World Fuel Services 2012 Annual Report Download - page 74

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The accounting guidance on fair value measurements and disclosures establishes a hierarchy for inputs
used in measuring fair value that maximizes the use of observable inputs and minimizes the use of
unobservable inputs by requiring that the most observable inputs be used when available. Observable
inputs are inputs that market participants would use in pricing the asset or liability developed based on
market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our
assumptions about the assumptions market participants would use in pricing the asset or liability
developed based on the best information available under the circumstances. The hierarchy is broken
down into three levels based on the reliability of the inputs as follows:
1. Level 1 Inputs – Quoted prices (unadjusted) in active markets for identical assets or liabilities that we
have the ability to access.
2. Level 2 Inputs – Inputs other than quoted prices included within Level 1 that are observable for the
asset or liability, either directly or indirectly. We perform annual back-testing to validate that these
inputs represent observable inputs that market participants use in pricing an asset or liability.
3. Level 3 Inputs – Inputs that are unobservable for the asset or liability.
The availability of observable inputs can vary and is affected by a wide variety of factors. To the extent
that valuation is based on inputs that are less observable or unobservable in the market, the
determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by
us in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs
used to measure fair value of a specific asset or liability may fall into different levels of the fair value
hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair
value measurement in its entirety falls is determined based on the lowest level input that is significant to
the fair value measurement in its entirety.
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 commodity contracts and hedged item commitments 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
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