BP 2014 Annual Report Download - page 109

1. Significant accounting policies, judgements, estimates and assumptions – continued
Leases
Finance leases are capitalized at the commencement of the lease term at the fair value of the leased item or, if lower, at the present value of the
minimum lease payments. Finance charges are allocated to each period so as to achieve a constant rate of interest on the remaining balance of the
liability and are charged directly against income. Capitalized leased assets are depreciated over the shorter of the estimated useful life of the asset or
the lease term.
Operating lease payments are recognized as an expense in the income statement on a straight-line basis over the lease term.
Financial assets
Financial assets are classified as loans and receivables; financial assets at fair value through profit or loss; derivatives designated as hedging
instruments in an effective hedge; held-to-maturity financial assets; or as available-for-sale financial assets, as appropriate. Financial assets include cash
and cash equivalents, trade receivables, other receivables, loans, other investments, and derivative financial instruments. The group determinesthe
classification of its financial assets at initial recognition. Financial assets are recognized initially at fair value, normally being the transaction price plus, in
the case of financial assets not at fair value through profit or loss, directly attributable transaction costs.
The subsequent measurement of financial assets depends on their classification, as follows:
Loans and receivables
Loans and receivables are carried at amortized cost using the effective interest method if the time value of money is significant. Gains and losses are
recognized in income when the loans and receivables are derecognized or impaired, as well as through the amortization process. This category of
financial assets includes trade and other receivables. Cash and cash equivalents are short-term highly liquid investments that are readily convertible to
known amounts of cash, are subject to insignificant risk of changes in value and have a maturity of three months or less from the date of acquisition.
Financial assets at fair value through profit or loss
Financial assets 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
These 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.
Held-to-maturity financial assets
Held-to-maturity financial assets are measured at amortized cost using the effective interest method, less any impairment.
Available-for-sale 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, and, for available-for-sale debt instruments, 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 loans and receivables
The group assesses at each balance sheet date whether a financial asset or group of financial assets is impaired. 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: recoverability of trade receivables
Judgements are required in assessing the recoverability of overdue trade receivables and determining whether a provision against the future
recoverability of those receivables is required. Factors considered include the credit rating of the 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 27 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
These 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.
Financial statements
BP Annual Report and Form 20-F 2014 105