BP 2012 Annual Report Download - page 225

(iv) Equity price risk
The group holds equity investments, typically made for strategic purposes, that are classified as non-current available-for-sale financial assetsandare
measured initially at fair value with changes in fair value recognized in other comprehensive income. Accumulated fair value changes are recycled to the
income statement on disposal, or when the investment is impaired. No impairment losses have been recognized in the years presented relating to listed
non-current available-for-sale investments. For further information see Note 27. In addition, at 31 December 2012, the group was a party to certain
equity price derivatives described in further detail below.
At 31 December 2012, it is estimated that an increase of 10% in quoted equity prices would result in an immediate credit to other comprehensive
income of $1,502 million (2011 $87 million credit to other comprehensive income), while a decrease of 10% in quoted equity prices would result in an
immediate charge to other comprehensive income of $1,502 million (2011 $87 million charge to other comprehensive income). At 31 December 2012,
82% (2011 77%) of the carrying amount of non-current available-for-sale equity financial assets represented the group’s 1.25% stake in Rosneft, thus
the group’s exposure is concentrated on changes in the share price of this equity in particular. As described in Note 33, the agreements for the purchase
of 5.66% and 9.80% shareholdings in Rosneft are derivative financial instruments, whose fair value is impacted by the Rosneft share price, and are
accounted for as cash flow hedges, with changes in fair value recognized in other comprehensive income to the extent the hedge is effective. See Note
4 for further information.
(b) Credit risk
Credit risk is the risk that a customer or counterparty to a financial instrument will fail to perform or fail to pay amounts due causing financial loss tothe
group and arises from cash and cash equivalents, derivative financial instruments and deposits with financial institutions and principally from credit
exposures to customers relating to outstanding receivables.
The group has a credit policy, approved by the CFO, that is designed to ensure that consistent processes are in place throughout the group to measure
and control credit risk. Credit risk is considered as part of the risk-reward balance of doing business. On entering into any business contract the extent to
which the arrangement exposes the group to credit risk is considered. Key requirements of the policy include segregation of credit approval authorities
from any sales, marketing or trading teams authorized to incur credit risk; the establishment of credit systems and processes to ensure that all
counterparty exposure is rated and that all counterparty exposure and limits can be monitored and reported; and the timely identification and reporting of
any non-approved credit exposures and credit losses. While each segment of the group is typically responsible for its own credit risk management and
reporting consistent with group policy, the treasury function holds group-wide credit risk authority and oversight responsibility for exposure to banks and
financial institutions.
The global credit environment remained challenging in 2012, suffering not only from continuing economic and political uncertainties but also from key
event risks, causing the group to further heighten awareness, discussion and co-ordination of the material credit risks arising from its activities.
Before trading with a new counterparty can start, its creditworthiness is assessed and a credit rating is allocated that indicates the probability of default,
along with a credit exposure limit. The assessment process takes into account all available qualitative and quantitative information about the
counterparty and the group, if any, to which the counterparty belongs. The counterparty’s business activities, financial resources and business risk
management processes are taken into account in the assessment, to the extent that this information is publicly available or otherwise disclosed to BP
by the counterparty, together with external credit ratings. Creditworthiness continues to be evaluated after transactions have been initiated and a
watchlist of higher-risk counterparties is maintained.
The group does not aim to remove credit risk but expects to experience a certain level of credit losses. The group attempts to mitigate credit risk by
entering into contracts that permit netting and allow for termination of the contract on the occurrence of certain events of default. Depending on the
creditworthiness of the counterparty, the group may require collateral or other credit enhancements such as cash deposits, letters of credit, trade credit
insurance, liens, third-party guarantees and other forms of credit mitigation. Trade receivables and payables, and derivative assets and liabilities, are
presented on a net basis where unconditional netting arrangements are in place with counterparties and where there is an intent to settle amounts due
on a net basis. The maximum credit exposure associated with financial assets is equal to the carrying amount. Collateral received and recognized in the
balance sheet at the year end was $334 million (2011 $273 million) and collateral held off balance sheet was $148 million (2011 $6 million). As at
31 December 2012, the group had in place other credit enhancements designed to mitigate approximately $11.5 billion of credit risk (2011 $8.6 billion).
Credit exposure exists in relation to guarantees issued by group companies under which amounts outstanding at 31 December 2012 were $237 million
(2011 $415 million) in respect of liabilities of jointly controlled entities and associates and $713 million (2011 $1,430 million) in respect of liabilities of
other third parties.
Notwithstanding the processes described above, significant unexpected credit losses can occasionally occur. Exposure to unexpected losses increases
with concentrations of credit risk that exist when a number of counterparties are involved in similar activities or operate in the same industry sectoror
geographical area, which may result in their ability to meet contractual obligations being impacted by changes in economic, political or other conditions.
The group’s principal customers, suppliers and financial institutions with which it conducts business are located throughout the world. In addition, these
risks are managed by maintaining a group watchlist and aggregating multi-segment exposures to ensure that a material credit risk is not missed.
Reports are regularly prepared and presented to the GFRC that cover the group’s overall credit exposure and expected loss trends, exposure by
segment, and overall quality of the portfolio. The reports also include details of the largest counterparties by exposure level and expected loss, and
details of counterparties on the group watchlist.
For the contracts comprising derivative financial instruments in an asset position at 31 December 2012, excluding the contracts with Rosneft accounted
for as derivatives, it is estimated that over 72% (2011 over 76%) of the unmitigated credit exposure is to counterparties of investment grade credit
quality.
For cash and cash equivalents, the treasury function dynamically manages bank deposit limits to ensure cash is well-diversified and to reduce
concentration risks. At 31 December 2012, over 98% of the cash and cash equivalents balance was deposited with financial institutions rated at least A-
by Standard & Poor’s and A3 by Moody’s. Direct cash and cash equivalent exposures to Greek, Italian, Irish, Portuguese and Spanish financial
institutions totalled less than 0.6% of total cash and cash equivalents.
Financial statements 223
BP Annual Report and Form 20-F 2012
Financial statements
26. Financial instruments and financial risk factors continued