World Fuel Services 2014 Annual Report Download - page 38

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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 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 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 income
(expense), 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.
Periodically, we will 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 a discounted cash flow valuation methodology.
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