World Fuel Services 2007 Annual Report Download - page 43

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64435 TX 35WORLD FUEL SERVICES
ANNUAL REPORT
26-Feb-2008 23:31 EST
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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.
Cash Flow Hedges. We enter into interest rate swaps in order to mitigate the risk of fluctuations in interest
rates. We recorded an unrealized net gain of $0.1 million and $0.3 million as of December 31, 2007 and 2006,
respectively, which were included in accumulated other comprehensive income in shareholders’ equity.
Fair Value Hedges. We enter into derivatives in order to hedge price risk associated with our inventories.
Accordingly, inventories designated as “hedged items” are marked to market through the statement of income, as
is the derivative that serves as the hedge instrument. As a result, gains and losses attributable to changes in fuel
prices are offset based on the effectiveness of the hedge instrument in the period in which the hedge is in effect.
Effective in the fourth quarter of 2007, we also designated derivatives as fair value hedge instruments in
order to hedge price risk associated with certain fixed price purchase and sale firm commitments. During the
fourth quarter of 2007, fair value hedge accounting was applied to hedge certain firm commitments which were
elected for treatment under the normal purchase and normal sales exemption and subsequently designated as
hedged items in fair value hedges.
Changes in the fair value of hedged sales commitments and their related hedge instruments are recorded in
revenues in our consolidated statement of income, while changes in the fair value of hedged purchase
commitments and inventories and their related hedge instruments are recorded in cost of sales in our consolidated
statement of income. We recorded an unrealized net gain of less than $0.1 million and $0.8 million as of
December 31, 2007 and 2006, respectively, relating to the ineffectiveness of our fair value hedge positions on the
respective dates.
Non-designated Derivatives. Our non-designated derivatives are primarily entered into in order to mitigate
the risk of market price fluctuations in marine, aviation and land fuel in the form of swaps as well as fixed price
purchase and sale contracts and to offer our customers fuel pricing alternatives to meet their needs. In addition,
non-designated derivatives are also entered into to hedge foreign currency fluctuation. The changes in fair value
of our non-designated commodity derivatives are recorded as a component of cost of sales in the statement of
income. The changes in fair value of our non-designated foreign currency derivatives are recorded as a
component of other income (expense), net, in the statement of income. We recorded an unrealized net loss of
$0.1 million and an unrealized net gain of less than $0.1 million as of December 31, 2007 and 2006, respectively,
relating to our non-designated derivatives positions on the respective dates.
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