BP 2005 Annual Report Download - page 126

124 Making energy more
Notes on financial statements continued
50 First-time adoption of International Financial Reporting Standards continued
ADJUSTMENTS REQUIRED TO THE BALANCE SHEET AS AT 1 JANUARY 2005 FOR THE ADOPTION OF IAS 32 AND IAS 39
Under UK GAAP, all derivatives used for trading purposes were recognized on the balance sheet at fair value. However, derivative financial
instruments used for hedging purposes were recognized by applying either the accrual method or the deferral method. Under the accrual method,
amounts payable or receivable in respect of derivatives are recognized ratably in earnings over the period of the contracts. Changes in the
derivatives and fair values are not recognized. On the deferral method, gains and losses from derivatives are deferred and recognized in earnings or
as adjustments to carrying amounts as the underlying hedged transaction matures or occurs.
For IFRS, all financial assets and financial liabilities have to be recognized initially at fair value. In subsequent periods the measurement of these
financial instruments depends on their classification into one of the following measurement categories: i) financial assets or financial liabilities at-fair-
value-through-profit-and-loss (such as those used for trading purposes, and all derivatives which do not qualify for hedge accounting); ii) loans and
receivables; and iii) available-for-sale financial assets (including certain investments held for the long term).
Fair value hedges Where fair value hedge accounting was applied to transactions that hedge the group’s exposure to the changes in the fair value
of a firm commitment or a recognized asset or liability that are attributable to a specific risk the derivatives designated as hedging instruments are
recorded at their fair value in the group’s balance sheet and changes in their fair value are recognized in the income statement. Any gain or loss
on the hedged item attributable to the hedged risk is adjusted against the carrying amount of the hedged item and recognized in the income
statement.
The ‘pay floating’ interest rate swaps and currency swaps hedging the debt book in place on 1 January 2005 were highly effective and
consequently qualify as fair value hedges for hedge accounting. The full fair value of the swaps was recognized on the balance sheet and the
carrying value of debt was adjusted.
Increase (decrease) in caption heading $ million
At 1 January
2005
Non-current assets – derivative financial instruments 112
Non-current liabilities – derivative financial instruments 129
Finance debt (17)
Total equity –
Cash flow hedges The group uses currency derivatives to hedge its exposure to variability in cash flows arising either from a recognized asset
or liability or a forecast transaction. The hedged instrument is recognized at fair value on the balance sheet. At maturity of the hedged item, the
element deferred in equity is treated in accordance with the nature of the hedged exposure, for example, capitalized into the cost of an item
of property, plant and equipment, or expensed in the case of a hedge of a tax payment.
Increase (decrease) in caption heading $ million
At 1 January
2005
Non-current assets – derivative financial instruments 79
Trade and other receivables (2)
Current assets – derivative financial instruments 141
Current liabilities – derivative financial instruments 16
Non-current liabilities – derivative financial instruments 4
Deferred tax liabilities 60
Total equity 138
Non-qualifying hedge derivatives Under IAS 39, there are strict criteria that need to be met in order for hedge accounting to be applied. This
adjustment records the impact of those derivatives, or elements thereof, held by the group that do not qualify for hedge accounting, or hedges for
which hedge accounting has not been claimed under IAS 39.
From 1 January 2005, these positions will be fair valued (‘marked to market’) and the change in fair value taken to income.
Increase (decrease) in caption heading $ million
At 1 January
2005
Non-current assets – derivative financial instruments 8
Current assets – derivative financial instruments 178
Current liabilities – derivative financial instruments 210
Non-current liabilities – derivative financial instruments 17
Deferred tax liabilities (13)
Total equity (28)