BP 2013 Annual Report Download - page 134

1. Significant accounting policies, judgements, estimates and assumptions – continued
Oil and natural gas properties, including related pipelines, are depreciated using a unit-of-production method. The cost of producing wells is amortized
over proved developed reserves. Licence acquisition, common facilities and future decommissioning costs are amortized over total proved reserves.
The unit-of-production rate for the depreciation of common facilities takes into account expenditures incurred to date, together with estimated future
capital expenditure expected to be incurred relating to as yet undeveloped reserves expected to be processed through these common facilities.
Other property, plant and equipment is depreciated on a straight-line basis over its expected useful life. The typical useful lives of the group’s other
property, plant and equipment are as follows:
Land improvements 15 to 25 years
Buildings 20 to 50 years
Refineries 20 to 30 years
Petrochemicals plants 20 to 30 years
Pipelines 10 to 50 years
Service stations 15 years
Office equipment 3 to 7 years
Fixtures and fittings 5 to 15 years
The expected useful lives of property, plant and equipment are reviewed on an annual basis and, if necessary, changes in useful lives are accounted for
prospectively.
The carrying amount of property, plant and equipment is reviewed for impairment whenever events or changes in circumstances indicate the carrying
value may not be recoverable.
An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued
use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the
carrying amount of the item) is included in the income statement in the period in which the item is derecognized.
Significant estimate or judgement
The determination of the group’s estimated oil and natural gas reserves requires significant judgements and estimates to be applied and these are
regularly reviewed and updated. Factors such as the availability of geological and engineering data, reservoir performance data, acquisition and
divestment activity, drilling of new wells and commodity prices all impact on the determination of the group’s estimates of its oil and natural gas
reserves. BP bases its proved reserves estimates on the requirement of reasonable certainty with rigorous technical and commercial assessments
based on conventional industry practice and regulatory requirements.
The estimation of oil and natural gas reserves and BP’s process to manage reserves bookings is described in Supplementary information on oil and
natural gas on page 200, which is unaudited. Details on BP’s proved reserves and production compliance and governance processes are provided on
page 245.
Estimates of oil and natural gas reserves are used to calculate depreciation, depletion and amortization charges for the group’s oil and gas properties.
The impact of changes in estimated proved reserves is dealt with prospectively by amortizing the remaining carrying value of the asset over the
expected future production. Oil and natural gas reserves also have a direct impact on the assessment of the recoverability of asset carrying values
reported in the financial statements. If proved reserves estimates are revised downwards, earnings could be affected by higher depreciation
expense or an immediate write-down of the property’s carrying value.
The 2013 movements in proved reserves are reflected in the tables showing movements in oil and natural gas reserves by region in Supplementary
information on oil and natural gas (unaudited) on page 200. Information on the carrying amounts of the group’s oil and natural gas properties,
together with the amounts recognized in the income statement as depreciation, depletion and amortization is contained in Note 10 and Note 7
respectively.
Impairment of intangible assets and property, plant and equipment
The group assesses assets or groups of assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable, for example, changes in the group’s business plans, changes in commodity prices leading to sustained unprofitable
performance, low plant utilization, evidence of physical damage or, for oil and gas assets, significant downward revisions of estimated reserves or
increases in estimated future development expenditure. If any such indication of impairment exists, the group makes an estimate of the asset’s
recoverable amount. Individual assets are grouped for impairment assessment purposes at the lowest level at which there are identifiable cash flows
that are largely independent of the cash flows of other groups of assets. An asset group’s recoverable amount is the higher of its fair value less costs
to sell and its value in use. Where the carrying amount of an asset group exceeds its recoverable amount, the asset group is considered impaired and
is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are adjusted for the risks specific to the asset
group and are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money. Fair
value less costs to sell is identified as the price that would be received to sell the asset in an orderly transaction between market participants and does
not reflect the effects of factors that may be specific to the entity and not applicable to entities in general.
An assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist
or may have decreased. If such an indication exists, the recoverable amount is estimated. A previously recognized impairment loss is reversed only if
there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognized. If that is
the case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that
would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in
profit or loss. After such a reversal, the depreciation charge is adjusted in future periods to allocate the asset’s revised carrying amount, less any
residual value, on a systematic basis over its remaining useful life.
130 BP Annual Report and Form 20-F 2013