BP 2007 Annual Report Download - page 105

BP ANNUAL REPORT AND ACCOUNTS 2007 103
1 Significant accounting policies continued
The expected useful lives of property, plant and equipment are reviewed on an annual basis and, if necessary, changes in useful lives are accounted
for prospectively.
The carrying value of property, plant and equipment is reviewed for impairment whenever events or changes in circumstances indicate the carrying
value may not be recoverable.
An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the
continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and
the carrying amount of the item) is included in the income statement in the period the item is derecognized.
Impairment of intangible assets and property, plant and equipment
The group assesses assets or groups of assets for impairment whenever events or changes in circumstances indicate that the carrying value of an
asset may not be recoverable. If any such indication of impairment exists, the group makes an estimate of its recoverable amount. Individual assets
are grouped for impairment assessment purposes at the lowest level at which there are identifiable cash flows that are largely independent of the
cash flows of other groups of assets. An asset group’s recoverable amount is the higher of its fair value less costs to sell and its value in use. Where
the carrying amount of an asset group exceeds its recoverable amount, the asset group is considered impaired and is written down to its recoverable
amount. In assessing value in use, the estimated future cash flows are adjusted for the risks specific to the asset group and are discounted to their
present value using a pre-tax discount rate that reflects current market assessments of the time value of money.
An assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer
exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognized impairment loss is reversed only
if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognized. If that
is the case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that
would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in
profit or loss. After such a reversal, the depreciation charge is adjusted in future periods to allocate the asset’s revised carrying amount, less any
residual value, on a systematic basis over its remaining useful life.
Financial assets
Financial assets are classified as loans and receivables; available-for-sale financial assets; financial assets at fair value through profit or loss; oras
derivatives designated as hedging instruments in an effective hedge, as appropriate. Financial assets include cash and cash equivalents, trade
receivables, other receivables, loans, other investments, and derivative financial instruments. The group determines the classification of its financial
assets at initial recognition. Financial assets are recognized initially at fair value, normally being the transaction price plus, in the case of financial assets
not at fair value through profit or loss, directly attributable transaction costs.
The subsequent measurement of financial assets depends on their classification, as follows:
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are
carried at amortized cost using the effective interest method if the time value of money is significant. Gains and losses are recognized in income when
the loans and receivables are derecognized or impaired, as well as through the amortization process. This category of financial assets includes trade
and other receivables.
Available-for-sale financial assets
Available-for-sale financial assets are those non-derivative financial assets that are not classified as loans and receivables. After initial recognition,
available-for-sale financial assets are measured at fair value, with gains or losses recognized as a separate component of equity until the investmentis
derecognized or until the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is included
in the income statement.
The fair value of quoted investments is determined by reference to bid prices at the close of business on the balance sheet date. Where there is no
active market, fair value is determined using valuation techniques. Where fair value cannot be reliably estimated, assets are carried at cost.
Financial assets at fair value through profit or loss
Derivatives, other than those designated as effective hedging instruments, are classified as held for trading and are included in this category. These
assets are carried on the balance sheet at fair value with gains or losses recognized in the income statement.
Derivatives designated as hedging instruments in an effective hedge
Such derivatives are carried on the balance sheet at fair value, the treatment of gains and losses arising from revaluation are described below in the
accounting policy for Derivative financial instruments and hedging activities.
Impairment of financial assets
The group assesses at each balance sheet date whether a financial asset or group of financial assets is impaired.
Loans and receivables
If there is objective evidence that an impairment loss on loans and receivables carried at amortized cost has been incurred, the amount of the loss is
measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the financial
asset’s original effective interest rate. The carrying amount of the asset is reduced, with the amount of the loss recognized in profit or loss.
Available-for-sale financial assets
If an available-for-sale financial asset is impaired, an amount comprising the difference between its cost (net of any principal payment and amortization)
and its fair value is transferred from equity to the income statement.