Note 5 - Derivative Instruments

3 Months Ended

Nov. 30, 2015

Notes to Financial Statements

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. The Company utilizes derivative instruments (foreign currency forward contracts) to manage the exposures related to the effects of foreign exchange rate fluctuations and reduce the volatility of earnings and cash flows associated with changes in foreign currency. The Company does not enter into foreign currency forward contracts for trading or speculative purposes. In designing a specific hedging approach, FactSet considered several factors, including offsetting exposures, the significance of exposures, the forecasting of risk and the potential effectiveness of the hedge. The gains and losses on foreign currency forward contracts offset the variability in operating expenses associated with currency movements. 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. There was no discontinuance of cash flow hedges during the first three months fiscal 2016 and 2015, and as such, no corresponding gains or losses related to changes in the value of the Company’s contracts were reclassified into earnings prior to settlement.

As of November 30, 2015, FactSet maintained the following foreign currency forward contracts to hedge its Indian Rupee, British Pound Sterling and Euro exposures:

● Indian Rupee - foreign currency forward contracts to hedge approximately 75% of its Indian Rupee exposure through the second quarter of fiscal 2018.

● British Pound Sterling - foreign currency forward contracts to hedge approximately 50% of its British Pound Sterling exposure through the first quarter of fiscal 2017.

● Euro - foreign currency forward contracts to hedge approximately 50% of its Euro exposure through the fourth quarter of fiscal 2016.

The following is a summary of all hedging positions and corresponding fair values:

(in thousands)	Gross Notional Value				Fair Value (Liability) Asset
Currency Hedged (in U.S. dollars)	Nov 30, 2015		Aug 31, 2015		Nov 30, 2015			Aug 31, 2015
Indian Rupee	$	51,420	$	56,320	$	(447	)	$	(990	)
Euro		15,107		20,263		(719	)		143
British Pound Sterling		32,589		15,831		(61	)		280
Total	$	99,116	$	92,414	$	(1,227	)	$	(567	)

As of November 30, 2015, the gross notional value of foreign currency forward contracts to purchase Indian Rupees with U.S. dollars was Rs. 3.6 billion. The gross notional value of foreign currency forward contracts to purchase British Pound Sterling with U.S. dollars was £21.6 million. The gross notional value of foreign currency forward contracts to purchase Euros with U.S. dollars was €13.6 million.

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 and 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, 2015		Aug 31, 2015
Derivatives designated as hedging instruments	Assets: Foreign Currency Forward Contracts
	Prepaid expenses and other current assets	$	607	$	1,035
	Liabilities: Foreign Currency Forward Contracts
	Accounts payable and accrued expenses	$	780	$	—
	Deferred rent and other non-current liabilities	$	1,054	$	1,602

All derivatives were designated as hedging instruments as of November 30, 2015 and August 31, 2015, 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, 2015 and 2014:

(in thousands)	(Loss) Recognized in AOCL on Derivatives (Effective Portion)						Location of (Loss) Reclassified from AOCL into Income (Effective Portion)	Gain (Loss) Reclassified from AOCL into Income (Effective Portion)
Derivatives in Cash Flow Hedging Relationships	2015			2014				2015		2014
Foreign currency forward contracts	$	(605	)	$	(218	)	SG&A	$	56	$	(39	)

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, 2015, FactSet estimates that approximately $0.2 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, 2015 and August 31, 2015, information related to these offsetting arrangements was as follows:

(in thousands)	Derivatives Offset in Consolidated Balance Sheets
November 30, 2015	Gross Derivative Amounts			Gross Derivative Amounts Offset in Balance Sheet			Net Amounts
Fair value of assets	$	789		$	(182	)	$	607
Fair value of liabilities		(2,016	)		182			(1,834	)
Total	$	(1,227	)	$	—		$	(1,227	)

(in thousands)	Derivatives Offset in Consolidated Balance Sheets
August 31, 2015	Gross Derivative Amounts			Gross Derivative Amounts Offset in Balance Sheet			Net Amounts
Fair value of assets	$	1,040		$	(5	)	$	1,035
Fair value of liabilities		(1,607	)		5			(1,602	)
Total	$	(567	)	$	—		$	(567	)