BP Suffered the Destruction of $1.3bn in Shareholder Value in 2005

BP, the world’s second largest oil company, suffered the destruction of at least $1.3bn in shareholder value simply as a result of the implementation of the Historical Cost accounting model in 2005.

[ClickPress, Tue Feb 07 2006] The application by BP, the global energy and petrochemical company, of the stable measuring unit assumption in the accounting of their Retained Income resulted in the destruction of at least $1.3bn of shareholder value during 2005.

This would be 6.9% of their announced replacement cost profit of $19.314 billion in 2005. The suffered real value destruction would amount to 6.507 cents per share and would be 69 % of the fourth quarter dividend of 9.375 cents per share.

Retained Income is a constant real value non-monetary item, but, cannot be updated in terms of Historical Cost Accounting rules in a low inflationary economy. Variable real value non-monetary items are valued, for example, at fair value, market value, present value, net realizable value, recoverable value, etc.

The International Accounting Standard Board’s International Standards only identify monetary and non-monetary items. The split between variable and constant real value non-monetary items is generally overlooked as a result of the implementation of the stable measuring unit assumption – the cornerstone of the Historical Cost Accounting model - whereby it is accepted in low cash inflationary economies that the functional currency’s internal real value is constantly being destroyed by cash inflation – but, this destruction of real value is regarded as of not sufficient importance to adjust the real values of constant real value non-monetary items in the financial statements. They are valued at historical cost which results in the destruction of the real value of constant real value non-monetary items not updated at the rate of inflation year after year.

Retained Income is thus, in essence, treated the same as cash in a zero interest bank account under the Historical Cost Accounting model.

If all BP’s activities had been conducted in a hyperinflationary economy during 2005 they could have updated Retained Income in terms of International Accounting Standard IAS 29 Financial Reporting in Hyperinflationary Economies. The $1.3 billion would not have been permanently destroyed and in stead could have been paid out to shareholders in dividends.

BP are not allowed to do this in a low inflationary economy in terms of Historical Cost Accounting rules. IAS29 is only applicable in hyperinflationary economies.

If BP continue accounting their Retained Income based on the Historical Cost Accounting model for the next ten years the combination of low inflation and the stable measuring unit assumption may permanently destroy an additional $13.34 billion of shareholders´ real value in their Retained Income – all else being equal. BP’s Retained Income was $39.053 billion as at the start of 2005.

Retained Income may be declared as dividends to shareholders. BP’s shareholders permanently lost $1.3 billion in 2005 as a result of the stable measuring unit assumption. They may also never receive that $13.34 billion over the next ten years when BP continue to apply the stable measuring unit assumption to account their Retained Income.

Changing over to Real Value Accounting™ will stop the destruction of shareholders´ real value in BP’s Retained Income and may gain the petrochemical giant’s shareholders at least $13.34 billion over the next ten years. The stable measuring unit assumption is not applied under the Real Value Accounting™ model.

(Value date: Dec 2005 - US CPI 196.8. All the above values have to be updated as the US CPI changes every month.)

Contact
Nicolaas J Smith
RealValueAccounting.Com™
Tel +351 918386974
www.realvalueaccounting.com

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