BP 2007 Annual Report Download - page 104

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1 Significant accounting policies continued
Intangible assets with a finite life are amortized on a straight-line basis over their expected useful lives. For patents, licences and trademarks,
expected useful life is the shorter of the duration of the legal agreement and economic useful life, which can range from three to 15 years. Computer
software costs have a useful life of three to five years.
The expected useful lives of assets are reviewed on an annual basis and, if necessary, changes in useful lives are accounted for prospectively.
The carrying value of intangible assets is reviewed for impairment whenever events or changes in circumstances indicate the carrying value may
not be recoverable.
Oil and natural gas exploration and development expenditure
Oil and natural gas exploration and development expenditure is accounted for using the successful efforts method of accounting.
Licence and property acquisition costs
Exploration licence and leasehold property acquisition costs are capitalized within intangible fixed assets and amortized on a straight-line basis over the
estimated period of exploration. Each property is reviewed on an annual basis to confirm that drilling activity is planned and it is not impaired. If no
future activity is planned, the remaining balance of the licence and property acquisition costs is written off. Upon determination of economically
recoverable reserves (‘proved reserves’ or ‘commercial reserves’), amortization ceases and the remaining costs are aggregated with exploration
expenditure and held on a field-by-field basis as proved properties awaiting approval within other intangible assets. When development is approved
internally, the relevant expenditure is transferred to property, plant and equipment.
Exploration expenditure
Geological and geophysical exploration costs are charged against income as incurred. Costs directly associated with an exploration well are capitalized
as an intangible asset until the drilling of the well is complete and the results have been evaluated. These costs include employee remuneration,
materials and fuel used, rig costs, delay rentals and payments made to contractors. If hydrocarbons are not found, the exploration expenditure is
written off as a dry hole. If hydrocarbons are found and, subject to further appraisal activity, which may include the drilling of further wells (exploration
or exploratory-type stratigraphic test wells), are likely to be capable of commercial development, the costs continue to be carried as an asset. All such
carried costs are subject to technical, commercial and management review at least once a year to confirm the continued intent to develop or
otherwise extract value from the discovery. When this is no longer the case, the costs are written off. When proved reserves of oil and natural gas are
determined and development is sanctioned, the relevant expenditure is transferred to property, plant and equipment.
Development expenditure
Expenditure on the construction, installation or completion of infrastructure facilities such as platforms, pipelines and the drilling of development wells,
including unsuccessful development or delineation wells, is capitalized within property, plant and equipment and is depreciated from the
commencement of production as described below in the accounting policy for Property, plant and equipment.
Property, plant and equipment
Property, plant and equipment is stated at cost, less accumulated depreciation and accumulated impairment losses.
The initial cost of an asset comprises its purchase price or construction cost, any costs directly attributable to bringing the asset into operation, the
initial estimate of any decommissioning obligation, if any, and, for qualifying assets, borrowing costs. The purchase price or construction cost is the
aggregate amount paid and the fair value of any other consideration given to acquire the asset. The capitalized value of a finance lease is also included
within property, plant and equipment.
Exchanges of assets are measured at fair value unless the exchange transaction lacks commercial substance or the fair value of neither the asset
received nor the asset given up is reliably measurable. The cost of the acquired asset is measured at the fair value of the asset given up, unless the
fair value of the asset received is more clearly evident. Where fair value is not used, the cost of the acquired asset is measured at the carrying amount
of the amount given up. The gain or loss on derecognition of the asset given up is recognized in profit or loss.
Expenditure on major maintenance refits or repairs comprises the cost of replacement assets or parts of assets, inspection costs and overhaul
costs. Where an asset or part of an asset that was separately depreciated is replaced and it is probable that future economic benefits associated with
the item will flow to the group, the expenditure is capitalized and the carrying amount of the replaced asset is derecognized. Inspection costs
associated with major maintenance programmes are capitalized and amortized over the period to the next inspection. Overhaul costs for major
maintenance programmes are expensed as incurred. All other maintenance costs are expensed as incurred.
Oil and natural gas properties, including related pipelines, are depreciated using a unit-of-production method. The cost of producing wells is
amortized over proved developed reserves. Licence acquisition, field development and future decommissioning costs are amortized over total proved
reserves. The unit-of-production rate for the amortization of field development costs takes into account expenditures incurred to date, together with
approved future development expenditure required to develop reserves.
Other property, plant and equipment is depreciated on a straight-line basis over its expected useful life.
The useful lives of the group’s other property, plant and equipment are as follows:
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Land improvements 15 to 25 years
Buildings 20 to 50 years
Refineries 20 to 30 years
Petrochemicals plants 20 to 30 years
Pipelines 10 to 50 years
Service stations 15 years
Office equipment 3 to 7 years
Fixtures and fittings 5 to 15 years