FROM PUBLISHED ACCOUNTS

KEY AUDIT MATTER INCLUDED IN AUDIT REPORT ON
‘POTENTIAL IMPACT OF CLIMATE CHANGE’

BP
plc. (31^st DECEMBER, 2019)

From
Audit Report on Consolidated Financial
Statements

Potential impact
of climate change and the energy transition (impacting PP&E, goodwill,
intangible assets and provisions)

KEY
AUDIT MATTER DESCRIPTION

Climate
change impacts BP’s business in a number of ways as set out in the strategic
report on pages 2-71 of the Annual Report and Accounts. It represents a
strategic challenge with its implications becoming increasingly significant
towards 2050 and beyond. Whilst many of BP’s oil and gas properties and
refining assets are long-term in nature, none are being amortised over a period
that extends beyond this date. At current rates of depreciation, depletion and
amortisation (DD&A), the average life of the upstream PP&E is seven
years, and the downstream PP&E is 13 years. Accordingly, the related
principal risks that we have identified for our audit are as follows:

(1)   Forecast assumptions used in assessing the
value of assets within BP’s balance sheet for impairment testing, particularly
oil and gas price assumptions relevant to upstream oil and gas PP&E assets,
may not appropriately reflect changes in supply and demand due to climate
change and the energy transition (see ‘impairment of upstream PP&E’ below);

(2)   Recoverability of exploration and appraisal
(E&A) assets included within BP’s balance sheet where the investment
required in order to develop particular projects into producing oil and gas
PP&E assets might not be sanctioned by the board in future due to climate
change considerations or a potential development may not be considered to be
economic due to the impact of climate change and the energy transition on oil
and gas prices (see ‘impairment of exploration and appraisal assets’ below).
Management also assessed the following potential risks that could arise from
climate change considerations;

(3)   The carrying value of goodwill may no longer
be recoverable and therefore may need to be impaired;

(4)   The useful economic lives of the group’s
PP&E may be shortened as society moves towards ‘net zero’ emissions
targets, such that the DD&A charge is materially understated;

(5)   Decommissioning and asset retirement
obligations may need to be brought forward with a resulting increase in the
present value of the associated liabilities; and

(6)   Climate change-related litigation brought
against BP, as disclosed in Note 33 to the financial statements and described
on page 320 under legal proceedings, may lead to an outflow of funds requiring
provision in the current year.

The material upstream goodwill balance is recorded and tested at the
segment level. The most significant assumption in the goodwill impairment test
affected by climate change relates to future oil and gas prices (see
‘impairment of upstream PP&E’ below). Given the significant headroom in the
goodwill impairment test, management identified no other assumption that could
lead to a material misstatement of goodwill due to the energy transition and
other climate change factors. Disclosures in relation to sensitivities for
goodwill are included within Note 14 on pages 187-188. The downstream segment
has a goodwill balance at 31^st December, 2019 of $3.9 billion, of
which the most significant element is $2.8 billion relating to the lubricants
business. Notwithstanding the expected global transition to electric vehicles,
management noted that demand for lubricants is forecast to continue to grow
until at least 2040, underpinning the substantial headroom in the most recent
impairment test as described in Note 14. As described on pages 70-71 and in
Note 1, the impact of potential changes in DD&A charges, or to decommissioning
dates would not have a material impact on the amounts reported in the current
period.

The above
considerations were a significant focus of management during the period which
led to this being a matter that we communicated to the audit committee, and
which had a significant effect on the overall audit strategy. We therefore
identified this as a key audit matter.

How
the scope of our audit responded to the key audit matter

Overall
response

We held
discussions with management, with Deloitte specialists and within the Group
engagement team to identify the areas where we felt climate change could have a
potential impact on the financial statements.

We also established a climate change steering committee comprising a
group of senior partners with specific sustainability and technical audit and
accounting expertise within Deloitte to provide an independent challenge to our
key decisions and conclusions with respect to this area.

Audit
procedures in respect of impairment of upstream oil and gas PP&E assets and
exploration and appraisal assets

The audit
response related to the two principal risks identified is set out under the key
audit matters for impairment of upstream oil and gas PP&E assets on pages
135-136 and the impairment of exploration and appraisal assets on page 137.

Other
audit procedures performed

We
challenged management’s assertion that the impact of potential changes in
DD&A charges, or to decommissioning dates, would not have a material impact
on the amounts reported in the current period, by making inquiries of relevant
BP personnel outside the finance function, reviewing internal and external
documents and conducting sensitivity analysis as part of our audit risk
assessment procedures. We obtained third party forecasts of future refined
petroleum product demand for those countries which are included in our group
full audit scope for downstream, under a range of scenarios including scenarios
noted as being consistent with achieving the 2015 COP 21 Paris agreement goal
to limit temperature rises to well below 2°C (‘Paris 2°C Goal’). These
indicated that global demand for such products was expected to remain
significant until at least 2040.

We
performed procedures to satisfy ourselves that, other than future oil and gas
price assumptions, there were no other assumptions in management’s goodwill
calculations to which reasonably possible changes could cause goodwill to be
materially misstated.

We
obtained an understanding of the controls identified by management as being
relevant to ensuring the completeness and accuracy of litigation and climate
change related disclosure within the Annual Report; we performed procedures to
test these controls.

With
regard to climate change litigation, we designed procedures specifically to
respond to the risks that provisions could be understated or that contingent
liability disclosures may be omitted or be inaccurate, including:

(i)   Holding discussions with the group general
counsel and other senior BP lawyers regarding climate change matters;

(ii)  Conducting a search for climate change
litigation and claims brought against the group; and

(iii) Making written inquiries of, and holding
discussions with, external legal counsel advising BP in relation to climate
change litigation.

We read
the other information included in the Annual Report and considered (a) whether
there was any material inconsistency between the other information and the
financial statements; or (b) whether there was any material inconsistency
between the other information and our understanding of the business based on
audit evidence obtained and conclusions reached in the audit.

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Corrigendum

We published an article titled Personal Data Protection by Mr. Rajendra
Ponkshe in the November 2020 issue
of bcaj, on
page 44. Mr. Ponkshe’s title was wrongly mentioned as ?Advocate’ instead of
?Chartered Accountant’.

This oversight at Spenta Multimedia, is regretted. The readers are requested
to note the correct title of the author.