World Fuel Services 2012 Annual Report Download - page 79

Expected volatility is based on the historical volatility of our common stock over the period that is
equivalent to the award’s expected life. Any adjustment to the historical volatility as an indicator of future
volatility would be based on the impact to historical volatility of significant non-recurring events that
would not be expected in the future. Risk-free interest rates are based on the U.S. Treasury yield curve at
the time of grant for the period that is equivalent to the award’s expected life. Dividend yields are based
on the historical dividends of World Fuel over the period that is equivalent to the award’s expected life, as
adjusted for stock splits.
Cash flows from income tax benefits resulting from income tax deductions in excess of the compensation
cost recognized for share-based payment awards (excess income tax benefits) are classified as financing
cash flows. These excess income tax benefits are credited to capital in excess of par value.
Foreign Currency
The functional currency of our U.S. and foreign subsidiaries is the U.S. dollar, except for certain
subsidiaries which utilize their respective local currency as their functional currency. Foreign currency
transaction gains and losses are recognized upon settlement of foreign currency transactions. In
addition, for unsettled foreign currency transactions, foreign currency translation gains and losses are
recognized for changes between the transaction exchange rates and month-end exchange rates.
Foreign currency transaction gains and losses are included in other income (expense), net, in the
accompanying consolidated statements of income and comprehensive income in the period incurred.
We recorded a net foreign currency transaction gain of $0.1 million in 2012, and losses of $2.7 million
and $1.8 million in 2011 and 2010, respectively.
Revenues and expenses of the subsidiaries that have a functional currency other than the U.S. dollar
have been translated into U.S. dollars at average exchange rates prevailing during the period. The assets
and liabilities of these subsidiaries have been translated at the rates of exchange on the balance sheet
dates. The resulting translation gain and loss adjustments are recorded in accumulated other
comprehensive income as a separate component of shareholders’ equity. We recorded net foreign
currency translation adjustment losses of $9.6 million and $11.3 million in 2012 and 2011, respectively
and a net foreign currency translation adjustment gain of $1.0 million in 2010. Cumulative foreign
currency translation adjustments included in accumulated other comprehensive income amounted to
losses of $16.1 million and $6.5 million as of December 31, 2012 and 2011, respectively and a gain of
$4.8 million as of December 31, 2010.
Income Taxes
Income taxes are accounted for under the asset and liability method. Under this method, deferred
income tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases, and operating loss and income tax credit carryforwards. Deferred income tax
assets and liabilities are measured using enacted income tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be recovered or settled. The effect on
deferred income tax assets and liabilities of a change in income tax rates is recognized in the income tax
provision in the period that includes the enactment date.
We must assess the likelihood that our deferred income tax assets will be recovered from our future
taxable income, and to the extent we believe that recovery is not likely, we must establish a valuation
allowance against those deferred income tax assets. Deferred income tax liabilities generally represent
items for which we have already taken a deduction in our income tax return, but we have not yet
recognized the items as expenses in our results of operations.
Significant judgment is required in evaluating our tax positions, and in determining our provisions for
income taxes, our deferred income tax assets and liabilities and any valuation allowance recorded
against our net deferred income tax assets. We establish reserves when, despite our belief that the
income tax return positions are fully supportable, certain positions are likely to be challenged and we
may ultimately not prevail in defending those positions.
U.S. income taxes have not been recognized on undistributed earnings of foreign subsidiaries. Our
intention is to reinvest these earnings permanently in active non-U.S. business operations. Therefore, no
income tax liability has been accrued for these earnings. Because of the availability of U.S. foreign tax
credits, it is not practicable to determine the amount of U.S. income tax payable if such earnings are not
reinvested indefinitely.
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