BP 2014 Annual Report Download - page 69

Corporate governance
Accounting judgements and estimates
Areas of significant judgement considered by the committee during the year and how these were addressed included:
Key issues/judgements in financial reporting Audit committee review
Accounting for
interests in other
entities
BP exercises judgement when assessing the level of control
obtained in a transaction to acquire an interest in another
entity, and, on an ongoing basis in assessing whether there
have been any changes in the level of control.
The committee continued to review the accounting for BP’s
investment in Rosneft including the assessment of significant
influence in light of developments during the year, such as the
imposition of US and EU sanctions.
Oil and natural gas
accounting
BP uses judgement and estimations when accounting for oil
and gas exploration, appraisal and development expenditure
and determining the group’s estimated oil and gas reserves.
The committee reviewed judgemental aspects of oil and gas
accounting as part of the company’s quarterly due-diligence
process, including the treatment of certain intangible assets.
The committee considered the judgements made in
assessing the exploration write-offs recorded during the year.
It received a briefing on the measurement of reserves and
also examined the group’s oil and gas reserves disclosures
that appear in this BP Annual Report and Form 20-F 2014.
Recoverability of asset
carrying values
Determining whether and how much an asset is impaired
involves management judgement and estimates on highly
uncertain matters such as future pricing or discount rates.
Judgements are also required in assessing the recoverability
of overdue receivables and deciding whether a provision is
required.
The committee reviewed the discount rates for impairment
testing as part of its annual process and examined the
assumptions for long-term oil and gas prices and refining
margins, particularly in light of the decline in prices in the latter
part of the year. The committee considered the judgements
made in assessing the existence of indicators of impairment of
assets as well as the significant estimates made in the
measurement of the impairment losses recognized. The
committee also continued to discuss periodically with
management the recoverability of overdue receivables.
Provisions and
contingencies
The group holds provisions for the future decommissioning of
oil and natural gas production facilities and pipelines at the
end of their economic lives. Most of these decommissioning
events are in the long term and the requirements that will
have to be met when a removal event occurs are uncertain.
Judgement is applied by the company when estimating
issues such as settlement dates, technology and legal
requirements.
The committee received briefings on the group’s
decommissioning, environmental remediation and litigation
provisioning, including key assumptions used, discount rates
and the movement in provisions over time.
Gulf of Mexico oil spill Judgement was applied during the year around the provisions
and contingencies relating to the incident.
The committee regularly discussed the provisioning for and
the disclosure of contingent liabilities relating to the Gulf of
Mexico oil spill with management, external auditors and
external counsel, including as part of the review of BP’s stock
exchange announcement at each quarter end. The committee
examined developments relating to US court rulings (including
Clean Water Act penalties, business and economic loss
settlement payments and natural resource damages) and
monitored legal developments while considering the impact
on the financial statements and other disclosures.
Pensions and other
post-retirement
benefits
Accounting for pensions and other post-retirement benefits
involves judgement about uncertain events, including
discount rates, inflation and life expectancy.
The committee examined the assumptions used by
management as part of its annual reporting process.
Taxation Computation of the group’s tax expense and liability, the
provisioning for potential tax liabilities and the level of deferred
tax asset recognition in relation to accumulated tax losses are
underpinned by management judgement.
The committee reviewed the judgements exercised on tax
provisioning as part of its annual review of key provisions.
BP Annual Report and Form 20-F 2014 65