World Fuel Services 2008 Annual Report Download - page 67

WORLD FUEL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
vesting, exercise and employment termination behavior. Expected volatility is based on the historical volatility of
our common stock over the period that is equivalent to the award’s expected life. Any adjustment to the historical
volatility as an indicator of future volatility would be based on the impact to historical volatility of significant
non-recurring events that would not be expected in the future. Risk-free interest rates are based on the U.S.
Treasury yield curve at the time of grant for the period that is equivalent to the award’s expected life. Dividend
yields are based on the historical dividends of World Fuel over the period that is equivalent to the award’s
expected life, as adjusted for stock splits.
The estimated fair value of common stock, restricted stock and restricted stock units (“RSUs”) is based on
the grant-date market value of our common stock, as defined in the respective plans under which the awards were
issued.
Cash flows from tax benefits resulting from tax deductions in excess of the compensation cost recognized
for share-based payment awards (excess tax benefits) are classified as financing cash flows. These excess income
tax benefits were credited to capital in excess of par value.
Foreign Currency
The functional currency of our U.S. and foreign subsidiaries, except for our two subsidiaries in Brazil, is the
U.S. dollar. Foreign currency transaction gains and losses are recognized upon settlement of foreign currency
transactions. In addition, for unsettled foreign currency transactions, foreign currency translation gains and losses
are recognized for changes between the transaction exchange rates and month-end exchange rates. Foreign
currency transaction gains and losses are included in other, net, in the accompanying consolidated statements of
income in the period incurred. We recorded net foreign currency transaction losses of $8.1 million and $0.6
million in 2008 and 2007, respectively, and foreign currency transaction gains of $0.1 million in 2006.
Commencing in October 2008, the financial position and results of operations of our two subsidiaries in
Brazil are measured using the foreign subsidiary’s local currency as the functional currency. Revenues and
expenses of the subsidiary have been translated into U.S. dollars at average exchange rates prevailing during the
period. Assets and liabilities have been translated at the rates of exchange on the balance sheet date. The resulting
translation gain and loss adjustments are recorded directly as a separate component of shareholders’ equity. As of
December 31, 2008, we recorded net foreign currency translation adjustment losses of $3.3 million.
Income Taxes
Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period
that includes the enactment date.
We must assess the likelihood that our deferred tax assets will be recovered from our future taxable income,
and to the extent we believe that recovery is not likely, we must establish a valuation allowance against those
deferred tax assets. Deferred tax liabilities generally represent items for which we have already taken a deduction
in our tax return, but we have not yet recognized the items as expenses in our results of operations. Significant
judgment is required in evaluating our tax positions, and in determining our provisions for income taxes, our
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