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Additionalinformationforshareholders
Additional information for shareholders
Foroilandnaturalgasproperties,theexpectedfuturecashowsare
estimatedusingmanagement’sbestestimateoffutureoilandnaturalgas
pricesandreservesvolumes.Pricesforoilandnaturalgasusedforfuture
cashowcalculationsarebasedonmarketpricesfortherstveyears
andthegroup’slong-termplanningassumptionsthereafter.Asat
31December2010,thegroup’slong-termplanningassumptionswere
$75perbarrelforBrentand$6.50/mmBtuforHenryHub(2009$75per
barreland$7.50/mmBtu).Theselong-termplanningassumptionsare
subjecttoperiodicreviewandmodication.Theestimatedfuturelevelof
productionisbasedonassumptionsaboutfuturecommodityprices,
productionanddevelopmentcosts,elddeclinerates,currentscal
regimesandotherfactors.
Thefuturecashowsareadjustedforrisksspecictothe
cash-generatingunitandarediscountedusingapre-taxdiscountrate.The
discountrateisderivedfromthegroup’spost-taxweightedaveragecostof
capitalandisadjustedwhereapplicabletotakeintoaccountanyspecic
risksrelatingtothecountrywherethecash-generatingunitislocated,
althoughotherratesmaybeusedifappropriatetothespecic
circumstances.In2010theratesrangedfrom11%to14%nominal
(20099%to13%nominal).Therateappliedineachcountryisre-assessed
eachyear.
Irrespectiveofwhetherthereisanyindicationofimpairment,BPis
requiredtotestannuallyforimpairmentofgoodwillacquiredinabusiness
combination.Thegroupcarriesgoodwillofapproximately$8.6billiononits
balancesheet(2009$8.6billion),principallyrelatingtotheAtlanticRicheld
andBurmahCastrolacquisitions.Intestinggoodwillforimpairment,the
groupusesasimilarapproachtothatdescribedaboveforasset
impairment.Iftherearelowoilpricesornaturalgaspricesorrening
marginsormarketingmarginsforanextendedperiod,thegroupmayneed
torecognizesignicantgoodwillimpairmentcharges.In2009,an
impairmentlossof$1.6billionwasrecognizedtowriteoffallofthe
goodwillallocatedtotheUSWestCoastfuelsvaluechain(FVC).The
prevailingweakreningenvironment,togetherwithareviewoffuture
marginexpectationsintheFVC,ledtoareductionintheexpectedfuture
cashows.
Taxation
Thecomputationofthegroup’sincometaxexpenseinvolvesthe
interpretationofapplicabletaxlawsandregulationsinmanyjurisdictions
throughouttheworld.Theresolutionoftaxpositionstakenbythegroup,
throughnegotiationswithrelevanttaxauthoritiesorthroughlitigation,can
takeseveralyearstocompleteandinsomecasesitisdifculttopredict
theultimateoutcome.
Inaddition,thegrouphascarry-forwardtaxlossesandtaxcreditsin
certaintaxingjurisdictionsthatareavailabletooffsetagainstfuturetaxable
prot.However,deferredtaxassetsarerecognizedonlytotheextentthatit
isprobablethattaxableprotwillbeavailableagainstwhichtheunusedtax
lossesortaxcreditscanbeutilized.Managementjudgementisexercised
inassessingwhetherthisisthecase.
Totheextentthatactualoutcomesdifferfrommanagement’s
estimates,incometaxchargesorcreditsmayariseinfutureperiods.For
moreinformationseeFinancialstatements–Note19onpage177and
Note44onpage218.
Derivative nancial instruments
Thegroupusesderivativenancialinstrumentstomanagecertain
exposurestouctuationsinforeigncurrencyexchangerates,interestrates
andcommoditypricesaswellasfortradingpurposes.Inaddition,
derivativesembeddedwithinothernancialinstrumentsorotherhost
contractsaretreatedasseparatederivativeswhentheirrisksand
characteristicsarenotcloselyrelatedtothoseofthehostcontract.Allsuch
derivativesareinitiallyrecognizedatfairvalueonthedateonwhicha
derivativecontractisenteredintoandaresubsequentlyremeasuredatfair
value.Gainsandlossesarisingfromchangesinthefairvalueofderivatives
thatarenotdesignatedaseffectivehedginginstrumentsarerecognizedin
theincomestatement.
Insomecasesthefairvaluesofderivativesareestimatedusing
modelsandothervaluationmethodsduetotheabsenceofquotedprices
orotherobservable,market-corroborateddata.Inparticular,thisappliesto
themajorityofthegroup’snaturalgasembeddedderivatives.Theseare
primarilylong-termUKgascontractsthatusepricingformulaenotrelated
togasprices,forexample,oilproductandpowerprices.Thesecontracts
arevaluedusingmodelswithinputsthatincludepricecurvesforeachof
thedifferentproductsthatarebuiltupfromactivemarketpricingdataand
extrapolatedtotheexpiryofthecontractsusingthemaximumavailable
externalpricinginformation.Additionally,wherelimiteddataexistsfor
certainproducts,pricesareinterpolatedusinghistoricandlong-termpricing
relationships.Pricevolatilityisalsoaninputforthemodels.Changesinthe
keyassumptionscouldhaveamaterialimpactonthegainsandlosseson
embeddedderivativesrecognizedintheincomestatement.Formore
informationseeFinancialstatements–Note34onpage192.Ananalysis
ofthesensitivityofthefairvalueoftheembeddedderivativestochanges
inthekeyassumptionsisprovidedinFinancialstatements–Note27
onpage185.
Provisions and contingencies
Thegroupholdsprovisionsforthefuturedecommissioningofoiland
naturalgasproductionfacilitiesandpipelinesattheendoftheireconomic
lives.ThelargestdecommissioningobligationsfacingBPrelatetothe
pluggingandabandonmentofwellsandtheremovalanddisposalofoiland
naturalgasplatformsandpipelinesaroundtheworld.Theestimated
discountedcostsofperformingthisworkarerecognizedaswedrillthe
wellsandinstallthefacilities,reectingourlegalobligationsatthattime.
Acorrespondingassetofanamountequivalenttotheprovisionisalso
createdwithinproperty,plantandequipment.Thisassetisdepreciated
overtheexpectedlifeoftheproductionfacilityorpipeline.Mostofthese
decommissioningeventsaremanyyearsinthefutureandtheprecise
requirementsthatwillhavetobemetwhentheremovaleventactually
occursareuncertain.Decommissioningtechnologiesandcostsare
constantlychanging,aswellaspolitical,environmental,safetyandpublic
expectations.Consequently,thetimingandamountsoffuturecashows
aresubjecttosignicantuncertainty.Changesintheexpectedfuturecosts
arereectedinboththeprovisionandtheasset.
Decommissioningprovisionsassociatedwithdownstreamand
petrochemicalsfacilitiesaregenerallynotrecognized,assuchpotential
obligationscannotbemeasured,giventheirindeterminatesettlement
dates.Thegroupperformsperiodicreviewsofitsdownstreamand
petrochemicalslong-livedassetsforanychangesinfactsandcircumstances
thatmightrequiretherecognitionofadecommissioningprovision.
Thetimingandamountoffutureexpendituresarereviewed
annually,togetherwiththeinterestrateusedindiscountingthecashows.
Theinterestrateusedtodeterminethebalancesheetobligationattheend
of2010was1.5%(20091.75%).Theinterestraterepresentstherealrate
(i.e.excludingtheimpactsofination)onlong-datedgovernmentbonds.
BPAnnualReportandForm20-F2010 125