BP 2012 Annual Report Download - page 293

Notes on financial statements
1. Accounting policies
Accounting standards
These accounts are prepared on a going concern basis and in accordance
with the Companies Act 2006 and applicable UK accounting standards.
Accounting convention
The financial statements are prepared under the historical cost
convention.
Foreign currency transactions
Functional currency is the currency of the primary economic environment
in which an entity operates and is normally the currency in which the
entity primarily generates and expends cash. Transactions in foreign
currencies are initially recorded in the functional currency by applying the
rate of exchange ruling at the date of the transaction. Monetary assets
and liabilities denominated in foreign currencies are retranslated into the
functional currency at the rate of exchange ruling at the balance sheet
date. Any resulting exchange differences are included in profit for the
year. Exchange adjustments arising when the opening net assets and the
profits for the year retained by non-US dollar functional currency branches
are translated into US dollars are taken to a separate component of equity
and reported in the statement of total recognized gains and losses.
Investments
Investments in subsidiaries and associated undertakings are recorded at
cost. The company assesses investments for impairment whenever
events or changes in circumstances indicate that the carrying value of an
investment may not be recoverable. If any such indication of impairment
exists, the company makes an estimate of its recoverable amount. Where
the carrying amount of an investment exceeds its recoverable amount,
the investment is considered impaired and is written down to its
recoverable amount.
Share-based payments
Equity-settled transactions
The cost of equity-settled transactions with employees of the company
and other members of the group 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
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 effect on the fair value of plan assets 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 the statement of
total recognized gains and losses in the period 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. The surplus or
deficit, net of taxation thereon, is presented separately above the total for
net assets on the face of the balance sheet.
The BP Pension Fund is operated in a way that does not allow the
individual participating employing companies in the pension fund to
identify their share of the underlying assets and liabilities of the fund, and
hence the company recognizes the full defined benefit pension plan
surplus or deficit in its balance sheet.
Deferred taxation
Deferred tax is recognized in respect of all timing differences that have
originated but not reversed at the balance sheet date where transactions
or events have occurred at that date that will result in an obligation to pay
more, or a right to pay less, tax in the future.
Deferred tax assets are recognized only to the extent that it is considered
more likely than not that there will be suitable taxable profits from which
the underlying timing differences can be deducted.
Deferred tax is measured on an undiscounted basis at the tax rates that
are expected to apply in the periods in which timing differences reverse,
based on tax rates and laws enacted or substantively enacted at the
balance sheet date.
Use of estimates
The preparation of accounts in conformity with generally accepted
accounting practice requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the accounts and the reported amounts of revenues and
expenses during the reporting period. Actual outcomes could differ from
these estimates.
The parent company financial statements of BP p.l.c. on pages PC1–PC11 do not form part of BP’s Annual Report on Form 20-F as filed with the SEC.
Financial statements
Parent company financial statements of BP p.l.c. PC4
BP Annual Report and Form 20-F 2012