BP 2009 Annual Report Download - page 134

BP Annual Report and Accounts 2009
Notes on financial statements
8. Impairment review of goodwill
132
$ million
Goodwill at 31 December 2009 2008
Exploration and Production 4,297 4,297
Refining and Marketing 4,245 5,462
Other businesses and corporate 78 119
8,620 9,878
Goodwill acquired through business combinations has been allocated to groups of cash-generating units that are expected to benefit from the synergies
of the acquisition. For Exploration and Production, goodwill has been allocated to each geographic region, that is UK, Rest of Europe, US and Rest of
World, and for Refining and Marketing, goodwill has been allocated to the Rhine fuels value chain (FVC), US West Coast FVC, Lubricants and Other.
In assessing whether goodwill has been impaired, the carrying amount of the cash-generating unit (including goodwill) is compared with the
recoverable amount of the cash-generating unit. The recoverable amount is the higher of fair value less costs to sell and value in use. In the absence of
any information about the fair value of a cash-generating unit, the recoverable amount is deemed to be the value in use.
The group calculates the recoverable amount as the value in use using a discounted cash flow model. The future cash flows are adjusted for
risks specific to the cash-generating unit and are discounted using a pre-tax discount rate. The discount rate is derived from the group’s post-tax
weighted average cost of capital and is adjusted where applicable to take into account any specific risks relating to the country where the cash-generating
unit is located. The rate to be applied to each country is reassessed each year. A discount rate of 11% has been used for all goodwill impairment
calculations performed in 2009 (2008 11%).
The business segment plans, which are approved on an annual basis by senior management, are the primary source of information for the
determination of value in use. They contain forecasts for oil and natural gas production, refinery throughputs, sales volumes for various types of refined
products (e.g. gasoline and lubricants), revenues, costs and capital expenditure. As an initial step in the preparation of these plans, various
environmental assumptions, such as oil prices, natural gas prices, refining margins, refined product margins and cost inflation rates, are set by senior
management. These environmental assumptions take account of existing prices, global supply-demand equilibrium for oil and natural gas, other
macroeconomic factors and historical trends and variability.
Exploration and Production
$ million
2009 2008
Rest of Rest of
UK US World Total UK US World Total
Goodwill 341 3,441 515 4,297 341 3,441 515 4,297
Excess of recoverable amount over carrying amount 7,721 15,528 n/a n/a 7,972 16,692 n/a n/a
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. As the production profile and related cash flows can be estimated from the company’s past
experience, management believes that the cash flows generated over the estimated life of field is the appropriate basis upon which to assess goodwill
and individual assets for impairment. 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. Capital expenditure and operating costs for the first
four years and expected hydrocarbon production profiles up to 2020 are derived from the business segment plan. Estimated production quantities and
cash flows up to the date of cessation of production on a field-by-field basis are developed to be consistent with this. The production profiles used are
consistent with the resource volumes approved as part of BP’s centrally-controlled process for the estimation of proved reserves and total resources.
Consistent with prior years, the 2009 review for impairment was carried out during the fourth quarter. As permitted by IAS 36, the detailed
calculations of recoverable amount performed in 2008 for the US and the UK, and calculations performed in 2005 for the Rest of World, were used for
the 2009 impairment test as the criteria of IAS 36 were considered to be satisfied: the excess of the recoverable amount over the carrying amount (the
headroom) was substantial in 2008 (for the US and the UK) and 2005 (for the Rest of World); 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 table above shows the carrying amount of the goodwill allocated to each of the regions of the Exploration and Production segment and,
where required, the headroom in the cash-generating units to which the goodwill has been allocated. The estimates of headroom at 31 December
2009 for the UK and the US are based on recoverable amounts determined in 2008 and carrying amounts at 31 December 2009. No impairment
charge is required.
For 2008, the Brent oil price assumption was an average $49 per barrel in 2009, $59 per barrel in 2010, $65 per barrel in 2011, $68 per barrel in
2012, $70 per barrel in 2013 and $75 per barrel in 2014 and beyond. The Henry Hub natural gas price assumption was an average of $6.16/mmBtu in
2009, $7.15/mmBtu in 2010, $7.34/mmBtu in 2011, $7.62/mmBtu in 2012, $7.60/mmBtu in 2013 and $7.50/mmBtu in 2014 and beyond. The prices for
the first five years were derived from forward price curves at the year-end. Prices in 2014 and beyond were determined using long-term views of
global supply and demand, building upon past experience of the industry and consistent with a number of external economic forecasts. These prices
were adjusted to arrive at appropriate consistent price assumptions for different qualities of oil and gas.
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 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.