BP 2012 Annual Report Download - page 191

1. Significant accounting policies continued
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 impairment loss been recognized for the asset in
prior years. Such reversal is recognized in profit or loss. After such a
reversal, the depreciation charge is adjusted in future periods to allocate
the asset’s revised carrying amount, less any residual value, on a
systematic basis over its remaining useful life.
Financial assets
Financial assets are classified as loans and receivables; available-for-sale
financial assets; financial assets at fair value through profit or loss; or as
derivatives designated as hedging instruments in an effective hedge, as
appropriate. Financial assets include cash and cash equivalents, trade
receivables, other receivables, loans, other investments, and derivative
financial instruments. The group determines the classification of its
financial assets at initial recognition. Financial assets are recognized
initially at fair value, normally being the transaction price plus, in the case
of financial assets not at fair value through profit or loss, directly
attributable transaction costs.
The subsequent measurement of financial assets depends on their
classification, as follows:
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or
determinable payments that are not quoted in an active market. Such
assets are carried at amortized cost using the effective interest method if
the time value of money is significant. Gains and losses are recognized in
income when the loans and receivables are derecognized or impaired, as
well as through the amortization process. This category of financial assets
includes trade and other receivables.
Available-for-sale financial assets
Available-for-sale financial assets are those non-derivative financial assets
that are not classified as loans and receivables or financial assets at fair
value through profit or loss. After initial recognition, available-for-sale
financial assets are measured at fair value, with gains or losses recognized
within other comprehensive income. Accumulated changes in fair value
are recorded as a separate component of equity until the investment is
derecognized or impaired.
The fair value of quoted investments is determined by reference to bid
prices at the close of business on the balance sheet date. Where there is
no active market, fair value is determined using valuation techniques.
Where fair value cannot be reliably measured, assets are carried at cost.
Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss are carried on the
balance sheet at fair value with gains or losses recognized in the income
statement. Derivatives, other than those designated as effective hedging
instruments, are classified as held for trading and are included in this
category.
Derivatives designated as hedging instruments in an effective hedge
Such derivatives are carried on the balance sheet at fair value. The
treatment of gains and losses arising from revaluation is described below
in the accounting policy for derivative financial instruments and hedging
activities.
Impairment of financial assets
The group assesses at each balance sheet date whether a financial asset
or group of financial assets is impaired.
Loans and receivables
If there is objective evidence that an impairment loss on loans and
receivables carried at amortized cost has been incurred, the amount of the
loss is measured as the difference between the asset’s carrying amount
and the present value of estimated future cash flows discounted at the
financial asset’s original effective interest rate. The carrying amount of the
asset is reduced, with the amount of the loss recognized in the income
statement.
Available-for-sale financial assets
If an available-for-sale financial asset is impaired, the cumulative loss
previously recognized in equity is transferred to the income statement.
Any subsequent recovery in the fair value of the asset is recognized within
other comprehensive income.
If there is objective evidence that an impairment loss on an unquoted
equity instrument that is carried at cost has been incurred, the amount of
the loss is measured as the difference between the asset’s carrying
amount and the present value of estimated future cash flows discounted
at the current market rate of return for a similar financial asset.
Inventories
Inventories, other than inventory held for trading purposes, are stated at
the lower of cost and net realizable value. Cost is determined by the first-
in first-out method and comprises direct purchase costs, cost of
production, transportation and manufacturing expenses. Net realizable
value is determined by reference to prices existing at the balance sheet
date.
Inventories held for trading purposes are stated at fair value less costs to
sell and any changes in fair value are recognized in the income statement.
Supplies are valued at cost to the group mainly using the average method
or net realizable value, whichever is the lower.
Financial liabilities
Financial liabilities are classified as financial liabilities at fair value through
profit or loss; derivatives designated as hedging instruments in an
effective hedge; or as financial liabilities measured at amortized cost, as
appropriate. Financial liabilities include trade and other payables, accruals,
most items of finance debt and derivative financial instruments. The group
determines the classification of its financial liabilities at initial recognition.
The measurement of financial liabilities depends on their classification, as
follows:
Financial liabilities at fair value through profit or loss
Financial liabilities at fair value through profit or loss are carried on the
balance sheet at fair value with gains or losses recognized in the income
statement. Derivatives, other than those designated as effective hedging
instruments, are classified as held for trading and are included in this
category.
Derivatives designated as hedging instruments in an effective hedge
Such derivatives are carried on the balance sheet at fair value. The
treatment of gains and losses arising from revaluation is described below
in the accounting policy for derivative financial instruments and hedging
activities.
Financial liabilities measured at amortized cost
All other financial liabilities are initially recognized at fair value. For interest-
bearing loans and borrowings this is the fair value of the proceeds
received net of issue costs associated with the borrowing.
After initial recognition, other financial liabilities are subsequently
measured at amortized cost using the effective interest method.
Amortized cost is calculated by taking into account any issue costs, and
any discount or premium on settlement. Gains and losses arising on the
repurchase, settlement or cancellation of liabilities are recognized
respectively in interest and other income and finance costs.
This category of financial liabilities includes trade and other payables and
finance debt.
Leases
Finance leases, which transfer to the group substantially all the risks and
benefits incidental to ownership of the leased item, are capitalized at the
commencement of the lease term at the fair value of the leased item or, if
lower, at the present value of the minimum lease payments. Finance
charges are allocated to each period so as to achieve a constant rate of
interest on the remaining balance of the liability and are charged directly
against income.
Capitalized leased assets are depreciated over the shorter of the
estimated useful life of the asset or the lease term. Operating lease
payments are recognized as an expense in the income statement on a
straight-line basis over the lease term. For both finance and operating
leases, contingent rents are recognized in the income statement in the
period in which they are incurred.
Financial statements 189
BP Annual Report and Form 20-F 2012
Financial statements