BP 2005 Annual Report Download - page 33

associates. Unrealized losses are also eliminated unless the transaction
provides evidence of an impairment of the asset transferred.
The group ceases to use the equity method of accounting on the
date from which it no longer has significant influence in the associate
or when the interest becomes held for sale.
FOREIGN CURRENCY TRANSLATION
In individual companies, transactions in foreign currencies are initially
recorded in the functional currency by applying the rate of exchange
ruling at the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies are translated into the functional
currency at the rate of exchange ruling at the balance sheet date. Any
resulting exchange differences are included in the income statement.
Non-monetary assets and liabilities that are measured in terms of
historical cost in a foreign currency are translated into the functional
currency using the rates of exchange as at the dates of the initial
transactions. Non-monetary assets and liabilities measured at fair
value in a foreign currency are translated into the functional currency
using the rate of exchange at the date the fair value was determined.
In the consolidated financial statements, the assets and liabilities
of non-US dollar functional currency subsidiaries, jointly controlled
entities and associates, including related goodwill, are translated into
US dollars at the rate of exchange ruling at the balance sheet date.
The results and cash flows of non-US dollar functional currency
subsidiaries, jointly controlled entities and associates are translated
into US dollars using average rates of exchange. Exchange
adjustments arising when the opening net assets and the profits for
the year retained by non-US dollar functional currency subsidiaries,
jointly controlled entities and associates are translated into US dollars
are taken to a separate component of equity and reported in the
statement of recognized income and expense. Exchange gains and
losses arising on long-term foreign currency borrowings used to
finance the group’s non-US dollar investments are also taken to equity.
On disposal of a non-US dollar functional currency subsidiary, jointly
controlled entity or associate, the deferred cumulative amount
recognized in equity relating to that particular non-US dollar operation
is recognized in the income statement.
BUSINESS COMBINATIONS AND GOODWILL
Business combinations are accounted for using the acquisition
method of accounting. The cost of an acquisition is measured as the
cash paid and the fair value of other assets given, equity instruments
issued and liabilities incurred or assumed at the date of exchange,
plus costs directly attributable to the acquisition. The acquired
identifiable assets, liabilities and contingent liabilities are measured at
their fair values at the date of acquisition. Any excess of the cost of
acquisition over the net fair value of the identifiable assets acquired is
recognized as goodwill. Any deficiency of the cost of acquisition
below the fair values of the identifiable net assets acquired (i.e.
discount on acquisition) is credited to the income statement in the
period of acquisition. Where the group does not acquire 100%
ownership of the acquired company, the interest of minority
shareholders is stated at the minority’s proportion of the fair values of
the assets and liabilities recognized. Subsequently, any losses
applicable to the minority shareholders in excess of the minority
interest are allocated against the interests of the parent.
Goodwill on acquisition is initially measured at cost being the
excess of the cost of the business combination over the acquirer’s
interest in the net fair value of the identifiable assets, liabilities and
contingent liabilities. Following initial recognition, goodwill is measured
at cost less any accumulated impairment losses. Goodwill is reviewed
for impairment annually or more frequently if events or changes in
circumstances indicate that the carrying value may be impaired.
As at the acquisition date, any goodwill acquired is allocated to
each of the cash-generating units expected to benefit from the
combination’s synergies. For this purpose, cash-generating units are
set at one level below a business segment. Impairment is determined
by assessing the recoverable amount of the cash-generating unit
to which the goodwill relates. Where the recoverable amount of the
cash-generating unit is less than the carrying amount, an impairment
loss is recognized.
Goodwill arising on business combinations prior to 1 January 2003
is stated at the previous UK GAAP carrying amount.
Goodwill may also arise upon investments in jointly controlled
entities and associates, being the surplus of the cost of investment
over the group’s share of the net fair value of the identifiable assets.
Such goodwill is recorded within investments in jointly controlled
entities and associates, and any impairment of the goodwill is included
within the income from jointly controlled entities and associates.
NON-CURRENT ASSETS HELD FOR SALE
Non-current assets and disposal groups classified as held for sale
are measured at the lower of carrying amount and fair value less
costs to sell.
Non-current assets and disposal groups are classified as held
for sale if their carrying amounts will be recovered through a sale
transaction rather than through continuing use. This condition is
regarded as met only when the sale is highly probable and the asset
or disposal group is available for immediate sale in its present
condition. Management must be committed to the sale, which should
be expected to qualify for recognition as a completed sale within one
year from the date of classification.
Property, plant and equipment and intangible assets once classified
as held for sale are not depreciated.
INTANGIBLE ASSETS
Intangible assets are stated at cost, less accumulated amortization
and accumulated impairment losses. Intangible assets include
expenditure on the exploration for and evaluation of oil and natural
gas resources, computer software, patents, licences, trademarks
and product development costs.
Intangible assets acquired separately from a business are carried
initially at cost. The initial cost is the aggregate amount paid and the
fair value of any other consideration given to acquire the asset.
An intangible asset acquired as part of a business combination is
recognized separately from goodwill if the asset is separable or arises
from contractual or other legal rights and its fair value can be
measured reliably.
Product development costs are capitalized as intangible assets
when a project has obtained internal sanction and the future
recoverability of such costs can reasonably be regarded as assured.
Intangible assets with a finite life are amortized on a straight-line
basis over their expected useful lives. For patents, licences and
trademarks, expected useful life is the lower of the duration of the
legal agreement and economic useful life, which can range from
three to 15 years. Computer software costs have a useful life of
three to five years.
The expected useful lives of the assets are reviewed on an annual
basis and, if necessary, changes in useful lives are accounted for
prospectively.
The carrying value of intangible assets is reviewed for impairment
whenever events or changes in circumstances indicate the carrying
value may not be recoverable. In addition, the carrying value of
capitalized product development expenditure is reviewed for
impairment annually before being brought into use.
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