in time when the commodity has been
shipped, title and risk of loss has been transferred to the customer,
and the following conditions have been met: persuasive evidence
of an arrangement exists, the price is fi xed and determinable, and
collectability of the resulting receivable is reasonably assured.
 e critical aspect of revenue recognition is recording all known
transactions as of the trade date of each transaction for the fi nancial
period. We have developed systems for each of our businesses to
capture all known transactions. Recording all known transactions
involves reviewing trades that occur after the fi nancial period
that relate to the fi nancial period.  e accuracy of capturing this
information is dependent upon the completeness and accuracy
of data capture of the operations systems and our clearing fi rms.
Physical Commodities Inventory. Physical commodities
inventory is stated at the lower of cost or fair value, determined
using the weighted-average price method. We generally mitigate
the price risk associated with physical commodities held in
inventory through the use of derivatives. We do not elect hedge
accounting under U.S. GAAP in accounting for this price
mitigation. Any unrealized gains in physical commodities inventory
are not recognized under U.S. GAAP, but unrealized gains and
losses in related derivative positions are recognized under U.S.
GAAP. As a result, our reported commodities trading earnings
are subject to volatility.
Allowance for Doubtful Accounts. We maintain allowances for
doubtful accounts for trade receivables and defi cits on customer
commodity accounts.  e allowances for doubtful accounts are
signifi cant estimates, and are maintained at a level considered
appropriate by our management based on reviews of historical
agings of customer defi cit accounts, receivables from customers,
availability of capital and liquidity for specifi c accounts, historical
trends of charge-off s and recoveries, and current and projected
economic, market and other conditions. If we become aware of a
customer’s inability to meet its fi nancial obligations, we establish
a specifi c allowance for a potential bad debt expense to reduce the
net recognized receivable to the amount we reasonably believe
will be collected. Additionally, diff erent assumptions, changes
in economic circumstances or the deterioration of the fi nancial
condition of our customers could result in additional provisions
to the allowances for doubtful accounts and increased bad debt
expense.  e valuation of the allowances for doubtful accounts
is performed on a quarterly basis.
Valuation of Goodwill and Intangible Assets. We record the
excess of purchase price over the fair value of the tangible and
identifi able intangible assets acquired as goodwill. Goodwill is
tested for impairment annually, as well as when an event or change
in circumstance indicates an impairment may have occurred.
Goodwill is tested for impairment by comparing the fair value
of our individual reporting units to their carrying amount to
determine if there is a potential goodwill impairment. If the
fair value of the reporting unit is less than its carrying value, an
impairment loss is recorded to the extent that the implied fair value
of the goodwill of the reporting unit is less than its carrying value.
For purposes of performing the impairment test for goodwill,
our reporting units are primarily units that are one level below
our reportable operating segments as defi ned within the Segment
Reporting Topic of the ASC. We estimate the fair value of these
reporting units using a discounted cash fl ow analysis. Determining
the fair value of a reporting unit is a matter of judgment and
often involves the use of signifi cant estimates and assumptions.
Our estimate of the fair value of each of the reporting units were
in excess of their respective carrying values at the time of their
annual goodwill impairment tests for 2011.
Intangible assets are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying value may
not be recoverable. In reviewing for impairment, the carrying
value of such assets is compared to the estimated undiscounted
future cash fl ows expected from the use of the assets and their
eventual disposition. If such cash fl ows are not suffi cient to
support the asset’s recorded value, an impairment charge is
recognized to reduce the carrying value of the intangible asset to
its estimated fair value.  e determination of future cash fl ows
as well as the estimated fair value of long-lived assets involves
signifi cant estimates on the part of management. If there is a
material change in economic conditions or other circumstances
infl uencing the estimate of future cash fl ows or fair value, we
could be required to recognize impairment charges in the future.
We evaluate the remaining useful lives of our intangible assets on
a periodic basis to determine whether events and circumstances
warrant a revision to the remaining estimated amortization period.
Loss Contingencies. We are currently involved in various claims
and legal proceedings. Quarterly, we review the status of each
signifi cant matter and assesses its potential fi nancial exposure. If
the potential loss from any claim or legal proceeding is considered
probable and the amount can be reasonably estimated, we accrue
a liability for the estimated loss. Signifi cant judgment is required
in both the determination of probability and the determination
as to whether an exposure is reasonably estimable. Because of
uncertainties related to these matters, accruals are based only on the
best information available at the time. As additional information
becomes available we reassess the potential liability related to
our pending claims and litigation and may revise our estimates.
Income Taxes. We are subject to income taxes in the U.S. and
numerous foreign jurisdictions. Signifi cant judgment is required
in determining the consolidated provision for income taxes and
in evaluating tax positions, including evaluating uncertainties.
As a result, the company recognizes tax liabilities based on