World Fuel Services 2011 Annual Report Download - page 79

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Accounts Receivable Purchase Agreement
We have a Receivables Purchase Agreement (‘‘RPA’’) to sell up to $125.0 million of certain of our
accounts receivable. The sale price is an amount equal to either 90% or 100%, depending on the
customer, of the sold accounts receivable balance less a discount margin equivalent to a floating market
rate plus 2% and certain other fees, as applicable. Under the terms of the RPA, we retain a beneficial
interest in certain of the sold accounts receivable of 10%, which is included in accounts receivable, net in
the accompanying consolidated balance sheet.
As of December 31, 2011, we had sold accounts receivable of $42.0 million and recorded a retained
beneficial interest of $3.2 million. During 2011, the fees and interest paid under the RPA were not
significant.
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 for
inventories included in a fair value hedge relationship, changes in the estimated fair market values.
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 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
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