BP 2006 Annual Report Download - page 104

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1 Significant accounting policies continued
Licence and property acquisition costs
Exploration and property leasehold acquisition costs are capitalized within intangible fixed assets and amortized on a straight-line basis over the
estimated period of exploration. Each property is reviewed on an annual basis to confirm that drilling activity is planned and it is not impaired. If no future
activity is planned, the remaining balance of the licence and property acquisition costs is written off. Upon determination of economically recoverable
reserves (‘proved reserves’ or ‘commercial reserves’), amortization ceases and the remaining costs are aggregated with exploration expenditure and
held on a field-by-field basis as proved properties awaiting approval within other intangible assets. When development is approved internally, the
relevant expenditure is transferred to property, plant and equipment.
Exploration expenditure
Geological and geophysical exploration costs are charged against income as incurred. Costs directly associated with an exploration well are capitalized
as an intangible asset until the drilling of the well is complete and the results have been evaluated. These costs include employee remuneration,
materials and fuel used, rig costs, delay rentals and payments made to contractors. If hydrocarbons are not found, the exploration expenditure is written
off as a dry hole. If hydrocarbons are found and, subject to further appraisal activity, which may include the drilling of further wells (exploration or
exploratory-type stratigraphic test wells), are likely to be capable of commercial development, the costs continue to be carried as an asset. All such
carried costs are subject to technical, commercial and management review at least once a year to confirm the continued intent to develop or otherwise
extract value from the discovery. When this is no longer the case, the costs are written off. When proved reserves of oil and natural gas are determined
and development is sanctioned, the relevant expenditure is transferred to property, plant and equipment.
Development expenditure
Expenditure on the construction, installation or completion of infrastructure facilities such as platforms, pipelines and the drilling of development wells,
including unsuccessful development or delineation wells, is capitalized within property, plant and equipment.
Property, plant and equipment
Property, plant and equipment is stated at cost, less accumulated depreciation and accumulated impairment losses.
The initial cost of an asset comprises its purchase price or construction cost, any costs directly attributable to bringing the asset into operation, the
initial estimate of any decommissioning obligation, if any, and, for qualifying assets, borrowing costs. The purchase price or construction cost is the
aggregate amount paid and the fair value of any other consideration given to acquire the asset. The capitalized value of a finance lease is also included
within property, plant and equipment.
Exchanges of assets are measured at the fair value of the asset given up unless the exchange transaction lacks commercial substance or the fair
value of neither the asset received nor the asset given up is reliably measurable.
Expenditure on major maintenance refits or repairs comprises the cost of replacement assets or parts of assets, inspection costs and overhaul costs.
Where an asset or part of an asset that was separately depreciated and is now written off is replaced and it is probable that future economic benefits
associated with the item will flow to the group, the expenditure is capitalized. Inspection costs associated with major maintenance programmes are
capitalized and amortized over the period to the next inspection. Overhaul costs for major maintenance programmes are expensed as incurred. All other
maintenance costs are expensed as incurred.
Oil and natural gas properties, including related pipelines, are depreciated using a unit-of-production method. The cost of producing wells is amortized
over proved developed reserves. Licence acquisition, decommissioning and field development costs are amortized over total proved reserves. The unit-
of-production rate for the amortization of field development costs takes into account expenditures incurred to date, together with sanctioned future
development expenditure.
Other property, plant and equipment is depreciated on a straight-line basis over its expected useful life.
The useful lives of the group’s other property, plant and equipment are as follows:
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Land improvements 15 to 25 years
Buildings 20 to 40 years
Refineries 20 to 30 years
Petrochemicals plants 20 to 30 years
Pipelines 10 to 50 years
Service stations 15 years
Office equipment 3 to 7 years
Fixtures and fittings 5 to 15 years
The expected useful lives of property, plant and equipment are reviewed on an annual basis and, if necessary, changes in useful lives are accounted
for prospectively.
The carrying value of property, plant and equipment is reviewed for impairment whenever events or changes in circumstances indicate the carrying
value may not be recoverable.
An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the
continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and
the carrying amount of the item) is included in the income statement in the period the item is derecognized.
Impairment of intangible assets and property, plant and equipment
The group assesses assets or groups of assets for impairment whenever events or changes in circumstances indicate that the carrying value of an
asset may not be recoverable. Individual assets are grouped for impairment assessment purposes at the lowest level at which there are identifiable
cash flows that are largely independent of the cash flows of other groups of assets. If any such indication of impairment exists, the group makes an
estimate of its recoverable amount. An asset group’s recoverable amount is the higher of its fair value less costs to sell and its value in use. Where the
carrying amount of an asset group exceeds its recoverable amount, the asset group is considered impaired and is written down to its recoverable
amount. In assessing value in use, the estimated future cash flows are adjusted for the risks specific to the asset group and are discounted to their
present value using a pre-tax discount rate that reflects current market assessments of the time value of money.