BP 2013 Annual Report Download - page 132

1. Significant accounting policies, judgements, estimates and assumptions – continued
The equity method of accounting
Under the equity method, the investment in an equity-accounted entity (joint venture or associate) is carried on the balance sheet at cost plus post-
acquisition changes in the group’s share of net assets of the equity-accounted entity, less distributions received and less any impairment in value ofthe
investment. Loans advanced to equity-accounted entities that have the characteristics of equity financing are also included in the investment on the
group balance sheet. The group income statement reflects the group’s share of the results after tax of the equity-accounted entity, adjusted to account
for depreciation, amortization and any impairment of the equity-accounted entity’s assets based on their fair values at the date of acquisition.
The group statement of comprehensive income includes the group’s share of the equity-accounted entity’s other comprehensive income. The group’s
share of amounts recognized directly in equity by an equity-accounted entity is recognized directly in the group’s statement of changes in equity.
Financial statements of equity-accounted entities are prepared for the same reporting year as the group. Where material differences arise, adjustments
are made to those financial statements to bring the accounting policies used into line with those of the group.
Unrealized gains on transactions between the group and its equity-accounted entities are eliminated to the extent of the group’s interest in the equity-
accounted entity. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.
The group assesses investments in equity-accounted entities for impairment whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. If any such indication of impairment exists, the carrying amount of the investment is compared with its recoverable
amount, being the higher of its fair value less costs to sell and value in use. Where the carrying amount exceeds the recoverable amount, the
investment is written down to its recoverable amount.
The group ceases to use the equity method of accounting on the date from which it no longer has joint control over the joint venture or significant
influence over the associate, or when the interest becomes classified as an asset held for sale.
Segmental reporting
The group’s operating segments are established on the basis of those components of the group that are evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing performance.
On 22 October 2012, BP announced that it had signed heads of terms for a proposed transaction to sell its 50% share in TNK-BP to Rosneft. Following
this agreement, BP’s investment in TNK-BP met the criteria to be classified as held for sale. On 21 March 2013, the disposal of BP’s investment in
TNK-BP completed and BP increased its investment in Rosneft. See Note 6 for further information. BP’s investment in Rosneft is reported as a
separate operating segment since that date, reflecting the way in which the investment is managed.
A separate organization within the group deals with the ongoing response to the Gulf of Mexico oil spill. This organization reports directly to the group
chief executive and its costs are excluded from the results of the operating segments. Under IFRS its costs are presented as a reconciling item
between the sum of the results of the reportable segments and the group results.
The accounting policies of the operating segments are the same as the group’s accounting policies described in this note, except that IFRS requires
that the measure of profit or loss disclosed for each operating segment is the measure that is provided regularly to the chief operating decision maker.
For BP, this measure of profit or loss is replacement cost profit before interest and tax which reflects the replacement cost of supplies by excluding
from profit inventory holding gains and losses. Replacement cost profit for the group is not a recognized measure under IFRS. For further information
see Note 7.
Foreign currency translation
The 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 subsidiaries, joint ventures and associates, 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, joint ventures 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, joint ventures 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, joint ventures
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 other comprehensive income. On disposal or partial disposal of a non-US dollar functional currency subsidiary, joint venture 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.
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 subject only to terms that are usual and customary for sales of such assets. 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 as held for sale.
Property, plant and equipment and intangible assets are not depreciated once classified as held for sale. The group ceases to use the equity method of
accounting from the date on which an interest in a joint venture or associate becomes held for sale. If a non-current asset or disposal group has been
classified as held for sale, but subsequently ceases to meet the criteria to be classified as held for sale, the group ceases to classify the asset or
disposal group as held for sale. Non-current assets and disposal groups that cease to be classified as held for sale are measured at the lower of the
carrying amount before the asset or disposal group was classified as held for sale (adjusted for any depreciation, amortization or revaluation that would
have been recognized had the asset or disposal group not been classified as held for sale) and its recoverable amount at the date of the subsequent
decision not to sell. Except for any interests in equity-accounted entities that cease to be classified as held for sale, any adjustment to the carrying
amount is recognized in profit or loss in the period in which the asset ceases to be classified as held for sale. When an interest in an equity-accounted
entity ceases to be classified as held for sale, it is accounted for using the equity method as from the date of its classification as held for sale and the
financial statements for the periods since classification as held for sale are amended accordingly.
128 BP Annual Report and Form 20-F 2013