INTL FCStone 2011 Annual Report Download - page 75

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INTL FCSTONE INC.Form10K 61
PART II
ITEM 8 Consolidated Financial Statements and Supplementary Data
reviewed at each reporting period to reevaluate if the intangible
asset’s useful life remains inde nite. Additionally, intangible assets
not subject to amortization are tested annually for impairment
at the scal year-end, and between annual tests if indicators of
potential impairment exist, using a fair-value-based approach. No
impairments of identi able intangible assets have been identi ed
during any of the periods presented.
Financial Instruments and Derivatives
Financial instruments owned, at fair value and financial
instruments sold, not yet purchased, at fair value consist of
nancial instruments carried at fair value or amounts that
approximate fair value, with related unrealized changes in gains or
losses recognized in the Company’s results of operations, except
for securities classi ed as available-for-sale. e fair value of a
fi nancial instrument is the amount at which the instrument could
be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale.
e Company accounts for its securities pledged on behalf of
customers and proprietary securities in accordance with the
Investments - Debt and Equity Securities Topic in the ASC.
In accordance with this guidance, the Company determines
the appropriate classifi cation of its investments as trading,
available-for-sale, or held-to-maturity at the time of purchase
and reevaluates the designation as of each reporting period.
e Company has classifi ed certain U.S. government obligations,
mortgage-backed securities, corporate debt securities and exchange
fi rm common stock not pledged for clearing purposes as available-
for-sale, which are carried at fair value based on observable or
quoted market prices and associated unrealized gains or losses
are recorded as a component of OCI, net of tax, until realized,
unless an unrealized loss is determined to be other than temporary,
in which case such loss is charged to earnings. e Company
classifi es those securities as available-for-sale because it would
consider selling them prior to maturity to meet liquidity needs
or as part of the Company’s risk management program.
e Company computes the cost of its securities on a specifi c
identifi cation basis. Such cost includes the direct costs to acquire
securities, adjusted for the amortization of any discount or
premium. e amortized cost of securities is computed under
the eff ective-interest method and is included in interest income.
Realized gains and losses, declines in value judged to be other
than temporary and interest on available-for-sale securities are
included in earnings.
Investment in managed funds, at fair value represents investments
in funds managed by the Company’s fund managers. e
investments are valued at period-end at the net asset value
provided by the fund’s administrator.
Commodities warehouse receipts are valued at the cash price
for the commodity based on published market quotes. For
commodities warehouse receipts, the change in fair value is
off set against the payable to customers with no impact on the
consolidated income statements.
e Company utilizes derivative instruments to manage exposures
to foreign currency, commodity price and interest rate risks for
the Company and its customers. e Company’s objectives for
holding derivatives include reducing, eliminating, and effi ciently
managing the economic impact of these exposures as eff ectively
as possible. Derivative instruments are recognized as either assets
or liabilities and are measured at fair value. e accounting for
changes in the fair value of a derivative depends on the intended
use of the derivative and the resulting designation. For a derivative
instrument designated as a hedge, the eff ective portion of the
derivative’s gain or loss is initially recorded in OCI, net of tax,
and is subsequently recognized in earnings when the hedged
exposure aff ects earnings. e ineff ective portion of the gain or
loss is recognized in earnings. Gains and losses from changes in
fair values of derivatives that are not designated as hedges for
accounting purposes are recognized in earnings.
e Company’s derivative contracts consist of exchange-traded
and OTC derivatives. Fair values of exchange-traded derivatives
are generally determined from quoted market prices. OTC
derivatives are valued using valuation models. e valuation
models used to derive the fair values of OTC derivatives require
inputs including contractual terms, market prices, yield curves and
measurements of volatility. e Company uses similar models to
value similar instruments. Where possible, the Company verifi es
the values produced by pricing models by comparing them to
market transactions. Inputs may involve judgment where market
prices are not readily available. e Company does not elect
hedge accounting under the Derivatives and Hedging Topic of
the ASC in accounting for derivatives used as economic hedges
in its commodities.
e Company provides clearing and execution of exchange-traded
futures and options on futures for middle-market intermediaries,
end-users, producers of commodities and the institutional
and professional trader market segments. e Company has a
subsidiary that is a registered FCM, clearing on various exchanges.
e primary sources of revenues for the Company’s FCM are
commissions and clearing fees derived from executing and clearing
orders for commodity futures contracts and options on futures
on behalf of its customers.
e Company also brokers foreign exchange forwards, options
and cash, or spot, transactions between customers and external
counterparties. A portion of the contracts are arranged on an
off setting basis, limiting the Company’s risk to performance of
the two off setting parties. e off setting nature of the contracts
eliminates the eff ects of market fl uctuations on the Company’s
operating results. Due to the Company’s role as a principal
participating in both sides of these contracts, the amounts
are presented gross on the consolidated balance sheets at their
respective fair values, net of off setting assets and liabilities.
In addition, the Company engages in speculative trading and
holds proprietary positions in futures, options, swaps and forward