World Fuel Services 2012 Annual Report Download - page 76

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 and comprehensive 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 and comprehensive 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 and
comprehensive 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.
For more information on our derivatives, see Note 3.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation and amortization.
Depreciation and amortization are calculated using the straight-line method over the estimated useful
lives of the assets. Costs of major additions and improvements are capitalized while expenditures for
maintenance and repairs, which do not extend the life of the asset, are expensed. Upon sale or
disposition of property and equipment, the cost and related accumulated depreciation and amortization
are eliminated from the accounts and any resulting gain or loss is credited or charged to income.
Long-lived assets held and used by us are reviewed based on market factors and operational
considerations for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable.
Purchases of computer software are capitalized. External costs and certain internal costs (including
payroll and payroll-related costs of employees) directly associated with developing significant computer
software applications for internal use are capitalized. Training and data conversion costs are expensed as
incurred. Computer software costs are amortized using the straight-line method over the estimated
useful life of the software.
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