BP 2006 Annual Report Download - page 103

BP Annual Report and Accounts 2006 101
1 Significant accounting policies continued
Interests in associates
An associate is an entity over which the group is in a position to exercise significant influence through participation in the financial and operating policy
decisions of the investee, but which is not a subsidiary or a jointly controlled entity.
The results, assets and liabilities of an associate are incorporated in these financial statements using the equity method of accounting as described
above for jointly controlled entities.
Foreign currency translation
Functional currency is the currency of the primary economic environment in which a company operates and is normally the currency in which the
company primarily generates and expends cash.
In individual companies, transactions in foreign currencies are initially recorded in the functional currency by applying the rate of exchange ruling at the
date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the rate of
exchange ruling at the balance sheet date. Any resulting exchange differences are included in the income statement. Non-monetary assets and liabilities
that are measured in terms of historical cost in a foreign currency are translated into the functional currency using the rates of exchange as at the dates
of the initial transactions. Non-monetary assets and liabilities measured at fair value in a foreign currency are translated into the functional currency using
the rate of exchange at the date the fair value was determined.
In the consolidated financial statements, the assets and liabilities of non-US dollar functional currency subsidiaries, jointly controlled entities and
associates, including related goodwill, are translated into US dollars at the rate of exchange ruling at the balance sheet date. The results and cash flows
of non-US dollar functional currency subsidiaries, jointly controlled entities and associates are translated into US dollars using average rates of exchange.
Exchange adjustments arising when the opening net assets and the profits for the year retained by non-US dollar functional currency subsidiaries, jointly
controlled entities and associates are translated into US dollars are taken to a separate component of equity and reported in the statement of recognized
income and expense. Exchange gains and losses arising on long-term intragroup foreign currency borrowings used to finance the group’s non-US dollar
investments are also taken to equity. On disposal of a non-US dollar functional currency subsidiary, jointly controlled entity or associate, the deferred
cumulative amount recognized in equity relating to that particular non-US dollar operation is recognized in the income statement.
Business combinations and goodwill
Business combinations are accounted for using the acquisition method of accounting. The cost of an acquisition is measured as the cash paid and the
fair value of other assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to
the acquisition. The acquired identifiable assets, liabilities and contingent liabilities are measured at their fair values at the date of acquisition. Any excess
of the cost of acquisition over the net fair value of the identifiable assets, liabilities and contingent liabilities acquired is recognized as goodwill. Any
deficiency of the cost of acquisition below the fair values of the identifiable net assets acquired (i.e. discount on acquisition) is credited to the income
statement in the period of acquisition. Where the group does not acquire 100% ownership of the acquired company, the interest of minority
shareholders is stated at the minority’s proportion of the fair values of the assets and liabilities recognized. Subsequently, any losses applicabletothe
minority shareholders in excess of the minority interest are allocated against the interests of the parent.
Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment annually or
more frequently if events or changes in circumstances indicate that the carrying value may be impaired.
At the acquisition date, any goodwill acquired is allocated to each of the cash-generating units expected to benefit from the combination’s synergies.
For this purpose, cash-generating units are set at one level below a business segment. Impairment is determined by assessing the recoverable amount
of the cash-generating unit to which the goodwill relates. Where the recoverable amount of the cash-generating unit is less than the carrying amount, an
impairment loss is recognized.
Goodwill arising on business combinations prior to 1 January 2003 is stated at the previous UK GAAP carrying amount.
Goodwill may also arise upon investments in jointly controlled entities and associates, being the surplus of the cost of investment over the group’s
share of the net fair value of the identifiable assets. Such goodwill is recorded within investments in jointly controlled entities and associates, andany
impairment of the goodwill is included within the earnings from jointly controlled entities and associates.
Non-current assets held for sale
Non-current assets and disposal groups classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell.
Non-current assets and disposal groups are classified as held for sale if their carrying amounts will be recovered through a sale transaction rather than
through continuing use. This condition is regarded as met only when the sale is highly probable and the asset or disposal group is available for
immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a
completed sale within one year from the date of classification.
Property, plant and equipment and intangible assets once classified as held for sale are not depreciated.
Intangible assets
Intangible assets are stated at the amount initially recognized, less accumulated amortization and accumulated impairment losses. Intangible assets
include expenditure on the exploration for and evaluation of oil and natural gas resources, computer software, patents, licences and trademarks.
Intangible assets acquired separately from a business are carried initially at cost. The initial cost is the aggregate amount paid and the fair value ofany
other consideration given to acquire the asset. An intangible asset acquired as part of a business combination is recognized separately from goodwillif
the asset is separable or arises from contractual or other legal rights and its fair value can be measured reliably.
Intangible assets with a finite life are amortized on a straight-line basis over their expected useful lives. For patents, licences and trademarks,
expected useful life is the shorter of the duration of the legal agreement and economic useful life, which can range from three to 15 years. Computer
software costs have a useful life of three to five years.
The expected useful lives of assets are reviewed on an annual basis and, if necessary, changes in useful lives are accounted for prospectively.
The carrying value of intangible assets is reviewed for impairment whenever events or changes in circumstances indicate the carrying value may not
be recoverable.
Oil and natural gas exploration and development expenditure
Oil and natural gas exploration and development expenditure is accounted for using the successful efforts method of accounting.