BP 2011 Annual Report Download - page 230

228 BP Annual Report and Form 20-F 2011
Notes on financial statements
33. Derivative financial instruments continued
Embedded derivative assets and liabilities have the following fair values and maturities.
$ million
2011
Less than
1 year 1-2 years 2-3 years 3-4 years 4-5 years
Over
5 years Total
Liabilities – commodity price contracts (347) (319) (306) (236) (134) (75) (1,417)
Net fair value (347) (319) (306) (236) (134) (75) (1,417)
$ million
2010
Less than
1 year 1-2 years 2-3 years 3-4 years 4-5 years
Over
5 years Total
Assets – commodity price contracts 18 –––––18
Liabilities – commodity price contracts (325) (326) (285) (281) (212) (196) (1,625)
– other embedded derivatives –(29) (60) – – –(89)
Net fair value (307) (355) (345) (281) (212) (196) (1,696)
The following table shows the changes during the year in the net fair value of embedded derivatives, within level 3 of the fair value hierarchy.
$ million
2011 2010
Commodity
price
Commodity
price
Net fair value of contracts at 1 January (1,607) (1,331)
Settlements 301 37
Losses recognized in the income statement (106) (350)
Exchange adjustments (5) 37
Net fair value of contracts at 31 December (1,417) (1,607)
The amount recognized in the income statement for the year relating to level 3 embedded derivatives still held at 31 December 2011 was a $106 million
loss (2010 $350 million loss relating to embedded derivatives still held at 31 December 2010).
The fair value gain (loss) on embedded derivatives is shown below.
$ million
2011 2010 2009
Commodity price embedded derivatives 190 (309) 607
Other embedded derivatives (122) – –
Fair value gain (loss) 68 (309) 607
Cash flow hedges
At 31 December 2011, the group held currency forwards and futures contracts and cylinders that were being used to hedge the foreign currency risk of
highly probable forecast transactions. Note 26 outlines the management of risk aspects for currency risk. For cash flow hedges the group only claims
hedge accounting for the intrinsic value on the currency with any fair value attributable to time value taken immediately to the income statement.
There were no highly probable transactions for which hedge accounting has been claimed that have not occurred and no significant element of hedge
ineffectiveness requiring recognition in the income statement. For cash flow hedges the pre-tax amount removed from equity during the period and
included in the income statement is a gain of $195 million (2010 gain of $25 million and 2009 loss of $366 million). The entire gain of $195 million is
included in production and manufacturing expenses (2010 $25 million gain in production and manufacturing expense; 2009 $332 million loss in production
and manufacturing expense and $34 million loss in finance costs). The amount removed from equity during the period and included in the carrying amount
of non-financial assets was a gain of $13 million (2010 $53 million loss and 2009 $136 million loss).
The amounts retained in equity at 31 December 2011 consist of deferred losses of $78 million maturing in 2012, deferred losses of $39 million
maturing in 2013 and deferred losses of $30 million maturing in 2014 and beyond.
Fair value hedges
At 31 December 2011, the group held interest rate and cross-currency interest rate swap contracts as fair value hedges of the interest rate risk on
fixed rate debt issued by the group. The effectiveness of each hedge relationship is quantitatively assessed and demonstrated to continue to be highly
effective. The gain on the hedging derivative instruments taken to the income statement in 2011 was $328 million (2010 $563 million gain and 2009 $98
million loss) offset by a loss on the fair value of the finance debt of $327 million (2010 $554 million loss and 2009 $117 million gain).
The interest rate and cross-currency interest rate swaps mature within one to 10 years, with an average maturity of four to five years (2010 four
to five years) and are used to convert sterling, euro, Swiss franc, Australian dollar, Japanese yen and Hong Kong dollar denominated borrowings into US
dollar floating rate debt. Note 26 outlines the group’s approach to interest rate and currency risk management.