BP 2012 Annual Report Download - page 193

1. Significant accounting policies continued
Other than the unwinding of 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 asset. 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 that 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 at each
balance sheet date and recognized as an expense over the vesting period,
with a corresponding liability for the cumulative expense 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 plan
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 plan 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 plans are recognized in the income
statement in the period in which they become payable.
Corporate taxes
Income tax expense represents the sum of current tax and deferred tax.
Interest and penalties relating to tax are also included in income tax
expense.
Income tax is recognized in the income statement, except to the extent
that it relates to items recognized in other comprehensive income or
directly in equity, in which case the related tax is recognized in other
comprehensive income or directly in equity.
Current tax is based on the taxable profit for the period. Taxable profit
differs from net profit as reported in the income statement because it is
determined in accordance with the rules established by the applicable
taxation authorities. It therefore excludes items of income or expense that
are taxable or deductible in other periods as well as items that are never
taxable or deductible. The group’s liability for current tax is calculated
using tax rates and laws that have been enacted or substantively enacted
by the balance sheet date.
Deferred tax is provided, using the liability method, on all temporary
differences at the balance sheet date between the tax bases of assets
and liabilities and their carrying amounts for financial reporting purposes.
Deferred tax liabilities are recognized for all taxable temporary differences
except:
• Where the deferred tax liability arises on the initial recognition of
goodwill; or
Financial statements 191
BP Annual Report and Form 20-F 2012
Financial statements