World Fuel Services 2015 Annual Report Download - page 58

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We measure our cash surrender value of life insurance contracts, derivative contracts and related hedged items at their fair
value in accordance with accounting guidance for fair value measurement. We believe the carrying value of our debt
approximates fair value since these obligations bear interest at variable rates or fixed rates which are not significantly
different than market rates.
The accounting guidance on fair value measurements and disclosures establishes a hierarchy for inputs used in measuring
fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the
most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing
the asset or liability developed based on market data obtained from sources independent of us. Unobservable inputs are
inputs that reflect our assumptions about the assumptions market participants would use in pricing the asset or liability
developed based on the best information available under the circumstances. The hierarchy is broken down into three levels
based on the reliability of the inputs as follows:
1. Level 1 Inputs – Quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to
access.
2. Level 2 Inputs – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability,
either directly or indirectly. We perform annual back-testing to validate that these inputs represent observable inputs
that market participants use in pricing an asset or liability.
3. Level 3 Inputs – Inputs that are unobservable for the asset or liability.
The availability of observable inputs can vary and is affected by a wide variety of factors. To the extent that valuation is
based on inputs that are less observable or unobservable in the market, the determination of fair value requires more
judgment. Accordingly, the degree of judgment exercised by us in determining fair value is greatest for instruments
categorized in Level 3. In certain cases, the inputs used to measure fair value of a specific asset or liability may fall into
different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within
which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the
fair value measurement in its entirety.
Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes
the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, our
own assumptions are set to reflect those that we feel market participants would use in pricing the asset or liability at the
measurement date.
Assets and liabilities that are recorded at fair value have been categorized based upon the fair value hierarchy. Our Level 1
items consist of exchange traded futures. Our Level 2 items consist of commodity swaps, commodity collars,
non-designated derivatives in the form of physical forward purchase or sales commitments, hedged inventories and hedged
physical forward purchase or sales commitments. Our Level 3 items consist of physical forward purchase or sales
commitments, foreign currency forward contracts and the Earn-out liability. Realized and unrealized gains and losses of our
physical forward purchase or sales commitments measured at fair value on a recurring basis that utilized Level 3 inputs are
recognized as a component of either revenue or cost of revenue (based on the underlying transaction type). Realized and
unrealized gains and losses of our foreign currency forward contracts which were not treated as cash flow hedges,
measured at fair value on a recurring basis that utilized Level 3 inputs are recognized as other expense/income. Realized
and unrealized gains and losses of our short-term investments measured at fair value on a recurring basis that utilized
Level 3 inputs are recognized as other expense/income.
Derivative instruments can have bid and ask prices that may be observed in the marketplace. Bid prices reflect the highest
price that a market participant is willing to pay and ask prices reflect the lowest price that a market participant is willing to
accept. Our policy is to consistently apply mid- market pricing for valuation of our derivative instruments.
Fair value of derivative commodity contracts and hedged item commitments is derived using forward prices that take into
account commodity prices, interest rates, credit risk ratings, option volatility and currency rates. In accordance with the
guidance on fair value measurements and disclosures, the impact of our credit risk rating is also considered when measuring
the fair value of liabilities. The fair value of derivative instruments may be based on a combination of valuation inputs that
are on different hierarchy levels. The fair value disclosures are determined based on the lowest level input that is significant
to the fair value measurement in its entirety. The nature of inputs that are considered Level 3 are model inputs. Commodity
contracts categorized in Level 3 are due to the significance of the unobservable model inputs to their respective fair values.
The unobservable model inputs, such as basis differentials, are based on the difference between the historical prices of our
prior transactions and the underlying observable data as well as certain risks related to non-performance. The effect on our
income before income taxes of a 10% change in the model input for non-performance risk would not be significant. Fair