World Fuel Services 2011 Annual Report Download - page 48

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
statement of 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 statement of
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 sheet 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 statement of 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 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.
24