BP 2011 Annual Report Download - page 189

BP Annual Report and Form 20-F 2011 187
Financial statements
Notes on financial statements
1. Significant accounting policies continued
Decommissioning
Liabilities for decommissioning costs are recognized when the group has
an obligation to dismantle and remove a facility or an item of plant and
to restore the site on which it is located, and when a reliable estimate of
that liability can be made. Where an obligation exists for a new facility,
such as oil and natural gas production or transportation facilities, this
liability will be recognized on construction or installation. An obligation for
decommissioning may also crystallize during the period of operation of a
facility through a change in legislation or through a decision to terminate
operations. The amount recognized is the present value of the estimated
future expenditure determined in accordance with local conditions and
requirements.
A corresponding item of property, plant and equipment of an
amount equivalent to the provision is also recognized. This is subsequently
depreciated as part of the asset.
Other than the unwinding discount on the provision, any change
in the present value of the estimated expenditure is reflected as an
adjustment to the provision and the corresponding item of property, plant
and equipment. Such changes include foreign exchange gains and losses
arising on the retranslation of the liability into the functional currency of the
reporting entity, when it is known that the liability will be settled in a foreign
currency.
Environmental expenditures and liabilities
Environmental expenditures that relate to current or future revenues are
expensed or capitalized as appropriate. Expenditures that relate to an
existing condition caused by past operations and do not contribute to
current or future earnings are expensed.
Liabilities for environmental costs are recognized when a clean-up is
probable and the associated costs can be reliably estimated. Generally, the
timing of recognition of these provisions coincides with the commitment to
a formal plan of action or, if earlier, on divestment or on closure of inactive
sites.
The amount recognized is the best estimate of the expenditure
required. Where the liability will not be settled for a number of years,
the amount recognized is the present value of the estimated future
expenditure.
Employee benefits
Wages, salaries, bonuses, social security contributions, paid annual leave
and sick leave are accrued in the period in which the associated services
are rendered by employees of the group. Deferred bonus arrangements
that have a vesting date more than 12 months after the period end are
valued on an actuarial basis using the projected unit credit method and
amortized on a straight-line basis over the service period until the award
vests. The accounting policies for share-based payments and for pensions
and other post-retirement benefits are described below.
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 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 plan assets, adjusted for the forecasts 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 other
comprehensive income in the year 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.