BP p.l.c. – Annual report – 31 December 2021
Industry: oil and gas
1. Significant accounting policies, judgements, estimates and assumptions (extract)
Inventories, other than inventories held for short-term trading purposes, are stated at the lower of cost and net realizable value. Cost is determined by the first-in first-out method and comprises direct purchase costs, cost of production, transportation and manufacturing expenses. Net realizable value is determined by reference to prices existing at the balance sheet date, adjusted where the sale of inventories after the reporting period gives evidence about their net realizable value at the end of the period.
Inventories held for short-term trading purposes are stated at fair value less costs to sell and any changes in fair value are recognized in the income statement.
Supplies are valued at the lower of cost on a weighted-average basis and net realizable value.
The inventory valuation at 31 December 2021 is stated net of a provision of $432 million (2020 $584 million) to write down inventories to their net realizable value, of which $64 million (2020 $216 million) relates to hydrocarbon inventories. The net credit to the income statement in the year in respect of inventory net realizable value provisions was $153 million (2020 $17 million credit), of which $151 million credit (2020 $71 million credit) related to hydrocarbon inventories.
As a result of the changes in strategic direction of the group and the evolution of the trading strategy set out in Note 1, from 1 January 2021, certain inventory, totalling $11.4 billion as at 31 December 2021, is now treated as trading inventory and is valued at fair value whereas the equivalent inventory was previously valued at the lower of cost or net realisable value in prior periods. Trading inventories are valued using quoted benchmark prices adjusted as appropriate for location and quality differentials. They are predominantly categorized within level 2 of the fair value hierarchy.