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

Notes on financial statements1. Significant accounting policies continuedCorporate taxesIncome tax expense represents the sum of the tax currently payable anddeferred tax. Interest and penalties relating to tax are also included inincome tax expense.The tax currently payable is based on the taxable profits for theperiod. Taxable profit differs from net profit as reported in the incomestatement because it excludes items of income or expense that are taxableor deductible in other periods and it further excludes items that are nevertaxable or deductible. The group’s liability for current tax is calculated usingtax rates and laws that have been enacted or substantively enacted by thebalance sheet date.Deferred tax is provided, using the liability method, on all temporarydifferences at the balance sheet date between the tax bases of assets andliabilities and their carrying amounts for financial reporting purposes.Deferred tax liabilities are recognized for all taxable temporarydifferences except:• Where the deferred tax liability arises on goodwill that is not taxdeductible or the initial recognition of an asset or liability in a transactionthat is not a business combination and, at the time of the transaction,affects neither accounting profit nor taxable profit or loss.• In respect of taxable temporary differences associated with investmentsin subsidiaries, jointly controlled entities and associates, where the groupis able to control the timing of the reversal of the temporary differencesand it is probable that the temporary differences will not reverse in theforeseeable future.Deferred tax assets are recognized for all deductible temporary differences,carry-forward of unused tax credits and unused tax losses, to the extentthat it is probable that taxable profit will be available against which thedeductible temporary differences and the carry-forward of unused taxcredits and unused tax losses can be utilized:• Except where the deferred income tax asset relating to the deductibletemporary difference arises from the initial recognition of an asset or liabilityin a transaction that is not a business combination and, at the time of thetransaction, affects neither accounting profit nor taxable profit or loss.• In respect of deductible temporary differences associated withinvestments in subsidiaries, jointly controlled entities and associates,deferred tax assets are recognized only to the extent that it is probablethat the temporary differences will reverse in the foreseeable future andtaxable profit will be available against which the temporary differencescan be utilized.The carrying amount of deferred tax assets is reviewed at each balancesheet date and reduced to the extent that it is no longer probable thatsufficient taxable profit will be available to allow all or part of the deferredincome tax asset to be utilized.Deferred tax assets and liabilities are measured at the tax rates thatare expected to apply to the year when the asset is realized or the liabilityis settled, based on tax rates (and tax laws) that have been enacted orsubstantively enacted at the balance sheet date.Tax relating to items recognized in other comprehensive incomeis recognized in other comprehensive income and tax relating to itemsrecognized directly in equity is recognized directly in equity and not in theincome statement.Customs duties and sales taxesRevenues, expenses and assets are recognized net of the amount ofcustoms duties or sales tax except:• Where the customs duty or sales tax incurred on a purchase of goodsand services is not recoverable from the taxation authority, in whichcase the customs duty or sales tax is recognized as part of the cost ofacquisition of the asset or as part of the expense item as applicable.• Receivables and payables are stated with the amount of customs duty orsales tax included.The net amount of sales tax recoverable from, or payable to, the taxationauthority is included within receivables or payables in the balance sheet.Own equity instrumentsThe group’s holdings in its own equity instruments, including ordinaryshares held by Employee Share Ownership Plan Trusts (ESOPs), areclassified as ‘treasury shares’, or ‘own shares’ for the ESOPs, and areshown as deductions from shareholders’ equity at cost. Considerationreceived for the sale of such shares is also recognized in equity, with anydifference between the proceeds from sale and the original cost beingtaken to the profit and loss account reserve. No gain or loss is recognizedin the income statement on the purchase, sale, issue or cancellation ofequity shares.RevenueRevenue arising from the sale of goods is recognized when the significantrisks and rewards of ownership have passed to the buyer, which is typicallyat the point that title passes, and the revenue can be reliably measured.Revenue is measured at the fair value of the consideration receivedor receivable and represents amounts receivable for goods provided in thenormal course of business, net of discounts, customs duties and salestaxes.Physical exchanges are reported net, as are sales and purchasesmade with a common counterparty, as part of an arrangement similar toa physical exchange. Similarly, where the group acts as agent on behalfof a third party to procure or market energy commodities, any associatedfee income is recognized but no purchase or sale is recorded. Additionally,where forward sale and purchase contracts for oil, natural gas or powerhave been determined to be for trading purposes, the associated salesand purchases are reported net within sales and other operating revenueswhether or not physical delivery has occurred.Generally, revenues from the production of oil and natural gasproperties in which the group has an interest with joint venture partners arerecognized on the basis of the group’s working interest in those properties(the entitlement method). Differences between the production sold and thegroup’s share of production are not significant.Interest income is recognized as the interest accrues (using theeffective interest rate that is the rate that exactly discounts estimatedfuture cash receipts through the expected life of the financial instrument tothe net carrying amount of the financial asset).Dividend income from investments is recognized when theshareholders’ right to receive the payment is established.ResearchResearch costs are expensed as incurred.Finance costsFinance costs directly attributable to the acquisition, construction orproduction of qualifying assets, which are assets that necessarily take asubstantial period of time to get ready for their intended use, are addedto the cost of those assets, until such time as the assets are substantiallyready for their intended use. All other finance costs are recognized in theincome statement in the period in which they are incurred.Use of estimatesThe preparation of financial statements requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities as well as the disclosure of contingent assets and liabilities at thebalance sheet date and the reported amounts of revenues and expensesduring the reporting period. Actual outcomes could differ from thoseestimates.Impact of new International Financial Reporting StandardsAdopted for 2011There are no new or amended standards or interpretations adopted witheffect from 1 January 2011 that have a significant impact on the financialstatements.188 BP Annual Report and Form 20-F 2011