BP 2014 Annual Report Download - page 133

12. Goodwill and impairment review of goodwill
$ million
2014 2013
Cost
At 1 January 12,851 12,804
Exchange adjustments (278) 46
Acquisitions 73 44
Deletions (164) (43)
At 31 December 12,482 12,851
Impairment losses
At 1 January 670 614
Impairment losses for the year –56
Deletions (56) –
At 31 December 614 670
Net book amount at 31 December 11,868 12,181
Net book amount at 1 January 12,181 12,190
Impairment review of goodwill
$ million
Goodwill at 31 December 2014 2013
Upstream 7,819 7,812
Downstream 3,968 4,277
Other businesses and corporate 81 92
11,868 12,181
Goodwill acquired through business combinations has been allocated to groups of cash-generating units that are expected to benefit from the
synergies of the acquisition. For Upstream, goodwill is allocated to all oil and gas assets in aggregate at the segment level. For Downstream, goodwill
has been allocated to Lubricants and Other.
For information on significant estimates and judgements made in relation to impairments see Impairment of property, plant and equipment, intangibles
and goodwill within Note 1.
Upstream
$ million
2014 2013
Goodwill 7,819 7,812
Excess of recoverable amount over carrying amount 26,077 6,811
The table above shows the carrying amount of goodwill for the segment and the excess of the recoverable amount over the carrying amount (the
headroom).
In 2014, the recoverable amount is calculated using a fair value less costs of disposal approach, whereas a value-in-use approach was used in 2013.
The change in valuation technique was made in order to more accurately reflect the recoverable amount, based on our view of assumptions that would
be used by a market participant. Both the fair value less costs of disposal and value-in-use calculations are based on the cash flows expected to be
generated by the projected oil or natural gas production profiles up to the expected dates of cessation of production of each producing field, based on
current estimates of reserves (for value in use) and reserves and risked resources (for fair value less costs of disposal). The fair value calculation is
based primarily on level 3 inputs as defined by the IFRS 13 ‘Fair value measurement’ hierarchy. As the production profile and related cash flows can be
estimated from BP’s experience, management believes that the estimated cash flows expected to be generated over the life of each field is the
appropriate basis upon which to assess goodwill and individual assets for impairment. The estimated date of cessation of production depends on the
interaction of a number of variables, such as the recoverable quantities of hydrocarbons, the production profile of the hydrocarbons, the cost of the
development of the infrastructure necessary to recover the hydrocarbons, production costs, the contractual duration of the production concession and
the selling price of the hydrocarbons produced. As each producing field has specific reservoir characteristics and economic circumstances, the cash
flows of the fields are computed using appropriate individual economic models and key assumptions agreed by BP management. Capital expenditure,
operating costs and expected hydrocarbon production profiles are derived from the business segment plan adjusted for assumptions reflecting the
current price environment. Estimated production volumes and cash flows up to the date of cessation of production on a field-by-field basis are
developed to be consistent with this. The production profiles used are consistent with the reserve and resource volumes approved as part of BP’s
centrally controlled process for the estimation of proved and probable reserves and total resources. Intangible assets are deemed to have a recoverable
amount equal to their carrying amount. Consistent with prior years, the 2014 review for impairment was carried out during the fourth quarter.
The key assumptions used in the fair value less costs of disposal calculation are oil and natural gas prices (see Note 1), production volumes and the
discount rate (see Note 1). The sensitivity of the headroom to changes in the key assumptions was estimated. Due to the non-linear relationship of
different variables, the calculations were performed using a number of simplifying assumptions, including assuming a change to the variable being
tested only, therefore a detailed calculation at any given price may produce a different result.
It is estimated that if the oil price assumption for all future years was approximately 15% below the current assumption for 2020 and beyond, this
would cause the recoverable amount to be equal to the carrying amount of goodwill and related non-current assets of the segment. It is estimated that
there is no reasonably possible change in the price assumption for natural gas that would cause the recoverable amount to be equal to the carrying
amount of goodwill and related non-current assets of the segment.
Estimated production volumes are based on detailed data for each field and take into account development plans agreed by management as part of the
long-term planning process. The average production for the purposes of goodwill impairment testing over the next 15 years is 847mmboe per year
Financial statements
BP Annual Report and Form 20-F 2014 129