Investment Accounting Policy
Interests in joint ventures
A joint venture is a contractual arrangement whereby two or more parties (venturers) undertake an economic activity that is subject to joint control. Joint control exists only when the strategic financial and operating decisions relating to the activity require the unanimous consent of the venturers. A jointly controlled entity is a joint venture that involves the establishment of a company, partnership or other entity to engage in economic activity that BP jointly controls with its fellow venturers.
The results, assets and liabilities of a jointly controlled entity are incorporated in these financial statements using the equity method of accounting. Under the equity method, the investment in a jointly controlled entity is carried in the balance sheet at cost, plus post-acquisition changes in BP' share of net assets of the jointly controlled entity, less distributions received and less any impairment in value of the investment. Loans advanced to jointly controlled entities that have the characteristics of equity financing are also included in the investment on BP balance sheet. BP income statement reflects BP's share of the results after tax of the jointly controlled entity.
Financial statements of jointly controlled entities are prepared for the same reporting year as BP. Where necessary, adjustments are made to those financial statements to bring the accounting policies used into line with those of BP.
Unrealized gains on transactions between BP and its jointly controlled entities are eliminated to the extent of BP's interest in the jointly controlled entities. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.
BP assesses investments in jointly controlled 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.
BP ceases to use the equity method of accounting on the date from which it no longer has joint control or significant influence over the joint venture or associate respectively, or when the interest becomes held for sale.
Certain of BP's activities, particularly in the Exploration and Production segment, are conducted through joint ventures where the venturers have a direct ownership interest in, and jointly control, the assets of the venture. BP recognizes, on a line-by-line basis in the consolidated financial statements, its share of the assets, liabilities and expenses of these jointly controlled assets incurred jointly with the other partners, along with BP's income from the sale of its share of the output and any liabilities and expenses that BP has incurred in relation to the venture.
Interests in associates
An associate is an entity over which BP 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.
Available-for-sale financial assets
Available-for-sale financial assets are those non-derivative financial assets that are not classified as loans and receivables. After initial recognition, available-for-sale financial assets are measured at fair value, with gains or losses recognized within other comprehensive income. Accumulated changes in fair value are recorded as a separate component of equity until the investment is derecognized or impaired.
The fair value of quoted investments is determined by reference to bid prices at the close of business on the balance sheet date. Where there is no active market, fair value is determined using valuation techniques. Where fair value cannot be reliably measured, assets are carried at cost.
Financial assets at fair value through profit or loss
Derivatives, other than those designated as effective hedging instruments, are classified as held for trading and are included in this category. These assets are carried on the balance sheet at fair value with gains or losses recognized in the income statement.
Source: BP PLC, Annual Report
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