BP 2006 Annual Report Download - page 143

BP Annual Report and Accounts 2006 141
36 Derivative financial instruments
An outline of the group’s financial risks and the policies and objectives pursued in relation to those risks is set out in the quantitative and qualitative
disclosures about market risk section on pages 61-64.
This note contains the disclosures required by IAS 32 for derivative financial instruments. IAS 39 prescribes strict criteria for hedge accounting,
whether as a cash flow or fair value hedge, and requires that any derivative that does not meet these criteria should be classified as held for trading and
fair valued. BP adopted IAS 32 and IAS 39 with effect from 1 January 2005 without restating prior periods’ financial information. Consequently, the
group’s accounting policy under UK GAAP has been used for 2004. The policy under UK GAAP and the disclosures required by UK GAAP for derivative
financial instruments are shown in Note 37.
In the normal course of business the group is a party to derivative financial instruments (derivatives) to manage its normal business exposures in
relation to commodity prices, foreign currency exchange rates and interest rates, including management of the balance between floating rate and fixed
rate debt consistent with risk management policies and objectives. Additionally, the group has a well-established trading activity that is undertaken in
conjunction with each of these activities using a similar range of contracts.
The fair value of derivative financial instruments at 31 December are set out below.
$ million
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2006 2005
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Fair
value
asset
Contractual
or notional
amounts
Fair
value
liability
Contractual
or notional
amounts
Fair
value
asset
Contractual
or notional
amounts
Fair
value
liability
Contractual
or notional
amounts
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Derivatives held for trading
Currency derivatives 137 6,820 (32) 3,923 41 634 (18) 1,687
Oil derivatives 2,664 57,600 (2,368) 59,524 2,765 56,394 (2,826) 52,524
Natural gas derivatives 6,558 139,961 (5,703) 107,145 6,836 148,794 (6,307) 128,330
Power derivatives 3,232 22,250 (3,190) 25,859 3,341 25,793 (3,158) 26,618
Other derivatives 113 499 – – ––––
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12,704 227,130 (11,293) 196,451 12,983 231,615 (12,309) 209,159
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Embedded derivatives
Natural gas and LNG contracts 107 219 (2,171) 11,810 587 4,620 (3,098) 8,563
Interest rate contracts – – (26) 150 – – (30) 150
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107 219 (2,197) 11,960 587 4,620 (3,128) 8,713
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Cash flow hedges
Currency forwards, futures and swaps 205 2,223 (33) 1,274 34 666 (94) 3,100
Currency options 14 2,677 – – – 693 (35) 1,470
Commodity futures ––––57 274 – –
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219 4,900 (33) 1,274 91 1,633 (129) 4,570
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Fair value hedges
Currency forwards, futures and swaps 228 3,865 (13) 598 222 2,566 (124) 1,967
Interest rate swaps 33 1,688 (91) 4,397 19 324 (217) 7,521
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261 5,553 (104) 4,995 241 2,890 (341) 9,488
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Hedges of net investments in foreign entities 107 394 – – 63 346 – –
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13,398 238,196 (13,627) 214,680 13,965 241,104 (15,907) 231,930
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Of which – current 10,373 (9,424) 10,056 (10,036)
–non-current 3,025 (4,203) 3,909 (5,871)
The fair values of embedded derivatives are included within non-current and current derivative financial instruments on the group balance sheet as this
is believed to be the most appropriate presentation. Previously, these balances were reported within non-current and current prepayments and accrued
income and accruals and deferred income. The comparative figures have been restated to conform with the 2006 presentation.
Derivatives held for trading
The group maintains active trading positions in a variety of derivatives. This activity is undertaken in conjunction with risk management activities.
Derivatives held for trading purposes are recognized at fair value and changes in fair value recognized in the income statement. Trading activities are
undertaken by using a range of contract types in combination to create incremental gains by arbitraging prices between markets, locations and time
periods. The net of these exposures is monitored using market value-at-risk techniques described in the section on market risk exposure.