BP 2008 Annual Report Download - page 156

Financial statements
BP Annual Report and Accounts 2008
Notes on financial statements
34. Derivative financial instruments continued
Cash flow hedges
At 31 December 2008, the group held currency forwards and futures contracts and cylinders that were being used to hedge the foreign currency risk
of highly probable forecast transactions, as well as cross-currency interest rate swaps to fix the US dollar interest rate and US dollar redemption value,
with matching critical terms on the currency leg of the swap with the underlying non-US dollar debt issuance. Note 28 outlines the management of
risk aspects for currency and interest rate risk. For cash flow hedges the group only claims for the intrinsic value on the currency with any fair value
attributable to time value taken immediately to profit or loss. There were no highly probable transactions for which hedge accounting has been claimed
that have not occurred and no significant element of hedge ineffectiveness requiring recognition in the income statement. For cash flow hedges the
pre-tax amount removed from equity during the period and included in the income statement is a loss of $45 million (2007 gain of $74 million and 2006
gain of $93 million). Of this, a loss of $1 million is included in production and manufacturing expenses (2007 $143 million gain and 2006 $162 million
gain) and a loss of $44 million is included in finance costs (2007 $69 million loss and 2006 $69 million loss). The amount removed from equity during
the year and included in the carrying amount of non-financial assets was a gain of $38 million (2007 $40 million gain and 2006 $6 million gain).
The amounts retained in equity at 31 December 2008 are expected to mature and affect the income statement by a $826 million loss in 2009, a
loss of $92 million in 2010 and a loss of $182 million in 2011 and beyond.
Fair value hedges
At 31 December 2008, the group held interest rate and cross-currency interest rate swap contracts as fair value hedges of the interest rate risk on
fixed rate debt issued by the group. The effectiveness of each hedge relationship is quantitatively assessed and demonstrated to continue to be highly
effective. The gain on the hedging derivative instruments taken to the income statement in 2008 was $2 million (2007 $334 million gain and 2006 $257
million gain) offset by a loss on the fair value of the finance debt of $20 million (2007 $327 million loss and 2006 $257 million loss).
The interest rate and cross-currency interest rate swaps have an average maturity of three to four years, (2007 one to two years) and are used
to convert sterling, euro, Swiss franc and Australian dollar denominated borrowings into US dollar floating rate debt. Note 28 outlines the group’s
approach to interest rate risk management.
Hedges of net investments in foreign operations
The group holds currency swap contracts as a hedge of a long-term investment in a UK subsidiary expiring in 2009. At 31 December 2008, the hedge
had a fair value of $2 million (2007 $40 million) and the loss on the hedge recognized in equity in 2008 was $38 million (2007 $67 million loss and 2006
$105 million gain). US dollars have been sold forward for sterling purchased and match the underlying liability with no significant ineffectiveness
reflected in the income statement.
35. Finance debt
$ million
2008 2007
Within After Within After
1 year a1 year Total 1 year a1 year Total
Borrowings 15,647 16,937 32,584 15,149 15,004 30,153
Net obligations under finance leases 93 527 620 245 647 892
15,740 17,464 33,204 15,394 15,651 31,045
aAmounts due within one year include current maturities of long-term debt and borrowings that are expected to be repaid later than the earliest contractual repayment dates of within one year.
US Industrial Revenue/Municipal Bonds of $3,166 million (2007 $2,880 million) with earliest contractual repayment dates within one year have expected repayment dates ranging from 1 to 40 years (2007
1 to 35 years). The bondholders typically have the option to tender these bonds for repayment on interest reset dates; however, any bonds that are tendered are usually remarketed and BP has not
experienced any significant repurchases. BP considers these bonds to represent long-term funding when internally assessing the maturity profile of its finance debt. Similar treatment is applied for loans
associated with long-term gas supply contracts totalling $1,806 million (2007 $1,899 million) that mature within nine years.
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