BP 2013 Annual Report Download - page 131

1. Significant accounting policies, judgements, estimates and assumptions – continued
Interests in other entities
Business combinations and goodwill
A business combination is a transaction or other event in which an acquirer obtains control of one or more businesses. A business is an integrated set
of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends or lower costs or
other economic benefits directly to investors or other owners or participants. A business consists of inputs and processes applied to those inputs that
have the ability to create outputs.
Business combinations are accounted for using the acquisition method. The identifiable assets acquired and liabilities assumed are measured at their
fair values at the acquisition date. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition-
date fair value, and the amount of any non-controlling interest in the acquiree. Non-controlling interests are stated either at fair value or at the
proportionate share of the recognized amounts of the acquiree’s identifiable net assets. Acquisition costs incurred are expensed and included in
distribution and administration expenses.
Goodwill is initially measured as the excess of the aggregate of the consideration transferred, the amount recognized for any non-controlling interest
and the acquisition-date fair values of any previously held interest in the acquiree over the fair value of the identifiable assets acquired and liabilities
assumed at the acquisition date.
At the acquisition date, any goodwill acquired is allocated to each of the cash-generating units, or groups of cash-generating units, expected to benefit
from the combination’s synergies.
Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment annually or
more frequently if events or changes in circumstances indicate the recoverable amount of the cash-generating unit to which the goodwill relates
should be assessed. Where the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognized. An
impairment loss recognized for goodwill is not reversed in a subsequent period.
Goodwill arising on business combinations prior to 1 January 2003 is stated at the previous carrying amount, less subsequent impairments, under UK
generally accepted accounting practice.
Goodwill may also arise upon investments in joint ventures and associates, being the surplus of the cost of investment over the group’s share of the
net fair value of the identifiable assets and liabilities. Such goodwill is recorded within the corresponding investment in joint ventures and associates,
and any impairment of the investment is included within the group’s share of earnings from joint ventures and associates.
Interests in joint arrangements
A joint arrangement is an arrangement of which two or more parties have joint control. Joint control is the contractually agreed sharing of control of an
arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.
A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement.
The results, assets and liabilities of a joint venture are incorporated in these financial statements using the equity method of accounting as described
below.
Certain of the group’s activities, particularly in the Upstream segment, are conducted through joint operations, which are joint arrangements whereby
the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement. BP
recognizes, on a line-by-line basis in the consolidated financial statements, its share of the assets, liabilities and expenses of these joint operations
incurred jointly with the other partners, along with the group’s income from the sale of its share of the output and any liabilities and expenses that the
group has incurred in relation to the joint operation.
Interests in associates
An associate is an entity over which the group has significant influence, through the power to participate in the financial and operating policy decisions
of the investee, but which is not a subsidiary or a joint arrangement. The results, assets and liabilities of an associate are incorporated in these financial
statements using the equity method of accounting as described below.
Significant estimate or judgement
Judgement is required in assessing the level of control obtained in a transaction to acquire an interest in another entity: depending upon the facts
and circumstances in each case, BP may obtain control, joint control or significant influence over the entity or arrangement. Transactions which give
BP control of a business are business combinations. If BP obtains joint control of an arrangement, judgement is also required to assess whether the
arrangement is a joint operation or a joint venture. If BP has neither control nor joint control, it may be in a position to exercise significant influence
over the entity, which is then accounted for as an associate.
Accounting for business combinations and acquisitions of investments in equity-accounted joint ventures and associates requires judgements and
estimates to be made in order to determine the fair value of the consideration transferred, together with the fair values of the assets acquired and
the liabilities assumed in a business combination, or the identifiable assets and liabilities of the equity-accounted entity at the acquisition date. The
group uses all available information, including external valuations and appraisals where appropriate, to determine these fair values. If necessary, the
group has up to one year from the acquisition date to finalize the determinations of fair value for business combinations.
At 31 December 2013, and since the transaction described in Note 6 concluded on 21 March 2013, BP owned 19.75% of the voting shares of OJSC
Oil Company Rosneft (Rosneft), a Russian oil and gas company. The Russian federal government, through its investment company OJSC
Rosneftegaz, owned 69.5% of the voting shares of Rosneft at 31 December 2013. BP uses the equity method of accounting for its investment in
Rosneft because under IFRS it is considered to have significant influence. Significant influence is defined as the power to participate in the financial
and operating policy decisions of the investee but is not control or joint control. IFRS identifies several indicators that may provide evidence of
significant influence, including representation on the board of directors of the investee and participation in policy-making processes. BP’s group chief
executive, Bob Dudley, has been elected to the board of directors of Rosneft, he is a member of the Rosneft board’s Strategic Planning Committee
and he participated in Rosneft’s steering committee to integrate TNK-BP. Furthermore, under the Rosneft Charter BP has the right to nominate a
second director to Rosneft’s nine-person board of directors for election at a general meeting of shareholders should it choose to do so in the future.
In addition, BP holds the voting rights at general meetings of shareholders conferred by its 19.75% stake in Rosneft. In management’s judgement,
the group has significant influence over Rosneft, as defined by the relevant accounting standard, and the investment is therefore accounted for as an
associate. BP’s share of Rosneft’s oil and natural gas reserves is included in the estimated net proved reserves of equity-accounted entities.
Financial statements
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