Bp's Analysis

Question 1:

Replacement cost is a cost that represents the current cost of the asset or current cost to produce the same product. Compared to historical cost accounting, replacement cost accounting is more flexible, and records the real value of the enterprise’s assets more truly. Furthermore, Inflation is one of the main reasons why BP wants to introduce replacement information into the presentation of its results. The inflation standard was come up in 1977, due to the historical cost emerged a lots of problem in calculated the plant, property and equipment. As the result, IAS(International accounting standards)15 (information reflecting the effects of changing prices) was come up to replaced IAS 6 to give some specific guidelines that companies can follow to improve the quality of disclosure. BP has recognized the limitations of historical cost accounting, so it starts to calculate profits using more up-to-date replacement costs in report.

Question 2

One of the possible explanations for that big gap is the inflation as well. And BP’s accounting policies also contribute to the difference. Inflation has been a stubborn worldwide phenomenon that has ruinous impact on economies of many countries over the years. Some countries have been suffering hyperinflationary condition that annual rate of inflation almost double or even higher each year, such as Argentina, Brazil, and Mexico (Radebaugh et al), and BP also has operated in some of those countries.

In BP’s accounting policies, stock holding gains or losses represent the difference between the replacement cost of sales and the historical cost of sales calculated using the first-in first-out method (Analist.nl-International aandeleninformatie 2004). So when oil has been sold, the gains can be realized.

In some hyperinflationary countries, the replacement cost raise very quick, so there will be a big difference between the current costs of goods sold and the historical cost of goods. This can be considered a realized holding gain, as some of the historical cost profit was derived from holding inventory during a period when its specific price was increasing. The stock holding gains had decreased to $16 million in 2003 compared to $1129 in 2002. It may also indicate BP had dropped its oil storage dramatically since 2003 due to crude oil supply disruption. And Trading conditions in 2003 were also affected by tight supplies in oil and gas markets and by a world economic recovery. High rates of stock turnover also explain that BP overall gas sales volumes rose 22% than 2002.

BP creates new profit centers by accessing new areas with the potential for large oil and natural gas fields, and the result for 2003 was an improvement of 33% over 2002 in Exploration and Production business. Growth in margins, combined with improved operating performance, led to a 77% improvement in