BP 2015 Annual Report Download - page 73

Corporate governance
* Undertaken jointly with the SEEAC.
Areas of audit committee focus in 2015
• Financial results announcements.
• Annual Report and Form 20-F.
• Accounting judgements and estimates.
• Developments in financial reporting
and accounting.
• Oil and gas reserves disclosure.
• Fair, balanced and understandable.*
• Confirmation of external auditor
independence.
• Non-audit fees: policy and approval.
• Audit plan, fees and engagement.
• Auditor performance and effectiveness.
• Proposed regulations for non-audit work.
• Key areas of judgement for year-end audit.
• Audit tendering.
• Cybersecurity.
• Trading, compliance and control.
• Compliance with business regulations.
• Review of the Downstream segment.
• Tax.
• Going concern.
• Succession and people development in
the finance function.
• Pensions and post-retirement benefits
assumptions.
• Review of effectiveness of BP’s system
of internal control and risk management.*
• Quarterly group audit reports.
• Quarterly significant allegations and
investigations reports.
• Quarterly ethics and compliance reports.
• Annual ethics certification.*
• Ethics and compliance function remit.*
• Principal risks, viability and significant
failings and weaknesses.*
Financial
disclosure
External
audit
Risk
reviews
System of internal
control and risk
management
Significant areas of accounting judgement considered by the committee during the year
Key issues/judgements in financial reporting Audit committee review
Oil and natural gas
accounting
BP uses judgement and estimations when accounting for oil
and gas exploration, appraisal and development expenditure
and determining the group’s estimated oil and gas reserves.
The committee reviewed judgemental aspects of oil and gas
accounting such as intangible asset balances relating to
exploration and appraisal activities as part of the company’s
quarterly due-diligence process. It also examined the
governance framework for the oil and gas reserves process,
training for staff and developments in regulations and
controls. Significant exploration write-offs during the year
were disclosed in the relevant quarter.
Recoverability of asset
carrying values
Determination as to whether and how much an asset is
impaired involves management judgement and estimates on
highly uncertain matters such as future pricing or discount
rates. Judgements are also required in assessing the
recoverability of overdue receivables and deciding whether
a provision is required.
The committee reviewed the discount rates for impairment
testing as part of its annual process and examined the
assumptions for long-term oil and gas prices and refining
margins. It received updates from management at each
quarter relating to market forward prices used for impairment
testing and considered whether any further impairment
indicators were present. The committee also reviewed
management’s approach to reviewing the carrying values of
upstream assets following further falls in market forward
prices. Significant impairments during the year were
disclosed as non-operating items★ in the relevant quarter.
Accounting for
interests in other
entities
BP exercises judgement when assessing the level of control
obtained in a transaction to acquire an interest in another
entity and when determining the fair value of assets acquired
and liabilities assumed, and the level of control which
continues to be exercised going forward.
The committee continued to review the accounting for BP’s
investment in Rosneft including the judgement on whether
the group has significant influence over Rosneft. During the
year the committee received reports from management and
the external auditor that assessed the extent of BP’s
influence, including participation in decision making through
the election of two BP nominees to the Rosneft board. It also
assessed other factors, including the signing of binding
agreements for BP to complete the purchase of a 20%
interest in Taas-Yuryakh Neftegazodobycha, a Rosneft
subsidiary.
The group’s trading
activities
BP uses judgement when estimating the fair value of some
derivative instruments in cases where there is an absence of
liquid market pricing information – for example, relating to
supply and trading activities.
The committee received a detailed briefing on the group’s
trading risk, controls and compliance and visited BP’s trading
floors in Houston and London. The committee considered the
controls in place to prevent unauthorized trading activity and
received information on the valuation of the group’s derivative
instruments and the financial models that are used.
Provisions and
contingencies
The group holds provisions for the future decommissioning of
oil and natural gas production facilities and pipelines at the
end of their economic lives. Most of these decommissioning
events are in the long term and the requirements that will
have to be met when a removal event occurs are uncertain.
Judgement is applied when estimating issues such as
settlement dates, technology and legal requirements.
The committee received briefings on the group’s
decommissioning, environmental remediation and litigation
provisioning, including key assumptions used, the governance
framework applied (covering accountabilities and controls),
discount rates and the movement in provisions over time.
★ Defined on page 256.BP Annual Report and Form 20-F 2015 69