BP 2006 Annual Report Download - page 61

Deferred taxation
The group has around $4.7 billion of carry-forward tax losses in the UK
and Germany, which would be available to offset against future taxable
income. At the end of 2006, $216 million of deferred tax assets were
recognized on these losses as this is the extent to which it is judged that
suitable taxable income will arise. No material carry-forward tax losses in
other taxing jurisdictions have been recognized as deferred tax assets and
these are unlikely to have a significant effect on the group’s tax rate in
future years.
Provisions and contingencies
The group holds provisions for the future decommissioning of oil and
natural gas production facilities and pipelines at the end of their economic
lives. The largest asset removal obligations facing BP relate to the
removal and disposal of oil and natural gas platforms and pipelines around
the world. The estimated discounted costs of dismantling and removing
these facilities are accrued on the installation of those facilities, reflecting
our legal obligations at that time. A corresponding asset of an amount
equivalent to the provision is also created within property, plant and
equipment. This asset is depreciated over the expected life of the
production facility or pipeline. Most of these removal events are many
years in the future and the precise requirements that will have to be met
when the removal event actually occurs are uncertain. Asset removal
technologies and costs are constantly changing, as well as political,
environmental, safety and public expectations. Consequently, the timing
and amounts of future cash flows are subject to significant uncertainty.
Changes in the expected future costs are reflected in both the provision
and tangible asset.
Decommissioning provisions associated with downstream and
petrochemicals facilities are generally not provided for, as such potential
obligations cannot be measured, given their indeterminate settlement
dates. The group performs periodic reviews of its downstream
and petrochemicals long-lived assets for any changes in facts
and circumstances that might require the recognition of
a decommissioning provision.
The timing and amount of future expenditures are reviewed annually,
together with the interest rate to be used in discounting the cash flows.
The interest rate used to determine the balance sheet obligation at the
end of 2006 was 2%, unchanged from the end of 2005. The interest rate
represents the real rate (i.e. adjusted for inflation) on long-dated
government bonds.
Other provisions and liabilities are recognized in the period when it
becomes probable that there will be a future outflow of funds resulting
from past operations or events that can be reasonably estimated. The
timing of recognition requires the application of judgement to existing
facts and circumstances, which can be subject to change. Since the
actual cash outflows can take place many years in the future, the carrying
amounts of provisions and liabilities are reviewed regularly and adjusted
to take account of changing facts and circumstances.
A change in estimate of a recognized provision or liability would
result in a charge or credit to net income in the period in which the
change occurs (with the exception of decommissioning costs as
described above).
In particular, provisions for environmental clean-up and remediation
costs are based on current legal and constructive requirements,
technology, price levels and expected plans for remediation. Actual costs
and cash outflows can differ from estimates because of changes in laws
and regulations, public expectations, prices, discovery and analysis of site
conditions and changes in clean-up technology.
The provision for environmental liabilities is reviewed at least annually.
The interest rate used to determine the balance sheet obligation at
31 December 2006 was 2%, the same rate as at the previous balance
sheet date.
As further described in Financial statements – Note 47 on page 168 the
group is subject to claims and actions. The facts and circumstances
relating to particular cases are evaluated regularly in determining whether
it is ‘probable’ that there will be a future outflow of funds and, once
established, whether a provision relating to a specific litigation should be
adjusted. Accordingly, significant management judgement relating to
contingent liabilities is required, since the outcome of litigation is difficult
to predict.
Pensions and other post-retirement benefits
Accounting for pensions and other post-retirement benefits involves
judgement about uncertain events, including estimated retirement dates,
salary levels at retirement, mortality rates, rates of return on plan assets,
determination of discount rates for measuring plan obligations, healthcare
cost trend rates and rates of utilization of healthcare services by retirees.
These assumptions are based on the environment in each country.
Determination of the projected benefit obligations for the group’s defined
benefit pension and other post-retirement plans is important to the
recorded amounts for such obligations on the balance sheet and to the
amount of benefit expense in the income statement. The assumptions
used may vary from year to year, which will affect future results of
operations. Any differences between these assumptions and the actual
outcome also affect future results of operations.
Pension and other post-retirement benefit assumptions are discussed
and agreed with the independent actuaries in December each year. These
assumptions are used to determine the projected benefit obligation at the
year end and hence the surpluses and deficits recorded on the group’s
balance sheet, and pension and other post-retirement benefit expense
for the following year.
The pension assumptions at 31 December 2006 and 2005 are summarized below.
%
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UK USA Other
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2006 2005 2006 2005 2006 2005
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Rate of return on pension plan assets 7.0 7.00 8.0 8.00 5.8 5.50
Discount rate for pension plan liabilities 5.1 4.75 5.7 5.50 4.8 4.00
Rate of increase in salaries 4.7 4.25 4.2 4.25 3.6 3.25
Rate of increase for pensions in payment 2.8 2.50 nil nil 1.8 1.75
Inflation 2.8 2.50 2.4 2.50 2.2 2.00
The assumptions used in calculating the charge for US other post-retirement benefits are consistent with those shown above for US pension plans
except for the discount rate for plan liabilities which is 5.9% (2005 5.5%).
BP Annual Report and Accounts 2006 59