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Unformatted text preview: Financial statements 114 Consolidated financial statements of the BP group Independent auditor’s reports Group income statement Group statement of comprehensive income 134 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 21. Significant accounting policies Significant event – Gulf of Mexico oil spill Business combinations and other significant transactions Disposals and impairment Segmental analysis Revenue from contracts with customers Income statement analysis Exploration expenditure Taxation Dividends Earnings per share Property, plant and equipment Capital commitments Goodwill Intangible assets Investments in joint ventures Investments in associates Other investments Inventories Trade and other receivables Valuation and qualifying accounts 134 151 153 154 156 159 159 160 160 163 163 165 165 166 167 168 168 170 170 171 171 22. Trade and other payables 23. Provisions 24. Pensions and other postretirement benefits 25. Cash and cash equivalents 26. Finance debt 27. Capital disclosures and analysis of changes in net debt 28. Operating leases 29. Financial instruments and financial risk factors 30. Derivative financial instruments 31. Called-up share capital 32. Capital and reserves 33. Contingent liabilities 34. Remuneration of senior management and nonexecutive directors 35. Employee costs and numbers 36. Auditor’s remuneration 37. Subsidiaries, joint arrangements and associates 38. Condensed consolidating information on certain US subsidiaries 172 172 172 179 179 180 180 181 185 192 194 197 198 199 199 200 201 Supplementary information on oil and natural gas (unaudited) Oil and natural gas exploration and production activities Movements in estimated net proved reserves 211 217 Standardized measure of discounted future net cash flows and changes therein relating to proved oil and gas reserves Operational and statistical information 232 235 Parent company financial statements of BP p.l.c. Company balance sheet Company statement of changes in equity Notes on financial statements 1. 2. 3. 4. 5. Significant accounting policies Investments Receivables Pensions Payables 238 239 240 240 243 243 243 247 6. 7. 8. 9. 10. 11. 12. 13. Taxation Called-up share capital Capital and reserves Financial guarantees Share-based payments Auditor’s remuneration Directors’ remuneration Employee costs and numbers 14. Related undertakings BP Annual Report and 20-F 2017and Form 20-F 2018 BPForm Annual Report 247 248 248 249 249 249 249 250 251 115 113 Financial statements 13. 14. 15. 16. 17. 18. 19. 20. 238 130 131 132 133 Notes on financial statements 1. 210 Group statement of changes in equity Group balance sheet Group cash flow statement 114 129 Consolidated financial statements of the BP group Independent auditor’s report on the Annual Report and Accounts to the members of BP p.l.c. Report on the audit of the financial statements Opinion In our opinion: • The financial statements of BP p.l.c. (the ‘parent company’) and its subsidiaries (the ‘group’) give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 December 2018 and of the group’s profit for the year then ended. • The group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union (EU) and IFRSs as issued by the International Accounting Standards Board (IASB). • The parent company financial statements have been properly prepared in accordance with United Kingdom generally accepted accounting practice including FRS 101 ‘Reduced Disclosure Framework'. • The financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the group financial statements, Article 4 of the IAS Regulation. We have audited the financial statements of BP p.l.c. which comprise: • • • • • • • Group income statement; Group statement of comprehensive income; Group and parent company statements of changes in equity; Group and parent company balance sheets; Group cash flow statement; Group related Notes 1 to 38 to the financial statements, including a summary of significant policies; and Parent company related Notes 1 to 14 to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in the preparation of the group financial statements is applicable law and IFRSs as adopted by the European Union and as issued by the IASB. The financial framework that has been applied in the preparation of the parent company financial statements is applicable law and United Kingdom accounting standards including FRS 101 (United Kingdom generally accepted accounting practice). Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the group and the parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the Financial Reporting Council’s (the ‘FRC’s’) Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We confirm that the non-audit services prohibited by the FRC’s Ethical Standard were not provided to the group or the parent company. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Summary of our audit approach Key audit matters The key audit matters that we identified in the current year were: • Impairment of Upstream oil and gas property, plant and equipment (PP&E) assets; • Accounting for acquisitions and disposals within the Upstream segment; • Impairment of exploration and appraisal assets; • Accounting for structured commodity transactions within the integrated supply and trading function, and the valuation of other level 3 financial instruments, where fraud risks may arise in revenue recognition; • User access management controls relating to financial systems; and • Management override of controls. Two key audit matters were identified by the previous auditor and described in their report for the year ended 31 December 2017 and are not included in our report for the year ended 31 December 2018. These were: • The determination of the liabilities, contingent liabilities and disclosures arising from the Gulf of Mexico oil spill - the provisions have substantially decreased from a quantitative perspective and the level of judgement in determining BP’s liabilities has reduced significantly as legal settlements have been reached; and • US Tax reform - the reform was signed into law in 2017 and gave rise to a one-off taxation charge. Whilst the impact of the reform has continued to be assessed in 2018, the judgement required and quantitative impact in the current year is considerably lower. The previous auditor also included a key audit matter in respect of unauthorized trading activity in the integrated supply and trading function. This is covered by the key audit matter set out above covering the accounting for structured commodity transactions and valuation of certain level 3 financial instruments. They also identified a key audit matter in respect of the estimation of oil and gas reserves and resources, which we have considered in the context of impairment of Upstream oil and gas PP&E assets. Materiality We have set materiality for the current year at $750 million based on profit before tax and underlying replacement cost profit before interest and tax. This page does not form part of BP's Annual Report on Form 20-F as filed with the SEC. 114 BP Annual Report and Form 20-F 2018 Scoping Our scope covered 136 components. Of these, 108 were full-scope audits, covering 71% of group revenue, and the remaining 28 were subject to specific procedures on certain account balances by component audit teams or the group audit team. First year audit transition The year ended 31 December 2018 is our first as auditor of the group. We commenced transition activities after our selection as auditor being announced in November 2016. These activities included: • Establishing independence from BP by exiting non-audit services which would be independence-impairing, as BP transitioned these to new service providers; • Establishing an appropriately resourced and skilled global audit team, including specialists, in all relevant locations; • Developing and delivering a bespoke “BP Academy” training course for Deloitte personnel joining the BP audit engagement; and • Holding introductory meetings with BP management. We commenced our audit planning procedures subsequent to us becoming independent on 16 October 2017. After establishing independence, our work included: • Shadowing the previous auditor through the 31 December 2017 audit, including attendance at key meetings, including audit committee meetings; • Reviewing the previous auditor’s 2016 and 2017 audit files; • Reviewing historical accounting policies and accounting judgements through discussion with management and review and challenge of management’s papers and supporting documentation; and • Conducting group audit team visits to components. These procedures built our understanding of the group which, together with our existing knowledge of the oil and gas industry, informed our audit risk assessment, through which we identified the risks of material misstatement to the group’s financial statements. We presented our transition observations to the group’s audit committee in a transition report in April 2018, with an update in May 2018. We presented further observations, together with our audit plan, in July 2018, and provided an update to our plan in December 2018. Conclusions relating to going concern, principal risks and viability statement Going concern We have reviewed the directors’ statement on page 111 about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them and their identification of any material uncertainties to the group’s and company’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements. We confirm that we have nothing material to report, add or draw attention to in respect of these matters. We considered as part of our risk assessment the nature of the group, its business model and related risks including where relevant the impact of Brexit, the requirements of the applicable financial reporting framework and the system of internal control. We evaluated the directors’ assessment of the group’s ability to continue as a going concern, including challenging the underlying data and key assumptions used to make the assessment, and evaluated the directors’ plans for future actions in relation to their going concern assessment. We are required to state whether we have anything material to add or draw attention to in relation to that statement required by Listing Rule 9.8.6R(3) and report if the statement is materially inconsistent with our knowledge obtained in the audit. Principal risks and viability statement Based solely on reading the directors’ statements and considering whether they were consistent with the knowledge we obtained in the course of the audit, including the knowledge obtained in the evaluation of the directors’ assessment of the group’s and the company’s ability to continue as a going concern, we are required to state whether we have anything material to add or draw attention to in relation to: • the disclosures on pages 55-56 that describe the principal risks and explain how they are being managed or mitigated; • the directors' confirmation on page 110 that they have carried out a robust assessment of the principal risks facing the group, including those that would threaten its business model, future performance, solvency or liquidity; or • the directors’ explanation on page 111 as to how they have assessed the prospects of the group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. We confirm that we have nothing material to report, add or draw attention to in respect of these matters. We are also required to report whether the directors’ statement relating to the prospects of the group required by Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. This page does not form part of BP's Annual Report on Form 20-F as filed with the SEC. BP Annual Report and Form 20-F 2018 115 These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. Throughout the course of our audit we identify risks of material misstatement (‘risks’) and classify those risks according to their severity. In assigning a category we consider both the likelihood of a risk of a material misstatement and the potential magnitude of a misstatement in making the assessment. Certain risks are classified as ‘significant’ or ‘higher’ depending on their severity. The category of the risk determines the level of evidence we seek in providing assurance that the associated financial statement item is not materially misstated. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Impairment of upstream oil and gas PP&E assets Key audit matter description How the scope of our audit responded to the key audit matter The group balance sheet includes property, plant and equipment (PP&E) of $135 billion, of which $99 billion is oil and gas properties within the Upstream segment. As required by IAS 36 'Impairment of Assets', management performed a review of the upstream cash generating units (CGUs) for indicators of impairment and impairment reversal as at 31 December 2018. We tested management’s internal controls over the setting of oil and gas prices, discount rates and reserve estimates. In addition, we conducted the following substantive procedures. Where such indicators were identified, management estimated the recoverable amount of the CGU to determine if any impairment charges or reversals were required. For the year ended 31 December 2018, BP recorded $400 million of Upstream impairment charges and $580 million of impairment reversals. Long-term oil and gas prices • We compared BP’s oil and gas price assumptions against thirdparty forecasts, peer information and relevant market data to determine whether BP’s forecasts were within the range of such forecasts. • In challenging management's forecasts, we considered the extent to which they reflected the energy transition due to climate change. Through our risk assessment procedures, we have determined that Discount rates there are three key estimates in management’s review for indicators • We independently evaluated BP’s discount rates used in of impairment/reversal and the level of impairment charge/reversal to impairment tests with input from Deloitte valuation specialists. record where indicators are identified. These are: • We assessed whether country risks were appropriately reflected • Long-term oil and gas prices - BP’s long-term oil and gas price in BP’s discount rates. assumptions have a significant impact on CGU impairment Reserves estimates assessments and valuations performed across the portfolio, and • We performed a look-back analysis to check for indications of are inherently uncertain. There is a risk that management’s oil bias over time. and gas price assumptions are not reasonable, leading to a material misstatement. • We reviewed BP’s reserves estimation methods and policies, assisted by Deloitte reserves experts. • Discount rates - Given the long timeframes involved, certain impairment assessments and valuations are sensitive to the • We assessed how these policies had been applied to seven discount rate applied. There is a risk that discount rates do not internal reserves estimates. reflect the return required by the market and the risks inherent in • We reviewed reports provided by external experts and assessed the cash flows being discounted, leading to a material their scope of work and findings. misstatement. Determination of the appropriate discount rate • We assessed the competence, capability and objectivity of BP’s can be judgemental. internal and external reserve experts, through obtaining their • Reserves estimates - A key input to impairment assessments relevant professional qualifications and experience. and valuations is the production forecast, in turn closely related Other procedures to the group’s reserves estimates and field development • We challenged management’s cash generating unit assumptions. CGU-specific estimates are not generally material. determination, scrutinized the impairment and impairment However, material misstatements could arise either from reversal indicator analysis and considered whether there was any systematic flaws in reserves estimation policies, or due to flawed contradictory evidence present. estimates in a particularly material individual impairment test. • Where such indicators were identified, we validated that BP’s Whilst all CGUs must be assessed for indicators of impairment and asset impairment methodology was appropriate and tested the impairment reversal annually, we focused on certain individual CGUs integrity of impairment models. with a total carrying value of $21.8 billion which we determined would • We compared hydrocarbon production forecasts and proved and be most at risk of a material impairment ($750 million) as a result of a probable reserves to reserve reports and our understanding of reasonably possible change in the key assumptions, particularly the the life of fields. long-term oil and gas price assumptions. Accordingly, we identified • We verified estimated future capital and operational costs by these as a significant audit risk. We also focused on assets with a comparison to approved budgets and assessed them with further $31.5 billion of combined CGU carrying value which were less reference to field production forecasts. sensitive. We identified these as a higher audit risk as they would be • We also assessed these estimates against management’s potentially at risk in aggregate to a material impairment by a change historical forecasting accuracy and whether the estimates had in such assumptions. Further information regarding these sensitivities been determined and applied on a consistent basis across the is given in Note 1. group where relevant. This page does not form part of BP's Annual Report on Form 20-F as filed with the SEC. 116 BP Annual Report and Form 20-F 2018 Key observations Long-term oil and gas prices We determined that BP’s Brent oil price forecasts are reasonable when compared against the range of other third-party forecasts. We challenged BP’s Henry Hub, NBP and Asian LNG price curves for periods when they were somewhat higher than the range of other third-party forecasts. However, management ran additional tests using a Henry Hub, NBP and Asian L...
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