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.