BP (BP)

Information on fair value accounting effects

BP uses derivative instruments to manage the economic exposure relating to inventories above normal operating requirements of crude oil, natural gas and petroleum products as well as certain contracts to supply physical volumes at future dates. Under IFRS, these inventories and contracts are recorded at historic cost and on an accruals basis, respectively. The related derivative instruments, however, are required to be recorded at fair value with gains and losses recognized in income because hedge accounting is either not permitted or not followed, principally due to the impracticality of effectiveness testing requirements. Therefore, measurement differences in relation to recognition of gains and losses occur. Gains and losses on these inventories and contracts are not recognized until the commodity is sold in a subsequent accounting period. Gains and losses on the related derivative commodity contracts are recognized in the income statement from the time the derivative commodity contract is entered into on a fair value basis using forward prices consistent with the contract maturity.
 
IFRS requires that inventory held for trading be recorded at its fair value using period end spot prices whereas any related derivative commodity instruments are required to be recorded at values based on forward prices consistent with the contract maturity. Depending on market conditions, these forward prices can be either higher or lower than spot prices resulting in measurement differences.
 
BP enters into contracts for pipelines and storage capacity which, under IFRS, are recorded on an accruals basis. These contracts are risk managed using a variety of derivative instruments which are fair valued under IFRS. This results in measurement differences in relation to recognition of gains and losses.
 
The way that BP manages the economic exposures described above, and measures performance internally, differs from the way these activities are measured under IFRS. BP calculates this difference by comparing the IFRS result with management’s internal measure of performance, under which the inventory and the supply and capacity contracts in question are valued based on fair value using relevant forward prices prevailing at the end of the period. We believe that disclosing management’s estimate of this difference provides useful information for investors because it enables investors to see the economic effect of these activities as a whole. The impacts of fair value accounting effects, relative to management’s internal measure of performance, are shown in the table on page 3. Information for all quarters of 2006, 2007 and 2008 can be found at www.bp.com/FVAE .
 
 
 
 

Cautionary statement: The foregoing discussion and the notes which follow contain forward-looking statements particularly those regarding tax rate; capital expenditure; disposal proceeds; the expected timing of completion of certain transactions; expected 2008 reserves replacement ratio; the continued slowing of global economies and uncertainty in the global financial markets; anticipated low demand for certain products; impact from falling crude oil prices on US domestic pipeline barrels; potential capacity of the Sherbino wind farm; quarterly charges and expected timing of commencement of production at the Sunrise field. By their nature, forward-looking statements involve risk and uncertainty and actual results may differ from those expressed in such statements depending on a variety of factors including the following: the timing of bringing new fields onstream; industry product supply; demand and pricing; operational problems; general economic conditions (including inflation); political stability and economic growth in relevant areas of the world; changes in laws and governmental regulations and quotas; exchange rate fluctuations; development and use of new technology; the success or otherwise of partnering; the actions of competitors; natural disasters and adverse weather conditions; changes in public expectations and other changes to business conditions; wars and acts of terrorism or sabotage; and other factors discussed in this announcement. For more information you should refer to our Annual Report and Accounts 2007 and our 2007 Annual Report on Form 20-F filed with the US Securities and Exchange Commission.

                  
 

      SIGNATURES

 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 

BP p.l.c.
(Registrant)
 

Dated: 03 February, 2009

/s/ D. J. PEARL
..............................
D. J. PEARL
Deputy Company Secretary

BP uses derivative instruments to manage
the economic exposure relating to inventories above normal operating requirements of crude
oil, natural gas and petroleum products as well as certain contracts to supply physical
volumes at future dates. Under IFRS, these inventories and contracts are recorded at
historic cost and on an accruals basis, respectively. The related derivative instruments,
however, are required to be recorded at fair value with gains and losses recognized in
income because hedge accounting is either not permitted or not followed, principally due to
the impracticality of effectiveness testing requirements. Therefore, measurement
differences in relation to recognition of gains and losses occur. Gains and losses on these
inventories and contracts are not recognized until the commodity is sold in a subsequent
accounting period. Gains and losses on the related derivative commodity contracts are
recognized in the income statement from the time the derivative commodity contract is
entered into on a fair value basis using forward prices consistent with the contract
maturity.

 

IFRS requires that inventory held for trading be recorded at its fair value using period
end spot prices whereas any related derivative commodity instruments are required to be
recorded at values based on forward prices consistent with the contract maturity. Depending
on market conditions, these forward prices can be either higher or lower than spot prices
resulting in measurement differences.

 

BP enters into contracts for pipelines and storage capacity which, under IFRS, are
recorded on an accruals basis. These contracts are risk managed using a variety of
derivative instruments which are fair valued under IFRS. This results in measurement
differences in relation to recognition of gains and losses.

 

The way that BP manages the economic exposures described above, and measures performance
internally, differs from the way these activities are measured under IFRS. BP calculates
this difference by comparing the IFRS result with management’s internal measure of
performance, under which the inventory and the supply and capacity contracts in question
are valued based on fair value using relevant forward prices prevailing at the end of the
period. We believe that disclosing management’s estimate of this difference provides
useful information for investors because it enables investors to see the economic effect of
these activities as a whole. The impacts of fair value accounting effects, relative to
management’s internal measure of performance, are shown in the table on page 3.
Information for all quarters of 2006, 2007 and 2008 can be found at
www.bp.com/FVAE
.

 

 

 

 

Cautionary statement: The foregoing
discussion and the notes which follow contain forward-looking statements particularly those
regarding tax rate; capital expenditure; disposal proceeds; the expected timing of
completion of certain transactions; expected 2008 reserves replacement ratio; the continued
slowing of global economies and uncertainty in the global financial markets; anticipated
low demand for certain products; impact from falling crude oil prices on US domestic
pipeline barrels; potential capacity of the Sherbino wind farm; quarterly charges and
expected timing of commencement of production at the Sunrise field. By their nature,
forward-looking statements involve risk and uncertainty and actual results may differ from
those expressed in such statements depending on a variety of factors including the
following: the timing of bringing new fields onstream; industry product supply; demand and
pricing; operational problems; general economic conditions (including inflation); political
stability and economic growth in relevant areas of the world; changes in laws and
governmental regulations and quotas; exchange rate fluctuations; development and use of new
technology; the success or otherwise of partnering; the actions of competitors; natural
disasters and adverse weather conditions; changes in public expectations and other changes
to business conditions; wars and acts of terrorism or sabotage; and other factors discussed
in this announcement. For more information you should refer to our Annual Report and
Accounts 2007 and our 2007 Annual Report on Form 20-F filed with the US Securities and
Exchange Commission.

                  


 



      SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

 

 

 

 

BP p.l.c.

(Registrant)

 

Dated: 03 February, 2009

/s/ D. J. PEARL

..............................

D. J. PEARL

Deputy Company Secretary