BP 2015 Annual Report Download - page 203

1. Significant accounting policies, judgements, estimates and assumptions – continued
Net interest expense relating to pensions and other post-retirement benefits, which is recognized in the income statement, 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.
Remeasurements of the defined benefit liability and 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 and are not
subsequently reclassified to profit and loss.
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. Defined benefit pension plan
surpluses are only recognized to the extent they are recoverable.
Contributions to defined contribution plans are recognized in the income statement in the period in which they become payable.
Significant estimate or judgement: pensions and other post-retirement benefits
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 and assumptions for
inflation rates.
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. The assumptions used are provided in
Note 6.
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 company’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 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 taxable temporary differences.
Deferred tax assets are only recognized to the extent that it is probable that they will be realized in the future.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period when the asset is realized or the liability is
settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. Deferred tax assets and liabilities
are not discounted.
Significant estimate or judgement: deferred tax
Management judgement is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and level of
future taxable profits.
Financial assets
All financial assets held by the company are classified as loans and receivables. Financial assets include cash and cash equivalents, other receivables,
loans, and other investments. The company determines the classification of its financial assets at initial recognition. Financial assets are recognized
initially at fair value, normally being the transaction price plus directly attributable transaction costs.
Loans and receivables
Loans and receivables 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 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 liabilities
All financial liabilities held by the company are classified as financial liabilities measured at amortized cost. Financial liabilities include other payables,
accruals, and most items of finance debt. The company determines the classification of its financial liabilities at initial recognition.
Financial liabilities measured at amortized cost
All financial liabilities are initially recognized at fair value. For interest-bearing loans and borrowings this is the fair value of the proceeds received net of
issue costs associated with the borrowing.
After initial recognition, financial liabilities are subsequently measured at amortized cost using the effective interest method. Amortized cost is
calculated by taking into account any issue costs, and any discount or premium on settlement. Gains and losses arising on the repurchase, settlement
or cancellation of liabilities are recognized respectively in interest and other income and finance costs.
This category of financial liabilities includes other payables, financial guarantees and finance debt.
The parent company financial statements of BP p.l.c. on pages 196-213 do not form part of BP’s Annual Report on Form 20-F as filed with the SEC.
Financial statements
BP Annual Report and Form 20-F 2015 199