BP 2013 Annual Report Download - page 172

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19. Financial instruments and financial risk factors – continued
BP is also exposed to interest rate risk from the possibility that changes in interest rates will affect future cash flows or the fair values of its financial
instruments, principally finance debt. While the group issues debt in a variety of currencies based on market opportunities, it uses derivatives to swap
the debt to a floating rate exposure, mainly to US dollar floating, but in certain defined circumstances maintains a US dollar fixed rate exposure for a
proportion of debt. The proportion of floating rate debt net of interest rate swaps at 31 December 2013 was 65% of total finance debt outstanding
(2012 65%). The weighted average interest rate on finance debt at 31 December 2013 was 2% (2012 2%) and the weighted average maturity of fixed
rate debt was four years (2012 four years).
The group’s earnings are sensitive to changes in interest rates on the floating rate element of the group’s finance debt. If the interest rates applicable
to floating rate instruments were to have increased by one percentage point on 1 January 2014, it is estimated that the group’s finance costs for 2014
would increase by approximately $312 million (2012 $311 million increase in 2013).
(iv) Equity price risk
The group holds equity investments, typically for strategic purposes, that are classified as non-current available-for-sale financial assets and are
measured initially at fair value with changes in fair value recognized in other comprehensive income.
At 31 December 2013 the group had no significant exposure to the price of quoted equity instruments. At 31 December 2012, an increase or decrease
of 10% in quoted equity prices would have resulted in an immediate credit or charge to other comprehensive income of $1,502 million. At
31 December 2012, 82% 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 was concentrated on changes in the share price of this equity in particular. The sensitivity analysis at 31 December
2012 includes the impact of a change in the share price on the valuation of the contracts to acquire Rosneft shares accounted for as cash flow hedge
derivatives.
(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. Credit exposure also exists in relation to guarantees issued by group companies under
which amounts outstanding at 31 December 2013 were $199 million (2012 $237 million) in respect of liabilities of joint ventures and associates and
$305 million (2012 $717 million) in respect of liabilities of other third parties.
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 maximum credit exposure associated with financial assets is equal to the carrying amount. The group does not aim to remove credit risk entirely
but expects to experience a certain level of credit losses. As at 31 December 2013, the group had in place credit enhancements designed to mitigate
approximately $13 billion of credit risk (2012 $12 billion). 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.
For the contracts comprising derivative financial instruments in an asset position at 31 December 2013 it is estimated that over 80% (2012 over 70%,
excluding the contracts with Rosneft accounted for as derivatives) 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 2013, 92% of the cash and cash equivalents balance was deposited with financial institutions rated at least A- by
Standard & Poor’s and Fitch, and A3 by Moody’s. Of the total cash and cash equivalents held at year end, collateral of $5,450 million was held by
third-party custodians in tri-partite repurchase agreements, which would only be released to BP in the event of repayment default by the borrower.
Trade and other receivables of the group are analysed in the table below. By comparing the BP credit ratings to the equivalent external credit ratings, it
is estimated that approximately 70-80% (2012 approximately 70-80%) of the unmitigated trade receivables portfolio exposure is of investment grade
credit quality. Current assets, including trade and other receivables, in Egypt amount to $2.3 billion (see page 241), of which over one third relates to
trade receivables which are not impaired but are past the original due date. Management is working with the counterparties to continue to collect these
amounts.
$ million
Trade and other receivables at 31 December 2013 2012
Neither impaired nor past due 37,201 33,053
Impaired (net of provision) 27 80
Not impaired and past due in the following periods
within 30 days 1,054 1,337
31 to 60 days 249 286
61 to 90 days 216 225
over 90 days 883 981
39,630 35,962
Movements in the impairment provision for trade receivables are shown in Note 24.
Financial instruments subject to offsetting, enforceable master netting arrangements and similar agreements
The following table shows the gross amounts of recognized financial assets and liabilities (i.e. before offsetting) and the amounts offset in the balance
sheet. Financial assets and liabilities are only offset when the group currently has a legally enforceable right to set off the recognized amounts and the
group intends to either settle on a net basis or realize the asset and settle the liability simultaneously. A right of set off is the group’s legal right to
settle an amount payable to a creditor by applying against it an amount receivable from the same counterparty. The relevant legal jurisdiction and laws
applicable to the relationships between the parties need to be considered when assessing whether a current legally enforceable right to set off exists.
168 BP Annual Report and Form 20-F 2013