BP 2009 Annual Report Download - page 199

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BP Annual Report and Accounts 2009
Parent company financial statements of BP p.l.c.
Financial statements
Notes on financial statements
1. Accounting policies
Accounting standards
These financial statements are prepared in accordance with applicable UK accounting standards.
Accounting convention
The financial statements are prepared under the historical cost convention.
Foreign currency transactions
Functional currency is the currency of the primary economic environment in which an entity operates and is normally the currency in which the entity
primarily generates and expends cash. 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 retranslated into the functional
currency at the rate of exchange ruling at the balance sheet date. Any resulting exchange differences are included in profit for the year. Exchange
adjustments arising when the opening net assets and the profits for the year retained by non-US dollar functional currency branches are translated into
US dollars are taken to a separate component of equity and reported in the statement of total recognized gains and losses.
Investments
Investments in subsidiaries and associated undertakings are recorded at cost. The company assesses investments for impairment whenever events or
changes in circumstances indicate that the carrying value of an investment may not be recoverable. If any such indication of impairment exists, the
company makes an estimate of its recoverable amount. Where the carrying amount of an investment exceeds its recoverable amount, the investment
is considered impaired and is written down to its recoverable amount.
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 equity instruments 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). Non-vesting conditions, such as the condition that employees
contribute to a savings-related plan, are taken into account in the grant-date fair value, and failure to meet a non-vesting condition is treated as a
cancellation, where this is within the control of the employee.
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.
When 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.
When 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.
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
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 plan 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 within the statement of total recognized gains and losses in the period in which they occur.