IFRS 12, paras 9, 21-23, B12 material associate disclosure, judgement where less than 20% voting rights held, commitments

BP p.l.c. – Annual report – 31 December 2020

Industry: oil and gas

1. Significant accounting policies, judgements, estimates and assumptions (extract)

Significant judgement: investment in Rosneft

Judgement is required in assessing the level of control or influence over another entity in which the group holds an interest. For bp, the judgement that the group has significant influence over Rosneft Oil Company (Rosneft), a Russian oil and gas company is significant. As a consequence of this judgement, bp uses the equity method of accounting for its investment and bp’s share of Rosneft’s oil and natural gas reserves is included in the group’s estimated net proved reserves of equity-accounted entities. If significant influence was not present, the investment would be accounted for as an investment in an equity instrument measured at fair value as described under ‘Financial assets’ below and no share of Rosneft’s oil and natural gas reserves would be reported.

Significant influence is defined in IFRS as the power to participate in the financial and operating policy decisions of the investee but is not control or joint control of those policies. Significant influence is presumed when an entity owns 20% or more of the voting power of the investee. Significant influence is presumed not to be present when an entity owns less than 20% of the voting power of the investee.

bp owns 19.75% of the voting shares of Rosneft. Rosneft’s largest shareholder is Rosneftegaz JSC (Rosneftegaz), which is wholly owned by the Russian government. At 31 December 2020, Rosneftegaz held 40.4% (2019 50% plus one share) of the voting shares of Rosneft . IFRS identifies several indicators that may provide evidence of significant influence, including representation on the board of directors of the investee and participation in policy-making processes. bp’s group chief executive, Bernard Looney, was approved as a member of the board of directors of Rosneft in June 2020 as one of bp’s two nominated directors. bp’s other nominated director, Bob Dudley, has been a member of the Rosneft board since 2013. He is also chairman of the Rosneft board’s Strategic and Sustainable Development Committee. bp also holds the voting rights at general meetings of shareholders conferred by its 19.75% stake in Rosneft. Transactions by Rosneft in its own shares during the year have increased bp’s economic interest in Rosneft to 22.03% (2019 19.75%). bp’s management considers, therefore, that the group has significant influence over Rosneft, as defined by IFRS.

17. Investments in associates

The following table provides aggregated summarized financial information for the group’s associates as it relates to the amounts recognized in the group income statement and on the group balance sheet.

The associate that is material to the group at both 31 December 2020 and 2019 is Rosneft.

bp owns 19.75% of the voting shares of Rosneft which are listed on the MICEX stock exchange in Moscow and its global depository receipts are listed on the London Stock Exchange. Rosneft’s largest shareholder is Rosneftegaz JSC (Rosneftegaz), which is wholly owned by the Russian government.

At 31 December 2020, Rosneftegaz held 40.4% (2019 50.0% plus one share) of the voting shares of Rosneft.

bp classifies its investment in Rosneft as an associate because, in management’s judgement, bp has significant influence over Rosneft; see Interests in other entities within Note 1 for further information. The group’s investment in Rosneft is a foreign operation whose functional currency is the Russian rouble. The decrease in the group’s equity-accounted investment balance for Rosneft at 31 December 2020 compared with 31 December 2019 principally relates to adverse foreign exchange effects, which have been recognized in other comprehensive income, and dividends, partially offset by bp’s share of Rosneft’s changes in equity.

During 2020 Rosneft completed a transaction to transfer all of its interest and cease participation in its Venezuelan businesses to a company owned by the government of the Russian Federation. In  consideration, Rosneft received shares equal to a 9.6% share of its own equity. The shares are held by a 100% subsidiary of Rosneft and accounted for as treasury shares. Rosneft also entered into share buyback transactions during the year. These are also accounted for as treasury shares. bp retains 19.75% of the voting rights at meetings of Rosneft shareholders and will continue to be entitled to dividends based on its current shareholding. bp’s economic interest, however, increased as a result of its indirect interest in the shares held by the subsidiary of Rosneft. bp’s share of profit or loss of Rosneft reflects its economic interest. At 31 December 2020, bp’s economic interest was 22.03%.

On 28 December 2020 Rosneft completed the acquisition of 100% stakes in JSC Taimyrneftegaz and LLC Taimyrburservis, and the sale of a 10% interest in LLC Vostok Oil. A preliminary assessment of the fair values of the assets and liabilities acquired and the consideration transferred in respect of the acquisitions has been undertaken and the further impact, if any, on bp’s accounting for its equity-accounted investment in Rosneft will be updated once this has been finalised.

The value of bp’s 19.75% shareholding in Rosneft based on the quoted market share price of $5.64 per share (2019 $7.21 per share) was $11,804 million at 31 December 2020 (2019 $15,090 million). The value of bp’s 22.03% economic interest based on the quoted market share price was $13,167 million at 31 December 2020.

The following table provides summarized financial information relating to Rosneft. This information is presented on a 100% basis and reflects adjustments made by bp to Rosneft’s own results in applying the equity method of accounting. bp adjusts Rosneft’s results for the accounting required under IFRS relating to bp’s purchase of its interest in Rosneft and the amortization of the deferred gain relating to the disposal of bp’s interest in TNKBP.

The group received dividends, net of withholding tax, of $480 million from Rosneft in 2020 (2019 $785 million and 2018 $620 million).

Summarized financial information for the group’s share of associates is shown below.

a In 2014-2019, Rosneft adopted hedge accounting in relation to a portion of highly probable future export revenue denominated in US dollars. Foreign exchange gains and losses arising on the retranslation of borrowings denominated in currencies other than the Russian rouble and designated as hedging instruments were recognized initially in other comprehensive income, and were reclassified to the income statement as the hedged revenue was recognized.

During the year, bp and Reliance Industries completed the formation of a new fuels and mobility venture, Reliance BP Mobility Limited, that will operate across India under the Jio-bp brand. bp invested $1 billion to acquire a 49% stake in the company. Transactions between the group and its associates are summarized below.

In addition to the transactions shown in the table above, in 2018 bp acquired a 49% stake in LLC Kharampurneftegaz, a Rosneft subsidiary, which develops resources within the Kharampurskoe and Festivalnoye licence areas in Yamalo-Nenets in northern Russia. bp’s interest in LLC Kharampurneftegaz is accounted for as an associate.

The terms of the outstanding balances receivable from associates are typically 30 to 45 days. The balances are unsecured and will be settled in cash. There are no significant provisions for doubtful debts relating to these balances and no significant expense recognized in the income statement in respect of bad or doubtful debts. Dividends receivable are not included in the table above.

The majority of purchases from associates relate to crude oil and oil products transactions with Rosneft. Sales to associates are related to various entities.

bp has commitments amounting to $10,777 million (2019 $11,198 million), primarily in relation to contracts with its associates for the purchase of transportation capacity. For information on capital commitments in relation to associates see Note 13.

bp’s share of impairment charges taken by associates in 2020 was $414 million (2019 $152 million).

13. Capital commitments

Authorized future capital expenditure for property, plant and equipment (excluding right-of-use assets) by group companies for which contracts had been signed at 31 December 2020 amounted to $8,009 million (2019 $11,382 million, 2018 $8,319 million). bp has contracted capital commitments amounting to $1,087 million (2019 $77 million, 2018 $25 million) in relation to joint ventures and $183 million (2019 $787 million, 2018 $1,227 million) in relation to associates. bp’s share of contracted capital commitments of joint ventures amounted to $900 million (2019 $1,024 million, 2018 $619 million).