BP 2011 Annual Report Download - page 208

206 BP Annual Report and Form 20-F 2011
Notes on financial statements
10. Impairment review of goodwill
$ million
Goodwill at 31 December 2011 2010
Exploration and Production 7,931 4,450
Refining and Marketing 4,014 4,074
Other businesses and corporate 155 74
12,100 8,598
Goodwill acquired through business combinations has been allocated to groups of cash-generating units that are expected to benefit from the synergies
of the acquisition. For Exploration and Production, goodwill is held at the segment level; previously it was allocated to each geographic region (UK, US and
Rest of World) (see below). For Refining and Marketing, goodwill has been allocated to the Rhine fuels value chain (FVC), Lubricants and Other.
In assessing whether goodwill has been impaired, the carrying amount of the cash-generating unit (including goodwill) is compared with the
recoverable amount of the cash-generating unit. The recoverable amount is the higher of fair value less costs to sell and value in use. In the absence of any
information about the fair value of a cash-generating unit, the recoverable amount is deemed to be the value in use.
The group calculates the value in use using a discounted cash flow model. The future cash flows are adjusted for risks specific to the
cash-generating unit and are discounted using a pre-tax discount rate. The discount rate is derived from the group’s post-tax weighted average cost of
capital and is adjusted where applicable to take into account any specific risks relating to the country where the cash-generating unit is located. The rate
to be applied to each country is reassessed each year. Discount rates of 12% and 14% have been used for goodwill impairment calculations performed in
2011 (2010 12% and 14%).
The business segment plans, which are approved on an annual basis by senior management, are the primary source of information for the
determination of value in use. They contain forecasts for oil and natural gas production, refinery throughputs, sales volumes for various types of refined
products (e.g. gasoline and lubricants), revenues, costs and capital expenditure. As an initial step in the preparation of these plans, various environmental
assumptions, such as oil prices, natural gas prices, refining margins, refined product margins and cost inflation rates, are set by senior management.
These environmental assumptions take account of existing prices, global supply-demand equilibrium for oil and natural gas, other macroeconomic factors
and historical trends and variability.
Exploration and Production
$ million
2011 2010
Total UK US
Rest of
world Total
Goodwill 7,931 341 3,479 630 4,450
Excess of recoverable amount over carrying amount 49,247 7,556 18,968 41,714 n/a
The value in use is based on the cash flows expected to be generated by the projected oil or natural gas production profiles up to the expected dates
of cessation of production of each producing field. As the production profile and related cash flows can be estimated from BP’s past experience,
management believes that the cash flows generated over the estimated life of field is the appropriate basis upon which to assess goodwill and individual
assets for impairment. The date of cessation of production depends on the interaction of a number of variables, such as the recoverable quantities of
hydrocarbons, the production profile of the hydrocarbons, the cost of the development of the infrastructure necessary to recover the hydrocarbons,
the production costs, the contractual duration of the production concession and the selling price of the hydrocarbons produced. As each producing field
has specific reservoir characteristics and economic circumstances, the cash flows of the fields are computed using appropriate individual economic
models and key assumptions agreed by BP’s management for the purpose. Capital expenditure and operating costs for the first four years and expected
hydrocarbon production profiles up to 2020 are derived from the business segment plan. Estimated production quantities and cash flows up to the date
of cessation of production on a field-by-field basis are developed to be consistent with this. The production profiles used are consistent with the resource
volumes approved as part of BP’s centrally-controlled process for the estimation of proved reserves and total resources.
Prior to 2011, goodwill in the Exploration and Production segment was allocated to each geographic region, that is UK, US and Rest of World, and
impairment reviews of goodwill were performed at this level. Following a reorganization of the Exploration and Production segment, the group has revised
the way goodwill is monitored for internal management purposes. Given the global nature of our upstream business, the impairment review of goodwill is
now performed at the Exploration and Production segment level. Consistent with prior years, the 2011 review for impairment was carried out during the
fourth quarter.
The table above shows the carrying amount of the goodwill for the segment and the excess of the recoverable amount over the carrying amount
(the headroom). Consistent with prior periods, midstream and intangible oil and gas assets were excluded from the headroom calculation.
The Brent oil price assumption used in the impairment review of goodwill is shown in the table below.
2011
2012 2013 2014 2015 2016
2017 and
thereafter
Brent oil price ($/bbl) 106 101 97 94 92 90
2010
2011 2012 2013 2014 2015
2016 and
thereafter
Brent oil price ($/bbl) 85 88 89 89 90 75
Key assumptions for oil and gas prices for the first five years were derived from forward price curves in the fourth quarter. Prices in 2017 and beyond
were determined using long-term views of global supply and demand, building upon past experience of the industry and consistent with external sources.
These prices were adjusted to arrive at appropriate consistent price assumptions for different qualities of oil and gas, or where appropriate, contracted oil
and gas prices were applied.