World Fuel Services 2013 Annual Report Download - page 58

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 changes in the estimated fair market values for inventories
included in a fair value hedge relationship.
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 sheets 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 (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.
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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