BP 2013 Annual Report Download - page 136

1. Significant accounting policies, judgements, estimates and assumptions – continued
Available-for-sale financial assets
Available-for-sale financial assets are those non-derivative financial assets that are not classified as loans and receivables, financial assets at fair value
through profit or loss, or held-to-maturity financial assets. After initial recognition, available-for-sale financial assets are measured at fair value, with
gains or losses recognized within other comprehensive income, except for impairment losses, foreign exchange gains or losses and any changes in fair
value arising from revised estimates of future cash flows, which are recognized in profit or loss.
Impairment of financial assets
The group assesses at each balance sheet date whether a financial asset or group of financial assets is impaired.
Loans and receivables
If there is objective evidence that an impairment loss on loans and receivables carried at amortized cost has been incurred, the amount of the loss is
measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the financial
asset’s original effective interest rate. The carrying amount of the asset is reduced, with the amount of the loss recognized in the income statement.
Significant estimate or judgement
Judgements are required in assessing the recoverability of overdue trade receivables, such as those in Egypt (see Note 19 for further details), and
determining whether a provision against the future recoverability of those receivables is required. Factors considered include the credit rating ofthe
counterparty, the amount and timing of anticipated future payments and any possible actions that can be taken to mitigate the risk of non-payment.
See Note 19 for information on overdue receivables.
Financial liabilities
Financial liabilities are classified as financial liabilities at fair value through profit or loss; derivatives designated as hedging instruments in an effective
hedge; or as financial liabilities measured at amortized cost, as appropriate. Financial liabilities include trade and other payables, accruals, most items of
finance debt and derivative financial instruments. The group determines the classification of its financial liabilities at initial recognition. The
measurement of financial liabilities depends on their classification, as follows:
Financial liabilities at fair value through profit or loss
Financial liabilities at fair value through profit or loss are carried on the balance sheet at fair value with gains or losses recognized in the income
statement. Derivatives, other than those designated as effective hedging instruments, are classified as held for trading and are included in this
category.
Derivatives designated as hedging instruments in an effective hedge
Such derivatives are carried on the balance sheet at fair value. The treatment of gains and losses arising from revaluation is described below in the
accounting policy for derivative financial instruments and hedging activities.
Financial liabilities measured at amortized cost
All other financial liabilities are initially recognized at fair value. For interest-bearing loans and borrowings this is the fair value of the proceeds received
net of issue costs associated with the borrowing.
After initial recognition, other financial liabilities are subsequently measured at amortized cost using the effective interest method. Amortizedcostis
calculated by taking into account any issue costs, and any discount or premium on settlement. Gains and losses arising on the repurchase, settlement
or cancellation of liabilities are recognized respectively in interest and other income and finance costs.
This category of financial liabilities includes trade and other payables and finance debt.
Derivative financial instruments and hedging activities
The group uses derivative financial instruments to manage certain exposures to fluctuations in foreign currency exchange rates, interest rates and
commodity prices as well as for trading purposes. Such derivative financial instruments are initially recognized at fair value on the date on which a
derivative contract is entered into and are subsequently remeasured at fair value. Derivatives relating to unquoted equity instruments are carried at cost
where it is not possible to reliably measure their fair value subsequent to initial recognition. Derivatives are carried as assets when the fair value is
positive and as liabilities when the fair value is negative.
Contracts to buy or sell a non-financial item that can be settled net in cash or another financial instrument, or by exchanging financial instruments asif
the contracts were financial instruments, with the exception of contracts that were entered into and continue to be held for the purpose of the receipt
or delivery of a non-financial item in accordance with the group’s expected purchase, sale or usage requirements, are accounted for as financial
instruments. Contracts to buy or sell equity investments, including investments in associates, are also financial instruments. Gains or losses arising
from changes in the fair value of derivatives that are not designated as effective hedging instruments are recognized in the income statement.
If, at inception of a contract, the valuation cannot be supported by observable market data, any gain or loss determined by the valuation methodology is
not recognized in the income statement but is deferred on the balance sheet and is commonly known as ‘day-one profit or loss’. This deferred gain or
loss is recognized in the income statement over the life of the contract until substantially all the remaining contract term can be valued using
observable market data at which point any remaining deferred gain or loss is recognized in the income statement. Changes in valuation from the initial
valuation are recognized immediately through the income statement.
For the purpose of hedge accounting, hedges are classified as:
• Fair value hedges when hedging exposure to changes in the fair value of a recognized asset or liability.
• Cash flow hedges when hedging exposure to variability in cash flows that is either attributable to a particular risk associated with a recognized asset
or liability or a highly probable forecast transaction.
Hedge relationships are formally designated and documented at inception, together with the risk management objective and strategy for undertaking
the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged,
and how the entity will assess the hedging instrument effectiveness in offsetting the exposure to changes in the hedged item’s fair value or cash flows
attributable to the hedged risk. Such hedges are expected at inception to be highly effective in achieving offsetting changes in fair value or cash flows.
Hedges meeting the criteria for hedge accounting are accounted for as follows:
Fair value hedges
The change in fair value of a hedging derivative is recognized in profit or loss. The change in the fair value of the hedged item attributable to the risk
being hedged is recorded as part of the carrying value of the hedged item and is also recognized in profit or loss.
132 BP Annual Report and Form 20-F 2013