BP 2006 Annual Report Download - page 186

184
53 US GAAP reconciliation continued
(e) Derivative financial instruments
Under IFRS, the group accounts for its derivative financial instruments under IAS 39 ‘Financial Instruments: Recognition and Measurement’. IAS 39
requires that derivative financial instruments be measured at fair value and changes in fair value are either recognized in the income statement or
directly in equity (other comprehensive income) depending on the classification of the instrument. Changes in the fair value of derivatives held for
trading purposes or those not designated or effective as hedges are recognized in the income statement.
Changes in the fair value of derivatives designated and effective as cash flow hedges are recognized directly in equity (other comprehensive income).
Amounts recorded in equity are transferred to the income statement when the hedged transaction affects profit or loss. Where the hedged item is the
cost of a non-financial asset or liability, the amounts taken to equity are transferred to the initial carrying amount of the non-financial asset or liability.
Changes in the fair value of derivatives designated and effective as fair value hedges are recognized in the income statement. The carrying amount of
the hedged item is adjusted for gains and losses attributable to the risk being hedged with the corresponding gains and losses recognized in the income
statement.
On adoption of IAS 39 on 1 January 2005, all cash flow and fair value hedges that previously qualified for hedge accounting under UK GAAP were
recorded on the balance sheet at fair value with the offset recorded through equity.
Under US GAAP all derivative financial instruments are accounted for under SFAS No. 133 ‘Accounting for Derivative Instruments and Hedging
Activities’ and recorded on the balance sheet at their fair value. Similar to IAS 39, SFAS 133 requires that changes in the fair value of derivatives are
recorded each period in the income statement or other comprehensive income, depending on whether the instrument is designated as part of a hedge
transaction.
Prior to 1 January 2005, the group did not designate any of its derivative financial instruments as part of hedged transactions under SFAS 133. As a
result, all changes in fair value were recognized in the income statement. A difference therefore exists between the treatment applied under SFAS 133
and that upon initial adoption of IAS 39 associated with those specific derivative instruments. This difference will remain until these individual derivative
transactions mature.
Additionally, under IFRS, hedge accounting can be applied to certain centrally-hedged foreign currency exposures. Under US GAAP, hedge accounting
can be applied only where the companies between the central treasury and the entity having the foreign currency exposure have the same functional
currency.
The adjustments to profit for the year and to BP shareholders’ equity to accord with US GAAP are summarized below.
Increase (decrease) in caption heading $ million
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2006 2005 2004
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Production and manufacturing expenses (169) –481
Finance costs (17) (15) –
Taxation 44 (72) (144)
Profit for the year 142 87 (337)
$ million
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2006 2005
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Goodwill 131 131
Finance debt (117) (140)
Deferred tax liabilities 46 46
BP shareholders’ equity 202 225
(f) Inventory valuation
Under IFRS, inventory held for trading purposes is remeasured to fair value with the changes in fair value recognized in the income statement. Under
US GAAP, all balances recorded in inventory are measured at the lower of cost and net realizable value.
The adjustments to profit for the year and to BP shareholders’ equity to accord with US GAAP are summarized below.
Increase (decrease) in caption heading $ million
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2006 2005 2004
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Purchases (250) 357 (250)
Taxation 88 (125) 88
Profit for the year 162 (232) 162
$ million
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2006 2005
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Inventories (7) (257)
Deferred tax liabilities (2) (90)
BP shareholders’ equity (5) (167)