World Fuel Services 2005 Annual Report Download - page 42

American Jobs Creation Act of 2004. In December 2004, the FASB issued Staff Position (“FSP”) No. 109-2,
“Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs
Creation Act of 2004.” The American Jobs Creation Act of 2004 (the “Act”), signed into law on October 22,
2004, provides for a special one-time tax deduction, or dividend received deduction (“DRD”), of 85% of
qualifying foreign earnings that are repatriated in either a company’s last tax year that began before the
enactment date or the first tax year that begins during the one-year period beginning on the enactment date. FSP
No. 109-2 provides entities additional time to assess the effect of repatriating foreign earnings under the Act for
purposes of applying SFAS No. 109, “Accounting for Income Taxes,” which typically requires the effect of a
new tax law to be recorded in the period of enactment. In the fourth quarter of 2005, we decided to repatriate
$40.0 million in foreign earnings pursuant to the special taxing provisions contained in the Act. For 2005, we
recorded additional tax expense of approximately $2.8 million, or $0.12 per basic share and $0.11 per diluted
share, related to this decision to repatriate foreign earnings.
Inventory Costs. In November 2004, the FASB issued SFAS No. 151, “Inventory Costs—an amendment of
Accounting Research Bulletins No. 43, Chapter 4.” This statement clarifies the requirement that abnormal
inventory-related costs be recognized as current-period charges. The provisions of this statement are to be
applied prospectively to inventory costs incurred during fiscal years beginning after June 15, 2005. We do not
expect the effects of adoption of SFAS No. 151 will have a material impact on our results of operations or
financial position.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Commodity
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.
Cash Flow Hedges. We enter into interest rate swaps in order to mitigate the risk of fluctuations in interest
rates. See below discussion on interest rate for additional information. As of December 31, 2005, we recorded
unrealized net gain of $0.2 million on these cash flow hedges, which was included in accumulated other
comprehensive income.
Fair Value Hedges. We enter into derivatives in order to hedge price risk associated with our inventories.
Effective July 1, 2005, fair value hedge accounting is applied to hedged inventory. Accordingly, inventories
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