BP 2007 Annual Report Download - page 126

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11 Impairment of goodwill continued
Retail
Cash flows beyond the five-year period are extrapolated using a 0.9% growth rate (2006 assumption was 1.3%) 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, marketing volumes, the
terminal value and discount rate. The weighted average Retail fuel margin used in the plan was 3.1 cents per litre (2006 2.6 cents per litre). The value
assigned to the unit gross margin varies between markets. For the purpose of planning, each market develops a gross margin based upon the
different income streams within the market and other market-specific factors. In 2007, all markets were provided with the same reference price,
which was then adjusted for specific market factors and income streams in each operating unit. The gross margin assumption quoted this year is the
weighted average of the margins used by each operating unit. The comparative has been prepared on the same basis. In the prior year each operating
unit was provided with a market-specific reference price as a starting point. The weighted average of these assumptions was disclosed as the gross
margin assumption in the prior year. The average value assigned to the marketing volume assumption is 125 billion litres a year (2006 134 billion litres
a year). The unit gross margin assumptions increase on average by 1% a year over the plan period and marketing volume assumptions grow by an
average of 1% a year over the plan period. The value assigned to the terminal value assumption is 6.5 times earnings (2006 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 $4.1 billion. Based on sensitivity analysis, it is estimated that if there is an
adverse change in the weighted average fuel 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 $1.8 billion and, if there is an adverse change in marketing
volumes of 14 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 $0.8 billion and, if the multiple of earnings falls to 1 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 $0.9 billion and, if the discount rate
increases to 17%, the value in use of the Retail unit would equal its carrying amount.
Lubricants
Cash flows beyond the five-year period are extrapolated using a 3% margin growth rate (2006 3%), which is lower than the long-term average growth
rate for the first five 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 margin and sales volumes over the plan period are 65 cents per litre (2006 53 cents per
litre) and 3.3 billion litres a year (2006 3.5 billion litres) respectively. These key assumptions reflect past experience.
The Lubricants unit’s recoverable amount exceeds its carrying amount by $5.0 billion. Based on sensitivity analysis, it is estimated that if there is an
adverse change in the operating margin of 14 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 $1.2 billion and, if there is an adverse change in Lubricants
sales volumes of 700 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 $1.2 billion and, if the discount rate increases to 19% the value in use of the
Lubricants unit would equal its carrying amount.
$ million
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2007
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Refining Retail Lubricants Other Total
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Goodwill 1,515 827 4,175 109 6,626
Excess of recoverable amount over carrying amount 11,443 4,062 5,028 n/a n/a
$ million
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2006
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Refining Retail Lubricants Other Total
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Goodwill 1,328 841 4,098 123 6,390
Excess of recoverable amount over carrying amount n/a 2,100 2,012 n/a n/a