BP 2012 Annual Report Download - page 189

1. Significant accounting policies continued
Interests in associates
An associate is an entity over which the group is in a position to exercise
significant influence through participation in the financial and operating
policy decisions of the investee, but which is not a subsidiary or a jointly
controlled entity. The results, assets and liabilities of an associate are
incorporated in these financial statements using the equity method of
accounting as described above for jointly controlled entities.
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 subsidiaries, jointly controlled entities and associates,
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 the 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 and liabilities. Such
goodwill is recorded within investments in jointly controlled entities and
associates, and any impairment of the investment is included within the
group’s share of 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 are not depreciated
once classified as held for sale. The group ceases to use the equity
method of accounting from the date on 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 the 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.
Financial statements 187
BP Annual Report and Form 20-F 2012
Financial statements