BP 2010 Annual Report Download - page 126

Additionalinformationforshareholders
Criticalaccountingpolicies
ThesignicantaccountingpoliciesofthegrouparesummarizedinFinancial
statements–Note1onpage150.
Inherentintheapplicationofmanyoftheaccountingpoliciesused
inpreparingthenancial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nancial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signicantimpactontheresultsof
thegroupandshouldbereadinconjunctionwiththeNotesonnancial
statements.
Theaccountingpoliciesandareasthatrequirethemostsignicant
judgementsandestimatesusedinthepreparationoftheconsolidated
nancialstatementsareinrelationtooilandnaturalgasaccounting,
includingtheestimationofreserves,therecoverabilityofassetcarrying
values,taxation,derivativenancialinstruments,provisionsand
contingencies,andinparticular,provisionsandcontingenciesrelatedtothe
GulfofMexicooilspill,andpensionsandotherpost-retirementbenets.
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conrmthatthereisnoindicationthatthecarryingamountexceedsthe
recoverableamount.Thisreviewincludesconrmingthatexplorationdrilling
isstillunderwayorrmly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sufcient
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rmly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eld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conrm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
appraisalanddevelopmentwells)areamortizedonthebasisofoil-
equivalentbarrelsthatareproducedinaperiodasapercentageofthe
estimatedprovedreserves.Costsofcommonfacilitiessubjectto
depreciationareexpendituresincurredtodate,togetherwithfuturecapital
expenditureexpectedtobeincurredinrelationtothesecommonfacilities
andexcludingfuturedrillingcosts.
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:
• Costofproducingwells–proveddevelopedreserves.
• Licenceandpropertyacquisition,commonfacilities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 below).
On31December2008,theSECpublishedarevisionof
Rule4-10(a)ofRegulationS-Xfortheestimationofreserves.In2009,the
applicationofthetechnicalaspectsoftheserevisedrules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–Oilandgas
disclosuresonpage50,whichisunaudited.Asdiscussedbelow,oiland
naturalgasreserveshaveadirectimpactontheassessmentofthe
recoverabilityofassetcarryingvaluesreportedinthenancialstatements.
The2010movementsinprovedreservesarereected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228-248.
Recoverability of asset carrying values
BPassessesitsxed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sustainedunprotableperformance,an
increaseinthediscountrate,lowplantutilization,evidenceofphysical
damageand,foroilandnaturalgasproperties,signicantdownward
revisionsofestimatedvolumesorincreasesinestimatedfuture
developmentexpenditure.Iftherearelowoilprices,naturalgasprices,
reningmarginsormarketingmarginsduringanextendedperiod,the
groupmayneedtorecognizesignicant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ows.Determinationastowhetherandhowmuchanassetis
impairedinvolvesmanagementestimatesonhighlyuncertainmatterssuch
asfuturecommodityprices,theeffectsofinationonoperatingexpenses,
discountrates,productionprolesandtheoutlookforglobalorregional
marketsupply-and-demandconditionsforcrudeoil,naturalgasand
renedproducts.
124BPAnnualReportandForm20-F2010