BP 2012 Annual Report Download - page 236

34. Finance debt continued
Fair values
The estimated fair value of finance debt is shown in the table below together with the carrying amount as reflected in the balance sheet.
Long-term borrowings in the table below include the portion of debt that matures in the year from 31 December 2012, whereas in the balance sheet the
amount is reported within current finance debt. The disposal deposits noted above are excluded from this analysis.
The carrying amount of the group’s short-term borrowings, comprising mainly commercial paper, approximates their fair value. The fair value of the
group’s long-term borrowings and finance lease obligations is estimated using quoted prices or, where these are not available, discounted cash flow
analyses based on the group’s current incremental borrowing rates for similar types and maturities of borrowing.
$ million
2012 2011
Fair
value
Carrying
amount
Fair
value
Carrying
amount
Short-term borrowings 3,128 3,128 3,800 3,800
Long-term borrowings 45,969 44,653 40,606 39,691
Net obligations under finance leases 520 384 776 692
Total finance debt 49,617 48,165 45,182 44,183
35. Capital disclosures and analysis of changes in net debt
The group defines capital as total equity. The group’s approach to managing capital is set out in its financial framework which BP continues to refine to
support the pursuit of value growth for shareholders, whilst maintaining a secure financial base. BP intends to maintain a net debt ratio within the
10-20% gearing range, and continue to hold a significant liquidity buffer while uncertainties remain.
The group monitors capital on the basis of the net debt ratio, that is, the ratio of net debt to net debt plus equity. Net debt is calculated as gross finance
debt, as shown in the balance sheet, less the fair value of associated derivative financial instruments that are used to hedge foreign exchange and
interest rate risks relating to finance debt, for which hedge accounting is applied, less cash and cash equivalents. Net debt and net debt ratio are non-
GAAP measures. BP believes these measures provide useful information to investors. Net debt enables investors to see the economic effect of gross
debt, related hedges and cash and cash equivalents in total. The net debt ratio enables investors to see how significant net debt is relative to equity
from shareholders. The derivatives are reported on the balance sheet within the headings ‘Derivative financial instruments’. All components of equity
are included in the denominator of the calculation. At 31 December 2012, the net debt ratio was 18.7% (2011 20.5%).
During 2012 and 2011, the company did not repurchase any of its own shares, other than as needed to satisfy the requirements of certain employee
share-based payment plans.
$ million
At 31 December 2012 2011
Gross debt 48,797 44,213
Less: fair value asset of hedges related to finance debt 1,700 1,133
47,097 43,080
Less: cash and cash equivalents 19,548 14,067
Net debt 27,549 29,013
Equity 119,620 112,482
Net debt ratio 18.7% 20.5%
An analysis of changes in net debt is provided below.
$ million
2012 2011
Movement in net debt
Finance
debta
Cash and
cash
equivalents
Net
debt
Finance
debta
Cash and
cash
equivalents
Net
debt
At 1 January (43,080) 14,067 (29,013) (44,420) 18,556 (25,864)
Exchange adjustments (75) 64 (11) 30 (492) (462)
Net cash flow (3,236) 5,417 2,181 (4,725) (3,997) (8,722)
Movement in finance debt relating to investing activitiesb(602) – (602) 6,167 – 6,167
Other movements (104) – (104) (132) – (132)
At 31 December (47,097) 19,548 (27,549) (43,080) 14,067 (29,013)
aIncluding the fair value of associated derivative financial instruments.
bSee Note 34 for further information.
234 Financial statements
BP Annual Report and Form 20-F 2012