BP 2008 Annual Report Download - page 110

BP Annual Report and Accounts 2008
Notes on financial statements
1. Significant accounting policies continued
Foreign currency translation
Functional currency is the currency of the primary economic environment
in which an entity operates and is normally the currency in which the
entity primarily generates and expends cash.
In individual companies, transactions in foreign currencies are
initially recorded in the functional currency by applying the rate of
exchange ruling at the date of the transaction. Monetary assets and
liabilities denominated in foreign currencies are retranslated into the
functional currency at the rate of exchange ruling at the balance sheet
date. Any resulting exchange differences are included in the income
statement. Non-monetary assets and liabilities that are measured at
historical cost and denominated in a foreign currency are translated into
the functional currency using the rates of exchange as at the dates of the
initial transactions. Non-monetary assets and liabilities measured at fair
value in a foreign currency are translated into the functional currency
using the rate of exchange at the date the fair value was determined.
In the consolidated financial statements, the assets and liabilities
of non-US dollar functional currency subsidiaries, jointly controlled entities
and associates, including related goodwill, are translated into US dollars at
the rate of exchange ruling at the balance sheet date. The results and cash
flows of non-US dollar functional currency subsidiaries, jointly controlled
entities and associates are translated into US dollars using average rates
of exchange. Exchange adjustments arising when the opening net assets
and the profits for the year retained by non-US dollar functional currency
subsidiaries, jointly controlled entities and associates are translated into
US dollars are taken to a separate component of equity and reported in
the statement of recognized income and expense. Exchange gains and
losses arising on long-term intragroup foreign currency borrowings used
to finance the group’s non-US dollar investments are also taken to equity.
On disposal of a non-US dollar functional currency subsidiary, jointly
controlled entity or associate, the deferred cumulative amount recognized
in equity relating to that particular non-US dollar operation is recognized in
the income statement.
Business combinations and goodwill
Business combinations are accounted for using the purchase method of
accounting. The cost of an acquisition is measured as the cash paid and
the fair value of other assets given, equity instruments issued and
liabilities incurred or assumed at the date of exchange, plus costs directly
attributable to the acquisition. The acquired identifiable assets, liabilities
and contingent liabilities are measured at their fair values at the date of
acquisition. Any excess of the cost of acquisition over the net fair value
of the identifiable assets, liabilities and contingent liabilities acquired is
recognized as goodwill. Any deficiency of the cost of acquisition below
the fair values of the identifiable net assets acquired (i.e. discount on
acquisition) is credited to the income statement in the period of
acquisition. Where the group does not acquire 100% ownership of
the acquired company, the interest of minority shareholders is stated at
the minority’s proportion of the fair values of the assets and liabilities
recognized. Subsequently, any losses applicable to the minority
shareholders in excess of the minority interest on the group balance
sheet are allocated against the interests of the parent.
At the acquisition date, any goodwill acquired is allocated to each
of the cash-generating units expected to benefit from the combination’s
synergies. For this purpose, cash-generating units are set at one level
below a business segment.
Following initial recognition, goodwill is measured at cost less any
accumulated impairment losses. Goodwill is reviewed for impairment
annually or more frequently if events or changes in circumstances
indicate that the carrying value may be impaired.
Impairment is determined by assessing the recoverable amount of
the cash-generating unit to which the goodwill relates. Where the
recoverable amount of the cash-generating unit is less than the carrying
amount, an impairment loss is recognized.
Goodwill arising on business combinations prior to 1 January
2003 is stated at the previous carrying amount under UK generally
accepted accounting practice.
Goodwill may also arise upon investments in jointly controlled
entities and associates, being the surplus of the cost of investment
over the group’s share of the net fair value of the identifiable assets. Such
goodwill is recorded within investments in jointly controlled entities
and associates, and any impairment of the goodwill is included within
the earnings from jointly controlled entities and associates.
Non-current assets held for sale
Non-current assets and disposal groups classified as held for sale
are measured at the lower of carrying amount and fair value less
costs to sell.
Non-current assets and disposal groups are classified as held
for sale if their carrying amounts will be recovered through a sale
transaction rather than through continuing use. This condition is regarded
as met only when the sale is highly probable and the asset or disposal
group is available for immediate sale in its present condition.
Management must be committed to the sale, which should be expected
to qualify for recognition as a completed sale within one year from the
date of classification.
Property, plant and equipment and intangible assets once
classified as held for sale are not depreciated.
Intangible assets
Intangible assets, other than goodwill, include expenditure on the
exploration for and evaluation of oil and natural gas resources, computer
software, patents, licences and trademarks and are stated at the amount
initially recognized, less accumulated amortization and accumulated
impairment losses.
Intangible assets acquired separately from a business are carried
initially at cost. The initial cost is the aggregate amount paid and the fair
value of any other consideration given to acquire the asset. An intangible
asset acquired as part of a business combination is measured at fair
value at the date of acquisition and is recognized separately from
goodwill if the asset is separable or arises from contractual or other legal
rights and its fair value can be measured reliably.
Intangible assets with a finite life are amortized on a straight-line
basis over their expected useful lives. For patents, licences and
trademarks, expected useful life is the shorter of the duration of the legal
agreement and economic useful life, which can range from three to 15
years. Computer software costs have a useful life of three to five years.
The expected useful lives of assets are reviewed on an
annual basis and, if necessary, changes in useful lives are accounted
for prospectively.
The carrying value of intangible assets is reviewed for impairment
whenever events or changes in circumstances indicate the carrying value
may not be recoverable.
Financial statements
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