BP 2011 Annual Report Download - page 186

184 BP Annual Report and Form 20-F 2011184 BP Annual Report and Form 20-F 2011
Notes on financial statements
1. Significant accounting policies continued
Oil and natural gas exploration, appraisal and development expenditure
Oil and natural gas exploration, appraisal and development expenditure
is accounted for using the principles of the successful efforts method of
accounting.
Licence and property acquisition costs
Exploration licence and leasehold property acquisition costs are capitalized
within intangible assets and are reviewed at each reporting date to confirm
that there is no indication that the carrying amount exceeds the recoverable
amount. This review includes confirming that exploration drilling is still
under way or firmly planned or that it has been determined, or work is
under way to determine, that the discovery is economically viable based on
a range of technical and commercial considerations and sufficient progress
is being made on establishing development plans and timing. If no future
activity is planned, the remaining balance of the licence and property
acquisition costs is written off. Lower value licences are pooled and
amortized on a straight-line basis over the estimated period of exploration.
Upon recognition of proved reserves and internal approval for development,
the relevant expenditure is transferred to property, plant and equipment.
Exploration and appraisal expenditure
Geological and geophysical exploration costs are charged against income
as incurred. Costs directly associated with an exploration well are initially
capitalized as an intangible asset until the drilling of the well is complete
and the results have been evaluated. These costs include employee
remuneration, materials and fuel used, rig costs and payments made to
contractors. If potentially commercial quantities of hydrocarbons are not
found, the exploration well is written off as a dry hole. If hydrocarbons are
found and, subject to further appraisal activity, are likely to be capable of
commercial development, the costs continue to be carried as an asset.
Costs directly associated with appraisal activity, undertaken to
determine the size, characteristics and commercial potential of a reservoir
following the initial discovery of hydrocarbons, including the costs of
appraisal wells where hydrocarbons were not found, are initially capitalized
as an intangible asset.
All such carried costs are subject to technical, commercial and
management review at least once a year to confirm the continued intent
to develop or otherwise extract value from the discovery. When this is no
longer the case, the costs are written off. When proved reserves of oil and
natural gas are determined and development is approved by management,
the relevant expenditure is transferred to property, plant and equipment.
Development expenditure
Expenditure on the construction, installation and completion of infrastructure
facilities such as platforms, pipelines and the drilling of development wells,
including service and unsuccessful development or delineation wells, is
capitalized within property, plant and equipment and is depreciated from the
commencement of production as described below in the accounting policy
for property, plant and equipment.
Property, plant and equipment
Property, plant and equipment is stated at cost, less accumulated
depreciation and accumulated impairment losses.
The initial cost of an asset comprises its purchase price or construction
cost, any costs directly attributable to bringing the asset into operation, the
initial estimate of any decommissioning obligation, if any, and, for qualifying
assets, borrowing costs. The purchase price or construction cost is the
aggregate amount paid and the fair value of any other consideration given
to acquire the asset. The capitalized value of a finance lease is also included
within property, plant and equipment. Exchanges of assets are measured
at fair value unless the exchange transaction lacks commercial substance or
the fair value of neither the asset received nor the asset given up is reliably
measurable. The cost of the acquired asset is measured at the fair value
of the asset given up, unless the fair value of the asset received is more
clearly evident. Where fair value is not used, the cost of the acquired asset is
measured at the carrying amount of the asset given up. The gain or loss on
derecognition of the asset given up is recognized in profit or loss.
Expenditure on major maintenance refits or repairs comprises the cost
of replacement assets or parts of assets, inspection costs and overhaul
costs. Where an asset or part of an asset that was separately depreciated
is replaced and it is probable that future economic benefits associated
with the item will flow to the group, the expenditure is capitalized and
the carrying amount of the replaced asset is derecognized. Inspection
costs associated with major maintenance programmes are capitalized and
amortized over the period to the next inspection. Overhaul costs for major
maintenance programmes, and all other maintenance costs are expensed
as incurred.
Oil and natural gas properties, including related pipelines, are
depreciated using a unit-of-production method. The cost of producing wells
is amortized over proved developed reserves. Licence acquisition, common
facilities and future decommissioning costs are amortized over total proved
reserves. The unit-of-production rate for the amortization of common
facilities costs takes into account expenditures incurred to date, together
with the future capital expenditure expected to be incurred in relation to
these common facilities.
Other property, plant and equipment is depreciated on a straight
line basis over its expected useful life. The useful lives of the group’s other
property, plant and equipment are as follows:
Land improvements 15 to 25 years
Buildings 20 to 50 years
Refineries 20 to 30 years
Petrochemicals 20 to 30 years
Pipelines 10 to 50 years
Service stations 15 years
Office equipment 3 to 7 years
Fixtures and fittings 5 to 15 years
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 amount 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 in which 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 amount of
an asset may not be recoverable, for example, low prices or margins for an
extended period or, for oil and gas assets, significant downward revisions
of estimated volumes or increases in estimated future development
expenditure. If any such indication of impairment exists, the group makes an
estimate of the asset’s 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 an 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