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

Notes on financial statements34. Finance debt continuedFair valuesThe estimated fair value of finance debt is shown in the table below together with the carrying amount as reflected in the balance sheet.Long-term borrowings in the table below include the portion of debt that matures in the year from 31 December 2011, whereas in the balancesheet the amount would be reported within current finance debt. The disposal deposits noted above are excluded from this analysis.The carrying amount of the group’s short-term borrowings, comprising mainly commercial paper, approximates their fair value. The fair value ofthe group’s long-term borrowings and finance lease obligations is estimated using quoted prices or, where these are not available, discounted cash flowanalyses based on the group’s current incremental borrowing rates for similar types and maturities of borrowing.$ million2011 2010Fair valueCarryingamount Fair value Carrying amountShort-term borrowings 3,800 3,800 1,453 1,453Long-term borrowings 40,606 39,691 37,258 36,876Net obligations under finance leases 776 692 928 810Total finance debt 45,182 44,183 39,639 39,13935. Capital disclosures and analysis of changes in net debtThe group defines capital as total equity. The group’s approach to managing capital is set out in its financial framework which BP continues to refine tosupport the pursuit of value growth for shareholders, while maintaining a secure financial base. We intend to maintain a significant liquidity buffer and toreduce our net debt ratio to the lower half of the 10-20% gearing range over time as our disposal programme progresses.The group monitors capital on the basis of the net debt ratio, that is, the ratio of net debt to net debt plus equity. Net debt is calculated as grossfinance debt, as shown in the balance sheet, plus the fair value of associated derivative financial instruments that are used to hedge foreign exchangeand interest rate risks relating to finance debt, for which hedge accounting is applied, less cash and cash equivalents. Net debt and net debt ratio arenon-GAAP measures. BP believes these measures provide useful information to investors. Net debt enables investors to see the economic effect ofgross debt, related hedges and cash and cash equivalents in total. The net debt ratio enables investors to see how significant net debt is relative to equityfrom shareholders. The derivatives are reported on the balance sheet within the headings ‘Derivative financial instruments’. All components of equity areincluded in the denominator of the calculation. At 31 December 2011 the net debt ratio was 20.5% (2010 21.2%).During 2011 and 2010, the company did not repurchase any of its own shares, other than to satisfy the requirements of certain employeeshare‐based payment plans.http://www.bp.com/downloads/changesinnetdebt$ millionAt 31 December 2011 2010Gross debt 44,213 45,336Less: Cash and cash equivalents 14,067 18,556Less: Fair value asset of hedges related to finance debt 1,133 916Net debt 29,013 25,864Equity 112,482 95,891Net debt ratio 20.5% 21.2%An analysis of changes in net debt is provided below.Cash andcashequivalents$ million2011 2010Cash andcashequivalentsMovement in net debtFinancedebt aNetdebtFinancedebt aNetdebtAt 1 January (44,420) 18,556 (25,864) (34,500) 8,339 (26,161)Exchange adjustments 30 (492) (462) 194 (279) (85)Net cash flow (4,725) (3,997) (8,722) (3,613) 10,496 6,883Movement in finance debt relating to investing activities b 6,167 – 6,167 (6,197) – (6,197)Other movements (132) – (132) (304) – (304)At 31 December (43,080) 14,067 (29,013) (44,420) 18,556 (25,864)aIncluding fair value of associated derivative financial instruments.bSee Note 34 for further information.230 BP Annual Report and Form 20-F 2011