World Fuel Services 2005 Annual Report Download - page 33

Derivatives
We enter into derivative contracts in order to mitigate the risk of market price fluctuations in marine and
aviation fuel, and to offer our customers fuel pricing alternatives to meet their needs. We also enter into
derivatives in order to mitigate the risk of fluctuation in interest rates. All derivatives are recognized as a
component of prepaid expenses and other current assets or accrued expenses and other current liabilities on the
balance sheet at fair market value. If the derivative does not qualify as a hedge under Statement of Financial
Accounting Standard (“SFAS”) No. 133 or is not designated as a hedge, changes in the fair market value of the
derivative are recognized as a component of cost of sales in the statement of income. Derivatives which qualify
for hedge accounting are designated as either a fair value or cash flow hedge. For fair value hedges, changes in
the fair market value of the hedge and the hedged item are recognized as a component of cost of sales in the
statement of income. For cash flow hedges, changes in the fair market value of the hedge are recognized as a
component of other comprehensive income (“OCI”) in the stockholders’ equity section of the balance sheet.
To qualify for hedge accounting, as either a fair value or cash flow hedge, the hedging relationship between
the hedging instruments and hedged items must be highly effective over an extended period of time in achieving
the offset of changes in fair values or cash flows attributable to the hedged risk at the inception of the hedge.
Hedge accounting is discontinued prospectively if and when the hedging relationship over an extended period of
time is determined to be ineffective. We assess hedge effectiveness based on total changes in the fair market
value of our hedging instruments and hedged items and any ineffectiveness is recognized in the statement of
income. Adjustment to the carrying amounts of hedged items is discontinued in instances where the related fair
value hedging instrument becomes ineffective and any previously recorded fair market value changes are not
adjusted until the fuel is sold.
For additional information on derivatives, see “Item 7A – Quantitative and Qualitative Disclosures About
Market Risk” of this Form 10-K.
Goodwill and Identifiable Intangible Assets
Goodwill represents our cost in excess of net assets of the acquired companies and the joint venture interest
in PAFCO. We recorded identifiable intangible assets for customer relationships existing at the date of the
acquisitions. Identifiable intangible assets are being amortized over their useful lives that range from five to
seven years. We account for goodwill and identifiable intangible assets in accordance with SFAS No. 142,
“Goodwill and Other Intangible Assets.” Among other provisions, SFAS No. 142 states that goodwill shall not be
amortized prospectively.
In accordance with SFAS No. 142, goodwill is reviewed annually at year end (or more frequently under
certain circumstances) for impairment. The initial step of the goodwill impairment test compares the fair value of
a reporting unit, which is the same as our reporting segment, with its carrying amount, including goodwill. The
fair value of our reporting segment is estimated using discounted cash flow and market capitalization
methodologies.
Revenue Recognition
Revenue is recognized when fuel deliveries are made and title passes to the customer, or as fuel related
services are performed, provided that: there is a persuasive evidence of an arrangement, the sales price is fixed or
determinable and collectibility is reasonably assured.
Income Taxes
Income tax expense is provided for using the asset and liability method, under which deferred tax assets and
liabilities are determined based upon the temporary differences between the financial statement and income tax
bases of assets and liabilities using currently enacted tax rates. Deferred tax assets are reduced by a valuation
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