BP Annual Report and Form 20-F 2011 - Company Reporting

on financial statementsNotes on financial statements1. Significant accounting policiesAuthorization of financial statements and statement of compliancewith International Financial Reporting StandardsThe consolidated financial statements of the BP group for the year ended31 December 2011 were approved and signed by the chairman and groupchief executive on 6 March 2012 having been duly authorized to do so bythe board of directors. BP p.l.c. is a public limited company incorporated anddomiciled in England and Wales. The consolidated financial statements havebeen prepared in accordance with International Financial Reporting Standards(IFRS) as issued by the International Accounting Standards Board (IASB),IFRS as adopted by the European Union (EU) and in accordance with theprovisions of the Companies Act 2006. IFRS as adopted by the EU differs incertain respects from IFRS as issued by the IASB, however, the differenceshave no impact on the group’s consolidated financial statements for theyears presented. The significant accounting policies of the group are set outbelow.Basis of preparationThe consolidated financial statements have been prepared in accordancewith IFRS and IFRS Interpretations Committee (IFRIC) interpretationsissued and effective for the year ended 31 December 2011, or issued andearly adopted. The standards and interpretations adopted in the year aredescribed further on page 188.The accounting policies that follow have been consistently appliedto all years presented. The group balance sheet as at 1 January 2010 isnot presented as it is not affected by the retrospective adoption of anynew accounting policies during the year, nor any other retrospectiverestatements or reclassifications.The consolidated financial statements are presented in US dollarsand all values are rounded to the nearest million dollars ($ million), exceptwhere otherwise indicated.For further information regarding the key judgements and estimatesmade by management in applying the group’s accounting policies, refer toCritical accounting policies on pages 154 to 157, which forms part of thesefinancial statements.Basis of consolidationThe group financial statements consolidate the financial statementsof BP p.l.c. and the entities it controls (its subsidiaries) drawn up to 31December each year. Control comprises the power to govern the financialand operating policies of the investee so as to obtain benefit from itsactivities and is achieved through direct and indirect ownership of votingrights; currently exercisable or convertible potential voting rights; or by wayof contractual agreement. Subsidiaries are consolidated from the date oftheir acquisition, being the date on which the group obtains control, andcontinue to be consolidated until the date that such control ceases. Thefinancial statements of subsidiaries are prepared for the same reportingyear as the parent company, using consistent accounting policies.Intercompany balances and transactions, including unrealized profits arisingfrom intragroup transactions, have been eliminated. Unrealized losses areeliminated unless the transaction provides evidence of an impairment of theasset transferred. Minority interests represent the equity in subsidiaries thatis not attributable, directly or indirectly, to the group.Segmental reportingThe group’s operating segments are established on the basis of thosecomponents of the group that are evaluated regularly by the chief operatingdecision maker in deciding how to allocate resources and in assessingperformance. During the second quarter of 2010 a separate organizationwas created within the group to deal with the ongoing response to theGulf of Mexico oil spill. This organization reports directly to the groupchief executive officer and its costs are excluded from the results of theexisting operating segments. Under IFRS its costs are therefore presentedas a reconciling item between the sum of the results of the reportablesegments and the group results.The accounting policies of the operating segments are the same as thegroup’s accounting policies described in this note, except that IFRS requiresthat the measure of profit or loss disclosed for each operating segmentis the measure that is provided regularly to the chief operating decisionmaker. For BP, this measure of profit or loss is replacement cost profitbefore interest and tax which reflects the replacement cost of supplies byexcluding from profit inventory holding gains and losses. Replacement costprofit for the group is not a recognized measure under generally acceptedaccounting practice (GAAP). For further information see Note 6.Interests in joint venturesA joint venture is a contractual arrangement whereby two or more parties(venturers) undertake an economic activity that is subject to joint control.Joint control exists only when the strategic financial and operating decisionsrelating to the activity require the unanimous consent of the venturers. Ajointly controlled entity is a joint venture that involves the establishment of acompany, partnership or other entity to engage in economic activity that thegroup jointly controls with its fellow venturers.The results, assets and liabilities of a jointly controlled entity areincorporated in these financial statements using the equity method ofaccounting. Under the equity method, the investment in a jointly controlledentity is carried in the balance sheet at cost, plus post-acquisition changesin the group’s share of net assets of the jointly controlled entity, lessdistributions received and less any impairment in value of the investment.Loans advanced to jointly controlled entities that have the characteristics ofequity financing are also included in the investment on the group balancesheet. The group income statement reflects the group’s share of theresults after tax of the jointly controlled entity.Financial statements of jointly controlled entities are prepared forthe same reporting year as the group. Where necessary, adjustments aremade to those financial statements to bring the accounting policies usedinto line with those of the group.Unrealized gains on transactions between the group and its jointlycontrolled entities are eliminated to the extent of the group’s interest in thejointly controlled entities. Unrealized losses are also eliminated unless thetransaction provides evidence of an impairment of the asset transferred.The group assesses investments in jointly controlled entities forimpairment whenever events or changes in circumstances indicate that thecarrying value may not be recoverable. If any such indication of impairmentexists, the carrying amount of the investment is compared with itsrecoverable amount, being the higher of its fair value less costs to sell andvalue in use. Where the carrying amount exceeds the recoverable amount,the investment is written down to its recoverable amount.The group ceases to use the equity method of accounting on thedate from which it no longer has joint control or significant influence overthe joint venture or associate respectively, or when the interest becomesheld for sale.Certain of the group’s activities, particularly in the Exploration andProduction segment, are conducted through joint ventures where theventurers have a direct ownership interest in, and jointly control, the assetsof the venture. BP recognizes, on a line-by-line basis in the consolidatedfinancial statements, its share of the assets, liabilities and expenses ofthese jointly controlled assets incurred jointly with the other partners, alongwith the group’s income from the sale of its share of the output and anyliabilities and expenses that the group has incurred in relation to the venture.Interests in associatesAn associate is an entity over which the group is in a position to exercisesignificant influence through participation in the financial and operatingpolicy decisions of the investee, but which is not a subsidiary or a jointlycontrolled entity. The results, assets and liabilities of an associate areincorporated in these financial statements using the equity method ofaccounting as described above for jointly controlled entities.182 BP Annual Report and Form 20-F 2011