World Fuel Services 2015 Annual Report Download - page 38

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of current or future credit worthiness of our customers, particularly in these difficult economic and financial markets.
Accounts receivable are reduced by an allowance for bad debt.
If credit losses exceed established allowances, our business, financial condition, results of operations and cash flows may
be adversely affected. For additional information on the credit risks inherent in our business, see “Item 1A – Risk Factors”
in this 2015 10-K Report.
Inventories
Inventories are valued using the average cost methodology and are stated at the lower of average cost or market.
Components of inventory include fuel purchase costs, the related transportation costs and changes in the estimated fair
market values for inventories included in a fair value hedge relationship.
Derivatives
We enter into financial derivative contracts in order to mitigate the risk of market price fluctuations in aviation, marine and
land fuel, to offer our customers fuel pricing alternatives to meet their needs and to mitigate the risk of fluctuations in foreign
currency exchange rates. We also enter into proprietary derivative transactions, primarily intended to capitalize on arbitrage
opportunities related to basis or time spreads related to fuel products we sell. We have applied the normal purchase and
normal sales exception (“NPNS”), as provided by accounting guidance for derivative instruments and hedging activities, to
certain of our physical forward sales and purchase contracts. While these contracts are considered derivative instruments
under the guidance for derivative instruments and hedging activities, they are not recorded at fair value, but rather are
recorded in our consolidated financial statements when physical settlement of the contracts occurs. If it is determined that
a transaction designated as NPNS no longer meets the scope of the 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 the accounting guidance for derivative instruments are recognized at their estimated fair
market value in accordance with the accounting guidance for fair value measurements. If the derivative does not qualify as
a hedge or is not designated as a hedge, changes in the estimated fair market value of the derivative are recognized as a
component of revenue, cost of revenue or other income (expense), net (based on the underlying transaction type) in the
consolidated statements of income and comprehensive 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 estimated 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 statements of income and comprehensive 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 sheets 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 estimated fair market value of the hedge is recognized as a component of other income
(expense), net in the consolidated statements of income and comprehensive 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 in a
manner 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 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.
Goodwill and Identifiable Intangible Assets
Goodwill arises because the purchase price paid reflects numerous factors, including the strategic fit and expected synergies
these acquisitions bring to our existing operations. Goodwill is recorded at fair value and is reviewed at least annually at year-
end (or more frequently under certain circumstances) for impairment.
Goodwill is evaluated for impairment based on an assessment of 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 (Step 0). 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 two-step impairment analysis.