World Fuel Services 2014 Annual Report Download - page 59

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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 future prices) in assessing hedge
qualification, along with ineffectiveness, is included as a component of cost of revenue in earnings. Adjustments to the
carrying amounts of hedged items are 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 more information on our derivatives, see Note 3.
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 loss is credited or charged to income. Long-lived
assets held and used by us 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.
Purchases of computer software are capitalized. External costs and certain internal costs (including payroll and
payroll-related costs of employees) directly associated with developing significant computer software applications for
internal use are capitalized. Training and data conversion costs are expensed as incurred. Computer software costs are
amortized using the straight-line method over the estimated useful life of the software.
Goodwill and Identifiable Intangible Assets
Goodwill represents the future earnings and cash flow potential of acquired businesses in excess of the fair values that are
assigned to all other identifiable assets and liabilities. Goodwill arises because the purchase price paid reflects numerous
factors, including the strategic fit and expected synergies these acquisitions bring to existing operations and the prevailing
market value for comparable companies. Goodwill is not subject to periodic amortization; instead, it is reviewed annually at
year-end (or more frequently under certain circumstances) for impairment. We assess qualitative factors to determine
whether it is more likely than not that the fair value of any individual reporting unit is less than its carrying amount. In
performing the qualitative assessment, we assess relevant events and circumstances that may impact the fair value of our
reporting units, including the following: (i) macroeconomic conditions, (ii) industry and market considerations, (iii) earnings
quality/sustainability, (iv) overall financial performance, (v) events affecting a reporting unit, (vi) share price and (vii) recent
fair value calculation for our reporting units, if available. After assessing the above described events and circumstances, if
we determine that it is more likely than not that the fair value of a reporting unit is greater than its carrying value, then no
further testing is required. Otherwise, we would perform the first step of quantitative testing for goodwill impairment.
Periodically, we will perform the first step of quantitative testing for goodwill impairment in lieu of performing a qualitative
assessment. The first step of the goodwill impairment test compares the estimated fair value of a reporting unit with its
carrying value. We estimate the fair value of a reporting unit using a discounted cash flow valuation methodology.
In connection with our acquisitions, we record identifiable intangible assets existing at the date of the acquisitions for
customer relationships, supplier and non-compete agreements, developed technology and trademark/trade name rights.
Identifiable intangible assets subject to amortization are amortized over their estimated useful lives and are reviewed for
impairment and appropriate remaining useful lives whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable based on market factors and operational considerations. For identifiable
intangible assets not subject to amortization, we first assess qualitative factors to determine whether it is more likely than
not that an asset has been impaired. After assessing qualitative factors, if we determine that it is more likely than not that
the fair value of an asset is greater than its carrying value, then no further testing is required. Otherwise, we would review
for impairment by comparing the fair value of the intangible asset to its carrying value.
Other Investments
Our other investments consist primarily of equity investments, net of basis adjustments. These investments are accounted
for under the equity method as we own less than 50 percent of the entities and exercise significant influence over the
investee, but do not have operational or financial control.