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

Notes on financial statements10. Impairment review of goodwill$ millionGoodwill at 31 December 2011 2010Exploration and Production 7,931 4,450Refining and Marketing 4,014 4,074Other businesses and corporate 155 7412,100 8,598Goodwill acquired through business combinations has been allocated to groups of cash-generating units that are expected to benefit from the synergiesof the acquisition. For Exploration and Production, goodwill is held at the segment level; previously it was allocated to each geographic region (UK, US andRest of World) (see below). For Refining and Marketing, goodwill has been allocated to the Rhine fuels value chain (FVC), Lubricants and Other.In assessing whether goodwill has been impaired, the carrying amount of the cash-generating unit (including goodwill) is compared with therecoverable amount of the cash-generating unit. The recoverable amount is the higher of fair value less costs to sell and value in use. In the absence of anyinformation about the fair value of a cash-generating unit, the recoverable amount is deemed to be the value in use.The group calculates the value in use using a discounted cash flow model. The future cash flows are adjusted for risks specific to thecash-generating unit and are discounted using a pre-tax discount rate. The discount rate is derived from the group’s post-tax weighted average cost ofcapital and is adjusted where applicable to take into account any specific risks relating to the country where the cash-generating unit is located. The rateto be applied to each country is reassessed each year. Discount rates of 12% and 14% have been used for goodwill impairment calculations performed in2011 (2010 12% and 14%).The business segment plans, which are approved on an annual basis by senior management, are the primary source of information for thedetermination of value in use. They contain forecasts for oil and natural gas production, refinery throughputs, sales volumes for various types of refinedproducts (e.g. gasoline and lubricants), revenues, costs and capital expenditure. As an initial step in the preparation of these plans, various environmentalassumptions, such as oil prices, natural gas prices, refining margins, refined product margins and cost inflation rates, are set by senior management.These environmental assumptions take account of existing prices, global supply-demand equilibrium for oil and natural gas, other macroeconomic factorsand historical trends and variability.Exploration and Production$ million2011 2010Total UK USRest ofworldTotalGoodwill 7,931 341 3,479 630 4,450Excess of recoverable amount over carrying amount 49,247 7,556 18,968 41,714 n/aThe value in use is based on the cash flows expected to be generated by the projected oil or natural gas production profiles up to the expected datesof cessation of production of each producing field. As the production profile and related cash flows can be estimated from BP’s past experience,management believes that the cash flows generated over the estimated life of field is the appropriate basis upon which to assess goodwill and individualassets for impairment. The date of cessation of production depends on the interaction of a number of variables, such as the recoverable quantities ofhydrocarbons, the production profile of the hydrocarbons, the cost of the development of the infrastructure necessary to recover the hydrocarbons,the production costs, the contractual duration of the production concession and the selling price of the hydrocarbons produced. As each producing fieldhas specific reservoir characteristics and economic circumstances, the cash flows of the fields are computed using appropriate individual economicmodels and key assumptions agreed by BP’s management for the purpose. Capital expenditure and operating costs for the first four years and expectedhydrocarbon production profiles up to 2020 are derived from the business segment plan. Estimated production quantities and cash flows up to the dateof cessation of production on a field-by-field basis are developed to be consistent with this. The production profiles used are consistent with the resourcevolumes approved as part of BP’s centrally-controlled process for the estimation of proved reserves and total resources.Prior to 2011, goodwill in the Exploration and Production segment was allocated to each geographic region, that is UK, US and Rest of World, andimpairment reviews of goodwill were performed at this level. Following a reorganization of the Exploration and Production segment, the group has revisedthe way goodwill is monitored for internal management purposes. Given the global nature of our upstream business, the impairment review of goodwill isnow performed at the Exploration and Production segment level. Consistent with prior years, the 2011 review for impairment was carried out during thefourth quarter.The table above shows the carrying amount of the goodwill for the segment and the excess of the recoverable amount over the carrying amount(the headroom). Consistent with prior periods, midstream and intangible oil and gas assets were excluded from the headroom calculation.The Brent oil price assumption used in the impairment review of goodwill is shown in the table below.20112012 2013 2014 2015 20162017 andthereafterBrent oil price ($/bbl) 106 101 97 94 92 9020102011 2012 2013 2014 20152016 andthereafterBrent oil price ($/bbl) 85 88 89 89 90 75Key assumptions for oil and gas prices for the first five years were derived from forward price curves in the fourth quarter. Prices in 2017 and beyondwere determined using long-term views of global supply and demand, building upon past experience of the industry and consistent with external sources.These prices were adjusted to arrive at appropriate consistent price assumptions for different qualities of oil and gas, or where appropriate, contracted oiland gas prices were applied.206 BP Annual Report and Form 20-F 2011