BP 2005 Annual Report Download - page 122

120 Making energy more
Notes on financial statements continued
50 First-time adoption of International Financial Reporting Standards continued
Share-based payments Under UK GAAP, BP recognized as an expense the costs of the potential awards for the long-term incentive plans
(Executive Directors’ Incentive Plan and the Long Term Performance Plan) and certain other share-based schemes. The costs of awards under the
long-term incentive plans were accrued over the performance period of each plan, based on the estimated actual cost of shares, and an adjustment
was made to reflect the actual cost when the final award was confirmed. The cost of other share-based schemes was based on the fair value of
the awards.
IFRS requires the fair value of the option and share awards that ultimately vest to be charged to the income statement over the vesting or
performance period. The fair value is determined at the date of the grant using an appropriate pricing model (i.e. a binomial model). If an award fails to
vest as the result of certain types of performance condition not being satisfied, the charge to the income statement will be adjusted to reflect this.
BP has developed a binomial (or lattice-type) pricing model, which has been used to arrive at the fair value at the grant date of the share option
schemes and part of the award under the long-term incentive plans. The other part of the long-term incentive plans is based on market conditions
and has been valued using a Monte Carlo model.
Although IFRS 1 allows entities to restrict the recognition of the expense of share-based payments to those schemes granted after 7 November
2002 that have not vested as of 1 January 2005, BP has elected to apply IFRS 2 ‘Share-based Payment’ fully retrospectively.
Increase (decrease) in caption heading $ million
Years ended
31 December
2004 2003
Production and manufacturing expenses 28 25
Distribution and administration expenses 58 70
Taxation (62) (56)
Profit for the year (24) (39)
$ million
At 31 December 1 January
2004 2003 2003
Deferred tax liabilities (353) (235) (179)
Total equity 353 235 179
Asset swaps and fair value adjustment Under UK GAAP asset swaps are generally treated as exchanges of assets at net book value, with no gain or
loss resulting from them. IFRS requires assets acquired in asset exchanges to be accounted for at fair value at the date of the transaction, with any
gain or loss recognized in income.
In 2000, BP agreed to a transaction with its partners in the Prudhoe Bay field in Alaska whereby it received an increase in its natural gas interest
in return for a reduction in its share of liquids production.
In 2001, BP undertook a transaction with Solvay that led to the exchange of businesses for an interest in a joint venture and an associated
undertaking. The transaction has been recorded at fair value for IFRS. On 1 November 2004 BP acquired Solvay’s interests in these ventures and
has accounted for this as a business combination.
Increase (decrease) in caption heading $ million
Years ended
31 December
2004 2003
Depreciation, depletion and amortization (12) (5)
Taxation (27) 3
Profit for the year 39 2
$ million
At 31 December 1 January
2004 2003 2003
Property, plant and equipment (340) (269) (280)
Non-current liabilities – accruals and deferred income (48) (53) (52)
Deferred tax liabilities (102) (76) (80)
Total equity (190) (140) (148)