BP 2008 Annual Report Download - page 115

BP Annual Report and Accounts 2008
Notes on financial statements
1. Significant accounting policies continued
Cash-settled transactions
The cost of cash-settled transactions is measured at fair value and
recognized as an expense over the vesting period, with a corresponding
liability recognized on the balance sheet.
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 credit
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 the defined benefit obligation).
Past service costs are recognized immediately when the company
becomes committed to a change in pension plan design. 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 is 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 plan surplus or deficit 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 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.
Contributions to defined contribution schemes are recognized in
the income statement in the period in which they become payable.
Corporate taxes
Income tax expense represents the sum of the tax currently payable and
deferred tax. Interest and penalties relating to tax are also included in
income tax expense.
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.
• In respect of taxable temporary differences associated with
investments in subsidiaries, jointly controlled entities and associates,
except where the group is able to control the timing of the reversal of
the temporary differences 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:
• Except where the deferred income tax asset relating to the
deductible temporary difference arises from 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.
• In respect of deductible temporary differences associated with
investments in subsidiaries, jointly controlled entities and associates,
deferred tax assets are only recognized to the extent that it is
probable that the temporary differences will reverse in the
foreseeable future and taxable profit will be available against
which the temporary differences can be utilized.
The carrying amount of deferred tax assets is reviewed at each balance
sheet date and reduced to the extent that it is no longer probable that
sufficient taxable profit will be available to allow all or part of the deferred
income tax asset to be utilized.
Deferred tax assets and liabilities are measured at the tax rates
that are expected to apply to the year when the asset is realized or the
liability is settled, based on tax rates (and tax laws) that have been
enacted or substantively enacted at the balance sheet date.
Tax relating to items recognized directly in equity is recognized in
equity and not in the income statement.
Customs duties and sales taxes
Revenues, expenses and assets are recognized net of the amount of
customs duties or sales tax except:
• Where the customs duty or sales tax incurred on a purchase of
goods and services is not recoverable from the taxation authority,
in which case the customs duty or sales tax is recognized as part
of the cost of acquisition of the asset or as part of the expense
item as applicable.
• Receivables and payables are stated with the amount of customs
duty or sales tax included.
The net amount of sales tax recoverable from, or payable to, the taxation
authority is included as part of receivables or payables in the balance sheet.
Own equity instruments
The group’s holdings in its own equity instruments, including ordinary
shares held by Employee Share Ownership Plans (ESOPs), are classified
as ‘treasury shares’, or ‘own shares’ for the ESOPs, and are shown as
deductions from shareholders’ equity at cost. Consideration received for
the sale of such shares is also recognized in equity, with any difference
between the proceeds from sale and the original cost being taken to
the profit and loss account reserve. No gain or loss is recognized in
the income statement on the purchase, sale, issue or cancellation
of equity shares.
Revenue
Revenue arising from the sale of goods is recognized when the
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