INTL FCStone 2011 Annual Report Download - page 76

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INTL FCSTONE INC.Form10K62
PART II
ITEM 8 Consolidated Financial Statements and Supplementary Data
contracts, including corn, wheat, soybeans, sugar and silver. Since
some of the derivatives held or sold by the Company are for
speculative trading purposes, these derivative instruments are not
designated as hedging instruments and accordingly, the changes
in fair value during the period are recorded in the consolidated
income statements as a component of ‘trading gains’ (see Note6).
e Company also holds proprietary positions in its foreign
exchange line of business. On a limited basis, the Company’s
foreign exchange trade desk will accept a customer transaction and
will off set that transaction with a similar but not identical position
with a counterparty. ese unmatched transactions are intended
to be short-term in nature and are often conducted to facilitate
the most eff ective transaction for the Company’s customer. ese
spot and forward contracts are accounted for as free-standing
derivatives and reported in the consolidated balance sheets at
their fair values. e Company does not seek hedge accounting
treatment for these derivatives, and accordingly, the changes in fair
value during the period are recorded in the consolidated income
statements within ‘trading gains’ (see Note6). In applying the
guidance in the Balance Sheet-Off setting Topic of the ASC, the
Company’s accounting policy is such that open contracts with
the same customer are netted at the account level, in accordance
with netting arrangements in place with each party, as applicable
and rights to reclaim cash collateral or obligations to return cash
collateral are netted against fair value amounts recognized for
derivative instruments with the same customer in accordance
with the master netting arrangements in place with each customer.
e Company may lease commodities to or from customers
or counterparties, or advance commodities to customers on an
unpriced basis, receiving payment as and when they become
priced. ese are valued at fair value and classifi ed under fi nancial
instruments as hybrid contracts with embedded derivative features
that cannot be reliably measured and separated from the host
contract. As permitted by the Derivatives and Hedging Topic
of the ASC, the entire instrument is recorded at fair value, with
the corresponding change in fair value recognized as revenue
within the consolidated income statements as a component of
‘trading gains’.
Exchange Memberships and Stock
e Company is required to hold certain exchange membership
seats and exchange fi rm common stock and pledge them for
clearing purposes, in order to provide the Company the right
to process trades directly with the various exchanges. Exchange
memberships include seats on the Chicago Board of Trade
(“CBOT”), the Board of Trade of Kansas City, Missouri,Inc., the
Minnesota Grain Exchange, the NewYork Mercantile Exchange
(“NYMEX”), the COMEX Division of the NewYork Mercantile
Exchange, Mercado de Valores de Buenos Aires S.A. (“MERVAL”),
the Chicago Mercantile Exchange (“CME”) Growth and Emerging
Markets, InterContinental Exchange,Inc. (“ICE”) Futures and
London Metal Exchange (“LME”). Exchange fi rm common stock
includeshares of CME Group,Inc., ICE and LME.
Exchange memberships and fi rm common stocks pledged for
clearing purposes are recorded at cost, in accordance with U.S.
GAAP and CFTC regulations and are included within ‘other
assets’ on the consolidated balance sheets. Equity investments in
exchange fi rm common stock not pledged for clearing purposes
are classifi ed as available-for-sale and recorded at fair value, with
unrealized gains and losses recorded as a component of OCI,
net of tax, until realized. Equity investments in exchange fi rm
common stock not pledged for clearing purposes are included
within the ‘fi nancial instruments owned’ on the consolidated
balance sheets.
The cost basis for FCStone’s exchange memberships and
firm common stock was established using fair value on
September30,2009 as a result of applying purchase accounting
relating to the acquisition of FCStone’s assets. e cost basis for
the Hanley Companies’ exchange memberships was established
using fair value on July1,2010, as a result of applying purchase
accounting relating to the acquisition of the Hanley Companies’
assets. e Company acquiredshares of the LME during the year
ended September30,2011 at a cost of $3.4million.
In January2011, excessshares of exchange fi rm common stock,
with a cost basis of $1.2million, were sold, resulting in a nominal
gain. In July2011, the CME Group removed the requirement
of its member fi rms to hold a specifi ed quantity of its exchange
fi rm common stock in order to process trades directly with the
exchange. Since theshares of CME Group common stock are
no longer pledged for clearing purposes, during the fi scal year
ended September30,2011, the Company designated theshares
as available-for-sale and recorded them at fair value within
‘fi nancial instruments owned’ in the consolidated balance sheets.
e cost basis for exchange memberships and fi rm common stock
pledged for clearing purposes was $10.3million and $11.9million
as of September30,2011 and 2010, respectively. e fair value
of exchange memberships and fi rm common stock pledged
for clearing purposes was $10.5million and $9.9million as of
September30,2011 and 2010, respectively. e fair value of
exchange fi rm common stock is determined by quoted market
prices, and the fair value of exchange memberships is determined
by recent sale transactions. e Company monitors the fair value
of exchange membership seats and fi rm common stock on a
quarterly basis, and does not consider any current unrealized
losses on individual exchange memberships to be anything other
than a temporary impairment.
Business Combinations
Acquisitions during fi scal2011 and 2010 are accounted for
as business combinations in accordance with the provisions of
the Business Combinations Topic of the ASC. Under the new
accounting guidance the method of accounting for a number
of aspects of business combinations was revised, such that more
assets and liabilities acquired will be measured at fair value as of
the acquisition date. Certain contingent liabilities acquired will