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

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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
Notes on financial statements1. Significant accounting policies continuedimpairment loss been recognized for the asset in prior years. Such reversalis recognized in profit or loss. After such a reversal, the depreciation chargeis adjusted in future periods to allocate the asset’s revised carrying amount,less any residual value, on a systematic basis over its remaining useful life.Financial assetsFinancial assets are classified as loans and receivables; available-for-salefinancial assets; financial assets at fair value through profit or loss; or asderivatives designated as hedging instruments in an effective hedge, asappropriate. Financial assets include cash and cash equivalents, tradereceivables, other receivables, loans, other investments, and derivativefinancial instruments. The group determines the classification of its financialassets at initial recognition. Financial assets are recognized initially at fairvalue, normally being the transaction price plus, in the case of financial assetsnot at fair value through profit or loss, directly attributable transaction costs.The subsequent measurement of financial assets depends on theirclassification, as follows:Loans and receivablesLoans and receivables are non-derivative financial assets with fixed ordeterminable payments that are not quoted in an active market. Suchassets are carried at amortized cost using the effective interest method ifthe time value of money is significant. Gains and losses are recognized inincome when the loans and receivables are derecognized or impaired, aswell as through the amortization process. This category of financial assetsincludes trade and other receivables.Available-for-sale financial assetsAvailable-for-sale financial assets are those non-derivative financial assetsthat are not classified as loans and receivables. After initial recognition,available-for-sale financial assets are measured at fair value, with gainsor losses recognized within other comprehensive income. Accumulatedchanges in fair value are recorded as a separate component of equity untilthe investment is derecognized or impaired.The fair value of quoted investments is determined by reference tobid prices at the close of business on the balance sheet date. Where thereis no active market, fair value is determined using valuation techniques.Where fair value cannot be reliably measured, assets are carried at cost.Financial assets at fair value through profit or lossDerivatives, other than those designated as effective hedging instruments,are classified as held for trading and are included in this category. Theseassets are carried on the balance sheet at fair value with gains or lossesrecognized in the income statement.Derivatives designated as hedging instruments in an effective hedgeSuch derivatives are carried on the balance sheet at fair value. Thetreatment of gains and losses arising from revaluation is described belowin the accounting policy for derivative financial instruments and hedgingactivities.Impairment of financial assetsThe group assesses at each balance sheet date whether a financial asset orgroup of financial assets is impaired.Loans and receivablesIf there is objective evidence that an impairment loss on loans andreceivables carried at amortized cost has been incurred, the amount of theloss is measured as the difference between the asset’s carrying amountand the present value of estimated future cash flows discounted at thefinancial asset’s original effective interest rate. The carrying amount of theasset is reduced, with the amount of the loss recognized in the incomestatement.Available-for-sale financial assetsIf an available-for-sale financial asset is impaired, the cumulative losspreviously recognized in equity is transferred to the income statement. Anysubsequent recovery in the fair value of the asset is recognized within othercomprehensive income.If there is objective evidence that an impairment loss on anunquoted equity instrument that is carried at cost has been incurred, theamount of the loss is measured as the difference between the asset’scarrying amount and the present value of estimated future cash flowsdiscounted at the current market rate of return for a similar financial asset.InventoriesInventories, other than inventory held for trading purposes, are stated atthe lower of cost and net realizable value. Cost is determined by the first-infirst-out method and comprises direct purchase costs, cost of production,transportation and manufacturing expenses. Net realizable value isdetermined by reference to prices existing at the balance sheet date.Inventories held for trading purposes are stated at fair value lesscosts to sell and any changes in net realizable value are recognized in theincome statement.Supplies are valued at cost to the group mainly using the averagemethod or net realizable value, whichever is the lower.Financial liabilitiesFinancial liabilities are classified as financial liabilities at fair value throughprofit or loss; derivatives designated as hedging instruments in an effectivehedge; or as financial liabilities measured at amortized cost, as appropriate.Financial liabilities include trade and other payables, accruals, most items offinance debt and derivative financial instruments. The group determines theclassification of its financial liabilities at initial recognition. The measurementof financial liabilities depends on their classification, as follows:Financial liabilities at fair value through profit or lossDerivatives, other than those designated as effective hedging instruments,are classified as held for trading and are included in this category. Theseliabilities are carried on the balance sheet at fair value with gains or lossesrecognized in the income statement.Derivatives designated as hedging instruments in an effective hedgeSuch derivatives are carried on the balance sheet at fair value. The treatmentof gains and losses arising from revaluation is described below in theaccounting policy for derivative financial instruments and hedging activities.Financial liabilities measured at amortized costAll other financial liabilities are initially recognized at fair value. For interestbearingloans and borrowings this is the fair value of the proceeds receivednet of issue costs associated with the borrowing.After initial recognition, other financial liabilities are subsequentlymeasured at amortized cost using the effective interest method. Amortizedcost is calculated by taking into account any issue costs, and any discountor premium on settlement. Gains and losses arising on the repurchase,settlement or cancellation of liabilities are recognized respectively in interestand other income and finance costs.This category of financial liabilities includes trade and other payablesand finance debt.Financial statementsBP Annual Report and Form 20-F 2011 185
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Cover imagePhotograph of DeepseaSta
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Cross reference to Form 20-FPageIte
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Miscellaneous termsIn this document
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6 BP Annual Report and Form 20-F 20
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Chairman’s letterCarl-Henric Svan
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During the year, the remuneration c
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Business review: Group overviewBP A
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SafetyDuring the year, we reorganiz
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In Refining and Marketing, our worl
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Crude oil and gas prices,and refini
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In detailFor more information, seeR
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Our market: Longer-term outlookThe
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BP’s distinctive capabilities and
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Technology will continue to play a
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In detailFor more information,see C
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In detailFind out more online.bp.co
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BP Annual Report and Form 20-F 2011
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Below BP has asignificant presencei
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What you can measure6 Active portfo
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Business review: Group overview2012
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Our risk management systemOur enhan
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Our current strategic priorities ar
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Our performance2011 was a year of f
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Left BP employeesat work in Prudhoe
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We continued to sell non-core asset
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Reported recordableinjury frequency
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Business reviewBP in more depth56 F
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Business reviewThe primary addition
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Business reviewRisk factorsWe urge
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Business review2010. Similar action
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Business reviewBusiness continuity
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Business reviewSafetyOver the past
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Business reviewour review of all th
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Business reviewGreenhouse gas regul
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Business reviewCompleting the respo
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Business reviewOur performanceKey s
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Business reviewwere in Russia (Oren
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Business reviewCanadaIn Canada, BP
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Business review• In March 2011, T
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Business reviewaccess advantageous
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Business reviewBP’s vice presiden
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Business reviewhttp://www.bp.com/do
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Business reviewbalance of participa
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Business reviewAcquisitions and dis
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Business reviewLPGOur global LPG ma
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Business reviewOther businesses and
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Business reviewLiquidity and capita
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Business reviewThe group expects it
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Business reviewFrequently, work (in
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Business reviewHazardous and Noxiou
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Business reviewpart of a larger por
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Directors andsenior management114 D
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Directors and senior managementDire
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Directors and senior managementH L
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Corporate governanceCorporate gover
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Corporate governanceAntony Burgmans
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Corporate governanceBoard oversight
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Corporate governanceBoard and commi
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Corporate governancefinancial repor
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Corporate governancechairs and secr
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Corporate governance• Oversee GCR
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Notes on financial statementsTotal
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Supplementary information on oil an
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SignaturesThe registrant hereby cer
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Parent company financial statements
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BP Annual Report and Form 20-F 2011 - Company Reporting

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