BP 2012 Annual Report Download - page 190

1. Significant accounting policies continued
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.
Oil and natural gas exploration, appraisal and development expenditure
Oil and natural gas exploration, appraisal and development expenditure is
accounted for using the principles of the successful efforts method of
accounting.
Licence and property acquisition costs
Exploration licence and leasehold property acquisition costs are capitalized
within intangible assets and are reviewed at each reporting date to
confirm that there is no indication that the carrying amount exceeds the
recoverable amount. This review includes confirming that exploration
drilling is still under way or firmly 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
sufficient 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. Upon recognition of proved reserves and internal approval for
development, the relevant expenditure is transferred to property, plant
and equipment.
Exploration and appraisal expenditure
Geological and geophysical exploration costs are charged against income
as incurred. Costs directly associated with an exploration well are initially
capitalized as an intangible asset until the drilling of the well is complete
and the results have been evaluated. These costs include employee
remuneration, materials and fuel used, rig costs and payments made to
contractors. If potentially commercial quantities of hydrocarbons are not
found, the exploration well is written off as a dry hole. If hydrocarbons are
found and, subject to further appraisal activity, are likely to be capable of
commercial development, the costs continue to be carried as an asset.
Costs directly associated with appraisal activity, undertaken to determine
the size, characteristics and commercial potential of a reservoir following
the initial discovery of hydrocarbons, including the costs of appraisal wells
where hydrocarbons were not found, are initially capitalized as an
intangible asset.
All such carried costs are subject to technical, commercial and
management review at least once a year to confirm the continued intent
to develop or otherwise extract value from the discovery. When this is no
longer the case, the costs are written off. When proved reserves of oil and
natural gas are determined and development is approved by management,
the relevant expenditure is transferred to property, plant and equipment.
Development expenditure
Expenditure on the construction, installation and completion of
infrastructure facilities such as platforms, pipelines and the drilling of
development wells, including service and unsuccessful development or
delineation wells, is capitalized within property, plant and equipment and
is depreciated from the commencement of production as described below
in the accounting policy for property, plant and equipment.
Property, plant and equipment
Property, plant and equipment is stated at cost, less accumulated
depreciation and accumulated impairment losses. The initial cost of an
asset comprises its purchase price or construction cost, any costs directly
attributable to bringing the asset into the location and condition necessary
for it to be capable of operating in the manner intended by management,
the initial estimate of any decommissioning obligation, if any, and, for
qualifying assets, borrowing costs. The purchase price or construction
cost is the aggregate amount paid and the fair value of any other
consideration given to acquire the asset. The capitalized value of a finance
lease is also included within property, plant and equipment. Exchanges of
assets are measured at fair value unless the exchange transaction lacks
commercial substance or the fair value of neither the asset received nor
the asset given up is reliably measurable. The cost of the acquired asset is
measured at the fair value of the asset given up, unless the fair value of
the asset received is more clearly evident. Where fair value is not used,
the cost of the acquired asset is measured at the carrying amount of the
asset given up. The gain or loss on derecognition of the asset given up is
recognized in profit or loss.
Expenditure on major maintenance refits or repairs comprises the cost of
replacement assets or parts of assets, inspection costs and overhaul
costs. Where an asset or part of an asset that was separately depreciated
is replaced and it is probable that future economic benefits associated
with the item will flow to the group, the expenditure is capitalized and the
carrying amount of the replaced asset is derecognized. Inspection costs
associated with major maintenance programmes are capitalized and
amortized over the period to the next inspection. Overhaul costs for major
maintenance programmes, and all other maintenance costs are expensed
as incurred.
Oil and natural gas properties, including related pipelines, are depreciated
using a unit-of-production method. The cost of producing wells is
amortized over proved developed reserves. Licence acquisition, common
facilities and future decommissioning costs are amortized over total
proved reserves. The unit-of-production rate for the amortization of
common facilities costs takes into account expenditures incurred to date,
together with the future capital expenditure expected to be incurred in
relation to these common facilities.
Other property, plant and equipment is depreciated on a straight line basis
over its expected useful life. The typical useful lives of the group’s other
property, plant and equipment are as follows:
Land improvements 15 to 25 years
Buildings 20 to 50 years
Refineries 20 to 30 years
Petrochemicals plants 20 to 30 years
Pipelines 10 to 50 years
Service stations 15 years
Office equipment 3 to 7 years
Fixtures and fittings 5 to 15 years
The expected useful lives of property, plant and equipment are reviewed
on an annual basis and, if necessary, changes in useful lives are
accounted for prospectively.
The carrying amount of property, plant and equipment is reviewed for
impairment whenever events or changes in circumstances indicate the
carrying value may not be recoverable.
An item of property, plant and equipment is derecognized upon disposal
or when no future economic benefits are expected to arise from the
continued use of the asset. Any gain or loss arising on derecognition of
the asset (calculated as the difference between the net disposal proceeds
and the carrying amount of the item) is included in the income statement
in the period in which the item is derecognized.
Impairment of intangible assets and property, plant and equipment
The group assesses assets or groups of assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable, for example, changes in the group’s
business plans, changes in commodity prices leading to sustained
unprofitable performance, low plant utilization, evidence of physical
damage or, for oil and gas assets, significant downward revisions of
estimated volumes or increases in estimated future development
expenditure. If any such indication of impairment exists, the group makes
an estimate of the asset’s recoverable amount. Individual assets are
grouped for impairment assessment purposes at the lowest level at which
there are identifiable cash flows that are largely independent of the cash
flows of other groups of assets. An asset group’s recoverable amount is
the higher of its fair value less costs to sell and its value in use. Where the
carrying amount of an asset group exceeds its recoverable amount, the
asset group is considered impaired and is written down to its recoverable
amount. In assessing value in use, the estimated future cash flows are
adjusted for the risks specific to the asset group and are discounted to
their present value using a pre-tax discount rate that reflects current
market assessments of the time value of money.
An assessment is made at each reporting date as to whether there is any
indication that previously recognized impairment losses may no longer
exist or may have decreased. If such an indication exists, the recoverable
188 Financial statements
BP Annual Report and Form 20-F 2012