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

Notes on financial statements6. Segmental analysisThe group’s organizational structure reflects the various activities in which BP is engaged. In 2011, BP had two reportable segments: Exploration andProduction and Refining and Marketing. BP’s activities in low-carbon energy are managed through our Alternative Energy business, which is reported inOther businesses and corporate. The group is managed on an integrated basis.Exploration and Production’s activities include oil and natural gas exploration, field development and production; midstream transportation, storageand processing; and the marketing and trading of natural gas, including liquefied natural gas (LNG), together with power and natural gas liquids (NGLs).At the end of 2010, BP announced its decision to reorganize its Exploration and Production segment to create three functional divisions –Exploration, Developments and Production, integrated through a Strategy and Integration organization. This structure was established in March 2011 butthis has not affected the group’s reportable segments and Exploration and Production continues to be reported as a single operating segment.From 1 January 2012, the group’s investment in TNK-BP will be reported as a separate operating segment, rather than within the Exploration andProduction segment, reflecting the way in which the investment is now managed.Refining and Marketing’s activities include the refining, manufacturing, marketing, transportation, and supply and trading of crude oil, petroleum,petrochemicals products and related services to wholesale and retail customers.Other businesses and corporate comprises the Alternative Energy business, Shipping, Treasury (which in the segmental analysis includes all ofthe group’s cash, cash equivalents and associated interest income), and corporate activities worldwide. It also included the group’s aluminium businessuntil its disposal during 2011. The Alternative Energy business is an operating segment that has been aggregated with the other activities within Otherbusinesses and corporate as it does not meet the materiality thresholds for separate segment reporting.In 2010, following the Gulf of Mexico incident, we established the Gulf Coast Restoration Organization (GCRO) and equipped it with dedicatedresources and capabilities to manage all aspects of our response to the incident. This organization reports directly to the group chief executive and isoverseen by a board committee, however it is not an operating segment.The accounting policies of the operating segments are the same as the group’s accounting policies described in Note 1. However, IFRS requiresthat the measure of profit or loss disclosed for each operating segment is the measure that is provided regularly to the chief operating decision maker forthe purposes of performance assessment and resource allocation. For BP, this measure of profit or loss is replacement cost profit or loss before interestand tax which reflects the replacement cost of supplies by excluding from profit or loss inventory holding gains and losses a . Replacement cost profit orloss for the group is not a recognized GAAP measure.Sales between segments are made at prices that approximate market prices, taking into account the volumes involved. Segment revenuesand segment results include transactions between business segments. These transactions and any unrealized profits and losses are eliminated onconsolidation, unless unrealized losses provide evidence of an impairment of the asset transferred. Sales to external customers by region are based onthe location of the seller. The UK region includes the UK-based international activities of Refining and Marketing.All surpluses and deficits recognized on the group balance sheet in respect of pension and other post-retirement benefit plans are allocated toOther businesses and corporate. However, the periodic expense relating to these plans is allocated to the other operating segments based upon thebusiness in which the employees work.Certain financial information is provided separately for the US as this is an individually material country for BP, and for the UK as this is BP’scountry of domicile.aInventory holding gains and losses represent the difference between the cost of sales calculated using the average cost to BP of supplies acquired during the period and the cost of sales calculatedon the first-in first-out (FIFO) method after adjusting for any changes in provisions where the net realizable value of the inventory is lower than its cost. Under the FIFO method, which we use for IFRSreporting, the cost of inventory charged to the income statement is based on its historic cost of purchase, or manufacture, rather than its replacement cost. In volatile energy markets, this can havea significant distorting effect on reported income. The amounts disclosed represent the difference between the charge (to the income statement) for inventory on a FIFO basis (after adjusting for anyrelated movements in net realizable value provisions) and the charge that would have arisen if an average cost of supplies was used for the period. For this purpose, the average cost of supplies duringthe period is principally calculated on a monthly basis by dividing the total cost of inventory acquired in the period by the number of barrels acquired. The amounts disclosed are not separately reflected inthe financial statements as a gain or loss. No adjustment is made in respect of the cost of inventories held as part of a trading position and certain other temporary inventory positions.200 BP Annual Report and Form 20-F 2011