BP 2013 Annual Report Download - page 139

1. Significant accounting policies, judgements, estimates and assumptions – continued
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 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, where this is within
the control of the employee is treated as a cancellation and expensed.
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, resulting from either a plan amendment or a curtailment (a reduction in future obligations as
a result of a material reduction in the plan membership), are recognized immediately when the company becomes committed to a change.
Net interest expense relating to pensions and other post-retirement benefits represents the net change in present value of plan obligations and the
value of plan assets resulting from the passage of time, and is determined by applying the discount rate to the present value of the benefit obligation at
the start of the year, and to the fair value of plan assets at the start of the year, taking into account expected changes in the obligation or plan assets
during the year. Net interest expense relating to pensions and other post-retirement benefits is recognized in the income statement.
Remeasurements of the net defined benefit liability or asset, comprising actuarial gains and losses, and the return on plan assets (excluding amounts
included in net interest described above) are recognized within other comprehensive income 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.
Contributions to defined contribution plans are recognized in the income statement in the period in which they become payable.
Significant estimate or judgement
Accounting for pensions and other post-retirement benefits involves judgement about uncertain events, including estimated retirement dates, salary
levels at retirement, mortality rates, determination of discount rates for measuring plan obligations and net interest expense, assumptions for inflation
rates, US healthcare cost trend rates and rates of utilization of healthcare services by US retirees.
These assumptions are based on the environment in each country. The assumptions used may vary from year to year, which would affect future net
income and net assets. Any differences between these assumptions and the actual outcome also affect future net income and net assets.
Pension and other post-retirement benefit assumptions are reviewed by management at the end of each year. These assumptions are used to
determine the projected benefit obligation at the year end and hence the surpluses and deficits recorded on the group’s balance sheet, and pension
and other post-retirement benefit expense for the following year. In 2013, we adopted the revised version of IAS 19 ‘Employee Benefits’ (see below
for further information), and we now apply the same rate of return on plan assets as we use to discount our pension liabilities. The impact of this
change on key financial statement line items is shown at the end of this note.
The pension and other post-retirement benefit assumptions at 31 December 2013, 2012 and 2011 are provided in Note 30.
The discount rate, inflation rate and the US healthcare cost trend rate have a significant effect on the amounts reported. A sensitivity analysis of the
impact of changes in these assumptions on the benefit expense and obligation is provided in Note 30.
In addition to the financial assumptions, we regularly review the demographic and mortality assumptions. Mortality assumptions reflect best practice
in the countries in which we provide pensions and have been chosen with regard to the latest available published tables adjusted where appropriate
to reflect the experience of the group and an extrapolation of past longevity improvements into the future. A sensitivity analysis of the impact of
changes in the mortality assumptions on the benefit expense and obligation is provided in Note 30.
Income taxes
Income tax expense represents the sum of current tax and deferred tax. Interest and penalties relating to income tax are also included in the 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.
Financial statements
BP Annual Report and Form 20-F 2013 135