World Fuel Services 2007 Annual Report Download - page 32

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64435 TX 24WORLD FUEL SERVICES
ANNUAL REPORT
27-Feb-2008 07:44 EST
CLN PSTAM
RR Donnelley ProFile SER cobbr0cm 5*
PMT 2C
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9.9.26
information. If the derivative does not qualify as a hedge under Statement of Financial Accounting Standard
(“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” or is not designated as a
hedge, changes in the fair market value of the derivative are recognized as a component of cost of sale in the
statement of income. Derivatives which qualify for hedge accounting may be designated as either a fair value or
cash flow hedge. For our fair value hedges, changes in the fair market value of the hedge and the hedged item are
recognized in the same line item as a component of either revenue or cost of sales in the statement of income. For
our cash flow hedges, the effective portion of the changes in the fair market value of the hedge is recognized as a
component of other comprehensive income in the shareholders’ equity section of the balance sheet, while the
ineffective portion of the changes in the fair market value of the hedge is recognized as a component of interest
expense in the statement of income. Cash flows for our hedging instruments used in our hedges are classified in
the same category as the cash flow from the hedged items. If for any reason hedge accounting is discontinued,
then any cash flows subsequent to the date of discontinuance shall be classified consistent with the nature of the
instrument.
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. We
use a regression analysis based on historical spot prices in assessing the qualification for our fair value hedges.
However, our measurement of hedge ineffectiveness for inventory hedges utilizes spot prices for the hedged item
(inventory) and forward or future prices for the hedge instrument. Therefore, the excluded component (forward
or futures prices) in assessing hedge qualification, along with ineffectiveness, is included as a component of cost
of sales in earnings. 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 the estimated fair value of net assets, including identifiable
intangible assets, of acquired companies and the joint venture interest in PAFCO. Goodwill is not subject to
periodic amortization; instead, it is reviewed annually at year-end (or more frequently under certain
circumstances) for impairment. The initial step of the goodwill impairment test compares the estimated fair value
of a reporting unit, which is the same as our reporting segments, with its carrying amount, including goodwill.
The fair value of our reporting segment is estimated using discounted cash flow and market capitalization
methodologies.
In connection with our acquisitions, we recorded identifiable intangible assets existing at the date of the
acquisitions for customer, charge card holder and merchant relationships, non-compete agreements and
trademark/tradename. Our identifiable intangible assets are amortized over their useful lives, which are estimated
as follows: customer relationships—ranging from 2 to 7 years; charge card holder relationships—20 years;
charge card merchant relationships—15 years; non-compete agreements—1 to 3 years; and trademark/
tradename—indefinite. Indentifiable intangible assets are reviewed based on market factors and operational
considerations for impairment whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable.
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