BP 2006 Annual Report Download - page 105

BP Annual Report and Accounts 2006 103
1 Significant accounting policies continued
An assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or
may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognized impairment loss is reversed only if there
has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognized. If that is the
case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would
have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in profit or
loss. After such a reversal, the depreciation charge is adjusted in future periods to allocate the asset’s revised carrying amount, less any residual value,
on a systematic basis over its remaining useful life.
Financial assets
Financial assets are classified as loans and receivables; available-for-sale financial assets; financial assets at fair value through profit or loss; oras
derivatives designated as hedging instruments in an effective hedge, as appropriate. Financial assets include cash and cash equivalents; trade
receivables; other receivables; loans; other investments; and derivative financial instruments. The group determines the classification of its financial
assets at initial recognition. When financial assets are recognized initially, they are measured at fair value, normally being the transaction price plus, in
the case financial assets not at fair value through profit or loss, directly attributable transaction costs. As explained in Note 49, the group has not
restated comparative amounts on first applying IAS 32 and IAS 39, as permitted in IFRS 1 ‘First-time Adoption of International Financial Reporting
Standards’.
The subsequent measurement of financial assets depends on their classification, as follows:
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are
carried at amortized cost using the effective interest method if the time value of money is significant. Gains and losses are recognized in income when
the loans and receivables are derecognized or impaired, as well as through the amortization process.
Available-for-sale financial assets
Available-for-sale financial assets are those non-derivative financial assets that are not classified as loans and receivables. After initial recognition,
available-for-sale financial assets are measured at fair value, with gains or losses being recognized as a separate component of equity until the
investment is derecognized or until the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in equity
is included in the income statement.
The fair value of quoted investments is determined by reference to bid prices at the close of business on the balance sheet date. Where there is no
active market, fair value is determined using valuation techniques. These include using recent arm’s-length market transactions; reference to the current
market value of another instrument which is substantially the same; discounted cash flow analysis; and pricing models. Where fair value cannot be
reliably estimated, assets are carried at cost.
Financial assets at fair value through profit or loss
Derivatives, other than those designated as hedging instruments, are classified as held for trading and are included in this category. These assets are
carried on the balance sheet at fair value with gains or losses recognized in the income statement.
Derivatives designated as hedging instruments in an effective hedge
Such derivatives are carried on the balance sheet at fair value, the treatment of gains and losses arising from revaluation are described below in the
accounting policy for Derivative financial instruments.
Impairment of financial assets
The group assesses at each balance sheet date whether a financial asset or group of financial assets is impaired.
Loans and receivables
If there is objective evidence that an impairment loss on loans and receivables carried at amortized cost has been incurred, the amount of the loss is
measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the financial
asset’s original effective interest rate. The carrying amount of the asset is reduced, with the amount of the loss recognized in administration costs.
Available-for-sale financial assets
If an available-for-sale financial asset is impaired, an amount comprising the difference between its cost (net of any principal payment and amortization)
and its fair value is transferred from equity to the income statement.
If there is objective evidence that an impairment loss on an unquoted equity instrument that is not carried at fair value because its fair value cannot be
reliably measured, or on a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument, has been incurred,
the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows
discounted at the current market rate of return for a similar financial asset.
Financial assets are derecognized on sale or settlement.
Inventories
Inventories, other than inventory held for trading purposes, are stated at the lower of cost and net realizable value. Cost is determined by the first-in
first-out method and comprises direct purchase costs, cost of production, transportation and manufacturing expenses.
Inventories held for trading purposes are stated at fair value less costs to sell and any changes in net realizable value are recognized in the income
statement.
Supplies are valued at cost to the group mainly using the average method or net realizable value, whichever is the lower.
Trade and other receivables
Trade and other receivables are carried at the original invoice amount, less allowances made for doubtful receivables. Where the time value of money is
material, receivables are carried at amortized cost. Provision is made when there is objective evidence that the group will be unable to recover balances
in full. Balances are written off when the probability of recovery is assessed as being remote.