BP (BP)

Impact of new US accounting standards (concluded)

Pensions and other postretirement benefits: In September 2006, the FASB issued SFAS No. 158 ‘Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)’ (SFAS 158). SFAS 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in the statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. Because the funded status of benefit plans is fully recognized in the statement of financial position, a minimum liability will no longer be recognized. Retrospective application of SFAS 158 is not permitted. The Group will adopt SFAS 158 with effect from December 31, 2006. Upon adoption of SFAS 158, the recognition of the overfunded or underfunded status of the Group’s defined benefit postretirement plans will generally accord with the Group’s IFRS accounting. Differences in recognition rules for actuarial gains and losses will continue to give rise to differences in periodic pension and other postretirement benefit costs as measured under IFRS and US GAAP. At December 31, 2006, it is estimated that the Group’s shareholders’ equity, as adjusted to accord with US GAAP, will decrease by approximately $3 billion. The actual effects of adopting SFAS 158 will be based on the funded status of the Group’s plans at December 31, 2006.

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Impact of new US accounting standards (concluded)

Pensions and other postretirement benefits: In September 2006, the FASB issued SFAS No. 158 ‘Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)’ (SFAS 158). SFAS 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in the statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. Because the funded status of benefit plans is fully recognized in the statement of financial position, a minimum liability will no longer be recognized. Retrospective application of SFAS 158 is not permitted. The Group will adopt SFAS 158 with effect from December 31, 2006. Upon adoption of SFAS 158, the recognition of the overfunded or underfunded status of the Group’s defined benefit postretirement plans will generally accord with the Group’s IFRS accounting. Differences in recognition rules for actuarial gains and losses will continue to give rise to differences in periodic pension and other postretirement benefit costs as measured under IFRS and US GAAP. At December 31, 2006, it is estimated that the Group’s shareholders’ equity, as adjusted to accord with US GAAP, will decrease by approximately $3 billion. The actual effects of adopting SFAS 158 will be based on the funded status of the Group’s plans at December 31, 2006.

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Impact of new US accounting standards – concluded

In April 2005, the FASB issued Staff Position No. 19-1 ‘Accounting for Suspended Well Costs’ (FSP 19-1). FSP 19-1 amends SFAS 19 to permit the continued capitalization of exploratory well costs beyond one year if (a) the well found a sufficient quantity of reserves to justify its completion as a producing well and (b) the entity is making sufficient progress assessing the reserves and the economic and operating viability of the project. If either condition is not met, or if an entity obtains information that raises substantial doubt about the economic or operational viability of the project, the exploratory well is assumed to be impaired, and its costs, net of any salvage value, is charged to expense. FSP 19-1 provides a number of indicators that would be considered in order to demonstrate that sufficient progress was being made in assessing the reserves and the economic viability of the project. FSP 19-1 is effective for accounting periods beginning after April 4, 2005. Early application of the guidance is permitted in periods for which financial statements have not yet been issued.

BP's accounting policy is that costs directly associated with an exploration well are capitalized as an intangible asset until the drilling of the well is complete and the results have been evaluated. If hydrocarbons are found, and, subject to further appraisal activity which may include the drilling of further wells (exploration or exploratory-type stratigraphic test wells), are likely to be capable of commercial development, the costs continue to be carried as an asset. All such carried costs are subject to technical, commercial and management review at least once a year to confirm the continued intent to develop or otherwise extract value from the discovery. When this is no longer the case, the costs are written off. When proved reserves of oil and natural gas are determined and development is sanctioned, the relevant expenditure is transferred to property, plant and equipment. BP has adopted the FSP with effect from January 1, 2004. No previously capitalized costs were expensed upon the adoption of the FSP.