DERIVATIVE INSTRUMENTS

Cash Flow Hedges

FactSet conducts business outside the U.S. in several currencies including the British Pound Sterling, Euro, Indian Rupee, Japanese Yen 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 AOCL and subsequently reclassified into operating expenses when the hedged exposure affects earnings. There was

discontinuance of cash flow hedges during fiscal

2018

2017,

and as such,

corresponding gains or losses related to changes in the value of the Company’s contracts were reclassified into earnings prior to settlement.

As of

August 31, 2018,

FactSet maintained the following foreign currency forward contracts to hedge its exposures:

●

Philippine Peso

– foreign currency forward contracts to hedge approximately

75%

of its Philippine Peso exposure through the

fourth

quarter of fiscal

2020.

●

Indian Rupee

– foreign currency forward contracts to hedge approximately

75%

of its Indian Rupee exposure through the

third

quarter of fiscal

2019

and

50%

of its exposure from the

fourth

quarter of fiscal

2019

through the end of the

second

quarter of fiscal

2020.

●

Euro

– foreign currency forward contracts to hedge approximately

50%

of its Euro exposure through the

third

quarter of fiscal

2019.

●

British Pound Sterling

– foreign currency forward contracts to hedge approximately

50%

of its British Pound Sterling exposure through the

third

quarter of fiscal

2019.

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

	Gross Notional Value				Fair Value (Liability) Asset
Currency Hedged ( in thousands, in U.S. dollars)	August 31, 2018		August 31, 2017		August 31, 2018			August 31, 2017
Philippine Peso	$	52,000	$	—	$	(1,230	)	$	—
Indian Rupee		50,780		51,000		(1,490	)		6,142
Euro		26,312		—		(503	)		—
British Pound Sterling		18,995		—		(723	)		—
Total	$	148,087	$	51,000	$	(3,946	)	$	6,142

As of

August 31, 2018,

the gross notional value of foreign currency forward contracts to purchase Philippine Pesos with U.S. dollars was PHP

2.8

billion. 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 Euros with U.S. dollars was €

22.0

million. The gross notional value of foreign currency forward contracts to purchase British Pound Sterling with U.S. dollars was

£14.0

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, when applicable. 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. As 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:

Designation of Derivatives (in thousands)	Balance Sheet Location	August 31, 2018		August 31, 2017
Derivatives designated as hedging instruments	Assets: Foreign Currency Forward Contracts
	Prepaid expenses and other current assets	$	90	$	3,796
	Other assets	$	—	$	2,346

	Liabilities: Foreign Currency Forward Contracts
	Accounts payable and accrued expenses	$	1,731	$	—
	Deferred rent and other non-current liabilities	$	2,305	$	—

All derivatives were designated as hedging instruments as of

August 31, 2018

and

2017,

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 each of the

three

fiscal years ended

August 31, 2018,

2017

and

2016:

(in thousands)	(Loss) Gain Recognized in AOCL on Derivatives (Effective Portion)								Location of Gain (Loss) Reclassified from AOCL	Gain (Loss) Reclassified from AOCL into Income (Effective Portion)
Derivatives in Cash Flow Hedging Relationships	2018			2017		2016			into Income (Effective Portion)	2018		2017			2016
Foreign currency forward contracts	$	(7,700	)	$	5,183	$	(1,806	)	SG&A	$	3,106	$	(2,883	)	$	(451	)

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

August 31, 2018,

FactSet estimates that

$1.6

million of net derivative losses related to its cash flow hedges included in AOCL will be reclassified into earnings within the next

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

August 31, 2018

and

2017,

there were

net settlements recorded on Consolidated Balance Sheets.