STRATEGIC ANALYSIS

Task 5: BP and M&S

Task 5: BP and M&S

Introduction

BP, The British Petroleum Company, is one of the largest international petroleum and petrochemical companies. It is an integrated energy firm involved in oil and gas exploration, production, refining and marketing, and the manufacturing and marketing of petrochemicals. According to Business Week, as of May 31, 1994, BP was the third largest public company in Britain and the thirty-first largest in the world. (Pincus 1996, 443-467) BP was privatised in the 1980s.

The United Kingdom (U.K.) and the United States (U.S.) have active and extensive stock and bond markets, and a primary purpose of financial reporting in both countries is to provide investors and creditors (i.e., suppliers of capital) with information useful for decision making. Generally accepted accounting principles (GAAP) in the U.K. and the U.S. are similar. For example, both U.K. and U.S. GAAP require providing for uncollectible accounts and depreciating fixed assets over their useful lives. Nevertheless, differences exist between U.S. GAAP and U.K. GAAP, in terms of accounting standards and financial statement format and terminology.

BP uses historical cost accounting, but its income statement also reports replacement cost information about certain earnings components. You will also notice that BP uses the FIFO inventory valuation method. In the U.K., companies may not use the LIFO method for either tax purposes or financial reporting purposes. Because under LIFO the costs of the latest goods acquired are treated as the costs of the first goods sold, LIFO-based cost of goods sold will approximate cost of goods sold computed on a current or replacement cost basis. In turn, this yields a measure of gross margin (or gross profit) under LIFO that reflects the ability of the company to generate revenues in excess of the replacement cost of the goods it sold.

In contrast, because under FIFO the first costs assigned to cost of goods sold are the acquisition costs of the oldest goods on hand, the result is a matching of old (i.e., non-current) costs in cost of goods sold against current revenues, and a measure of gross margin that reflects two components: (a) gross margin on a LIFO basis; and (b) any gains or losses realized over the period from when inventory was acquired until it was sold (referred to as holding gains/ losses or inventory profits/losses). Therefore, gross margin computed under LIFO generally will differ from gross margin computed under FIFO unless changes in inventory costs are small in amount or inventory turns over very rapidly, such that the oldest costs under FIFO approximate current costs.

Although boasting a long-established presence in France, BP is unlikely to see significant growth in its operations there over the medium term. The group's refining portfolio is only marginal now following the Lavera sale and, while the retail and marketing arms show more promise, the overall French position could see a gradual decrease in both absolute and relative importance for the oil major. This is a trend seen across BP's European interests, with the group likely to maintain ...