Summary of Significant Accounting Policies

Nature of Operations — Brady Corporation is an international manufacturer of identification solutions and specialty materials that identify and protect premises, products and people. The ability to provide customers with a broad range of proprietary, customized, and diverse products for use in various applications, along with a commitment to quality and service, a global footprint, and multiple sales channels, have made Brady a world leader in many of its markets.

Principles of Consolidation — The accompanying consolidated financial statements include the accounts of Brady Corporation and its subsidiaries (“Brady” or the “Company”), all of which are wholly-owned. All intercompany accounts and transactions have been eliminated in consolidation.

Discontinued Operations — The results of operations of the Asia Die-Cut & Balkhausen businesses have been reported as discontinued operations for all periods presented. The corresponding assets and liabilities have been reclassified in accordance with the authoritative literature on assets held for sale at July 31, 2013 and, as a result, the balances are not comparable between periods. In accordance with the authoritative literature, the Company has elected to not separately disclose the cash flows related to the Asia Die-Cut & Balkhausen discontinued operations. See Note 13 for additional information about the Company's discontinued operations.

Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Subsequent Events — On September 12, 2013, the Company announced an increase in the annual dividend to shareholders of the Company's Class A Common Stock, from $0.76 to $0.78 per share. A quarterly dividend of $0.195 will be paid on October 31, 2013, to shareholders of record at the close of business on October 10, 2013. This dividend represents an increase of 2.6% and is the 28th consecutive annual increase in dividends.

Fair Value of Financial Instruments — The Company believes the carrying amount of its financial instruments (cash and cash equivalents, accounts receivable and accounts payable) is a reasonable estimate of the fair value of these instruments due to their short-term nature. See Note 5 for more information regarding the fair value of long-term debt and Note 10 for fair value measurements.

Cash Equivalents — The Company considers all highly liquid investments with original maturities of three months or less when acquired to be cash equivalents, which are recorded at cost.

Accounts Receivables — Accounts receivables are stated net of allowances for doubtful accounts of $5,093 and $6,006 as of July 31, 2013 and 2012, respectively. No single customer comprises more than 5% of the Company’s consolidated net sales in 2013, 2012 or 2011, or 5% of the Company’s consolidated accounts receivable as of July 31, 2013 or 2012. Specific customer provisions may be made during review of significant outstanding amounts, utilizing information about customer creditworthiness and current economic trends, indicates that collection is doubtful. In addition, provisions are made for the remainder of accounts receivable based upon the age of the receivable and the Company’s historical collection experience.

Inventories — Inventories are stated at the lower of cost or market. Cost has been determined using the last-in, first-out (“LIFO”) method for certain domestic inventories (approximately 12% of total inventories at July 31, 2013, and approximately 18% of total inventories at July 31, 2012) and the first-in, first-out (“FIFO”) or average cost methods for other inventories. Had all domestic inventories been accounted for on a FIFO basis instead of on a LIFO basis, the carrying value would have increased by $7,923 and $9,271 on July 31, 2013 and 2012, respectively.

Property, Plant, and Equipment — Property, plant, and equipment are recorded at cost. The cost of buildings and improvements and machinery and equipment is being depreciated over their estimated useful lives using primarily the straight-line method for financial reporting purposes. The estimated useful lives range from 3 to 33 years as shown below.



Asset Category		Range of Useful Lives
Buildings & Improvements		10 to 33 Years
Computer Systems		5 Years
Machinery & Equipment		3 to 10 Years

Fully depreciated assets are retained in property and accumulated depreciation accounts until disposal. Upon disposal, assets and related accumulated depreciation are removed from the accounts and the net amount, less proceeds from disposal, is charged or credited to operations. Leasehold improvements are depreciated over the shorter of the lease term or the estimated useful life of the respective asset. Depreciation expense was $22,976, $21,672, and $23,804 for the years ended July 31, 2013, 2012 and 2011, respectively.

Goodwill and Other Intangible Assets — The cost of intangible assets with determinable useful lives is amortized to reflect the pattern of economic benefits consumed on a straight-line basis, over the estimated periods benefited. Intangible assets with indefinite useful lives and goodwill are not subjected to amortization. These assets are assessed for impairment annually or more frequently as deemed necessary.

Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company completes impairment reviews for its reporting units using a fair-value method based on management's judgments and assumptions. The fair value represents the amount at which a reporting unit could be bought or sold in a current transaction between market participants on an arms-length basis. In estimating the fair value, the Company utilizes a discounted cash flow model and market multiples approach. The estimated fair value is compared with the carrying amount of the reporting unit, including goodwill. The annual impairment testing performed on May 1, 2013, in accordance with ASC 350, “Intangibles - Goodwill and Other” (“Step One”) indicated that the following reporting units had a fair value substantially in excess of its carrying value: IDS Americas & Europe, WPS Europe and WPS APAC. The PeopleID reporting unit does not have a fair value substantially in excess of its carrying value, however, this reporting unit consists of the Company's fiscal 2013 acquisition of PDC, and given the short period of time between the date of the acquisition, December 28, 2012, and the Company's annual goodwill impairment assessment date of May 1, 2013, the fair value in excess of carrying value is considered reasonable and consistent with the valuation at acquisition.

The results of the Step One analysis completed over the Company's remaining two reporting units, WPS Americas and IDS APAC, indicated that they were potentially impaired.

WPS Americas Goodwill Impairment

Since the global economic recession of 2009, organic growth within the WPS Americas reporting unit has been difficult to achieve, especially within mature markets such as the U.S. and Canada where business-to-business transactions over the Internet are more advanced than many of the European and Australian markets. With the acceleration of the Internet in the business-to-business market, competition and pricing have intensified. As a result, organic sales declined by approximately 7% and segment profit declined by nearly 20% during fiscal 2013 as compared to fiscal 2012.

The Company is modifying its strategy within the WPS platform, which includes investments in the following: enhanced e-commerce capabilities, expanded product offerings, enhanced industry-specific expertise, and adjusting its pricing strategies. Although management believes the strategy modifications will improve organic sales and profitability of the WPS platform in future years, there is risk associated with any strategy. As such, the Company's annual goodwill impairment analysis ("Step One") reflects the risk in the strategy and the decline in fiscal 2013 sales and profitability, which occurred during a period of time in which the Company was redirecting its investment from the traditional catalog model to e-business. The Company used the discounted cash flow model and market multiples model in order to complete Step One, and concluded that the WPS Americas reporting unit failed, as the resulting fair value was less than the carrying value of the reporting unit.

The Company proceeded to measure the amount of the potential impairment (“Step Two”) with the assistance of a third party valuation firm. In Step Two of the goodwill impairment test, the Company determined the implied fair value of the goodwill and compared it to the carrying value. The Company allocated the fair value of the WPS Americas reporting unit to its assets and liabilities as if the reporting unit had been acquired in a business combination. The excess fair value of the reporting unit over the fair value of its identifiable assets and liabilities was the implied fair value of goodwill. Upon completion of the assessment, the Company recognized a goodwill impairment charge of $172,280 during fiscal 2013. In conjunction with the goodwill impairment test of the WPS Americas reporting unit, indefinite-lived tradenames associated with the reporting unit were analyzed for potential impairment. Indefinite-lived tradenames in the amount of $10,568 associated with the WPS segment were impaired during the three months ended July 31, 2013.

IDS APAC Goodwill Impairment

The IDS APAC reporting unit had goodwill remaining of $18,225 at the annual impairment assessment date. Although sales grew within this reporting unit from 2012 to 2013, profit declined, and neither were as high as anticipated. Projections for the business were not sufficient to support the carrying value of the reporting unit. The Company used the discounted cash flow model and market multiples model in order to complete Step One, and concluded that the IDS APAC reporting failed, as the resulting fair value was less than the carrying value of the reporting unit. The amount by which the carrying value exceeded fair value was greater than the balance of goodwill remaining, as such, a qualitative assessment was completed for Step Two because the amount by which the carrying value exceeded fair value was more than the balance of goodwill remaining. The Company recognized a goodwill impairment charge for the entire remaining goodwill balance of $18,225 during the year ended July 31, 2013.

Changes in the carrying amount of goodwill by reportable segment for the years ended July 31, 2013 and 2012, were as follows:



	IDS			WPS			Die-Cut			Total
Balance as of July 31, 2011	$	389,586		$	260,807		$	149,950		$	800,343
Current year acquisitions	1,227			21,617			—			22,844
Current year divestitures	(495		)	—			—			(495		)
Impairment charge	—			—			(115,688		)	(115,688		)
Translation adjustments	(22,425		)	(5,483		)	(2,305		)	(30,213		)
Balance as of July 31, 2012	$	367,893		$	276,941		$	31,957		$	676,791
Current year acquisitions	170,180			—			—			170,180
Current year divestitures	(2,882		)	—			—			(2,882		)
Reclassification to assets held for sale	(4,129		)	—			(33,218		)	(37,347		)
Impairment charges	(18,225		)	(172,280		)	—			(190,505		)
Translation adjustments	4,192			(4,454		)	1,261			999
Balance as of July 31, 2013	$	517,029		$	100,207		$	—		$	617,236

Goodwill decreased by $59,555 during fiscal 2013. The decline in the balance consisted of the following:

•The reclassification of goodwill of $37,347 to the Asia Die-Cut and Balkhausen disposal group, which is classified as held for sale as of July 31, 2013

•An impairment charge of $172,280 recognized on the Company's WPS Americas reporting unit

•An impairment charge of $18,225 recognized on the Company's IDS APAC reporting unit

•The divestitures of Brady Medical and Varitronics within the IDS segment during the first quarter of 2013, which decreased goodwill by $863 and $2,019, respectively, for a total of $2,882

These decreases were partially offset by the current year acquisition of PDC, which added $170,180 to the goodwill balance, and the positive effects of currency fluctuations of $999.

Goodwill decreased by $123,552 during fiscal 2012. The decline in the balance consisted of the following:

•An impairment charge of $115,688 recognized on the Company's former North/South Asia reporting unit

•The negative effects of currency fluctuations of $30,213

•The divestiture of Etimark within the IDS segment during the fourth quarter of 2012, which decreased goodwill by $495

These decreases were partially offset by the 2012 acquisitions of Grafo, Pervaco, and Runelandhs, which increased goodwill by $1,227, $8,440, and $13,177, respectively. Grafo is reported within the IDS segment, and Pervaco and Runelandhs are reported within the WPS segment.

Goodwill at July 31, 2013 included $18,225 and $172,280 of accumulated impairment losses within the IDS and WPS segments, respectively, for a total of $190,505.

Other intangible assets include patents, tradenames, customer relationships, non-compete agreements and other intangible assets with finite lives being amortized in accordance with the accounting guidance for other intangible assets. The net book value of these assets was as follows:



	July 31, 2013								July 31, 2012
	Weighted Average Amortization Period (Years)	Gross Carrying Amount		Accumulated Amortization			Net Book Value		Weighted Average Amortization Period (Years)	Gross Carrying Amount		Accumulated Amortization			Net Book Value
Amortized other intangible assets:
Patents	5	$	11,053	$	(9,597	)	$	1,456	5	$	10,418	$	(9,058	)	$	1,360
Tradenames and other	5	15,289		(8,398		)	6,891		7	8,945		(7,094		)	1,851
Customer relationships	8	261,076		(144,620		)	116,456		7	164,392		(128,805		)	35,587
Non-compete agreements and other	4	14,942		(14,215		)	727		4	15,988		(15,417		)	571
Unamortized other intangible assets:
Tradenames	N/A	31,321		—			31,321		N/A	44,750		—			44,750
Total		$	333,681	$	(176,830	)	$	156,851		$	244,493	$	(160,374	)	$	84,119

The value of goodwill and other intangible assets in the condensed consolidated balance sheets at July 31, 2013, differs from the value assigned to them in the original allocation of purchase price due to the effect of fluctuations in the exchange rates used to translate the financial statements into the United States Dollar between the date of acquisition and July 31, 2013. The acquisition of PDC increased customer relationships and amortized tradenames by $102,500 and $6,800 respectively.

In conjunction with the goodwill impairment test over the WPS Americas reporting unit, indefinite-lived tradenames associated with the reporting unit were written down to fair value. As a result, indefinite-lived tradenames related to the WPS segment in the amount of $10,568 were impaired during the current period.

Amortization expense on intangible assets during fiscal 2013, 2012, and 2011 was $17,148, $10,576 and $15,571, respectively. The amortization over each of the next five fiscal years is projected to be $19,321, $18,513, $16,349, $13,197 and $11,881 for the fiscal years ending July 31, 2014, 2015, 2016, 2017 and 2018, respectively.

Impairment of Long-Lived and Other Intangible Assets — The Company evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived and other finite-lived intangible assets may warrant revision or that the remaining balance of an asset may not be recoverable. The measurement of possible impairment is based on fair value of the assets generally estimated by the ability to recover the balance of assets from expected future operating cash flows on an undiscounted basis. If impairment is determined to exist, any related impairment loss is calculated based on the fair value of the asset.

In conjunction with the goodwill impairment test over the IDS APAC reporting unit, long-lived assets associated with the reporting unit were analyzed for potential impairment. As a result, long-lived assets in the amount of $3,375 were impaired during the current period.

Catalog Costs and Related Amortization — The Company accumulates all direct costs incurred, net of vendor cooperative advertising payments, in the development, production, and circulation of its catalogs on its balance sheet until such time as the related catalog is mailed. The catalog costs are subsequently amortized into selling, general, and administrative expense over the expected sales realization cycle, which is one year or less. Consequently, any difference between the estimated and actual revenue stream for a particular catalog and the related impact on amortization expense is neutralized within a period of one year or less. The estimate of the expected sales realization cycle for a particular catalog is based on the Company’s historical sales experience with identical or similar catalogs, and an assessment of prevailing economic conditions and various competitive factors. The Company tracks subsequent sales realization, reassesses the marketplace, and compares its findings to the previous estimate, and adjusts the amortization of future catalogs, if necessary. At July 31, 2013 and 2012, $11,255 and $15,011, respectively, of prepaid catalog costs were included in prepaid expenses and other current assets.

Revenue Recognition — Revenue is recognized when it is both earned and realized or realizable. The Company’s policy is to recognize revenue when title to the product and risk of loss have transferred to the customer, persuasive evidence of an arrangement exists, and collection of the sales proceeds is reasonably assured, all of which generally occur upon shipment of goods to customers. The majority of the Company’s revenue relates to the sale of inventory to customers, and revenue is recognized when title and the risks and rewards of ownership pass to the customer. Given the nature of the Company’s business and the applicable rules guiding revenue recognition, the Company’s revenue recognition practices do not contain estimates that materially affect the results of operations, with the exception of estimated returns and credit memos. The Company provides for an allowance for estimated product returns and credit memos which is recognized as a deduction from sales at the time of the sale. As of July 31, 2013 and 2012, the Company had a reserve of $2,711 and $3,046, respectively.

Sales Incentives — The Company accounts for cash consideration (such as sales incentives and cash discounts) given to its customers or resellers as a reduction of revenue rather than an operating expense. Sales incentives for the years ended July 31, 2013, 2012, and 2011 were $20,209, $18,474, and $18,826, respectively.

Shipping and Handling Fees and Costs — Amounts billed to a customer in a sale transaction related to shipping and handling fees are reported as net sales and the related costs incurred for shipping and handling are reported as cost of goods sold.

Advertising Costs — Advertising costs are expensed as incurred, except catalog and mailing costs as outlined above. Advertising expense for the years ended July 31, 2013, 2012, and 2011 was $77,905, $74,830, and $79,236, respectively.

Stock-Based Compensation — The Company has an incentive stock plan under which the Board of Directors may grant nonqualified stock options to purchase shares of Class A Nonvoting Common Stock or restricted shares of Class A Nonvoting Common Stock to employees and non-employee directors. The options have an exercise price equal to the fair market value of the underlying stock at the date of grant and generally vest ratably over a three-year period, with one-third becoming exercisable one year after the grant date and one-third additional in each of the succeeding two years. Options issued under the plan, referred to herein as “service-based” options, generally expire 10 years from the date of grant. The Company also grants stock options to certain executives and key management employees that vest upon meeting certain financial performance conditions over the vesting schedule described above. These options are referred to herein as “performance-based” options. Performance-based stock options expire 10 years from the date of grant. Restricted shares issued under the plan have an issuance price equal to the fair market value of the underlying stock at the date of grant. The restricted shares granted in fiscal 2008 were amended in fiscal 2011 to allow for vesting after either a five-year period or a seven-year period based upon both performance and service conditions. The restricted shares granted in fiscal 2011 vest ratably at the end of years 3, 4 and 5 upon meeting certain performance and service conditions. These shares are referred to herein as “performance-based restricted shares.” Restricted shares granted in fiscal 2013 vest at the end of a three-year period based upon service conditions. These shares are referred to herein as “cliff-vested restricted shares”.

The Company also grants restricted stock units to certain executives and key management employees that vest upon meeting certain financial performance conditions over a specified vesting period, referred to herein as “performance-based restricted stock units.” The performance-based restricted stock units granted in fiscal 2013 vest over a two-year period period upon meeting both performance and service conditions.

As of July 31, 2013, the Company has reserved 5,150,975 shares of Class A Nonvoting Common Stock for outstanding stock options and restricted shares and 4,359,943 shares of Class A Nonvoting Common Stock remain for future issuance of stock options and restricted shares under the active plans. The Company uses treasury stock or will issue new Class A Nonvoting Common Stock to deliver shares under these plans.

The Company recognizes the compensation cost of all share-based awards at the time it is deemed probable the award will vest. The cost is recognized on a straight-line basis over the vesting period of the award. Total stock-based compensation expense recognized by the Company during the years ended July 31, 2013, 2012, and 2011 was $1,736 ($1,059 net of taxes), $9,735 ($5,939 net of taxes), and $9,830 ($5,996 net of taxes), respectively. The decrease in fiscal 2013 was due to the reversal of stock-based compensation of $7,883. The reversal consisted of $4,232 of stock-based compensation expense on the performance-based restricted shares granted in fiscal 2008 that were unlikely to meet the financial performance conditions, $1,502 of stock compensation expense on performance-based restricted shares for which the original service conditions will not be met, and $2,149 of stock compensation expense on performance-based stock options granted in fiscal 2011 and fiscal 2012 that will not meet the financial performance conditions to vest.

As of July 31, 2013, total unrecognized compensation cost related to share-based compensation awards that are expected to vest was $8,342 pre-tax, net of estimated forfeitures, which the Company expects to recognize over a weighted-average period of 1.7 years.

The Company has estimated the fair value of its service-based and performance-based stock option awards granted during the years ended July 31, 2013, 2012, and 2011 using the Black-Scholes option valuation model. The weighted-average assumptions used in the Black-Scholes valuation model are reflected in the following table:



	2013					2012						2011
	Service-Based			Performance-Based		Service-Based			Performance-Based			Service-Based			Performance-Based
Black-Scholes Option Valuation Assumptions	Option Awards			Option Awards		Option Awards			Option Awards			Option Awards			Option Awards
Expected term (in years)	5.93			—		5.89			6.57			5.91			6.57
Expected volatility	38.67		%	—		39.41		%	39.21		%	40.22		%	39.39		%
Expected dividend yield	2.21		%	—		2.07		%	1.99		%	1.94		%	1.96		%
Risk-free interest rate	0.91		%	—		1.16		%	2.05		%	1.65		%	2.35		%
Weighted-average market value of underlying stock at grant date	$	30.58		$	—	$	27.05		$	29.55		$	29.13		$	28.43
Weighted-average exercise price	$	30.58		$	—	$	27.05		$	29.55		$	29.13		$	28.35
Weighted-average fair value of options granted during the period	$	9.05		$	—	$	8.42		$	10.01		$	9.59		$	9.87

The Company uses historical data regarding stock option exercise behaviors to estimate the expected term of options granted based on the period of time that options granted are expected to be outstanding. Expected volatilities are based on the historical volatility of the Company’s stock. The expected dividend yield is based on the Company’s historical dividend payments and historical yield. The risk-free interest rate is based on the U.S. Treasury yield curve in effect on the grant date for the length of time corresponding to the expected term of the option. The market value is calculated as the average of the high and the low stock price on the date of the grant.

The Company granted 5,000 cliff-vested restricted shares in December 2012, with a grant price and fair value of $32.99. The Company granted 10,000 shares of performance-based restricted stock units in September 2012, with a grant price and fair value of $30.21. The Company granted 100,000 shares of performance-based restricted stock in August of 2010, with a grant price and fair value of $28.35, and 210,000 shares in fiscal 2008, with a grant price and fair value of $32.83. As of July 31, 2013, 5,000 cliff-vested restricted shares were outstanding, 10,000 performance-based restricted stock units were outstanding and 221,667 performance-based restricted shares were outstanding.

The Company granted 828,450 service-based stock options during fiscal 2013, with a weighted average exercise price of $30.58 and a weighted average fair value of $9.05. There were no performance-based stock options granted during fiscal 2013.

Research and Development — Amounts expended for research and development are expensed as incurred.

Other Comprehensive Income — Other comprehensive income consists of foreign currency translation adjustments, net unrealized gains and losses from cash flow hedges and net investment hedges, and the unamortized gain on the post-retirement medical plans net of their related tax effects.

The following table illustrates the changes in the balances of each component of accumulated other comprehensive income for the periods presented. The unrealized gain (loss) on cash flow hedges and the unrecognized gain on the postretirement medical plan are presented net of tax:



	Unrealized (loss) gain on cash flow hedges			Gain (loss) on postretirement medical plan			Foreign currency translation adjustments			Accumulated other comprehensive income
Beginning balance, July 31, 2010	$	(321	)	$	1,357		$	49,869		$	50,905
Current-period change	(833		)	831			62,995			62,993
Ending balance, July 31, 2011	$	(1,154	)	$	2,188		$	112,864		$	113,898
Current-period change	2,030			(1,210		)	(55,307		)	(54,487		)
Ending balance, July 31, 2012	$	876		$	978		$	57,557		$	59,411
Current-period change	(777		)	875			(3,446		)	(3,348		)
Ending balance, July 31, 2013	$	99		$	1,853		$	54,111		$	56,063

The decrease in accumulated other comprehensive income for the year ended July 31, 2013 compared to the year ended July 31, 2012 was primarily due to the depreciation of the U.S. dollar against other currencies. The foreign currency translation adjustments line in the table above includes the impact of foreign currency translation, foreign currency translation on intercompany notes, and the settlements of net investment hedges, net of tax.

The following table illustrates the income tax benefit (expense) on the components of other comprehensive income:



	2013			2012			2011
Income tax benefit (expense) related to items of other comprehensive (loss) income:
Net investment hedge translation adjustments	$	2,877		$	(7,784	)	$	9,324
Long-term intercompany loan settlements	(650		)	(2,508		)	(1,193		)
Cash flow hedges	454			(855		)	295
Pension and other post-retirement benefits	(555		)	583			(490		)
Other income tax adjustments	108			(898		)	(2,699		)
Income tax benefit (expense) related to items of other comprehensive (loss) income	$	2,234		$	(11,462	)	$	5,237

Foreign Currency Translation — Foreign currency assets and liabilities are translated into United States dollars at end of period rates of exchange, and income and expense accounts are translated at the weighted average rates of exchange for the period. Resulting translation adjustments are included in other comprehensive income.

Income Taxes — The Company accounts for income taxes in accordance with the applicable accounting guidance, which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. The Company recognizes the effect of income tax positions only if sustaining those positions is more likely than not. Changes in recognition or measurement are reflected in the period in which a change in judgment occurs.

Risk Management Activities — The Company is exposed to market risk, such as changes in interest rates and currency exchange rates. The Company does not hold or issue derivative financial instruments for trading purposes.

Foreign Currency Hedging — The objective of the Company’s foreign currency exchange risk management is to minimize the impact of currency movements on non-functional currency transactions and minimize the foreign currency translation impact on the Company’s foreign operations. While the Company’s risk management objectives and strategies are driven from an economic perspective, the Company attempts, where possible and practical, to ensure that the hedging strategies it engages in qualify for hedge accounting and result in accounting treatment where the earnings effect of the hedging instrument provides substantial offset (in the same period) to the earnings effect of the hedged item. Generally, these risk management transactions will involve the use of foreign currency derivatives to protect against exposure resulting from transactions in a currency differing from the respective functional currency.

The Company utilizes forward foreign exchange currency contracts to reduce the exchange rate risk of specific foreign currency denominated transactions. These contracts typically require the exchange of a foreign currency for U.S. dollars at a fixed rate at a future date, with maturities of less than 18 months. These instruments may or may not qualify as hedges under the accounting guidance for derivative instruments and hedging activities based upon the intended objective of the contract. The fair value of these instruments at July 31, 2013 and 2012 was a liability of $596 and an asset of $953, respectively. As of July 31, 2013 and 2012, the notional amount of these outstanding forward exchange contracts was $157.5 million and $61.2 million. See Note 12 for more information regarding the Company’s derivative instruments and hedging activities.

The Company has designated a portion of its foreign exchange contracts as cash flow hedges and recorded these contracts at fair value on the Consolidated Balance Sheets. For these instruments, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive income (“AOCI”) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. At July 31, 2013 and July 31, 2012, unrealized gains of $118 and $1,348 have been included in AOCI, respectively. All balances are expected to be reclassified from AOCI to earnings during the next fifteen months when the hedged transactions impact earnings.

The Company has designated a portion of its foreign exchange contracts as net investment hedges of the Company’s net investments in foreign operations and recorded these contracts at fair value on the Consolidated Balance Sheets. For net investment hedges that meet the effectiveness requirements, the net gains or losses attributable to changes in spot exchange rates are recorded as cumulative translation within accumulated other comprehensive income. Any ineffective portions are to be recognized in earnings. Recognition in earnings of amounts previously recorded in cumulative translation is limited to circumstances such as complete or substantially complete liquidation of the net investment in the hedged foreign operation. At July 31, 2013 and July 31, 2012, unrealized losses of $150 and $1,041 have been included in AOCI, respectively.

The Company also utilizes Euro-denominated debt, Euro-denominated intercompany loans, and British Pound-denominated intercompany loans designated as hedge instruments to hedge portions of the Company’s net investments in Euro and British- Pound denominated foreign operations. As of July 31, 2013, the Company had €75.0 million foreign denominated debt and £25.0 million intercompany debt outstanding designated as net investment hedges of the Company’s net investment in its European foreign operations. See Note 12 for more information regarding the Company’s derivative instruments and hedging activities. For net investment hedges that meet the effectiveness requirements, the net gains or losses attributable to changes in spot exchange rates are recorded in cumulative translation within accumulated other comprehensive income. Any ineffective portions are to be recognized in earnings. Recognition in earnings of amounts previously recorded in cumulative translation is limited to circumstances such as complete or substantially complete liquidation of the net investment in the hedged foreign operation. At July 31, 2013 and July 31, 2012, unrealized losses of $2,715 and unrealized gains of $2,635, have been included in AOCI, respectively.

The Company also enters into foreign exchange contracts to create economic hedges to manage foreign exchange risk exposure. The fair value of these instruments at July 31, 2013 and 2012 was a liability of $603 and an asset of $78, respectively. The Company has not designated these derivative contracts as hedge transactions, and accordingly, the mark-to-market impact of these derivatives is recorded each period in current earnings.

Hedge effectiveness is determined by how closely the changes in the fair value of the hedging instrument offset the changes in the fair value or cash flows of the hedged item. Hedge accounting is permitted only if the hedging relationship is expected to be highly effective at the inception of the hedge and on an on-going basis. Gains or losses on the derivative related to hedge ineffectiveness are recognized in current earnings. The amount of hedge ineffectiveness was not significant for the fiscal years ended July 31, 2013, 2012, and 2011.

New Accounting Standards — In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-05, “Presentation of Comprehensive Income,” which eliminates the option to present components of other comprehensive income (“OCI”) as part of the statement of changes in stockholders’ equity. The amendments in this standard require that all non-owner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Subsequently, in December 2011, the FASB issued ASU 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income,” which indefinitely defers the requirements in ASU 2011-05 to present on the face of the financial statements adjustments for items that are reclassified from OCI to net earnings in the statement where the components of net earnings and the components of OCI are presented. The ASU does not change the items that must be reported in OCI. The Company has provided the required statements of comprehensive income beginning with the first quarter of fiscal 2013.

In January 2013, the FASB issued ASU 2013-01, "Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities," which clarified that the scope of the disclosures under U.S. GAAP is limited to derivatives, including bifurcated embedded derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are offset either in accordance with ASC 210 or ASC 815. Entities with other types of financial assets and financial liabilities subject to a master netting arrangement or similar agreement are no longer subject to the disclosure requirements in ASU 2011-11. The guidance is effective for annual periods beginning on or after January 1, 2013 and interim periods within those annual periods. Disclosures are to be provided retrospectively for all periods presented. The adoption of this update will not have a material impact on the financial statements of the Company.

In February 2013, the FASB issued ASU 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income," which requires entities to disclose additional information for items reclassified out of accumulated other comprehensive income ("AOCI"). For items reclassified out of AOCI and into net earnings in their entirety, entities are required to disclose the effect of the reclassification in each affected line in the statement of earnings. For AOCI reclassification items that are not reclassified in their entirety into net earnings, a cross reference to other required U.S. GAAP disclosures is required. This information may be provided either in the notes or parenthetically on the face of the statement that reports net earnings as long as all the information is disclosed in a single location. However, an entity is prohibited from providing this information parenthetically on the face of the statement that reports net earnings if it has items that are not reclassified in their entirety into net earnings. The guidance is effective for annual and interim reporting periods beginning after December 15, 2012. The adoption of this update will not have a material impact on the financial statements of the Company.

In March 2013, the FASB issued ASU 2013-05, "Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity," which applies to the release of the cumulative translation adjustment into net earnings when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity. The guidance requires that a parent deconsolidate a subsidiary or derecognize a group of assets that is a business if the parent ceases to have a controlling financial interest in that group of assets, and resolves the diversity in practice for the treatment of business combinations achieved in stages involving a foreign entity. The guidance is effective for annual and interim reporting periods beginning after December 15, 2013. The adoption of this update will not have a material impact on the financial statements of the Company.