World Fuel Services 2013 Annual Report Download - page 30

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 (expense) income, net (based on the underlying transaction type) in the consolidated statements 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
statements 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 sheets 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 (expense) income, net in the consolidated statements 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.
Goodwill and Identifiable Intangible Assets
Goodwill represents the future earnings and cash flow potential of acquired businesses in excess of the fair values that are assigned to
all other identifiable assets and liabilities. Goodwill arises because the purchase price paid reflects numerous factors, including the
strategic fit and expected synergies these acquisitions bring to existing operations and the prevailing market value for comparable
companies. Goodwill is not subject to periodic amortization; instead, it is reviewed annually at year-end (or more frequently under
certain circumstances) for impairment. We assess qualitative factors to determine whether it is more likely than not that the fair value
of any individual reporting unit is less than its carrying amount. In performing the qualitative assessment, we assess relevant events
and circumstances that may impact the fair value of our reporting units, including the following: (i) macroeconomic conditions,
(ii) industry and market considerations, (iii) earnings quality/sustainability, (iv) overall financial performance, (v) events affecting a
reporting unit, (vi) share price and (vii) recent fair value calculation for our reporting units, if available. After assessing the above
described events and circumstances, if we determine that it is more likely than not that the fair value of a reporting unit is greater than
its carrying value, then no further testing is required. Otherwise, we would perform the first step of quantitative testing for goodwill
impairment.
From time to time, we may perform the first step of quantitative testing for goodwill impairment in lieu of performing a qualitative
assessment. The first step of the goodwill impairment test compares the estimated fair value of a reporting unit with its carrying value.
We estimate the fair value of a reporting unit using discounted cash flows and market capitalization methodologies.
In connection with our acquisitions, we record identifiable intangible assets existing at the date of the acquisitions for customer
relationships, supplier and non-compete agreements, developed technology and trademark/trade name rights. Identifiable intangible
assets subject to amortization are amortized over their estimated useful lives and are reviewed for impairment and appropriate
remaining useful lives whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable based on market factors and operational considerations. For identifiable intangible assets not subject to amortization, we
first assess qualitative factors to determine whether it is more likely than not that an asset has been impaired. After assessing
qualitative factors, if we determine that it is more likely than not that the fair value of an asset is greater than its carrying value, then no
further testing is required. Otherwise, we would review for impairment by comparing the fair value of the intangible asset to its
carrying value.
Extinguishment of Liability
In the normal course of business, we accrue liabilities for fuel and services received for which invoices have not yet been received.
These liabilities are derecognized, or extinguished, if either (i) payment is made to relieve our obligation for the liability or (ii) we are
legally released from our obligation for the liability, such as when our legal obligations with respect to such liabilities lapse or otherwise
no longer exist. We derecognized vendor liability accruals due to the legal release of our obligations in the amount of $8.5 million,
$11.2 million and $8.3 million during 2013, 2012 and 2011, respectively, which is reflected as a reduction of cost of revenue in the
accompanying consolidated statements of income and comprehensive income.
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