BP 2007 Annual Report Download - page 106

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1 Significant accounting policies continued
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 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.
Financial assets are derecognized on sale or settlement.
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.
Financial liabilities
Financial liabilities are classified as financial liabilities at fair value through profit or loss; derivatives designated as hedging instruments in aneffective
hedge; or as financial liabilities measured at amortized cost, as appropriate. Financial liabilities include trade and other payables, accruals, finance debt
and derivative financial instruments. The group determines the classification of its financial liabilities at initial recognition. The measurement offinancial
liabilities depends on their classification, as follows:
Financial liabilities at fair value through profit or loss
Derivatives, other than those designated as effective hedging instruments, are classified as held for trading and are included in this category. These
liabilities are carried on the balance sheet at fair value with gains or losses recognized in the income statement.
Derivatives designated as hedging instruments in an effective hedge
Such derivatives are carried on the balance sheet at fair value, the treatment of gains and losses arising from revaluation are described below in the
accounting policy for Derivative financial instruments and hedging activities.
Financial liabilities measured at amortized cost
All other financial liabilities are initially recognized at fair value. For interest-bearing loans and borrowings this is the fair value of the proceeds received
net of issue costs associated with the borrowing.
After initial recognition, other financial liabilities are subsequently measured at amortized cost using the effective interest method. Amortized cost is
calculated by taking into account any issue costs, and any discount or premium on settlement. Gains and losses arising on the repurchase, settlement
or cancellation of liabilities are recognized respectively in interest and other revenues and finance costs.
This category of financial liabilities includes trade and other payables and finance debt.
Leases
Finance leases, which transfer to the group substantially all the risks and benefits incidental to ownership of the leased item, are capitalized at the
commencement of the lease term at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Finance
charges are allocated to each period so as to achieve a constant rate of interest on the remaining balance of the liability and are charged directly
against income.
Capitalized leased assets are depreciated over the shorter of the estimated useful life of the asset or the lease term.
Operating lease payments are recognized as an expense in the income statement on a straight-line basis over the lease term.
Derivative financial instruments and hedging activities
The group uses derivative financial instruments to manage certain exposures to fluctuations in foreign currency exchange rates, interest rates and
commodity prices as well as for trading purposes. Such derivative financial instruments are initially recognized at fair value on the date on which a
derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as assets when the fair value is positive and
as liabilities when the fair value is negative.
Contracts to buy or sell a non-financial item that can be settled net in cash or another financial instrument, or by exchanging financial instruments,
as if the contracts were financial instruments, with the exception of contracts that were entered into and continue to be held for the purpose of the
receipt or delivery of a non-financial item in accordance with the group’s expected purchase, sale or usage requirements, are accounted for as
financial instruments.
Gains or losses arising from changes in the fair value of derivatives that are not designated as effective hedging instruments are recognized in the
income statement.
For the purpose of hedge accounting, hedges are classified as:
– Fair value hedges when hedging the exposure to changes in the fair value of a recognized asset or liability.
– Cash flow hedges when hedging exposure to variability in cash flows that is either attributable to a particular risk associated with a recognized
asset or liability or a highly probable forecast transaction.
– Hedges of a net investment in a foreign operation.