BP 2007 Annual Report Download - page 125

BP ANNUAL REPORT AND ACCOUNTS 2007 123
11 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 2007 using data that was appropriate at that
time. As permitted by IAS 36, the detailed calculations made in 2005 and 2006 were used for the 2007 impairment test on the goodwill in each
geographical segment as the criteria of IAS 36 were considered to be satisfied: the excess of the recoverable amount over the carrying amount was
substantial for Rest of World in 2005 and the UK and the US in 2006; 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.
The following table shows the carrying value of the goodwill allocated to each of the regions of the Exploration and Production segment and, where
required, 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.
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 (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.
In the prior year, it was estimated that the long-term price of Brent that would cause the total recoverable amount to be equal to the total carrying
amount of 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, and that no reasonably possible change in oil and gas prices would cause the headroom in Rest of World to be reduced to zero.
Since that time, oil prices have continued to rise and the group has increased its price assumptions as disclosed above. Management now believes
that no reasonably possible change in oil and gas prices would cause the headroom in any of the geographical segments 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 that would reduce the group’s headroom to zero.
$ million
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2007
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Rest of
UK US World Total
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Goodwill 341 3,391 515 4,247
$ million
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2006
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Rest of
UK US World Total
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Goodwill 341 3,426 515 4,282
Excess of recoverable amount over carrying amount 7,886 28,856 n/a n/a
Refining and Marketing
For all cash-generating units, the cash flows for the next five years are derived from the five-year business segment plan. The cost inflation rate is
assumed to be 2.5% (2006 2.5%) throughout the period. In determining the value in use for each of the cash-generating units, cash flows for a period
of 10 years have been discounted and aggregated with its terminal value.
Refining
Cash flows beyond the five-year period are extrapolated using a 2% growth rate (2006 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 average value assigned to the gross margin during the plan period is based on a $7.90 per barrel global indicator margin (GIM),
which is then adjusted for specific refinery configurations (2006 $7.25 per barrel). The average value assigned to the production volume is 850mmbbl a
year (2006 850mmbbl) over the plan period. The value assigned to the terminal value assumption is 6 times earnings (2006 6 times), which is
indicative of similar assets in the current market. These key assumptions reflect past experience and are consistent with external sources.
The Refining unit’s recoverable amount exceeds its carrying amount by $11.4 billion. Based on sensitivity analysis, it is estimated that if the GIM
changes by $1 per barrel, the Refining unit’s value in use changes by $7.6 billion and, if there was an adverse change in the GIM of $1.50 per barrel,
the recoverable amount of the Refining unit would equal its carrying amount. If the volume assumption changes by 5%, the Refining unit’s value in
use changes by $5.1 billion and, if there was an adverse change in Refining volumes of 95mmbbl a year, the recoverable amount of the Refining unit
would equal its carrying amount. If the multiple of earnings used in the terminal value changes by 1 then the Refining unit’s value in use changes by
$1.7 billion. Management believes no reasonably possible change in the multiple of earnings used in the terminal value would lead to the Refining
unit’s value in use being equal to its carrying amount.