BP 2009 Annual Report Download - page 119

117
BP Annual Report and Accounts 2009
Notes on financial statements
Financial statements
1. Significant accounting policies continued
Interests in associates
An associate is an entity over which the group is in a position to exercise
significant influence through participation in the financial and operating
policy decisions of the investee, but which is not a subsidiary or a jointly
controlled entity. The results, assets and liabilities of an associate are
incorporated in these financial statements using the equity method of
accounting as described above for jointly controlled entities.
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, other than
those measured at fair value, are not retranslated subsequent to
initial recognition.
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
comprehensive income. 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 of exchange gains and losses
recognized in equity relating to that particular non-US dollar operation is
reclassified to 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. 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.
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.
The cost of 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 investment 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. The group ceases to use
the equity method of accounting on the date from which an interest in
a joint venture or an interest in an associate becomes held for sale.
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, and 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.