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

Notes on financial statements1. Significant accounting policies continuedOil and natural gas exploration, appraisal and development expenditureOil and natural gas exploration, appraisal and development expenditureis accounted for using the principles of the successful efforts method ofaccounting.Licence and property acquisition costsExploration licence and leasehold property acquisition costs are capitalizedwithin intangible assets and are reviewed at each reporting date to confirmthat there is no indication that the carrying amount exceeds the recoverableamount. This review includes confirming that exploration drilling is stillunder way or firmly planned or that it has been determined, or work isunder way to determine, that the discovery is economically viable based ona range of technical and commercial considerations and sufficient progressis being made on establishing development plans and timing. If no futureactivity is planned, the remaining balance of the licence and propertyacquisition costs is written off. Lower value licences are pooled andamortized on a straight-line basis over the estimated period of exploration.Upon recognition of proved reserves and internal approval for development,the relevant expenditure is transferred to property, plant and equipment.Exploration and appraisal expenditureGeological and geophysical exploration costs are charged against incomeas incurred. Costs directly associated with an exploration well are initiallycapitalized as an intangible asset until the drilling of the well is completeand the results have been evaluated. These costs include employeeremuneration, materials and fuel used, rig costs and payments made tocontractors. If potentially commercial quantities of hydrocarbons are notfound, the exploration well is written off as a dry hole. If hydrocarbons arefound and, subject to further appraisal activity, are likely to be capable ofcommercial development, the costs continue to be carried as an asset.Costs directly associated with appraisal activity, undertaken todetermine the size, characteristics and commercial potential of a reservoirfollowing the initial discovery of hydrocarbons, including the costs ofappraisal wells where hydrocarbons were not found, are initially capitalizedas an intangible asset.All such carried costs are subject to technical, commercial andmanagement review at least once a year to confirm the continued intentto develop or otherwise extract value from the discovery. When this is nolonger the case, the costs are written off. When proved reserves of oil andnatural gas are determined and development is approved by management,the relevant expenditure is transferred to property, plant and equipment.Expenditure on major maintenance refits or repairs comprises the costof replacement assets or parts of assets, inspection costs and overhaulcosts. Where an asset or part of an asset that was separately depreciatedis replaced and it is probable that future economic benefits associatedwith the item will flow to the group, the expenditure is capitalized andthe carrying amount of the replaced asset is derecognized. Inspectioncosts associated with major maintenance programmes are capitalized andamortized over the period to the next inspection. Overhaul costs for majormaintenance programmes, and all other maintenance costs are expensedas incurred.Oil and natural gas properties, including related pipelines, aredepreciated using a unit-of-production method. The cost of producing wellsis amortized over proved developed reserves. Licence acquisition, commonfacilities and future decommissioning costs are amortized over total provedreserves. The unit-of-production rate for the amortization of commonfacilities costs takes into account expenditures incurred to date, togetherwith the future capital expenditure expected to be incurred in relation tothese common facilities.Other property, plant and equipment is depreciated on a straightline basis over its expected useful life. The useful lives of the group’s otherproperty, plant and equipment are as follows:Land improvementsBuildings Refineries PetrochemicalsPipelinesService stationsOffice equipmentFixtures and fittings15 to 25 years20 to 50 years20 to 30 years20 to 30 years10 to 50 years15 years3 to 7 years5 to 15 yearsThe expected useful lives of property, plant and equipment are reviewed onan annual basis and, if necessary, changes in useful lives are accounted forprospectively.The carrying amount of property, plant and equipment is reviewedfor impairment whenever events or changes in circumstances indicate thecarrying value may not be recoverable.An item of property, plant and equipment is derecognized upondisposal or when no future economic benefits are expected to arise fromthe continued use of the asset. Any gain or loss arising on derecognition ofthe asset (calculated as the difference between the net disposal proceedsand the carrying amount of the item) is included in the income statement inthe period in which the item is derecognized.Development expenditureExpenditure on the construction, installation and completion of infrastructurefacilities such as platforms, pipelines and the drilling of development wells,including service and unsuccessful development or delineation wells, iscapitalized within property, plant and equipment and is depreciated from thecommencement of production as described below in the accounting policyfor property, plant and equipment.Property, plant and equipmentProperty, plant and equipment is stated at cost, less accumulateddepreciation and accumulated impairment losses.The initial cost of an asset comprises its purchase price or constructioncost, any costs directly attributable to bringing the asset into operation, theinitial estimate of any decommissioning obligation, if any, and, for qualifyingassets, borrowing costs. The purchase price or construction cost is theaggregate amount paid and the fair value of any other consideration givento acquire the asset. The capitalized value of a finance lease is also includedwithin property, plant and equipment. Exchanges of assets are measuredat fair value unless the exchange transaction lacks commercial substance orthe fair value of neither the asset received nor the asset given up is reliablymeasurable. The cost of the acquired asset is measured at the fair valueof the asset given up, unless the fair value of the asset received is moreclearly evident. Where fair value is not used, the cost of the acquired asset ismeasured at the carrying amount of the asset given up. The gain or loss onderecognition of the asset given up is recognized in profit or loss.184 BP Annual Report and Form 20-F 2011Impairment of intangible assets and property, plant and equipmentThe group assesses assets or groups of assets for impairment wheneverevents or changes in circumstances indicate that the carrying amount ofan asset may not be recoverable, for example, low prices or margins for anextended period or, for oil and gas assets, significant downward revisionsof estimated volumes or increases in estimated future developmentexpenditure. If any such indication of impairment exists, the group makes anestimate of the asset’s recoverable amount. Individual assets are groupedfor impairment assessment purposes at the lowest level at which there areidentifiable cash flows that are largely independent of the cash flows of othergroups of assets. An asset group’s recoverable amount is the higher of its fairvalue less costs to sell and its value in use. Where the carrying amount of anasset group exceeds its recoverable amount, the asset group is consideredimpaired and is written down to its recoverable amount. In assessing value inuse, the estimated future cash flows are adjusted for the risks specific to theasset group and are discounted to their present value using a pre-tax discountrate that reflects current market assessments of the time value of money.An assessment is made at each reporting date as to whether thereis any indication that previously recognized impairment losses may no longerexist or may have decreased. If such an indication exists, the recoverableamount is estimated. A previously recognized impairment loss is reversedonly if there has been a change in the estimates used to determine theasset’s recoverable amount since the last impairment loss was recognized.If that is the case, the carrying amount of the asset is increased to itsrecoverable amount. That increased amount cannot exceed the carryingamount that would have been determined, net of depreciation, had no