BP 2011 Annual Report Download - page 185

BP Annual Report and Form 20-F 2011 183
Financial statements
Notes on financial statements
1. Significant accounting policies continued
Foreign currency translation
The functional currency is the currency of the primary economic environment
in which an entity operates and is normally the currency in which the entity
primarily generates and expends cash.
In individual companies, transactions in foreign currencies are initially
recorded in the functional currency by applying the rate of exchange ruling
at the date of the transaction. Monetary assets and liabilities denominated
in foreign currencies are retranslated into the functional currency at the
rate of exchange ruling at the balance sheet date. Any resulting exchange
differences are included in the income statement. Non-monetary assets
and liabilities, other than those measured at fair value, are not retranslated
subsequent to initial recognition.
In the consolidated financial statements, the assets and liabilities
of non-US dollar functional currency subsidiaries, jointly controlled entities
and associates, including related goodwill, are translated into US dollars at
the rate of exchange ruling at the balance sheet date. The results and cash
flows of non-US dollar functional currency subsidiaries, jointly controlled
entities and associates are translated into US dollars using average rates
of exchange. Exchange adjustments arising when the opening net assets
and the profits for the year retained by non-US dollar functional currency
subsidiaries, jointly controlled entities and associates are translated into
US dollars are taken to a separate component of equity and reported in
the statement of comprehensive income. Exchange gains and losses
arising on long-term intragroup foreign currency borrowings used to
finance the group’s non-US dollar investments are also taken to other
comprehensive income. On disposal or partial disposal of a non-US dollar
functional currency subsidiary, jointly controlled entity or associate, the
deferred cumulative amount of exchange gains and losses recognized in
equity relating to that particular non-US dollar operation is reclassified to
income statement.
Business combinations and goodwill
A business combination is a transaction or other event in which an acquirer
obtains control of one or more businesses. A business is an integrated set
of activities and assets that is capable of being conducted and managed
for the purpose of providing a return in the form of dividends or lower
costs or other economic benefits directly to investors or other owners or
participants. A business consists of inputs and processes applied to those
inputs that have the ability to create outputs.
Business combinations are accounted for using the acquisition
method. The identifiable assets acquired and liabilities assumed are
measured at their fair values at the acquisition date. The cost of an
acquisition is measured as the aggregate of the consideration transferred,
measured at acquisition-date fair value, and the amount of any minority
interest in the acquiree. Minority interests are stated either at fair value
or at the proportionate share of the recognized amounts of the acquiree’s
identifiable net assets. Acquisition costs incurred are expensed and
included in distribution and administration expenses.
Goodwill is initially measured as the excess of the aggregate of the
consideration transferred, the amount recognized for any minority interest
and the acquisition-date fair values of any previously held interest in the
acquiree over the fair value of the identifiable assets acquired and liabilities
assumed at the acquisition date.
At the acquisition date, any goodwill acquired is allocated to each of
the cash-generating units, or groups of cash-generating units, expected to
benefit from the combination’s synergies.
Following initial recognition, goodwill is measured at cost less any
accumulated impairment losses. Goodwill is reviewed for impairment annually
or more frequently if events or changes in circumstances indicate that the
carrying value may be impaired. Impairment is determined by assessing the
recoverable amount of the cash-generating unit to which the goodwill relates.
Where the recoverable amount of the cash-generating unit is less than the
carrying amount, an impairment loss is recognized. An impairment loss
recognized for goodwill is not reversed in a subsequent period.
Goodwill arising on business combinations prior to 1 January 2003
is stated at the previous carrying amount, less subsequent impairments,
under UK generally accepted accounting practice.
Goodwill may also arise upon investments in jointly controlled entities and
associates, being the surplus of the cost of investment over the group’s
share of the net fair value of the identifiable assets. Such goodwill is
recorded within investments in jointly controlled entities and associates,
and any impairment of the investment is included within the earnings from
jointly controlled entities and associates.
Non-current assets held for sale
Non-current assets and disposal groups classified as held for sale are
measured at the lower of carrying amount and fair value less costs to sell.
Non-current assets and disposal groups are classified as held for
sale if their carrying amounts will be recovered through a sale transaction
rather than through continuing use. This condition is regarded as met only
when the sale is highly probable and the asset or disposal group is available
for immediate sale in its present condition subject only to terms that are
usual and customary for sales of such assets. Management must be
committed to the sale, which should be expected to qualify for recognition
as a completed sale within one year from the date of classification as held
for sale.
Property, plant and equipment and intangible assets once classified
as held for sale are not depreciated. The group ceases to use the equity
method of accounting on the date from which an interest in a jointly
controlled entity or an interest in an associate becomes held for sale.
If a non-current asset or disposal group has been classified as held
for sale, but subsequently ceases to meet the criteria to be classified as
held for sale, the group ceases to classify the asset or disposal group as
held for sale. Non-current assets and disposal groups that cease to be
classified as held for sale are measured at the lower of carrying amount
before the asset or disposal group was classified as held for sale (adjusted
for any depreciation, amortization or revaluation that would have been
recognized had the asset or disposal group not been classified as held for
sale) and its recoverable amount at the date of the subsequent decision
not to sell. Except for any interests in equity-accounted entities that cease
to be classified as held for sale, any adjustment to the carrying amount
is recognized in profit or loss in the period in which the asset ceases to
be classified as held for sale. When an interest in an equity-accounted
entity ceases to be classified as held for sale, it is accounted for using the
equity method as from the date of its classification as held for sale and the
financial statements for the periods since classification as held for sale are
amended accordingly.
Intangible assets
Intangible assets, other than goodwill, include expenditure on the
exploration for and evaluation of oil and natural gas resources, computer
software, patents, licences and trademarks and are stated at the amount
initially recognized, less accumulated amortization and accumulated
impairment losses. For information on accounting for expenditures on the
exploration for and evaluation of oil and gas resources, see the accounting
policy for oil and natural gas exploration, appraisal and development
expenditure below.
Intangible assets acquired separately from a business are carried
initially at cost. The initial cost is the aggregate amount paid and the fair
value of any other consideration given to acquire the asset. An intangible
asset acquired as part of a business combination is measured at fair value
at the date of acquisition and is recognized separately from goodwill if the
asset is separable or arises from contractual or other legal rights.
Intangible assets with a finite life are amortized on a straight-line
basis over their expected useful lives. For patents, licences and trademarks,
expected useful life is the shorter of the duration of the legal agreement
and economic useful life, and can range from three to 15 years. Computer
software costs generally have a useful life of three to five years.
The expected useful lives of assets are reviewed on an annual basis
and, if necessary, changes in useful lives are accounted for prospectively.
The carrying value of intangible assets is reviewed for impairment
whenever events or changes in circumstances indicate the carrying value
may not be recoverable.