BP 2005 Annual Report Download - page 35

amount of the asset is increased to its recoverable amount. That
increased amount cannot exceed the carrying amount that would have
been determined, net of depreciation, had no impairment loss been
recognized for the asset in prior years. Such reversal is recognized in
profit or loss. After such a reversal, the depreciation charge is adjusted
in future periods to allocate the asset’s revised carrying amount, less
any residual value, on a systematic basis over its remaining useful life.
FINANCIAL ASSETS
Financial assets are classified as financial assets at fair value through
profit or loss; loans and receivables; held-to-maturity investments; 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 determines the classification of its financial
assets at initial recognition. When financial assets are recognized
initially, they are measured 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. As explained in
Note 50, the group has not restated comparative amounts, on first
applying IAS 32 ’Financial Instruments: Disclosure and Presentation’
and IAS 39 ’Financial Instruments: Recognition and Measurement’, as
permitted in IFRS 1 ’First-time Adoption of International Financial
Reporting Standards’.
All regular way purchases and sales of financial assets are
recognized on the trade date, being the date that the group commits
to purchase or sell the asset. Regular way transactions require
delivery of assets within the timeframe generally established by
regulation or convention in the marketplace. The subsequent
measurement of financial assets depends on their classification,
as follows:
Financial assets at fair value through profit or loss Financial assets
classified as held for trading and other assets designated as such on
inception are included in this category. Financial assets are classified
as held for trading if they are acquired for sale in the short term.
Derivatives are also classified as held for trading unless they are
designated as hedging instruments. Assets are carried on the
balance sheet at fair value with gains or losses recognized in the
income statement.
Loans and receivables Loans and receivables are non-derivative
financial assets with fixed or determinable payments that are not
quoted in an active market, do not qualify as trading assets and have
not been designated as either fair value through profit and loss or
available-for-sale. Such assets 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.
Held-to-maturity investments Non-derivative financial assets with fixed
or determinable payments and fixed maturity are classified as held-to-
maturity when the group has the positive intention and ability to hold
to maturity. Held-to-maturity investments are carried at amortized cost
using the effective interest method. Gains and losses are recognized
in income when the investments are derecognized or impaired, as
well as through the amortization process. Investments intended to be
held for an undefined period are not included in this classification.
Available-for-sale financial assets Available-for-sale financial assets are
those non-derivative financial assets that are designated as such or
are not classified in any of the three preceding categories. After initial
recognition, available-for-sale financial assets are measured at fair
value, with gains or losses being recognized as a separate component
of equity until the investment is derecognized or until the investment
is determined to be impaired, at which time the cumulative gain or
loss previously reported in equity is included in the income statement.
Fair values The fair value of quoted investments is determined by
reference to bid prices at the close of business on the balance sheet
date. Where there is no active market, fair value is determined using
valuation techniques. These include using recent arm’s-length market
transactions; reference to the current market value of another
instrument which is substantially the same; discounted cash flow
analysis; and pricing models. Otherwise assets are carried at cost.
IMPAIRMENT OF FINANCIAL ASSETS
The group assesses at each balance sheet date whether a financial
asset or group of financial assets is impaired.
Assets carried at amortized cost 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 administration costs.
If, in a subsequent period, the amount of the impairment loss
decreases and the decrease can be related objectively to an event
occurring after the impairment was recognized, the previously
recognized impairment loss is reversed. Any subsequent reversal of an
impairment loss is recognized in the income statement, to the extent
that the carrying value of the asset does not exceed its amortized cost
at the reversal date.
Assets carried at cost If there is objective evidence that an impairment
loss on an unquoted equity instrument that is not carried at fair value
because its fair value cannot be reliably measured, or on a derivative
asset that is linked to and must be settled by delivery of such an
unquoted equity instrument, 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 current market rate of return for a similar financial asset.
Available-for-sale financial assets If an available-for-sale asset is
impaired, an amount comprising the difference between its cost
(net of any principal payment and amortization) and its fair value is
transferred from equity to the income statement.
Reversals of impairment losses on debt instruments are taken
through the income statement if the increase in fair value of the
instrument can be objectively related to an event occurring after the
impairment loss was recognized in profit or loss. Reversals in respect
of equity instruments classified as available-for-sale are not recognized
in the income statement.
INVENTORIES
Inventories, other than inventory held for trading purposes, are stated
at the lower of cost and net realizable value. Cost is determined by
the first-in first-out method and comprises direct purchase costs,
cost of production, transportation and manufacturing expenses.
Inventories held for trading purposes are stated at fair value less
costs to sell and any changes in net realizable value are recognized
in the income statement.
Supplies are valued at cost to the group mainly using the average
method or net realizable value, whichever is the lower.
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