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

Notes on financial statements1. Significant accounting policies continuedForeign currency translationThe functional currency is the currency of the primary economic environmentin which an entity operates and is normally the currency in which the entityprimarily generates and expends cash.In individual companies, transactions in foreign currencies are initiallyrecorded in the functional currency by applying the rate of exchange rulingat the date of the transaction. Monetary assets and liabilities denominatedin foreign currencies are retranslated into the functional currency at therate of exchange ruling at the balance sheet date. Any resulting exchangedifferences are included in the income statement. Non-monetary assetsand liabilities, other than those measured at fair value, are not retranslatedsubsequent to initial recognition.In the consolidated financial statements, the assets and liabilitiesof non-US dollar functional currency subsidiaries, jointly controlled entitiesand associates, including related goodwill, are translated into US dollars atthe rate of exchange ruling at the balance sheet date. The results and cashflows of non-US dollar functional currency subsidiaries, jointly controlledentities and associates are translated into US dollars using average ratesof exchange. Exchange adjustments arising when the opening net assetsand the profits for the year retained by non-US dollar functional currencysubsidiaries, jointly controlled entities and associates are translated intoUS dollars are taken to a separate component of equity and reported inthe statement of comprehensive income. Exchange gains and lossesarising on long-term intragroup foreign currency borrowings used tofinance the group’s non-US dollar investments are also taken to othercomprehensive income. On disposal or partial disposal of a non-US dollarfunctional currency subsidiary, jointly controlled entity or associate, thedeferred cumulative amount of exchange gains and losses recognized inequity relating to that particular non-US dollar operation is reclassified toincome statement.Business combinations and goodwillA business combination is a transaction or other event in which an acquirerobtains control of one or more businesses. A business is an integrated setof activities and assets that is capable of being conducted and managedfor the purpose of providing a return in the form of dividends or lowercosts or other economic benefits directly to investors or other owners orparticipants. A business consists of inputs and processes applied to thoseinputs that have the ability to create outputs.Business combinations are accounted for using the acquisitionmethod. The identifiable assets acquired and liabilities assumed aremeasured at their fair values at the acquisition date. The cost of anacquisition is measured as the aggregate of the consideration transferred,measured at acquisition-date fair value, and the amount of any minorityinterest in the acquiree. Minority interests are stated either at fair valueor at the proportionate share of the recognized amounts of the acquiree’sidentifiable net assets. Acquisition costs incurred are expensed andincluded in distribution and administration expenses.Goodwill is initially measured as the excess of the aggregate of theconsideration transferred, the amount recognized for any minority interestand the acquisition-date fair values of any previously held interest in theacquiree over the fair value of the identifiable assets acquired and liabilitiesassumed at the acquisition date.At the acquisition date, any goodwill acquired is allocated to each ofthe cash-generating units, or groups of cash-generating units, expected tobenefit from the combination’s synergies.Following initial recognition, goodwill is measured at cost less anyaccumulated impairment losses. Goodwill is reviewed for impairment annuallyor more frequently if events or changes in circumstances indicate that thecarrying value may be impaired. Impairment is determined by assessing therecoverable amount of the cash-generating unit to which the goodwill relates.Where the recoverable amount of the cash-generating unit is less than thecarrying amount, an impairment loss is recognized. An impairment lossrecognized for goodwill is not reversed in a subsequent period.Goodwill arising on business combinations prior to 1 January 2003is stated at the previous carrying amount, less subsequent impairments,under UK generally accepted accounting practice.Goodwill may also arise upon investments in jointly controlled entities andassociates, being the surplus of the cost of investment over the group’sshare of the net fair value of the identifiable assets. Such goodwill isrecorded within investments in jointly controlled entities and associates,and any impairment of the investment is included within the earnings fromjointly controlled entities and associates.Non-current assets held for saleNon-current assets and disposal groups classified as held for sale aremeasured at the lower of carrying amount and fair value less costs to sell.Non-current assets and disposal groups are classified as held forsale if their carrying amounts will be recovered through a sale transactionrather than through continuing use. This condition is regarded as met onlywhen the sale is highly probable and the asset or disposal group is availablefor immediate sale in its present condition subject only to terms that areusual and customary for sales of such assets. Management must becommitted to the sale, which should be expected to qualify for recognitionas a completed sale within one year from the date of classification as heldfor sale.Property, plant and equipment and intangible assets once classifiedas held for sale are not depreciated. The group ceases to use the equitymethod of accounting on the date from which an interest in a jointlycontrolled entity or an interest in an associate becomes held for sale.If a non-current asset or disposal group has been classified as heldfor sale, but subsequently ceases to meet the criteria to be classified asheld for sale, the group ceases to classify the asset or disposal group asheld for sale. Non-current assets and disposal groups that cease to beclassified as held for sale are measured at the lower of carrying amountbefore the asset or disposal group was classified as held for sale (adjustedfor any depreciation, amortization or revaluation that would have beenrecognized had the asset or disposal group not been classified as held forsale) and its recoverable amount at the date of the subsequent decisionnot to sell. Except for any interests in equity-accounted entities that ceaseto be classified as held for sale, any adjustment to the carrying amountis recognized in profit or loss in the period in which the asset ceases tobe classified as held for sale. When an interest in an equity-accountedentity ceases to be classified as held for sale, it is accounted for using theequity method as from the date of its classification as held for sale and thefinancial statements for the periods since classification as held for sale areamended accordingly.Intangible assetsIntangible assets, other than goodwill, include expenditure on theexploration for and evaluation of oil and natural gas resources, computersoftware, patents, licences and trademarks and are stated at the amountinitially recognized, less accumulated amortization and accumulatedimpairment losses. For information on accounting for expenditures on theexploration for and evaluation of oil and gas resources, see the accountingpolicy for oil and natural gas exploration, appraisal and developmentexpenditure below.Intangible assets acquired separately from a business are carriedinitially at cost. The initial cost is the aggregate amount paid and the fairvalue of any other consideration given to acquire the asset. An intangibleasset acquired as part of a business combination is measured at fair valueat the date of acquisition and is recognized separately from goodwill if theasset is separable or arises from contractual or other legal rights.Intangible assets with a finite life are amortized on a straight-linebasis over their expected useful lives. For patents, licences and trademarks,expected useful life is the shorter of the duration of the legal agreementand economic useful life, and can range from three to 15 years. Computersoftware costs generally have a useful life of three to five years.The expected useful lives of assets are reviewed on an annual basisand, if necessary, changes in useful lives are accounted for prospectively.The carrying value of intangible assets is reviewed for impairmentwhenever events or changes in circumstances indicate the carrying valuemay not be recoverable.Financial statementsBP Annual Report and Form 20-F 2011 183