BP 2005 Annual Report Download - page 23

BP Annual Report and Accounts 2005 21
following adjustments would have been necessary in the
financial statements for the years ended 31 December 2004
and 2003:
••• All derivatives, including embedded derivatives, would
have been brought on to the balance sheet at fair value.
••• Available-for-sale investments would have been carried at
fair value rather than at cost.
The principal differences for the group between
reporting on the basis of UK GAAP and IFRS are as follows:
••• Ceasing to amortize goodwill.
••• Setting up deferred taxation on acquisitions; inventory
valuation differences; and unremitted earnings of
subsidiaries, jointly controlled entities and associates.
••• Expensing a greater proportion of major
maintenance costs.
••• No longer recognizing dividends proposed but not
declared as a liability at the balance sheet date.
••• Recognizing an expense for the fair value of employee
share option schemes.
••• Recording asset swaps on the basis of fair value.
••• Recognizing changes in the fair value of embedded
derivatives in the income statement.
Further information regarding the impact of adopting
IFRS is shown in Note 50 on financial statements, First-time
adoption of International Financial Reporting Standards.
The new accounting policies adopted by the group are
summarized on pages 30-38.
Inherent in the application of many of the accounting
policies used in the preparation of the financial statements
is the need for BP management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities at the date of the accounts and the reported amounts
of revenues and expenses during the reporting period. Actual
outcomes could differ from the estimates and assumptions
used. The following summary provides further information
about the critical accounting policies that could have a
significant impact on the results of the group and should be
read in conjunction with the Notes on financial statements.
The accounting policies and areas that require the most
significant judgements and estimates to be used in the
preparation of the consolidated financial statements are
in relation to oil and natural gas accounting, including the
estimation of reserves, the recoverability of asset carrying
values, contingent liabilities, provisions and liabilities,
pensions and other post-retirement benefits and
deferred taxation.
Oil and natural gas accounting Accounting for oil and gas
exploration and development activity is subject to special
accounting rules that are unique to the oil and gas industry.
In the absence of an IFRS dealing specifically with oil and
gas accounting (IFRS 6 ‘Exploration for and Evaluation
of Mineral Resources’ only addresses limited areas), BP
continues to have regard to the accounting guidance for
oil and gas companies contained in the UK Statement of
Recommended Practice, ‘Accounting for Oil and Gas
Exploration, Development, Production and Decommissioning
Activities’ (UK SORP).
Other financial issues
CRITICAL ACCOUNTING POLICIES AND NEW ACCOUNTING STANDARDS
For all periods up to and including the year ended
31 December 2004, BP prepared its financial statements in
accordance with UK generally accepted accounting practice
(UK GAAP). BP, together with all other European Union (EU)
companies listed on an EU stock exchange, was required
to prepare consolidated financial statements in accordance
with International Financial Reporting Standards (IFRSs)
as adopted by the EU with effect from 1 January 2005.
The Annual Report and Accounts for the year ended
31 December 2005 comprises BP’s first consolidated financial
statements prepared under IFRS. The financial statements
of the parent company are still prepared under UK GAAP.
In preparing these financial statements, the group has
complied with all IFRSs applicable for periods beginning on
or after 1 January 2005. In addition, BP has also decided
to adopt early IFRS 6 ‘Exploration for and Evaluation of
Mineral Resources’, the amendment to IAS 19 ‘Amendment
to International Accounting Standard IAS 19 Employee
Benefits: Actuarial Gains and Losses, Group Plans and
Disclosures’, the amendment to IAS 39 ‘Amendment to
International Accounting Standard IAS 39 Financial
Instruments: Recognition and Measurement: Cash Flow
Hedge Accounting of Forecast Intragroup Transactions’ and
IFRIC 4 ‘Determining whether an Arrangement contains a
Lease’. The EU has adopted all standards and interpretations
adopted by BP for its 2005 reporting.
The general principle that should be applied on first-time
adoption of IFRS is that standards in force at the first
reporting date (for BP, 31 December 2005) should be applied
retrospectively. However, IFRS 1 ‘First-time Adoption of
International Financial Reporting Standards’ (IFRS 1)
contains a number of exemptions that companies are
permitted to apply. BP has taken the following exemptions:
••• Comparative information on financial instruments is
prepared in accordance with UK GAAP and the group
has adopted IAS 32 ‘Financial Instruments: Disclosure
and Presentation’ (IAS 32) and IAS 39 ‘Financial
Instruments: Recognition and Measurement’ (IAS 39)
from 1 January 2005.
••• IFRS 3 ‘Business Combinations’ has not been applied
to acquisitions of subsidiaries or of interests in jointly
controlled entities and associates that occurred before
1 January 2003.
••• Cumulative currency translation differences for all foreign
operations are deemed to be zero at 1 January 2003.
••• The group has recognized all cumulative actuarial gains
and losses on pensions and other post-retirement
benefits as at 1 January 2003 directly in equity.
••• IFRS 2 ‘Share-based Payment’ has been applied
retrospectively to all share-based payments that had not
vested before 1 January 2003.
As indicated above, BP adopted IAS 32 and IAS 39 with
effect from 1 January 2005 and, as permitted under IFRS 1,
the group has not restated comparative information. Had
IAS 32 and IAS 39 been applied from 1 January 2003, the