BP 2014 Annual Report Download - page 148

27. Financial instruments and financial risk factors
The accounting classification of each category of financial instruments, and their carrying amounts, are set out below.
$ million
At 31 December 2014 Note
Loans and
receivables
Available-
for-sale financial
assets
Held-to-
maturity
investments
At fair value
through profit
or loss
Derivative
hedging
instruments
Financial
liabilities
measured at
amortized cost
Total carrying
amount
Financial assets
Other investments – equity shares 16 – 420 – – – – 420
– other 16 – 538 – 599 – – 1,137
Loans 992 – – – – – 992
Trade and other receivables 18 30,551 – – – – – 30,551
Derivative financial instruments 28 – – – 8,511 1,096 – 9,607
Cash and cash equivalents 23 23,504 2,989 3,270 – – – 29,763
Financial liabilities
Trade and other payables 20 – – – – – (40,327) (40,327)
Derivative financial instruments 28 – – – (6,100) (788) – (6,888)
Accruals – – – – – (7,963) (7,963)
Finance debt 24 – – – – – (52,854) (52,854)
55,047 3,947 3,270 3,010 308 (101,144) (35,562)
At 31 December 2013
Financial assets
Other investments – equity shares 16 –291 – – – – 291
– other 16 –1,167 – 574 – – 1,741
Loans 979 – – – – – 979
Trade and other receivables 18 39,630 – – – – – 39,630
Derivative financial instruments 28 – – – 5,189 995 – 6,184
Cash and cash equivalents 23 19,153 2,267 1,100 – – – 22,520
Financial liabilities
Trade and other payables 20 – – – – – (48,072) (48,072)
Derivative financial instruments 28 – – – (4,159) (388) – (4,547)
Accruals – – – – – (9,507) (9,507)
Finance debt 24 – – – – – (48,192) (48,192)
59,762 3,725 1,100 1,604 607 (105,771) (38,973)
The fair value of finance debt is shown in Note 24. For all other financial instruments, the carrying amount is either the fair value, or approximates the
fair value.
Financial risk factors
The group is exposed to a number of different financial risks arising from natural business exposures as well as its use of financial instruments
including market risks relating to commodity prices, foreign currency exchange rates and interest rates; credit risk; and liquidity risk.
The group financial risk committee (GFRC) advises the group chief financial officer (CFO) who oversees the management of these risks. The GFRC is
chaired by the CFO and consists of a group of senior managers including the group treasurer and the heads of the group finance, tax and the integrated
supply and trading functions. The purpose of the committee is to advise on financial risks and the appropriate financial risk governance framework for
the group. The committee provides assurance to the CFO and the group chief executive (GCE), and via the GCE to the board, that the group’s financial
risk-taking activity is governed by appropriate policies and procedures and that financial risks are identified, measured and managed in accordancewith
group policies and group risk appetite.
The group’s trading activities in the oil, natural gas and power markets are managed within the integrated supply and trading function, while the
activities in the financial markets are managed by the treasury function, working under the compliance and control structure of the integrated supply
and trading function. All derivative activity is carried out by specialist teams that have the appropriate skills, experience and supervision. Theseteams
are subject to close financial and management control.
The integrated supply and trading function maintains formal governance processes that provide oversight of market risk, credit risk and operationalrisk
associated with trading activity. A policy and risk committee monitors and validates limits and risk exposures, reviews incidents and validates risk-
related policies, methodologies and procedures. A commitments committee approves value-at-risk delegations, the trading of new products,
instruments and strategies and material commitments.
In addition, the integrated supply and trading function undertakes derivative activity for risk management purposes under a separate control framework
as described more fully below.
(a) Market risk
Market risk is the risk or uncertainty arising from possible market price movements and their impact on the future performance of a business. The
primary commodity price risks that the group is exposed to include oil, natural gas and power prices that could adversely affect the value of the group’s
financial assets, liabilities or expected future cash flows. The group enters into derivatives in a well-established entrepreneurial trading operation. In
addition, the group has developed a control framework aimed at managing the volatility inherent in certain of its natural business exposures. In
accordance with the control framework the group enters into various transactions using derivatives for risk management purposes.
The major components of market risk are commodity price risk, foreign currency exchange risk and interest rate risk, each of which is discussed below.
144 BP Annual Report and Form 20-F 2014