BP 2006 Annual Report Download - page 194

192
53 US GAAP reconciliation continued
$ million
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Oil price
Natural
gas
price
Power
price
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Fair value of contracts at 1 January 2004 (154) 191 134
Contracts realized or settled in the year 154 259 54
Unrealized gains (losses) recognized at inception of contract (33) 73 (3)
Unrealized gains (losses) recognized as a result of changes in valuation techniques and assumptions –––
Other unrealized gains (losses) recognized during the year (107) (109) (8)
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Fair value of contracts at 31 December 2004 (140) 414 177
In addition to the risk management activities related to equity crude disposal, refinery supply and marketing, BP’s supply and trading function
undertakes trading in the full range of conventional derivative financial and commodity instruments and physical cargoes available in the energy markets.
The group controls the scale of the trading exposures by using a value-at-risk model with a maximum value-at-risk limit authorized by the board.
The group measures its market risk exposure, i.e. potential gain or loss in fair values, on its trading activity using value-at-risk techniques. These
techniques are based on a variance/covariance model or a Monte Carlo simulation and make a statistical assessment of the market risk arising from
possible future changes in market values over a 24-hour period. The calculation of the range of potential changes in fair value takes into account a
snapshot of the end-of-day exposures and the history of one-day price movements, together with the correlation of these price movements. The
potential movement in fair values is expressed to 1.65 standard deviations which is equivalent to a 95% confidence level. This means that, in broad
terms, one would expect to see an increase or a decrease in fair values greater than the value at risk on approximately one occasion per month if the
portfolio were left unchanged.
The group calculates value at risk on all instruments that are held for trading purposes and therefore give an exposure to market risk. The value-at-risk
models take account of derivative financial instruments such as oil, natural gas and power price futures and swap agreements. Financial assets and
liabilities and physical crude oil and refined products that are treated as held for trading positions are also included in these calculations. For options, a
linear approximation is included in the value-at-risk models. The value-at-risk calculation for oil, natural gas, NGLs and power price exposure alsoincludes
derivative commodity instruments (commodity contracts that permit settlement either by delivery of the underlying commodity or in cash), such as
forward contracts.
The following table shows values at risk for energy trading activities.
$ million
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
High Low Average Year end
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2006
Oil price trading 56 16 29 22
Natural gas and NGL price trading 29 10 19 15
Power price trading 11263
2005
Oil price trading 80 17 33 31
Natural gas and NGL price trading 39 6 15 17
Power price trading 16279
2004
Oil price trading 30 10 16 25
Natural gas and NGL price trading 23 6 13 10
Power price trading 10144
Impact of new US accounting standards
Adopted for 2006
Accounting changes and error corrections
In May 2005, the FASB issued SFAS No. 154 ‘Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement
No. 3’. SFAS 154 applies to all voluntary changes in accounting principle and changes the requirements for the accounting for and reporting of a change
in accounting principle. SFAS 154 requires retrospective application to prior period financial statements of a voluntary change in accounting principle
unless it is impracticable. Previously, most voluntary changes in accounting principle were recognized by including in net income of the period of the
change the cumulative effect of changing to the new accounting principle. SFAS 154 also requires that a change in the method of depreciation,
amortization or depletion for long-lived non-financial assets be accounted for as a change in accounting estimate that is affected by a change in
accounting principle. Previously, such changes were reported as a change in accounting principle. SFAS 154 is effective for accounting changes and
corrections of errors made in accounting periods beginning after 15 December 2005. The group adopted SFAS 154 with effect from 1 January 2006.
The adoption of SFAS 154 did not have a significant effect on the group’s profit as adjusted to accord with US GAAP, or on BP shareholders’ equity as
adjusted to accord with US GAAP.