World Fuel Services 2008 Annual Report Download - page 64

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WORLD FUEL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Derivatives
We enter into derivative contracts in order to mitigate the risk of market price fluctuations in marine,
aviation and land 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 foreign currency exchange rates. We have applied the
normal purchase and normal sales exception (“NPNS”), as provided by Statement of Financial Accounting
Standard (“FAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” to certain of our
physical forward sales and purchase contracts. While these contracts are considered derivative instruments under
FAS No. 133, they are not recorded at fair value, but on an accrual basis of accounting, which means the values
related to such contracts are not recorded in our consolidated financial statements until physical settlement of the
contract occurs. If it is determined that a transaction designated as NPNS no longer meets the scope exception,
the fair value of the related contract is recorded as an asset or liability on the consolidated balance sheet and the
difference between the fair value and the contract amount is immediately recognized through earnings.
Our derivatives that are subject to FAS No. 133 are recognized at estimated fair market value in accordance
with FAS No. 157. If the derivative does not qualify as a hedge under FAS No. 133 or is not designated as a
hedge, changes in the fair market value of the derivative are recognized as a component of revenue or cost of
revenue (based on the underlying transaction type) in the consolidated 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 instrument and the hedged item are recognized in the same
line item as a component of either revenue or cost of revenue (based on the underlying transaction type) in the
consolidated 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 consolidated balance sheet and subsequently reclassified into the same line item as the
forecasted transaction when both are settled, while the ineffective portion of the changes in the fair market value
of the hedge is recognized as a component of other non-operating expense/income in the consolidated 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 our fair value 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 revenue 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.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation
and amortization are calculated using the straight-line method over the estimated useful lives of the assets. Costs
of major additions and improvements are capitalized while expenditures for maintenance and repairs, which do
not extend the life of the asset, are expensed. Upon sale or disposition of property and equipment, the cost and
related accumulated depreciation and amortization are eliminated from the accounts and any resulting gain or
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