BP 2007 Annual Report Download - page 141

BP ANNUAL REPORT AND ACCOUNTS 2007 139
28 Financial instruments and financial risk factors continued
The group has a credit policy, approved by the CFO, that is designed to ensure that consistent processes are in place throughout the group to
measure and control credit risk. Credit risk is considered as part of the risk-reward balance of doing business. On entering into any business contract
the extent to which the arrangement exposes the group to credit risk is considered. Key requirements of the policy are formal delegated authorities to
the sales and marketing teams to incur credit risk and to a specialized credit function to set counterparty limits; the establishment of credit systems
and processes to ensure that counterparties are rated and limits set; and systems to monitor exposure against limits and report regularly on those
exposures, and immediately on any excesses, and to track and report credit losses. The treasury function provides a similar credit risk management
activity with respect to group-wide exposures to banks and other financial institutions.
Before trading with a new counterparty can start, its creditworthiness is assessed and a credit rating is allocated that indicates the probability of
default, along with a credit exposure limit. The assessment process takes into account all available qualitative and quantitative information aboutthe
counterparty and the group, if any, to which the counterparty belongs. The counterparty’s business activities, financial resources and business risk
management processes are taken into account in the assessment, to the extent that this information is publicly available or otherwise disclosed to the
group by the counterparty, together with external credit ratings, if any, including ratings prepared by Moody’s Investor Service and Standard & Poor’s.
Creditworthiness continues to be evaluated after transactions have been initiated and a watchlist of higher-risk counterparties is maintained. Once
assigned a credit rating, each counterparty is allocated a maximum exposure limit.
The group does not aim to remove credit risk but expects to experience a certain level of credit losses. The group attempts to mitigate credit risk by
entering into contracts that permit netting and allow for termination of the contract on the occurrence of certain events of default. Depending on the
creditworthiness of the counterparty, the group may require collateral or other credit enhancements such as cash deposits or letters of credit and
parent company guarantees. Trade and other derivative assets and liabilities are presented on a net basis where unconditional netting arrangements
are in place with counterparties and where there is an intent to settle amounts due on a net basis. The maximum credit exposure associated with
financial assets is equal to the carrying amount. At 31 December 2007, the maximum credit exposure was $53,498 million (2006 $55,420 million). This
does not take into account collateral held of $474 million (2006 $689 million). In addition, credit exposure exists in relation to guarantees issued by
group companies under which amounts outstanding at 31 December 2007 were $443 million (2006 $1,123 million) in respect of liabilities of jointly
controlled entities and associates and $601 million (2006 $789 million) in respect of liabilities of other third parties.
Notwithstanding the processes described above, significant unexpected credit losses can occasionally occur. Exposure to unexpected losses
increases with concentrations of credit risk that exist when a number of counterparties are involved in similar activities or operate in the same industry
sector or geographical area, which may result in their ability to meet contractual obligations being impacted by changes in economic, political or other
conditions. The group’s principal customers, suppliers and financial institutions with which it conducts business are located throughout the world.In
addition, these risks are managed by maintaining a group watchlist and aggregating multi-segment exposures to ensure that a material credit risk is
not missed.
Reports are regularly prepared and presented to the GFRC that cover the group’s overall credit exposure and expected loss trends, exposure by
segment, and overall quality of the portfolio. The reports also include details of the largest counterparties by exposure level and expected loss, and
details of counterparties on the group watchlist.
It is estimated that over 80% of the counterparties to the contracts comprising the derivative financial instruments in an asset position are of
investment grade credit quality.
Trade and other receivables of the group are analysed in the table below. By comparing the BP credit ratings to the equivalent external credit
ratings, it is estimated that approximately 65-70% of the trade receivables portfolio exposure are of investment grade quality. With respect to the
trade and other receivables that are neither impaired nor past due, there are no indications as of the reporting date that the debtors will not meet their
payment obligations.
The group does not typically renegotiate the terms of trade receivables; however, if a renegotiation does take place, the outstanding balance is
included in the analysis based on the original payment terms. There were no significant renegotiated balances outstanding at 31 December 2007 or
31 December 2006.
$ million
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Trade and other receivables at 31 December 2007 2006
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Neither impaired nor past due 35,167 34,737
Impaired (net of valuation allowance) 145 101
Not impaired and past due in the following periods
within 30 days 2,350 2,404
31 to 60 days 273 475
61 to 90 days 311 253
over 90 days 464 504
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38,710 38,474
The movement in the valuation allowance for trade receivables is set out below.
$ million
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2007 2006
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At 1 January 421 374
Exchange adjustments 34 32
Charge for the year 175 158
Utilization (224) (143)
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At 31 December 406 421