Note 5 - Derivative Instruments

3 Months Ended

Nov. 30, 2013

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities Disclosure [Text Block]

5. DERIVATIVE INSTRUMENTS

Cash Flow Hedges

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. 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, 2013 and 2012, 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.

As of November 30, 2013 FactSet maintained foreign currency forward contracts to hedge approximately 75% of its Indian Rupee exposure through the end of the second quarter of fiscal 2016, 40% of its British Pound exposure through the end of the second quarter of fiscal 2014, and 50% of its Philippines Peso exposure through the end of fiscal 2014. At November 30, 2013 the notional principal and fair value of foreign exchange contracts to purchase Indian Rupees with U.S. dollars was Rs.2.7 billion and ($3.6) million, respectively. At November 30, 2013, the notional principal and fair value of foreign exchange contracts to purchase Philippine Pesos with U.S. dollars was Php377.5 million and $0.1 million, respectively. At November 30, 2013 the notional principal and fair value of foreign exchange contracts to purchase British Pounds with U.S. dollars was £3.2 million and $0.3 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, 2013		Aug 31, 2013		Nov 30, 2013			Aug 31, 2013
Indian Rupee	$	42,407	$	47,388	$	(3,556	)	$	(7,693	)
Philippine Peso		8,550		11,700		106			(178	)
British Pound		4,816		10,436		337			131
Total	$	55,773	$	69,524	$	(3,113	)	$	(7,740	)

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 table provides 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, 2013		Aug 31, 2013
Derivatives designated as hedging instruments	Assets: Foreign Currency Forward Contracts
	Prepaid expenses and other current assets	$	443	$	0
	Liabilities: Foreign Currency Forward Contracts
	Accounts payable and accrued expenses	$	1,466	$	3,085
	Deferred Rent and other non-current liabilities	$	2,090	$	4,655

All derivatives were designated as hedging instruments as of November 30, 2013 and August 31, 2013, respectively.

Derivatives in Cash Flow Hedging Relationships

The following table provides the pre-tax effect of derivative instruments in cash flow hedging relationships for the three months ended November 30, 2013 and 2012 (in thousands):

	Gain Recognized in AOCL on Derivatives (Effective Portion)				Location of (Loss) Reclassified from AOCL into Income	(Loss) Reclassified from AOCL into Income (Effective Portion)
Derivatives in Cash Flow Hedging Relationships	FY14		FY13		(Effective Portion)	FY14			FY13
Foreign currency forward contracts	$	4,227	$	1,571	SG&A	$	(400	)	$	(491	)

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. As of November 30, 2013, FactSet estimates that approximately $1.0 million of net derivative losses related to its cash flow hedges included in AOCL will be reclassified into earnings within the next 12 months.

Offsetting of Derivative Instruments

FactSet’s master netting and other similar arrangements with its respective counterparties allow for net settlement under certain conditions. As of November 30, 2013 and August 31, 2013, information related to these offsetting arrangements was as follows (in thousands):

	Derivatives Offset in Balance Sheet
November 30, 2013	Gross Derivative Amount			Gross Derivative Amounts Offset in Balance Sheet		Net Amount
Fair value of assets	$	443		$	0	$	443
Fair value of liabilities		(3,657	)		101		(3,556	)
Total	$	(3,214	)	$	101	$	(3,113	)

	Derivatives Offset in Balance Sheet
August 31, 2013	Gross Derivative Amount			Gross Derivative Amounts Offset in Balance Sheet		Net Amount
Fair value of assets	$	131		$	0	$	131
Fair value of liabilities		(7,871	)		0		(7,871	)
Total	$	(7,740	)	$	0	$	(7,740	)