Note 6. Derivative Instruments

3 Months Ended

Nov. 30, 2012

Derivative Instruments and Hedging Activities Disclosure [Text Block]

6. DERIVATIVE INSTRUMENTS

Foreign Exchange Risk Management

FactSet conducts business outside the U.S. in several currencies including the British Pound Sterling, Euro, Japanese Yen, Indian Rupee and Philippine Peso. As such, it is exposed to movements in foreign currency exchange rates compared to the U.S. dollar. To manage the exposures related to the effects of foreign exchange rate fluctuations, the Company utilizes derivative instruments (foreign currency forward contracts). The Company’s primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in foreign currency. The Company does not enter into foreign exchange forward contracts for trading or speculative purposes.

Cash Flow Hedges

FactSet enters into foreign currency forward contracts to reduce the effects of foreign currency fluctuations. In designing a specific hedging approach, FactSet considered several factors, including offsetting exposures, significance of exposures, forecasting risk and potential effectiveness of the hedge. The gains and losses on foreign currency forward contracts offset the variability in operating expenses associated with currency movements. There was no discontinuance of cash flow hedges during the three months ended November 30, 2012 and 2011, respectively, and as such, no corresponding gains or losses were reclassified into earnings. The changes in fair value for these foreign currency forward contracts are initially reported as a component of accumulated other comprehensive loss (“AOCL”) and subsequently reclassified into operating expenses when the hedged exposure affects earnings. FactSet did not enter into any new hedging contracts during the first three months of fiscal 2013.

· Indian Rupee Hedging Contracts from Fiscal 2012 - During fiscal 2012, FactSet entered into foreign currency forward contracts to hedge approximately 90% of its Indian Rupee exposure through the end of the first quarter of fiscal 2013, 75% of its Indian Rupee exposure through the end of the first quarter of fiscal 2014 and 50% of its Indian Rupee exposure through the end of the first quarter of fiscal 2015.

· Euro Hedging Contracts from Fiscal 2012 – During fiscal 2012, FactSet entered into foreign currency forward contracts to hedge approximately 50% of its net Euro exposure through the end of the second quarter of fiscal 2013.

At November 30, 2012 the notional principal and fair value of foreign exchange contracts to purchase Indian Rupees with U.S. dollars was Rs.1.7 billion and ($0.5) million, respectively. At November 30, 2012, the notional principal and fair value of foreign exchange contracts to purchase Euros with U.S. dollars were €3.8 million and $0.2 million, respectively.

The following is a summary of all hedging positions and corresponding fair values (in thousands):

	Gross Notional Value				Fair Value Asset (Liability)
Currency Hedged (in U.S. dollars)	Nov 30, 2012		Aug 31, 2012		Nov 30, 2012			Aug 31, 2012
Euro	$	4,694	$	10,160	$	182		$	60
Indian Rupee		30,511		36,286		(525	)		(2,434	)
Total	$	35,205	$	46,446	$	(343	)	$	(2,374	)

Counterparty Credit Risk

As a result of the use of derivative instruments, the Company is exposed to counterparty credit risk. FactSet has incorporated counterparty risk into the fair value of its derivative assets and its own credit risk into the value of the Company’s derivative liabilities. FactSet calculates credit risk from observable data related to credit default swaps (“CDS”) as quoted by publicly available information. Counterparty risk is represented by CDS spreads related to the senior secured debt of the respective bank with whom FactSet has executed these derivative transactions. Because CDS spread information is not available for FactSet, the Company’s credit risk is determined based on using a simple average of CDS spreads for peer companies.

To mitigate counterparty credit risk, FactSet enters into contracts with large financial institutions. The Company regularly reviews its credit exposure balances as well as the creditworthiness of the counterparties. The Company does not expect any losses as a result of default of its counterparties.

Fair Value of Derivative Instruments

The following tables provide a summary of the fair value amounts of derivative instruments and gains and losses on derivative instruments (in thousands):

Designation of Derivatives	Balance Sheet Location	Nov 30, 2012		Aug 31, 2012
Derivatives designated as hedging instruments	Liabilities: Foreign Currency Forward Contracts
	Accounts payable and accrued expenses	$	343	$	2,374

All derivatives were designated as hedging instruments as of November 30, 2012 and August 31, 2012, respectively.

Derivatives in Cash Flow Hedging Relationships for the three months ended November 30, 2012 and 2011 (in thousands):

	Gain (Loss) Recognized in AOCL on Derivatives (Effective Portion)					Location of (Loss) Gain Reclassified from AOCL into Income	(Loss) Gain Reclassified from AOCL into Income (Effective Portion)
Derivatives in Cash Flow Hedging Relationships	2012		2011			(Effective Portion)	2012			2011
Foreign currency forward contracts	$	796	$	(1,596	)	SG&A	$	(491	)	$	520

Note: No amount of ineffectiveness was recorded in the Consolidated Statements of Income for these designated cash flow hedges and all components of each derivative’s gain or loss was included in the assessment of hedge effectiveness.

Accumulated Unrealized Loss on Cash Flow Hedges

The following table provides a summary of the activity associated with all of the Company’s designated cash flow hedges reflected in AOCL (in thousands and net of tax):

Beginning balance at August 31, 2012	$	(1,551	)
Changes in fair value		796
Realized loss reclassified to earnings		491
Ending balance at November 30, 2012	$	(264	)