World Fuel Services 2011 Annual Report Download - page 78

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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 instruments 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 modeled inputs.
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.
There were no significant changes to our valuation techniques during 2011 and 2010.
Cash and Cash Equivalents
Our cash equivalents consist principally of overnight investments, bank money market accounts, bank
time deposits, money market mutual funds and investment grade commercial paper 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 of our customers, and any specific customer collection issues that we have
identified. Accounts receivable are reduced by an allowance for bad debt.
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