BP 2005 Annual Report Download - page 79

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35 Derivative financial instruments continued
EMBEDDED DERIVATIVES HELD FOR TRADING
Prior to the development of an active gas trading market, UK gas contracts were priced using a basket of available price indices, primarily relating
to oil products. Post the development of an active UK gas market, certain contracts were entered into or renegotiated using pricing formulae
not directly related to gas prices, for example, oil product and power prices. In these circumstances, pricing formulae have been determined
to be derivatives, embedded within the overall contractual arrangements that are not clearly and closely related to the underlying commodity.
The resulting fair value relating to these contracts is recognized on the balance sheet with gains or losses recognized in the income statement.
These contracts are valued using price curves for each of the different products that are built up from active market pricing data and extrapolated
to 2018 using the maximum available external pricing information. Additionally, where limited data exists for certain products, prices are
interpolated using historic and long-term pricing relationships.
The fair values of embedded derivatives are included on the balance sheet within the following headings.
$ million
2005
Current Non-current Total
Prepayments and accrued income 330 257 587
Accruals and deferred income (953) (2,175) (3,128)
(623) (1,918) (2,541)
Embedded derivatives have the following maturities: $ million
2005
Fair Fair
value value
asset liability
Within one year 330 (953)
1 to 2 years 176 (703)
2 to 3 years 76 (502)
3 to 4 years 5 (237)
4 to 5 years – (180)
Over 5 years – (553)
587 (3,128)
Embedded derivative assets are denominated in the following currencies: $ million
2005
Currency of denomination
Other
US dollar Sterling Euro currencies Total
Functional currency
US dollar 79 – – – 79
Sterling – 508 – – 508
79 508 – – 587
Embedded derivative liabilities are denominated in the following currencies: $ million
2005
Currency of denomination
Other
US dollar Sterling Euro currencies Total
Functional currency
US dollar (30) – – – (30)
Sterling – (3,098) – – (3,098)
(30) (3,098) – – (3,128)
Embedded derivative assets held for trading have the following contractual or notional values and maturities: $ million
2005
Less than Over Total fair
1 year 1-2 years 2-3 years 3-4 years 4-5 years 5 years value
Natural gas embedded derivatives
Fair value 330 176 76 5 – – 587
Notional value 425 484 465 450 429 2,367 4,620
Embedded derivative liabilities held for trading have the following contractual or notional values and maturities: $ million
2005
Less than Over Total fair
1 year 1-2 years 2-3 years 3-4 years 4-5 years 5 years value
Natural gas embedded derivatives
Fair value (953) (703) (472) (237) (180) (553) (3,098)
Notional value 740 870 1,097 832 767 4,257 8,563
Interest rate embedded derivatives
Fair value – – (30) – – – (30)
Notional value – – 150 – – – 150
BP Annual Report and Accounts 2005 77