Fair value headache pains BP
BP’s poor performance has been compounded by the burden of IFRS fair value demands
Earlier this week, the company disclosed that its third-quarter profits had
dropped by almost $2bn (£1bn) compared to the same period in 2006, but also took
the decision to present its figures in a way that stripped out the effects of
fair value.
Inventory losses amount to $539m under fair value. The requirement caused
massive swings in the value of its futures contracts, which has led to
BP taking
steps to present its numbers in such a way that allows investors to see the
‘economic effect of these activities as a whole’.
Under IFRS, BP’s inventories and contracts are recorded at historic cost and
on an accruals basis respectively.
A major sticking point concerning hedge accounting still remains for BP,
because the related derivative instruments must be recorded at fair value, with
gains and losses recognised on the income sheet. BP said in the report that
‘hedge accounting is either not permitted or not followed, principally due to
the impracticality of effectiveness testing requirements’.