Effective January 1, 2007, we adopted new accounting standards for financial instruments and hedging activities on a prospective basis; accordingly, comparative amounts for prior periods have not been restated. The new standards had the following impact on our Consolidated Statements of Financial Position as of December 31, 2007:
- The fair values of available-for-sale investments are recorded as assets on the Consolidated Statements of Financial Position. The company classified its investments in ICL and Sinofert as available-for-sale and therefore has recorded these investments at their fair value, resulting in a balance of unrealized holding gains in investments of $2,334.1 million, accumulated other comprehensive income of $2,133.7 million and future income tax liability of $200.4 million as of December 31, 2007. The total balance recorded in investments related to ICL and Sinofert as of December 31, 2007 was $2,725.5 million. In previous periods these investments had been recorded at cost which, as of December 31, 2006 and December 31, 2007, was $167.7 million for ICL and $223.7 million for Sinofert.
- Derivative instruments are generally recorded on the Consolidated Statements of Financial Position at fair value. At December 31, 2007, the fair value of our derivative instrument assets represented a current asset of $30.8 million and a long-term asset of $104.2 million. Of the total, $127.7 million related to natural gas swap, option and physical gas purchase contracts, with $127.6 million of the swap contracts designated as accounting hedges, and $7.3 million related to foreign currency and other forward purchase contracts. As of December 31, 2006, no such derivative instrument assets were recorded on the balance sheet. As of December 31, 2007, the current portion of derivative instrument liabilities of $0.2 million related to natural gas contracts was included in accounts payable and accrued charges. Net gains of $73.5 million on the contracts designated as accounting hedges have been recognized in accumulated other comprehensive income, net of income taxes, as of December 31, 2007, to the extent those hedges are effective; ineffectiveness of $9.6 million arising from January 1 to December 31, 2007 has been recognized as an increase through net income. The future income tax liability associated with these instruments was $50.3 million. Net realized and unrealized gains recognized in net income on physical gas purchase contracts and options not qualifying for hedge accounting arising from January 1 to December 31, 2007 were insignificant; no amounts were recorded in net income during 2006. Hedge ineffectiveness existing on derivative instruments as of January 1, 2007 was recorded as a cumulative effect adjustment to opening retained earnings, net of income tax, resulting in an increase in retained earnings of $0.2 million and a decrease in accumulated other comprehensive income of $0.2 million.
- Bond issue costs were reclassified from other assets to long-term debt and deferred swap gains were reclassified from other non-current liabilities to long-term debt, resulting in a reduction in other assets of $23.9 million, a reduction in other non-current liabilities of $6.6 million and a reduction in long-term debt of $17.3 million at January 1, 2007. These costs are amortized using the effective interest rate method, and will continue to be amortized over the term of the related liability. As of December 31, 2007, unamortized bond issue costs reduced long-term debt by $24.6 million while unamortized deferred swap gains increased it by $5.3 million.
During 2007, we recorded investments in auction rate securities in investments, which we classified as available-for-sale. As of December 31, 2007, the balance recorded in investments was $56.0 million (face value $132.5 million), resulting in a balance of unrealized holding losses of $76.5 million. The unrealized losses represent our estimate of diminution in value as of December 31, 2007, resulting from the lack of current liquidity for these investments at year-end and uncertainty as to the ultimate recoverability. Of the total unrealized loss, $26.5 million has been considered other-than-temporary and therefore reduced net income before income taxes, while $50.0 million has been considered temporary and reduced other comprehensive income before income taxes. In prior years, auction rate securities were included with cash and cash equivalents. The company has not reclassified prior years as the adjustments are not considered material.
Total assets were $9,716.6 million at December 31, 2007, an increase of $3,499.6 million or 56 percent over December 31, 2006. During the same period, total liabilities increased by $261.2 million to $3,697.9 million, and total shareholders' equity increased by $3,238.4 million to $6,018.7 million.
The largest contributors to the increase in assets during 2007 were investments in available-for-sale securities and derivative instruments as described above, cash and cash equivalents, property, plant and equipment and accounts receivable. Cash and cash equivalents increased $393.8 million, largely due to cash flow from operations which was $1,688.9 million during 2007. Accounts receivable increased $153.9 million or 35 percent compared to December 31, 2006, which is consistent with the 43 percent increase in sales in the last month of the year. These increases were partially offset by a $73.2 million decline in inventories as they were drawn down due to strong demand that exceeded the company's production, which was interrupted due to regularly scheduled maintenance at certain locations.
Liabilities increased despite cash flow from operations being used to repay $67.9 million of short-term debt obligations and $400.4 million of long-term debt obligations during 2007, including $400.0 million of 7.125 percent 10-year bonds at maturity. This reduction was more than offset by higher future income tax liability and accounts payable and accrued charges. Future income tax liability increased $356.0 million, of which $250.7 million was attributable to the adoption of new accounting standards for financial instruments and hedging activities as described above, with the remainder primarily driven by the impact of the strengthening Canadian dollar and higher income earned during 2007. Accounts payable and accrued charges were $366.5 million higher than at December 31, 2006 as income taxes payable were up $118.4 million with higher income earned in 2007 combined with a lower Canadian installment base; trade payables were up $99.1 million due to work on the company's potash expansion projects; accrued payroll was up $42.9 million due to higher incentive plan accruals related to share price appreciation and stronger results year over year; deferred revenue increased $17.3 million as a result of customers prepaying for product to lock in pricing ahead of announced price increases; and dividends payable were up $15.9 million as we doubled our quarterly cash dividend in May 2007.
Share capital, retained earnings and contributed surplus all increased at December 31, 2007 compared to December 31, 2006. Share capital was $29.7 million higher due to the issuance of common shares upon stock option exercises and under our dividend reinvestment plan. Recognition of compensation cost associated with our stock-based compensation plans increased contributed surplus by $38.6 million while the issuance of common shares arising from stock option exercises reduced the balance, for a net increase of $36.6 million. Net earnings of $1,103.6 million for 2007 increased retained earnings while dividends declared of $110.6 million and a cumulative effect adjustment related to the adoption of new accounting standards (as described above) reduced the balance, for a net increase in retained earnings of $993.2 million at December 31, 2007 compared to December 31, 2006. We also added a new line in the equity section of the Consolidated Statements of Financial Position for accumulated other comprehensive income as a result of new accounting standards effective January 1, 2007, as described above. Balances comprising accumulated other comprehensive income included (net of related income taxes) $2,098.7 million in net unrealized holding gains on our available-for-sale securities, $73.5 million in net unrealized gains on our natural gas derivatives that qualify for hedge accounting and $6.7 million in unrealized foreign exchange gains on translation of our self-sustaining foreign operations.