BP 2006 Annual Report Download - page 128

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14 Impairment of goodwill continued
Retail
Cash flows beyond the four-year period are extrapolated using a 1.3% growth rate (2005 assumption was no growth) reflecting a competitive
marketplace within a growing global economy.
The key assumptions to which the calculation of value in use for the Retail unit is most sensitive are unit gross margins, branded marketing volumes,
the terminal value and discount rate. The value assigned to the unit gross margin varies between markets. For the purpose of planning, each market
develops a gross margin based upon a market-specific reference price adjusted for the different income streams within the market and other market
specific factors. The weighted average Retail reference margin used in the plan was 5.0 cents per litre (2005 5.4 cents per litre). The value assigned to
the branded marketing volume assumption is 100 billion litres a year (2005 101 billion litres a year). The unit gross margin assumptions decline on
average by 5% a year over the plan period and marketing volume assumptions grow by an average of 5% a year over the plan period. The value
assigned to the terminal value assumption is 6.5 times earnings (2005 6.5 times), which is indicative of similar assets in the current market. These key
assumptions reflect past experience and are consistent with external sources.
The Retail unit’s recoverable amount exceeds its carrying amount by $2.1 billion. Based on sensitivity analysis, it is estimated that if there is an
adverse change in the unit gross margin of 11%, the recoverable amount of the Retail unit would equal its carrying amount. It is estimated that, if the
volume assumption changes by 5%, the Retail unit’s value in use changes by $1 billion and, if there is an adverse change in Retail volumes of 11 billion
litres a year, the recoverable amount of the Retail unit would equal its carrying amount. If the multiple of earnings used in the terminal value changes by
1 then the Retail unit’s value in use changes by $0.7 billion and, if the multiple of earnings falls to 3 times then the Retail value in use would equal its
carrying amount. A change of 1% in the discount rate would change the Retail value in use by $0.7 billion and, if the discount rate increases to 13%, the
value in use of the Retail unit would equal its carrying amount.
Lubricants
Cash flows beyond the four-year period are extrapolated using a 3% margin growth rate (2005 assumption was 3%), which is lower than the long-term
average growth rate for the first four years. The terminal value for the Lubricants unit represents cash flows discounted to perpetuity.
For the Lubricants unit, the key assumptions to which the calculation of value in use is most sensitive are operating margin, sales volumes and the
discount rate. The average values assigned to the operating margins and sales volumes over the plan period are 53 cents per litre (2005 56 cents per
litre) and 3.5 billion litres a year (2005 3.5 billion litres) respectively. These key assumptions reflect past experience.
The Lubricants unit’s recoverable amount exceeds its carrying amount by $2.0 billion. Based on sensitivity analysis, it is estimated that if there is an
adverse change in the operating gross margin of 5 cents per litre, the recoverable amount of the Lubricants unit would equal its carrying amount. If the
sales volume assumption changes by 5%, the Lubricants unit’s value in use changes by $1.1 billion and, if there is an adverse change in Lubricants
sales volumes of 300 million litres a year, the recoverable amount of the Lubricants unit would equal its carrying amount. A change of 1% in the
discount rate would change the Lubricants unit’s value in use by $0.6 billion and, if the discount rate increases to 14% the value in use of the Lubricants
unit would equal its carrying amount.
$ million
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2006
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Refining Retail Lubricants Other Total
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Goodwill 1,328 841 4,098 123 6,390
Excess of recoverable amount over carrying amount n/a 2,100 2,012 n/a –
$ million
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2005
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Refining Retail Lubricants Other Total
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Goodwill 1,388 832 3,612 123 5,955
Excess of recoverable amount over carrying amount n/a 1,511 3,953 n/a –
15 Distribution and administration expenses
$ million
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2006 2005 2004
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Distribution 13,174 13,187 12,325
Administration 1,273 1,325 1,284
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
14,447 14,512 13,609
Innovene operations –(806) (841)
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Continuing operations 14,447 13,706 12,768
16 Currency exchange gains and losses
$ million
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2006 2005 2004
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Currency exchange losses charged to income 222 94 55
Innovene operations –(80) (13)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Continuing operations 222 14 42