World Fuel Services 2015 Annual Report Download - page 59

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value of hedged item inventories is derived using spot commodity prices and basis differentials. Fair value of foreign
currency contracts is derived using forward prices that take into account interest rates, credit risk ratings and currency rates.
Factors that could warrant a Level 2 input to move to a Level 3 input may include lack of observable market data because
of a decrease in market activity, a degradation of a short-term investment which requires us to value the investment based
on a Level 3 input, or a change in significance of a Level 3 input to the fair value measurement in its entirety. Our policy is
to recognize transfers between Level 1, 2 or 3 as of the beginning of the reporting period in which the event or change in
circumstances caused the transfer to occur.
There were no significant changes to our valuation techniques during 2015 and 2014.
Cash and Cash Equivalents
Our cash equivalents consist principally of overnight investments, bank money market accounts and bank time deposits
which have an original maturity date of less than 90 days. These securities are carried at cost, which approximates market
value.
Accounts Receivable and Allowance for Bad Debt
Credit extension, monitoring and collection are performed for each of our business segments. Each segment has a credit
committee that is responsible for approving credit limits above certain amounts, setting and maintaining credit standards,
and managing the overall quality of the credit portfolio. We perform ongoing credit evaluations of our customers and adjust
credit limits based upon payment history and the customer’s current creditworthiness, as determined by our review of our
customer’s credit information. We extend credit on an unsecured basis to most of our customers. Accounts receivable are
deemed past due based on contractual terms agreed to with our customers.
We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses
based upon our historical experience with our customers, current market and industry conditions affecting our customers
and any specific customer collection issues that we have identified. Historical payment trends may not be a useful indicator
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.
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 sheets 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