BP 2005 Annual Report Download - page 38

36 Making energy more
SHARE-BASED PAYMENTS
Equity-settled transactions The cost of equity-settled transactions
with employees is measured by reference to the fair value at the
date at which they are granted and is recognized as an expense over
the vesting period, which ends on the date on which the relevant
employees become fully entitled to the award. Fair value is
determined by using an appropriate valuation model. In valuing equity-
settled transactions, no account is taken of any vesting conditions,
other than conditions linked to the price of the shares of the company
(market conditions).
No expense is recognized for awards that do not ultimately vest,
except for awards where vesting is conditional upon a market
condition, which are treated as vesting irrespective of whether or not
the market condition is satisfied, provided that all other performance
conditions are satisfied.
At each balance sheet date before vesting, the cumulative expense
is calculated, representing the extent to which the vesting period has
expired and management’s best estimate of the achievement or
otherwise of non-market conditions and the number of equity
instruments that will ultimately vest or, in the case of an instrument
subject to a market condition, be treated as vesting as described
above. The movement in cumulative expense since the previous
balance sheet date is recognized in the income statement, with a
corresponding entry in equity.
Where the terms of an equity-settled award are modified or a new
award is designated as replacing a cancelled or settled award, the
cost based on the original award terms continues to be recognized
over the original vesting period. In addition, an expense is recognized
over the remainder of the new vesting period for the incremental fair
value of any modification, based on the difference between the fair
value of the original award and the fair value of the modified award,
both as measured on the date of the modification. No reduction is
recognized if this difference is negative.
Where an equity-settled award is cancelled, it is treated as if it had
vested on the date of cancellation and any cost not yet recognized in
the income statement for the award is expensed immediately. Any
compensation paid up to the fair value of the award at the cancellation
or settlement date is deducted from equity, with any excess over fair
value being treated as an expense in the income statement.
Cash-settled transactions The cost of cash-settled transactions is
measured at fair value using an appropriate option valuation model.
Fair value is established initially at the grant date and at each
balance sheet date thereafter until the awards are settled. During the
vesting period, a liability is recognized representing the product of the
fair value of the award and the portion of the vesting period expired as
at the balance sheet date. From the end of the vesting period until
settlement, the liability represents the full fair value of the award as
at the balance sheet date. Changes in the carrying amount for the
liability are recognized in profit or loss for the period.
PENSIONS AND OTHER POST-RETIREMENT BENEFITS
The cost of providing benefits under the defined benefit plans is
determined separately for each plan using the projected unit method,
which attributes entitlement to benefits to the current period (to
determine current service cost) and to the current and prior periods
(to determine the present value of defined benefit obligation) and is
based on actuarial advice. Past service costs are recognized in profit
or loss on a straight-line basis over the vesting period or immediately
if the benefits have vested. When a settlement (eliminating all
obligations for benefits already accrued) or a curtailment (reducing
future obligations as a result of a material reduction in the scheme
membership or a reduction in future entitlement) occurs, the
obligation and related plan assets are remeasured using current
actuarial assumptions and the resultant gain or loss recognized in
the income statement during the period in which the settlement
or curtailment occurs.
The interest element of the defined benefit cost represents the
change in present value of scheme obligations resulting from the
passage of time, and is determined by applying the discount rate to
the opening present value of the benefit obligation, taking into
account material changes in the obligation during the year. The
expected return on plan assets is based on an assessment made at
the beginning of the year of long-term market returns on scheme
assets, adjusted for the effect on the fair value of plan assets of
contributions received and benefits paid during the year. The
difference between the expected return on plan assets and the
interest cost is recognized in the income statement as other finance
income or expense.
Actuarial gains and losses are recognized in full in the group
statement of recognized income and expense in the period in
which they occur.
The defined benefit pension asset or liability in the balance sheet
comprises the total for each plan of the present value of the defined
benefit obligation (using a discount rate based on high quality
corporate bonds), less any past service cost not yet recognized and
less the fair value of plan assets out of which the obligations are to be
settled directly. Fair value is based on market price information and, in
the case of quoted securities, is the published bid price. The value of a
net pension benefit asset is restricted to the sum of any unrecognized
past service costs and the present value of any amount the group
expects to recover by way of refunds from the plan or reductions in
the future contributions.
Contributions to defined contribution schemes are recognized in
the income statement in the period in which they become payable.
CORPORATE TAXES
Tax expense represents the sum of the tax currently payable and
deferred tax.
The tax currently payable is based on the taxable profits for the
period. Taxable profit differs from net profit as reported in the income
statement because it excludes items of income or expense that are
taxable or deductible in other periods and it further excludes items
that are never taxable or deductible. The group’s liability for current tax
is calculated using tax rates that have been enacted or substantively
enacted by the balance sheet date.
Deferred tax is provided, using the liability method, on all
temporary differences at the balance sheet date between the tax
bases of assets and liabilities and their carrying amounts for financial
reporting purposes.
Deferred tax liabilities are recognized for all taxable temporary
differences:
••• Except where the deferred tax liability arises on goodwill that is
not tax deductible or the initial recognition of an asset or liability
in a transaction that is not a business combination and, at the time
of the transaction, affects neither the accounting profit nor taxable
profit or loss; and
••• In respect of taxable temporary differences associated with
investments in subsidiaries, jointly controlled entities and
associates, except where the timing of the reversal of the
temporary differences can be controlled by the group and it is
probable that the temporary differences will not reverse in the
foreseeable future.
Deferred tax assets are recognized for all deductible temporary
differences, carry-forward of unused tax assets and unused tax losses,
to the extent that it is probable that taxable profit will be available
against which the deductible temporary differences and the carry-
forward of unused tax assets and unused tax losses can be utilized: