BP 2011 Annual Report Download - page 190

188 BP Annual Report and Form 20-F 2011188 BP Annual Report and Form 20-F 2011
Notes on financial statements
1. Significant accounting policies continued
Corporate taxes
Income tax expense represents the sum of the tax currently payable and
deferred tax. Interest and penalties relating to tax are also included in
income tax expense.
The tax currently payable is based on the taxable profits for the
period. Taxable profit differs from net profit as reported in the income
statement because it excludes items of income or expense that are taxable
or deductible in other periods and it further excludes items that are never
taxable or deductible. The group’s liability for current tax is calculated using
tax rates and laws that have been enacted or substantively enacted by the
balance sheet date.
Deferred tax is provided, using the liability method, on all temporary
differences at the balance sheet date between the tax bases of assets and
liabilities and their carrying amounts for financial reporting purposes.
Deferred tax liabilities are recognized for all taxable temporary
differences except:
• Where the deferred tax liability arises on goodwill that is not tax
deductible or the initial recognition of an asset or liability in a transaction
that is not a business combination and, at the time of the transaction,
affects neither accounting profit nor taxable profit or loss.
• In respect of taxable temporary differences associated with investments
in subsidiaries, jointly controlled entities and associates, where the group
is able to control the timing of the reversal of the temporary differences
and it is probable that the temporary differences will not reverse in the
foreseeable future.
Deferred tax assets are recognized for all deductible temporary differences,
carry-forward of unused tax credits and unused tax losses, to the extent
that it is probable that taxable profit will be available against which the
deductible temporary differences and the carry-forward of unused tax
credits and unused tax losses can be utilized:
• Except where the deferred income tax asset relating to the deductible
temporary difference arises from the initial recognition of an asset or liability
in a transaction that is not a business combination and, at the time of the
transaction, affects neither accounting profit nor taxable profit or loss.
• In respect of deductible temporary differences associated with
investments in subsidiaries, jointly controlled entities and associates,
deferred tax assets are recognized only to the extent that it is probable
that the temporary differences will reverse in the foreseeable future and
taxable profit will be available against which the temporary differences
can be utilized.
The carrying amount of deferred tax assets is reviewed at each balance
sheet date and reduced to the extent that it is no longer probable that
sufficient taxable profit will be available to allow all or part of the deferred
income tax asset to be utilized.
Deferred tax assets and liabilities are measured at the tax rates that
are expected to apply to the year when the asset is realized or the liability
is settled, based on tax rates (and tax laws) that have been enacted or
substantively enacted at the balance sheet date.
Tax relating to items recognized in other comprehensive income
is recognized in other comprehensive income and tax relating to items
recognized directly in equity is recognized directly in equity and not in the
income statement.
Customs duties and sales taxes
Revenues, expenses and assets are recognized net of the amount of
customs duties or sales tax except:
• Where the customs duty or sales tax incurred on a purchase of goods
and services is not recoverable from the taxation authority, in which
case the customs duty or sales tax is recognized as part of the cost of
acquisition of the asset or as part of the expense item as applicable.
• Receivables and payables are stated with the amount of customs duty or
sales tax included.
The net amount of sales tax recoverable from, or payable to, the taxation
authority is included within receivables or payables in the balance sheet.
Own equity instruments
The group’s holdings in its own equity instruments, including ordinary
shares held by Employee Share Ownership Plan Trusts (ESOPs), are
classified as ‘treasury shares’, or ‘own shares’ for the ESOPs, and are
shown as deductions from shareholders’ equity at cost. Consideration
received for the sale of such shares is also recognized in equity, with any
difference between the proceeds from sale and the original cost being
taken to the profit and loss account reserve. No gain or loss is recognized
in the income statement on the purchase, sale, issue or cancellation of
equity shares.
Revenue
Revenue arising from the sale of goods is recognized when the significant
risks and rewards of ownership have passed to the buyer, which is typically
at the point that title passes, and the revenue can be reliably measured.
Revenue is measured at the fair value of the consideration received
or receivable and represents amounts receivable for goods provided in the
normal course of business, net of discounts, customs duties and sales
taxes.
Physical exchanges are reported net, as are sales and purchases
made with a common counterparty, as part of an arrangement similar to
a physical exchange. Similarly, where the group acts as agent on behalf
of a third party to procure or market energy commodities, any associated
fee income is recognized but no purchase or sale is recorded. Additionally,
where forward sale and purchase contracts for oil, natural gas or power
have been determined to be for trading purposes, the associated sales
and purchases are reported net within sales and other operating revenues
whether or not physical delivery has occurred.
Generally, revenues from the production of oil and natural gas
properties in which the group has an interest with joint venture partners are
recognized on the basis of the group’s working interest in those properties
(the entitlement method). Differences between the production sold and the
group’s share of production are not significant.
Interest income is recognized as the interest accrues (using the
effective interest rate that is the rate that exactly discounts estimated
future cash receipts through the expected life of the financial instrument to
the net carrying amount of the financial asset).
Dividend income from investments is recognized when the
shareholders’ right to receive the payment is established.
Research
Research costs are expensed as incurred.
Finance costs
Finance costs directly attributable to the acquisition, construction or
production of qualifying assets, which are assets that necessarily take a
substantial period of time to get ready for their intended use, are added
to the cost of those assets, until such time as the assets are substantially
ready for their intended use. All other finance costs are recognized in the
income statement in the period in which they are incurred.
Use of estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as well as the disclosure of contingent assets and liabilities at the
balance sheet date and the reported amounts of revenues and expenses
during the reporting period. Actual outcomes could differ from those
estimates.
Impact of new International Financial Reporting Standards
Adopted for 2011
There are no new or amended standards or interpretations adopted with
effect from 1 January 2011 that have a significant impact on the financial
statements.