World Fuel Services 2005 Annual Report Download - page 59

WORLD FUEL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
customer’s current credit worthiness, as determined by our review of our customer’s credit information. We
extend credit on an unsecured basis to most of our customers. Accounts receivable are deemed past due based on
contractual terms agreed with our customers.
We continuously monitor collections and payments from our customers and maintain a provision for
estimated credit losses based upon our historical experience with our customers, current market and industry
conditions of our customers, and any specific customer collection issues that we have identified. Accounts and
notes receivable are reduced by an allowance for amounts that may become uncollectible in the future. We had
accounts and notes receivable of $490.8 million and $688.1 million, net of allowance for bad debts of $11.3
million and $12.2 million, as of December 31, 2004 and 2005, respectively. Accounts and notes receivable are
written-off when it becomes apparent based upon age or customer circumstances that such amounts will not be
collected.
The following table sets forth activities in our allowance for bad debts (in thousands):
2003 2004 2005
Balance at beginning of period .............................. $11,112 $10,538 $11,277
Charges to provision for bad debts ........................... 6,281 4,338 8,644
Write-off of uncollectible accounts receivable ................. (6,924) (3,683) (7,822)
Recoveries of bad debts ................................... 69 84 110
Balance at end of period ................................... $10,538 $11,277 $12,209
Inventories
Inventories are valued using average cost and are stated at the lower of cost or market. Components of
inventory cost include fuel purchase costs, the related transportation costs and storage fees.
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
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