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

Notes on financial statements1. Significant accounting policies continuedDecommissioningLiabilities for decommissioning costs are recognized when the group hasan obligation to dismantle and remove a facility or an item of plant andto restore the site on which it is located, and when a reliable estimate ofthat liability can be made. Where an obligation exists for a new facility,such as oil and natural gas production or transportation facilities, thisliability will be recognized on construction or installation. An obligation fordecommissioning may also crystallize during the period of operation of afacility through a change in legislation or through a decision to terminateoperations. The amount recognized is the present value of the estimatedfuture expenditure determined in accordance with local conditions andrequirements.A corresponding item of property, plant and equipment of anamount equivalent to the provision is also recognized. This is subsequentlydepreciated as part of the asset.Other than the unwinding discount on the provision, any changein the present value of the estimated expenditure is reflected as anadjustment to the provision and the corresponding item of property, plantand equipment. Such changes include foreign exchange gains and lossesarising on the retranslation of the liability into the functional currency of thereporting entity, when it is known that the liability will be settled in a foreigncurrency.Environmental expenditures and liabilitiesEnvironmental expenditures that relate to current or future revenues areexpensed or capitalized as appropriate. Expenditures that relate to anexisting condition caused by past operations and do not contribute tocurrent or future earnings are expensed.Liabilities for environmental costs are recognized when a clean-up isprobable and the associated costs can be reliably estimated. Generally, thetiming of recognition of these provisions coincides with the commitment toa formal plan of action or, if earlier, on divestment or on closure of inactivesites.The amount recognized is the best estimate of the expenditurerequired. Where the liability will not be settled for a number of years,the amount recognized is the present value of the estimated futureexpenditure.Employee benefitsWages, salaries, bonuses, social security contributions, paid annual leaveand sick leave are accrued in the period in which the associated servicesare rendered by employees of the group. Deferred bonus arrangementsthat have a vesting date more than 12 months after the period end arevalued on an actuarial basis using the projected unit credit method andamortized on a straight-line basis over the service period until the awardvests. The accounting policies for share-based payments and for pensionsand other post-retirement benefits are described below.Share-based paymentsEquity-settled transactionsThe cost of equity-settled transactions with employees is measured byreference to the fair value at the date at which equity instruments aregranted and is recognized as an expense over the vesting period, whichends on the date on which the relevant employees become fully entitled tothe award. Fair value is determined by using an appropriate valuation model.In valuing equity-settled transactions, no account is taken of any vestingconditions, other than conditions linked to the price of the shares of thecompany (market conditions). Non-vesting conditions, such as the conditionthat employees contribute to a savings-related plan, are taken into accountin the grant-date fair value, and failure to meet a non-vesting condition istreated as a cancellation, where this is within the control of the employee.No expense is recognized for awards that do not ultimately vest,except for awards where vesting is conditional upon a market condition,which are treated as vesting irrespective of whether or not the marketcondition is satisfied, provided that all other performance conditions aresatisfied.At each balance sheet date before vesting, the cumulative expense iscalculated, representing the extent to which the vesting period has expiredand management’s best estimate of the achievement or otherwise of nonmarketconditions and the number of equity instruments that will ultimatelyvest or, in the case of an instrument subject to a market condition, betreated as vesting as described above. The movement in cumulativeexpense since the previous balance sheet date is recognized in the incomestatement, with a corresponding entry in equity.When the terms of an equity-settled award are modified or a newaward is designated as replacing a cancelled or settled award, the costbased on the original award terms continues to be recognized over theoriginal vesting period. In addition, an expense is recognized over theremainder of the new vesting period for the incremental fair value of anymodification, based on the difference between the fair value of the originalaward and the fair value of the modified award, both as measured on thedate of the modification. No reduction is recognized if this difference isnegative.When an equity-settled award is cancelled, it is treated as if it hadvested on the date of cancellation and any cost not yet recognized in theincome statement for the award is expensed immediately.Cash-settled transactionsThe cost of cash-settled transactions is measured at fair value andrecognized as an expense over the vesting period, with a correspondingliability recognized on the balance sheet.Pensions and other post-retirement benefitsThe cost of providing benefits under the defined benefit plans isdetermined separately for each plan using the projected unit credit method,which attributes entitlement to benefits to the current period (to determinecurrent service cost) and to the current and prior periods (to determinethe present value of the defined benefit obligation). Past service costsare recognized immediately when the company becomes committedto a change in pension plan design. When a settlement (eliminating allobligations for benefits already accrued) or a curtailment (reducing futureobligations as a result of a material reduction in the scheme membershipor a reduction in future entitlement) occurs, the obligation and relatedplan assets are remeasured using current actuarial assumptions and theresultant gain or loss is recognized in the income statement during theperiod in which the settlement or curtailment occurs.The interest element of the defined benefit cost represents thechange in present value of scheme obligations resulting from the passageof time, and is determined by applying the discount rate to the openingpresent value of the benefit obligation, taking into account material changesin the obligation during the year. The expected return on plan assets isbased on an assessment made at the beginning of the year of long-termmarket returns on plan assets, adjusted for the forecasts of contributionsreceived and benefits paid during the year. The difference between theexpected return on plan assets and the interest cost is recognized in theincome statement as other finance income or expense.Actuarial gains and losses are recognized in full within othercomprehensive income in the year in which they occur.The defined benefit pension plan surplus or deficit in the balancesheet comprises the total for each plan of the present value of the definedbenefit obligation (using a discount rate based on high quality corporatebonds), less the fair value of plan assets out of which the obligations are tobe settled directly. Fair value is based on market price information and, inthe case of quoted securities, is the published bid price.Contributions to defined contribution schemes are recognized in theincome statement in the period in which they become payable.Financial statementsBP Annual Report and Form 20-F 2011 187