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

BP p.l.c. – Annual report – 31 December 2019

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. The Russian federal government, through its investment company JSC Rosneftegaz, owned 50% plus one share of the voting shares of Rosneft at 31 December 2019. 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, as at 31 December 2019, Bob Dudley, has been a member of the board of directors of Rosneft since 2013 and remains one of BP’s nominated directors following his resignation as BP’s group chief executive. He is also chairman of the Rosneft board’s Strategic Planning Committee. A second BP-nominated director, Guillermo Quintero, has been a member of the Rosneft board and its HR and Remuneration Committee since 2015. BP also holds the voting rights at general meetings of shareholders conferred by its 19.75% stake in Rosneft. BP’s management consider, 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.

 

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The associate that is material to the group at both 31 December 2019 and 2018 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. The Russian federal government, through its investment company JSC Rosneftegaz, owned 50.0% plus one share of the voting shares of Rosneft at 31 December 2019.

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 increase in the group’s equity-accounted investment balance for Rosneft at 31 December 2019 compared with 31 December 2018 principally relates to earnings from Rosneft and foreign exchange effects, which have been recognized in other comprehensive income, offset by dividends.

The value of BP’s 19.75% shareholding in Rosneft based on the quoted market share price of $7.21 per share (2018 $6.18 per share) was $15,090 million at 31 December 2019 (2018 $12,934 million).

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 TNK-BP. These adjustments have increased the reported profit for 2019, as shown in the table below, compared with the amounts reported in Rosneft’s IFRS financial statements. In particular, in 2018 these adjustments resulted in BP reporting a lower amount relating to impairment charges of downstream goodwill than the equivalent amounts reported by Rosneft.bp21

The group received dividends, net of withholding tax, of $785 million from Rosneft in 2019 (2018 $620 million and 2017 $314 million).

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

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a From 1 October 2014, Rosneft adopted hedge accounting in relation to a portion of highly probable future export revenue denominated in US dollars over a five-year period. Foreign exchange gains and losses arising on the retranslation of borrowings denominated in currencies other than the Russian rouble and designated as hedging instruments are recognized initially in other comprehensive income, and are reclassified to the income statement as the hedged revenue is recognized.

Transactions between the group and its associates are summarized below.

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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 $11,198 million (2018 $11,303 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.

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 2019 amounted to $11,382 million (2018 $8,319 million, 2017 $11,340 million). BP has contracted capital commitments amounting to $787 million (2018 $1,227 million, 2017 $1,451 million) in relation to associates. BP’s share of contracted capital commitments of joint ventures amounted to $1,024 million (2018 $619 million, 2017 $483 million).