BP 2011 Annual Report Download - page 288

PC4 BP Annual Report and Form 20-F 2011
Parent company financial statements of BP p.l.c.
The parent company financial statements of BP p.l.c. on pages PC1 – PC14 do not form part of BP’s Annual Report on Form 20-F as filed with the SEC.
Notes on financial statements
1. Accounting policies
Accounting standards
These financial statements are prepared in accordance with applicable UK accounting standards.
Accounting convention
The financial statements are prepared under the historical cost convention.
Foreign currency transactions
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. 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 profit for the year. Exchange adjustments arising
when the opening net assets and the profits for the year retained by non-US dollar functional currency branches are translated into US dollars are taken to
a separate component of equity and reported in the statement of total recognized gains and losses.
Investments
Investments in subsidiaries and associated undertakings are recorded at cost. The company assesses investments for impairment whenever events
or changes in circumstances indicate that the carrying value of an investment may not be recoverable. If any such indication of impairment exists, the
company makes an estimate of its recoverable amount. Where the carrying amount of an investment exceeds its recoverable amount, the investment is
considered impaired and is written down to its recoverable amount.
Share-based payments
Equity-settled transactions
The cost of equity-settled transactions with employees is measured by reference to the fair value at the date at which equity instruments are granted
and is recognized as an expense over the vesting period, which ends on the date on which the relevant employees become fully entitled to the award.
Fair value is determined by using an appropriate valuation model. In valuing equity-settled transactions, no account is taken of any vesting conditions,
other than conditions linked to the price of the shares of the company (market conditions). Non-vesting conditions, such as the condition that employees
contribute to a savings-related plan, are taken into account in the grant-date fair value, and failure to meet a non-vesting condition is treated as a
cancellation, where this is within the control of the employee.
No expense is recognized for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which
are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied.
At each balance sheet date before vesting, the cumulative expense is calculated, representing the extent to which the vesting period has expired
and management’s best estimate of the achievement or otherwise of non-market conditions and the number of equity instruments that will ultimately
vest or, in the case of an instrument subject to a market condition, be treated as vesting as described above. The movement in cumulative expense since
the previous balance sheet date is recognized in the income statement, with a corresponding entry in equity.
When the terms of an equity-settled award are modified or a new award is designated as replacing a cancelled or settled award, the cost based on
the original award terms continues to be recognized over the original vesting period. In addition, an expense is recognized over the remainder of the new
vesting period for the incremental fair value of any modification, based on the difference between the fair value of the original award and the fair value of
the modified award, both as measured on the date of the modification. No reduction is recognized if this difference is negative.
When an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation and any cost not yet recognized in the income
statement for the award is expensed immediately.
Cash-settled transactions
The cost of cash-settled transactions is measured at fair value and recognized as an expense over the vesting period, with a corresponding liability
recognized on the balance sheet.
Pensions
The cost of providing benefits under the defined benefit plans is determined separately for each plan using the projected unit credit method, which
attributes entitlement to benefits to the current period (to determine current service cost) and to the current and prior periods (to determine the present
value of the defined benefit obligation). Past service costs are recognized immediately when the company becomes committed to a change in pension
plan design. When a settlement (eliminating all obligations for benefits already accrued) or a curtailment (reducing future obligations as a result of a material
reduction in the scheme membership or a reduction in future entitlement) occurs, the obligation and related plan assets are remeasured using current
actuarial assumptions and the resultant gain or loss is recognized in the income statement during the period in which the settlement or curtailment occurs.
The interest element of the defined benefit cost represents the change in present value of scheme obligations resulting from the passage of
time, and is determined by applying the discount rate to the opening present value of the benefit obligation, taking into account material changes in the
obligation during the year. The expected return on plan assets is based on an assessment made at the beginning of the year of long-term market returns
on plan assets, adjusted for the forecasts of contributions received and benefits paid during the year. The difference between the expected return on plan
assets and the interest cost is recognized in the income statement as other finance income or expense.
Actuarial gains and losses are recognized in full within the statement of total recognized gains and losses in the year in which they occur.
The defined benefit pension plan surplus or deficit in the balance sheet comprises the total for each plan of the present value of the defined benefit
obligation (using a discount rate based on high quality corporate bonds), less the fair value of plan assets out of which the obligations are to be settled
directly. Fair value is based on market price information and, in the case of quoted securities, is the published bid price. The surplus or deficit, net of
taxation thereon, is presented separately above the total for net assets on the face of the balance sheet.