BP 2006 Annual Report Download - page 127

BP Annual Report and Accounts 2006 125
14 Impairment of goodwill continued
Exploration and Production
The value in use is based on the cash flows expected to be generated by the projected oil or natural gas production profiles up to the expected dates of
cessation of production of each producing field. The date of cessation of production depends on the interaction of a number of variables, such as the
recoverable quantities of hydrocarbons, the production profile of the hydrocarbons, the cost of the development of the infrastructure necessary to
recover the hydrocarbons, the production costs, the contractual duration of the production concession and the selling price of the hydrocarbons
produced. As each producing field has specific reservoir characteristics and economic circumstances, the cash flows of the fields are computed using
appropriate individual economic models and key assumptions agreed by BP’s management for the purpose. Cash outflows and hydrocarbon production
quantities for the first five years are agreed as part of the annual planning process. Thereafter, estimated production quantities and cash outflows up to
the date of cessation of production are developed to be consistent with this.
Consistent with prior years, the review for impairment was carried out during the fourth quarter of 2006 using data which was appropriate at that
time. As permitted by IAS 36, the detailed calculation made in 2005 was used for the 2006 impairment test on the goodwill allocated to the Rest of
World as the criteria of IAS 36 were considered to be satisfied in respect of this region: the excess of the recoverable amount over the carrying amount
was substantial in 2005; there had been no significant change in the assets and liabilities; and the likelihood that the recoverable amount would be less
than the carrying amount at the time of the test was remote. Therefore, the detailed impairment test for goodwill was reperformed only on the carrying
amounts in the UK and the US.
The following table shows the carrying value of the goodwill allocated to each of the regions of the Exploration and Production segment and the
amount by which the recoverable amount (value in use) exceeds the carrying amount of the goodwill and other non-current assets in the cash-
generating units to which the goodwill has been allocated. No impairment charge is required.
$ million
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2006
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
UK
Rest of
Europe USA
Rest of
World Total
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Goodwill 341 – 3,426 515 4,282
Excess of recoverable amount over carrying amount 7,886 n/a 28,856 n/a —
$ million
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2005
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
UK
Rest of
Europe USA
Rest of
World Total
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Goodwill 341 – 3,515 515 4,371
Excess of recoverable amount over carrying amount 3,205 n/a 6,421 n/a –
The key assumptions required for the value-in-use estimation are the oil and natural gas prices, production volumes and the discount rate. To test the
sensitivity of the excess of the recoverable amount over the carrying amount of goodwill and other non-current assets shown above (the headroom) to
changes in production volumes and oil and natural gas prices, management has developed ‘rules of thumb’ for key assumptions. Applying these gives
an indication of the impact on the headroom of possible changes in the key assumptions.
On the basis of the rules of thumb using estimated 2007 production profiles and an assumed average 15-year production life, it is estimated that the
long-term price of Brent that would cause the total recoverable amount to be equal to the total carrying amount of the goodwill and related non-current
assets for individual cash-generating units would be of the order of $31 per barrel for the UK and $28 per barrel for the US. No reasonably possible
change in oil or gas prices would cause the headroom in the Rest of the World to be reduced to zero.
Estimated production volumes are based on detailed data for the fields and take into account development plans for the fields agreed by
management as part of the long-term planning process. It is estimated that, if all our production were to be reduced by 10% for the whole of the next
15 years, this would not be sufficient to reduce the excess of recoverable amount over the carrying amounts of the individual cash generating units to
zero. Consequently, management believes no reasonably possible change in the production assumption would cause the carrying amount of goodwill
and other non-current assets to exceed their recoverable amount.
Management also believes that currently there is no reasonably possible change in discount rate which would reduce the group’s headroom to zero.
Refining and Marketing
For all cash generating units, the cash flows for the next four years are derived from the four-year business segment plan. The cost inflation rate is
assumed to be 2.5% (2005 assumption was 2.5%) throughout the period. For determining the value in use for each of the SPUs, cash flows for a
period of 10 years have been discounted and aggregated with its terminal value.
Refining
Cash flows beyond the four-year period are extrapolated using a 2% growth rate (2005 assumption was 2%).
The key assumptions to which the calculation of value in use for the Refining unit is most sensitive are gross margins, production volumes and the
terminal value. The value assigned to the gross margin is based on a $7.25 per barrel global indicator margin (GIM), which is then adjusted for specific
refinery configurations. In 2005 the value assigned to the gross margin was based on a $5.25 per barrel GIM, except in the first year of the plan period
when a GIM of $7.25 was used, reflecting market conditions expected in the near term. The value assigned to the production volume is 850mmbbl a
year (2005 900mmbbl) and remains constant over the plan period. The value assigned to the terminal value assumption is 6 times earnings (2005 5
times), which is indicative of similar assets in the current market. These key assumptions reflect past experience and are consistent with external
sources.
Management believes that no reasonably possible change in the key assumptions would lead to the Refining value in use being equal to its carrying
amount.