World Fuel Services 2015 Annual Report Download - page 62

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determine the estimated fair value of stock-settled stock appreciation rights (“SSAR Awards”), we use the Black-Scholes
option pricing model. The estimation of the fair value of SSAR Awards on the date of grant using an option-pricing model is
affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables
include our expected stock price volatility over the term of the awards, actual and projected employee stock option exercise
behaviors, risk- free interest rates and expected dividends. The expected term of SSAR Awards represents the estimated
period of time from grant until exercise or conversion and is based on vesting schedules and expected post-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.
Cash flows from income tax benefits resulting from income tax deductions in excess of the compensation cost recognized
for share-based payment awards (excess income tax benefits) are classified as financing cash flows. These excess income
tax benefits are credited to capital in excess of par value.
Foreign Currency
The functional currency of our U.S. and foreign subsidiaries is the U.S. dollar, except for certain subsidiaries which utilize
their respective local currency as their functional currency. 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 income (expense), net, in the accompanying
consolidated statements of income and comprehensive income in the period incurred. We recorded net foreign currency
transaction losses of $1.9 million, $1.0 million and $2.8 million in 2015, 2014 and 2013, respectively.
Revenues and expenses of the subsidiaries that have a functional currency other than the U.S. dollar have been translated
into U.S. dollars at average exchange rates prevailing during the period. The assets and liabilities of these subsidiaries have
been translated at the rates of exchange on the balance sheet dates. The resulting translation gain and loss adjustments
are recorded in accumulated other comprehensive income as a separate component of shareholders’ equity. We recorded
in accumulated other comprehensive income net foreign currency translation adjustment losses of $49.6 million (net of $4.0
million of net foreign currency translation adjustment losses attributable to non-controlling interest), $30.9 million and
$13.2 million in 2015, 2014 and 2013, respectively. Cumulative foreign currency translation adjustments included in
accumulated other comprehensive income amounted to net losses of $113.8 million, $60.2 million and $29.3 million as of
December 31, 2015, 2014 and 2013, respectively.
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 income tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted income 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 income tax rates is recognized in the income tax provision 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 income 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
deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We establish
reserves when, despite our belief that the income tax return positions are fully supportable, certain positions are likely to be
challenged and we may ultimately not prevail in defending those positions.
U.S. income taxes have not been recognized on undistributed earnings of foreign subsidiaries. Our intention is to reinvest
these earnings permanently in active non-U.S. business operations. Therefore, no income tax liability has been accrued for
these earnings. Because of the availability of U.S. foreign tax credits, it is not practicable to determine the amount of U.S.
income tax payable if such earnings are not reinvested indefinitely.