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

Notes on financial statements33. Derivative financial instruments continuedEmbedded derivative assets and liabilities have the following fair values and maturities.$ million2011Less than1 year 1-2 years 2-3 years 3-4 years 4-5 yearsOver5 years TotalLiabilities – commodity price contracts (347) (319) (306) (236) (134) (75) (1,417)Net fair value (347) (319) (306) (236) (134) (75) (1,417)Less than1 year 1-2 years 2-3 years 3-4 years 4-5 years$ million2010Over5 years TotalAssets – commodity price contracts 18 – – – – – 18Liabilities – commodity price contracts (325) (326) (285) (281) (212) (196) (1,625)– other embedded derivatives – (29) (60) – – – (89)Net fair value (307) (355) (345) (281) (212) (196) (1,696)The following table shows the changes during the year in the net fair value of embedded derivatives, within level 3 of the fair value hierarchy.$ million2011 2010CommoditypriceCommoditypriceNet fair value of contracts at 1 January (1,607) (1,331)Settlements 301 37Losses recognized in the income statement (106) (350)Exchange adjustments (5) 37Net fair value of contracts at 31 December (1,417) (1,607)The amount recognized in the income statement for the year relating to level 3 embedded derivatives still held at 31 December 2011 was a $106 millionloss (2010 $350 million loss relating to embedded derivatives still held at 31 December 2010).The fair value gain (loss) on embedded derivatives is shown below.$ million2011 2010 2009Commodity price embedded derivatives 190 (309) 607Other embedded derivatives (122) – –Fair value gain (loss) 68 (309) 607Cash flow hedgesAt 31 December 2011, the group held currency forwards and futures contracts and cylinders that were being used to hedge the foreign currency risk ofhighly probable forecast transactions. Note 26 outlines the management of risk aspects for currency risk. For cash flow hedges the group only claimshedge accounting for the intrinsic value on the currency with any fair value attributable to time value taken immediately to the income statement.There were no highly probable transactions for which hedge accounting has been claimed that have not occurred and no significant element of hedgeineffectiveness requiring recognition in the income statement. For cash flow hedges the pre-tax amount removed from equity during the period andincluded in the income statement is a gain of $195 million (2010 gain of $25 million and 2009 loss of $366 million). The entire gain of $195 million isincluded in production and manufacturing expenses (2010 $25 million gain in production and manufacturing expense; 2009 $332 million loss in productionand manufacturing expense and $34 million loss in finance costs). The amount removed from equity during the period and included in the carrying amountof non-financial assets was a gain of $13 million (2010 $53 million loss and 2009 $136 million loss).The amounts retained in equity at 31 December 2011 consist of deferred losses of $78 million maturing in 2012, deferred losses of $39 millionmaturing in 2013 and deferred losses of $30 million maturing in 2014 and beyond.Fair value hedgesAt 31 December 2011, the group held interest rate and cross-currency interest rate swap contracts as fair value hedges of the interest rate risk onfixed rate debt issued by the group. The effectiveness of each hedge relationship is quantitatively assessed and demonstrated to continue to be highlyeffective. The gain on the hedging derivative instruments taken to the income statement in 2011 was $328 million (2010 $563 million gain and 2009 $98million loss) offset by a loss on the fair value of the finance debt of $327 million (2010 $554 million loss and 2009 $117 million gain).The interest rate and cross-currency interest rate swaps mature within one to 10 years, with an average maturity of four to five years (2010 fourto five years) and are used to convert sterling, euro, Swiss franc, Australian dollar, Japanese yen and Hong Kong dollar denominated borrowings into USdollar floating rate debt. Note 26 outlines the group’s approach to interest rate and currency risk management.228 BP Annual Report and Form 20-F 2011