BP 2009 Annual Report Download - page 61

BP Annual Report and Accounts 2009
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Non-GAAP information on fair value accounting effects
BP uses derivative instruments to manage the economic exposure
relating to inventories above normal operating requirements of crude oil,
natural gas and petroleum products as well as certain contracts to supply
physical volumes at future dates. Under IFRS, these inventories and
contracts are recorded at historic cost and on an accruals basis
respectively. The related derivative instruments, however, are required to
be recorded at fair value with gains and losses recognized in income
because hedge accounting is either not permitted or not followed,
principally due to the impracticality of effectiveness testing requirements.
Therefore, measurement differences in relation to recognition of gains
and losses occur. Gains and losses on these inventories and contracts
are not recognized until the commodity is sold in a subsequent
accounting period. Gains and losses on the related derivative commodity
contracts are recognized in the income statement from the time the
derivative commodity contract is entered into on a fair value basis using
forward prices consistent with the contract maturity.
IFRS requires that inventory held for trading be recorded at its fair
value using period end spot prices whereas any related derivative
commodity instruments are required to be recorded at values based on
forward prices consistent with the contract maturity. Depending on
market conditions, these forward prices can be either higher or lower
than spot prices resulting in measurement differences.
BP enters into contracts for pipelines and storage capacity that, under
IFRS, are recorded on an accruals basis. These contracts are risk-
managed using a variety of derivative instruments which are fair valued
under IFRS. This results in measurement differences in relation to
recognition of gains and losses.
The way that BP manages the economic exposures described
above, and measures performance internally, differs from the way these
activities are measured under IFRS. BP calculates this difference for
consolidated entities by comparing the IFRS result with management’s
internal measure of performance, under which the inventory and the
supply and capacity contracts in question are valued based on fair value
using relevant forward prices prevailing at the end of the period. We
believe that disclosing management’s estimate of this difference
provides useful information for investors because it enables investors to
see the economic effect of these activities as a whole. The impacts of fair
value accounting effects, relative to management’s internal measure of
performance, are shown in the table below. A reconciliation to GAAP
information is set out below.
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$ million
2009 2008 2007
Exploration and Production
Unrecognized gains (losses) brought forward from previous period 389 107 155
Unrecognized (gains) losses carried forward 530 (389) (107)
Favourable (unfavourable) impact relative to management’s measure of performance 919 (282) 48
Refining and Marketing
Unrecognized gains (losses) brought forward from previous period (82) 429 72
Unrecognized (gains) losses carried forward (179) 82 (429)
Favourable (unfavourable) impact relative to management’s measure of performance (261) 511 (357)
658 229 (309)
Taxation credit (charge)a(213) (83) 111
445 146 (198)
By region
Exploration and Production
US 687 (231) (77)
Non-US 232 (51) 125
919 (282) 48
Refining and Marketing
US 16 231 (165)
Non-US (277) 280 (192)
(261) 511 (357)
aThe amounts shown for taxation are based upon the effective tax rate on group profit.
Reconciliation of non-GAAP information
$ million
2009 2008 2007
Exploration and Production
Replacement cost profit before interest and tax adjusted for fair value accounting effects 23,881 38,590 27,554
Impact of fair value accounting effects 919 (282) 48
Replacement cost profit before interest and tax 24,800 38,308 27,602
Refining and Marketing
Replacement cost profit before interest and tax adjusted for fair value accounting effects 1,004 3,665 2,978
Impact of fair value accounting effects (261) 511 (357)
Replacement cost profit before interest and tax 743 4,176 2,621