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

Notes on financial statements10. Impairment review of goodwill continuedThe key assumptions required for the value-in-use estimation are the oil and natural gas prices, production volumes and the discount rate. To test thesensitivity of the headroom to changes in production volumes and oil and natural gas prices, management has developed ‘rules of thumb’ for keyassumptions. Applying these gives an indication of the impact on the headroom of possible changes in the key assumptions. Due to the non-linearrelationship of different variables, the calculations were performed using a number of simplified assumptions, therefore a detailed calculation at any givenprice may produce a different result.It was estimated that if the oil price assumption was around 25% lower than the current assumption for 2017 and beyond, this would cause therecoverable amount to be equal to the carrying amount of goodwill and related non-current assets of the segment. It was estimated that no reasonablypossible change in the long-term price of natural gas would cause the headroom to be reduced to zero.Estimated production volumes are based on detailed data for the fields and take into account development plans for the fields agreed bymanagement as part of the long-term planning process. In 2011, it was estimated that, if all our production were to be reduced by 10% for the whole ofthe next 15 years, this would not be sufficient to reduce the excess of recoverable amount over the carrying amount to zero. Consequently, managementbelieves no reasonably possible change in the production assumption would cause the carrying amount to exceed the recoverable amount.Management also believes that currently there is no reasonably possible change in discount rate that would cause the carrying amount to exceedthe recoverable amount.Refining and Marketing$ million2011 2010Rhine FVC Lubricants Other Total Rhine FVC Lubricants Other TotalGoodwill 618 3,284 112 4,014 629 3,285 160 4,074Excess of recoverable amount over carryingamount 2,264 n/a n/a n/a 4,091 n/a n/a n/aCash flows for each cash-generating unit are derived from the business segment plans, which cover a period of two to five years. To determine the valuein use for each of the cash-generating units, cash flows for a period of 10 years are discounted and aggregated with a terminal value.Rhine FVCThe key assumptions to which the calculation of value in use for the Rhine FVC is most sensitive are refinery gross margins, throughput volumes anddiscount rate. Gross margin assumptions used in the Rhine FVC plan are consistent with those used to develop the regional Refining Marker Margin(RMM). The regional RMM is a margin measure based upon product yields and a marker crude oil deemed appropriate for the region. The average valuesassigned to the regional RMM and refinery throughput volume over the plan period are $11.35 per barrel and 257 million barrels per year (2010 $11.05 perbarrel and 248 million barrels per year). These values reflect past experience and are consistent with external sources. Cash flows beyond the five-yearplan period are extrapolated using a nominal 4% growth rate (2010 cash flows beyond the five-year plan period were extrapolated using a nominal 4%growth rate).2011Sensitivity analysisSensitivity of value in use to a change in refinery margins of $1 per barrel ($ billion) 1.5Adverse change in refinery margins to reduce recoverable amount to carrying amount ($ per barrel) 1.5Sensitivity of value in use to a 5% change in throughput volume ($ billion) 0.9Adverse change in throughput volume to reduce recoverable amount to carrying amount (million barrels per year) 31Sensitivity of value in use to a change in the discount rate of 1% ($ billion) 0.7Discount rate to reduce recoverable amount to carrying amount 16%LubricantsAs permitted by IAS 36, the detailed calculations of the Lubricants unit’s recoverable amount performed in the most recent detailed calculation in 2009were used for the 2011 impairment test as the criteria in that standard were considered satisfied: the headroom was substantial in 2009; there have beenno significant changes in the assets and liabilities; and the likelihood that the recoverable amount would be less than the carrying amount at the time ofthe test was remote.The key assumptions to which the calculation of value in use for the Lubricants unit is most sensitive are operating unit margins, sales volumesand discount rate. The values assigned to these key assumptions reflect past experience. No reasonably possible changes in any of these keyassumptions would cause the unit’s carrying amount to exceed its recoverable amount. Cash flows beyond the two-year plan period were extrapolatedusing a nominal 3% growth rate.11. Distribution and administration expenses$ million2011 2010 2009Distribution 12,416 11,393 12,798Administration 1,542 1,162 1,24013,958 12,555 14,038Financial statementsBP Annual Report and Form 20-F 2011 207