BP 2013 Annual Report Download - page 138

1. Significant accounting policies, judgements, estimates and assumptions – continued
such additional contributions will be made. The group recognizes a reimbursement asset separately, being the lower of the amount of the associated
restoration, environmental or other provision and the group’s share of the fair value of the net assets of the fund available to contributors.
Significant estimate or judgement
Detailed information on the Gulf of Mexico oil spill, including the financial impacts, is provided in Note 2.
The provision recognized is the best reliable estimate of expenditures required to settle certain present obligations at the end of the reporting period,
however there are future expenditures for which it is not possible to measure the obligation reliably. These are not provided for and are disclosed as
contingent liabilities. Accounting judgement is required to identify when a provision can be measured reliably, which can be especially challenging
when complex litigation activities are ongoing.
In addition, for those provisions which are recognized, there is significant estimation uncertainty about the amounts that will ultimately be paid,
especially with regard to amounts payable under the Deepwater Horizon Court Supervised Settlement Program (DHCSSP). A provision is made for
these costs when the amount can be measured reliably; this requires an analysis of claims received and processed and consideration of the status
of ongoing legal activity.
The provision for penalties under the US Clean Water Act is based on the estimated civil penalty for strict liability. This provision is calculated based
on estimates as to the volume of oil spilled, as well as the assumption that BP did not act with gross negligence or engage in wilful misconduct,
each of which will eventually be determined by the court on the basis of the trial proceedings.
Decommissioning
Liabilities for decommissioning costs are recognized when the group has an obligation to plug and abandon a well, dismantle and remove a facility or
an item of plant and to restore the site on which it is located, and when a reliable estimate of that liability can be made. Where an obligation exists for a
new facility or item of plant, such as oil and natural gas production or transportation facilities, this liability will be recognized on construction or
installation. Similarly, where an obligation exists for a well, this liability is recognized when it is drilled. An obligation for decommissioning may also
crystallize during the period of operation of a well, facility or item of plant through a change in legislation or through a decision to terminate operations;
an obligation may also arise in cases where an asset has been sold but the subsequent owner is no longer able to fulfil its decommissioning
obligations, for example due to bankruptcy. The amount recognized is the present value of the estimated future expenditure determined in accordance
with local conditions and requirements.
A corresponding intangible asset (in the case of an exploration or appraisal well) or item of property, plant and equipment of an amount equivalent to
the provision is also recognized. The item of property, plant and equipment is subsequently depreciated as part of the asset.
Other than the unwinding of discount on the provision, any change in the present value of the estimated expenditure is reflected as an adjustment to
the provision and the corresponding asset. Such changes include foreign exchange gains and losses arising on the retranslation of the liability into the
functional currency of the reporting entity, when it is known that the liability will be settled in a foreign currency.
Environmental expenditures and liabilities
Environmental expenditures that relate to future revenues are capitalized. Expenditures that relate to an existing condition caused by past operations
that do not contribute to future earnings are expensed.
Liabilities for environmental costs are recognized when a clean-up is probable and the associated costs can be reliably estimated. Generally, the timing
of recognition of these provisions coincides with the commitment to a formal plan of action or, if earlier, on divestment or on closure of inactive sites.
The amount recognized is the best estimate of the expenditure required. Where the liability will not be settled for a number of years, the amount
recognized is the present value of the estimated future expenditure.
Significant estimate or judgement
The group holds provisions for the future decommissioning of oil and natural gas production facilities and pipelines at the end of their economic lives.
The largest decommissioning obligations facing BP relate to the plugging and abandonment of wells and the removal and disposal of oil and natural
gas platforms and pipelines around the world. Most of these decommissioning events are many years in the future and the precise requirements
that will have to be met when the removal event actually occurs are uncertain. Decommissioning technologies and costs are constantly changing, as
well as political, environmental, safety and public expectations. If oil and natural gas production facilities and pipelines are sold to third parties and
the subsequent owner is unable to meet their decommissioning obligations, judgement must be used to determine whether BP is then responsible
for decommissioning, and if so the extent of that responsibility. Consequently, the timing and amounts of future cash flows are subject to significant
uncertainty. Any changes in the expected future costs are reflected in both the provision and the asset.
Decommissioning provisions associated with downstream and petrochemicals facilities are generally not recognized, as such potential obligations
cannot be measured, given their indeterminate settlement dates. The group performs periodic reviews of its downstream and petrochemicals long-
lived assets for any changes in facts and circumstances that might require the recognition of a decommissioning provision.
The provision for environmental liabilities is estimated based on current legal and constructive requirements, technology, price levels and expected
plans for remediation. Actual costs and cash outflows can differ from estimates because of changes in laws and regulations, public expectations,
prices, discovery and analysis of site conditions and changes in clean-up technology.
Other provisions and liabilities are recognized in the period when it becomes probable that there will be a future outflow of funds resulting from past
operations or events and the amount of cash outflow can be reliably estimated. The timing of recognition and quantification of the liability require the
application of judgement to existing facts and circumstances, which can be subject to change. Since the actual cash outflows can take place many
years in the future, the carrying amounts of provisions and liabilities are reviewed regularly and adjusted to take account of changing facts and
circumstances.
The timing and amount of future expenditures are reviewed annually, together with the interest rate used in discounting the cash flows. The interest
rate used to determine the balance sheet obligation at the end of 2013 was a real rate of 1.0% (2012 0.5%), which was based on long-dated
government bonds.
Provisions and contingent liabilities in relation to the Gulf of Mexico oil spill are discussed in Note 2. Information about the group’s other provisions is
provided in Note 29. As further described in Note 35, the group is subject to claims and actions. The facts and circumstances relating to particular
cases are evaluated regularly in determining whether it is probable that there will be a future outflow of funds and, once established, whether a
provision relating to a specific litigation should be established or revised. Accordingly, significant management judgement relating to provisions and
contingent liabilities is required, since the outcome of litigation is difficult to predict.
134 BP Annual Report and Form 20-F 2013