BP 2013 Annual Report Download - page 135

1. Significant accounting policies, judgements, estimates and assumptions – continued
Significant estimate or judgement
Determination as to whether, and how much, an asset is impaired involves management estimates on highly uncertain matters such as future
commodity prices, the effects of inflation on operating expenses, discount rates, production profiles and the outlook for global or regional market
supply-and-demand conditions for crude oil, natural gas and refined products.
For oil and natural gas properties, the expected future cash flows are estimated using management’s best estimate of future oil and natural gas
prices and reserves volumes. Prices for oil and natural gas used for future cash flow calculations are based on market prices for the first five years
and the group’s long-term price assumptions thereafter. As at 31 December 2013, the group’s long-term price assumptions were $90 per barrel for
Brent and $6.50/mmBtu for Henry Hub (2012 $90 per barrel and $6.50/mmBtu). These long-term price assumptions are subject to periodic review
and revision. The estimated future level of production is based on assumptions about future commodity prices, production and development costs,
field decline rates, current fiscal regimes and other factors.
For value in use calculations, future cash flows are adjusted for risks specific to the cash-generating unit and are discounted using a pre-tax discount
rate. The discount rate is derived from the group’s post-tax weighted average cost of capital and is adjusted where applicable to take into account
any specific risks relating to the country where the cash-generating unit is located, although other rates may be used if appropriate to the specific
circumstances. In 2013 the rates ranged from 12% to 14% nominal (2012 12% to 14% nominal). The discount rates applied in assessments of
impairment are reassessed each year. In cases where fair value less costs to sell is used to determine the recoverable amount of an asset, where
recent market transactions for the asset are not available for reference, accounting judgements are made about the assumptions market participants
would use when pricing the asset. Fair value less costs to sell may be determined based on similar recent market transaction data or using
discounted cash flow techniques. Where discounted cash flow analyses are used to calculate fair value less costs to sell, the discount rate used is
the group’s post-tax weighted average cost of capital.
Irrespective of whether there is any indication of impairment, BP is required to test annually for impairment of goodwill acquired in a business
combination. The group carries goodwill of approximately $12.2 billion on its balance sheet (2012 $12.2 billion), principally relating to the Atlantic
Richfield, Burmah Castrol, Devon Energy and Reliance transactions. In testing goodwill for impairment, the group uses a similar approach to that
described above for asset impairment. If there are low oil or natural gas prices or refining margins or marketing margins for an extended period, the
group may need to recognize significant goodwill impairment charges.
The recoverability of intangible exploration and appraisal expenditure is covered under Oil and natural gas exploration, appraisal and development
expenditure above.
Details of impairment charges recognized in the income statement are provided in Note 5 and details on the carrying amounts of assets are shown
in Note 14, Note 15 and Note 16.
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.
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 assets
Financial assets are classified as loans and receivables; financial assets at fair value through profit or loss; derivatives designated as hedging
instruments in an effective hedge; held-to-maturity financial assets; or as available-for-sale financial assets, as appropriate. Financial assets include cash
and cash equivalents, trade receivables, other receivables, loans, other investments, and derivative financial instruments. The group determinesthe
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. Cash and cash equivalents are short-term highly liquid investments that are readily convertible to known amounts of cash, are
subject to insignificant risk of changes in value and have a maturity of three months or less from the date of acquisition.
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.
Held-to-maturity financial assets
Held-to-maturity financial assets are non-derivative financial assets with fixed or determinable payments and fixed maturity that management has the
positive intention and ability to hold to maturity. They are measured at amortized cost using the effective interest method, less any impairment.
Financial statements
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