BP 2009 Annual Report Download - page 96

94
Critical accounting policies
The significant accounting policies of the group are summarized in
Financial statements – Note 1 on page 116.
Inherent in the application of many of the accounting policies
used in preparing the financial statements is the need for BP
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual outcomes could differ from the estimates
and assumptions used. The following summary provides more
information about the critical accounting policies that could have a
significant impact on the results of the group and should be read in
conjunction with the Notes on financial statements.
The accounting policies and areas that require the most significant
judgements and estimates used in the preparation of the consolidated
financial statements are in relation to oil and natural gas accounting,
including the estimation of reserves, the recoverability of asset carrying
values, taxation, derivative financial instruments, provisions and
contingencies, and pensions and other post-retirement benefits.
Oil and natural gas accounting
The group follows the principles of the successful efforts method of
accounting for its oil and natural gas exploration and production activities.
The acquisition of geological and geophysical seismic information,
prior to the discovery of proved reserves, is expensed as incurred.
Exploration licence and leasehold property acquisition costs are
capitalized within intangible assets and are reviewed at each reporting
date to confirm that there is no indication that the carrying amount
exceeds the recoverable amount. This review includes confirming that
exploration drilling is still under way or firmly planned or that it has been
determined, or work is under way to determine, that the discovery is
economically viable based on a range of technical and commercial
considerations and sufficient progress is being made on establishing
development plans and timing. If no future activity is planned, the
remaining balance of the licence and property acquisition costs is written
off. Lower value licences are pooled and amortized on a straight-line
basis over the estimated period of exploration.
For exploration wells and exploratory-type stratigraphic test wells,
costs directly associated with the drilling of wells are initially capitalized
within intangible assets, pending determination of whether potentially
economic oil and gas reserves have been discovered by the drilling
effort. These costs include employee remuneration, materials and fuel
used, rig costs, delay rentals and payments made to contractors. The
determination is usually made within one year after well completion, but
can take longer, depending on the complexity of the geological structure.
If the well did not encounter potentially economic oil and gas quantities,
the well costs are expensed as a dry hole and are reported in exploration
expense. Exploration wells that discover potentially economic quantities
of oil and natural gas and are in areas where major capital expenditure
(e.g. offshore platform or a pipeline) would be required before production
could begin, and where the economic viability of that major capital
expenditure depends on the successful completion of further exploration
work in the area, remain capitalized on the balance sheet as long as
additional exploration appraisal work is under way or firmly planned.
It is not unusual to have exploration wells and exploratory-type
stratigraphic test wells remaining suspended on the balance sheet for
several years while additional appraisal drilling and seismic work on the
potential oil and natural gas field is performed or while the optimum
development plans and timing are established.
All such carried costs are subject to regular technical, commercial and
management review on at least an annual basis to confirm the continued
intent to develop, or otherwise extract value from, the discovery. Where
this is no longer the case, the costs are immediately expensed.
Once a project is sanctioned for development, the carrying values
of exploration licence and leasehold property acquisition costs and costs
associated with exploration wells and exploratory-type stratigraphic test
wells, are transferred to production assets within property, plant and
equipment.
The capitalized exploration and development costs for proved oil
and natural gas properties (which include the costs of drilling
unsuccessful wells) are amortized on the basis of oil-equivalent barrels
that are produced in a period as a percentage of the estimated proved
reserves. Field development costs subject to depreciation are
expenditures incurred to date, together with approved future
development expenditure required to develop reserves.
The estimated proved reserves used in these unit-of-production
calculations vary with the nature of the capitalized expenditure. The
reserves used in the calculation of the unit-of-production amortization are
as follows:
• Producing wells – proved developed reserves.
• Licence and property acquisition, field development and future
decommissioning costs – total proved reserves
The impact of changes in estimated proved reserves is dealt with
prospectively by amortizing the remaining carrying value of the asset
over the expected future production. If proved reserves estimates are
revised downwards, earnings could be affected by higher depreciation
expense or an immediate write-down of the property’s carrying value
(see discussion of recoverability of asset carrying values on the
following page).
On 31 December 2008, the SEC published a revision of Rule
4-10 (a) of Regulation S-X for the estimation of reserves. These revised
rules form the basis of the 2009 year-end estimation of proved reserves
and the application of the technical aspects resulted in an immaterial
increase of less than 1% to BP’s total proved reserves. The estimation of
oil and natural gas reserves and BP’s process to manage reserves
bookings is described in Exploration and Production – Reserves and
production on page 24, which is unaudited. As discussed on the
following page, oil and natural gas reserves have a direct impact on the
assessment of the recoverability of asset carrying values reported in the
financial statements.
The 2009 movements in proved reserves are reflected in the
tables showing movements in oil and gas reserves by region in Financial
statements – Supplementary information on oil and natural gas
(unaudited) on pages 179 to 192.
Recoverability of asset carrying values
BP assesses its fixed assets, including goodwill, for possible impairment
if there are events or changes in circumstances that indicate that carrying
values of the assets may not be recoverable and, as a result, charges for
impairment are recognized in the group’s results from time to time. Such
indicators include changes in the group’s business plans, changes in
commodity prices leading to unprofitable performance, low plant
utilization, evidence of physical damage and, for oil and natural gas
properties, significant downward revisions of estimated volumes or
increases in estimated future development expenditure. If there are low
oil prices, natural gas prices, refining margins or marketing margins
during an extended period, the group may need to recognize significant
impairment charges.
The assessment for impairment entails comparing the carrying
value of the asset or cash-generating unit with its recoverable amount,
that is, the higher of fair value less costs to sell and value in use. Value in
use is usually determined on the basis of discounted estimated future
net cash flows.
BP Annual Report and Accounts 2009
Additional information for shareholders