Note 6. Derivative Instruments

3 Months Ended

Nov. 30, 2011

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. These hedging programs are not designed to provide long-term foreign currency protection as the contracts have maturities of less than two years. 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 first quarter of fiscal 2012 or fiscal 2011 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) income (“AOCLI”) and subsequently reclassified into operating expenses when the hedged exposure affects earnings.

During the first quarter of 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. During the first quarter of fiscal 2011, FactSet entered into foreign currency forward contracts to hedge approximately 95% of its Japanese Yen operating income through the end of the fourth quarter of fiscal 2011. In the second half of fiscal 2010, FactSet entered into foreign currency forward contracts to hedge approximately 95% of its net Euro exposure through the end of the first quarter of fiscal 2012 and 95% of its net British Pound Sterling exposure through the end of the third quarter of fiscal 2011.

At November 30, 2011 the notional principal and fair value of foreign exchange contracts to purchase Indian Rupees with U.S. dollars was $22.3 million and $2.4 million, respectively. At November 30, 2011, there were no other outstanding foreign exchange forward contracts.

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

	Gross Notional Value				Fair Value Asset (Liability)
Currency Hedged	Nov 30, 2011		August 31, 2011		Nov 30, 2011			August 31, 2011
Euro	$	0	$	8,422	$	0		$	916
British Pound Sterling		0		0		0			0
Japanese Yen		0		196		0			(19	)
Indian Rupee		22,275		0		(2,442	)		0
Total	$	22,275	$	8,618	$	(2,442	)	$	897

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 as determined by FactSet.

To mitigate counterparty credit risk, FactSet enters into contracts with large financial institutions (JPMorgan Chase and Bank of America). 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, 2011			Aug 31, 2011
Derivatives designated as hedging instruments	Assets: Foreign Currency Forward Contracts
	Other current assets	$	0		$	897
	Liabilities: Foreign Currency Forward Contracts
	Accounts payable and accrued expenses	$	2,442		$	0
	Deferred rent and other non-current liabilities		0			0
	Total liabilities	$	2,442		$	0
Derivatives not designated as hedging instruments	None	$	0		$	0
	Net Derivative Assets (Liabilities)	$	(2,442	)	$	897

Derivatives in Cash Flow Hedging Relationships for the three months ended November 30, 2011 and 2010 (in thousands):

	(Loss) Gain Recognized in AOCLI on Derivatives (Effective Portion)					Location of Gain Reclassified from AOCI into Income	Gain Reclassified from AOCLI to Income (Effective Portion)
Derivatives in Cash Flow Hedging Relationships		2011			2010	(Effective Portion)		2011		2010
Foreign currency forward contracts	$	(1,596	)	$	1,469	SG&A	$	520	$	444

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 Other Comprehensive (Loss) Income

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

	Three Months Ended November 30,
	2011		2010
Beginning balance, net of tax	$	590	$	(238	)
Changes in fair value		(1,596)		1,469
Realized gain reclassified to earnings		(520)		(444	)
Ending balance, net of tax	$	(1,526)	$	787