Annual Report 2010

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ACCOUNTING PRINCIPLES Introduction Lundin Petroleum’s annual report for 2010 has been prepared in compliance with International Financial Reporting Standards (IFRS). The ﬁnancial statements of the Group have been prepared in accordance with prevailing IFRS standards and International Financial Reporting Standards Committee (IFRIC) interpretations adopted by the EU Commission and the Swedish Annual Accounts Act (1995:1554). In addition RFR 1 “Supplementary Rules for Groups” has been applied as issued by the Swedish Financial Reporting Board. The Parent Company applies the same accounting principles as the Group, except as speciﬁed in the Parent Company accounting principles on page 93. The preparation of ﬁnancial statements in conformity with IFRS requires the use of certain critical accounting estimates and also requires management to exercise its judgement in the process of applying the Group’s accounting principles. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are signiﬁcant to the consolidated ﬁnancial statements, are disclosed under the headline “Critical accounting estimates and judgements”. A description of the Company’s operations and registered oﬃce is made in the Directors’ report on page 57. IFRIC 17, ‘Distribution of non-cash assets to owners’ (effective on or after 1 July 2009). This interpretation provides guidance on accounting for arrangements whereby an entity distributes non-cash assets to shareholders either as a distribution of reserves or as dividends. IFRS 5 has also been amended to require that assets are classiﬁed as held for distribution only when they are available for distribution in their present condition and the distribution is highly probable. This interpretation was applied during the year. IFRIC 18, ‘Transfers of assets from customers’, effective for transfer of assets received on or after 1 July 2009. The interpretation clariﬁes the requirements of IFRSs for agreements in which an entity receives from a customer an item of property plant and equipment that the entity must then use either or connect the customer to a network or to provide the customer with ongoing access to a supply of goods or services. This interpretation was applied during the year. IFRS 2 (amendments), ‘Group cash-settled and share-based payment transactions’. (effective on or after 1 January 2010). In addition to incorporating IFRIC 8, ‘Scope of IFRS 2’, and IFRIC 11, ‘IFRS 2 – Group and treasury share transactions’, the amendments expand on the guidance in IFRIC 11 to address the classiﬁcation of Group arrangements that were not covered by that interpretation. This interpretation does not have any impact on the Group’s ﬁnancial statements. IFRS 3 (Revised), ‘Business combinations’ (effective on or after 1 July 2009). The revised standard continues to apply the acquisition method to business combinations, with some signiﬁcant changes. For example, all payments to purchase a business are to be recorded at fair value at the acquisition date, with contingent payments classiﬁed as debt subsequently re-measured through the income statement. There is a choice on an acquisition-by-acquisition basis to measure the non-controlling interest in the acquiree either at fair vale or at the non-controlling interest’s proportionate share of the acquiree’s net assets. All acquisition-related costs should be expensed. This revision has had an impact on the Group accounts as Etrion’s acquisitions have been treated in line with IFRS 3 revised. IFRS 5 (amendment), ‘non-current assets held-for-sale and discontinued operations’. The amendment provides clariﬁcation that IFRS 5 speciﬁes the disclosures required in respect of non-current assets (or disposal Groups) classiﬁed as held for sale or discontinued operations. It also clariﬁes that the general requirement of IAS 1 still apply, particularly paragraph 15 (to achieve a fair presentation) and paragraph 125 (sources of estimation uncertainty) of IAS 1. The Group applies IFRS 5 (amendment) from 1 January 2010. The amendment does not have a material impact on the Group’s ﬁnancial statements. IAS 1 (amendment), ‘Presentation of financial statements’. The amendment provides clariﬁcation that the potential settlement of a liability by the issue of equity is not relevant to its classiﬁcation as current or non-current. By amending the deﬁnition of current liability, the amendment permits a liability to be classiﬁed as non-current (provided that the entity has an unconditional right to defer settlement by transfer of cash or other assets for at least 12 months after the accounting period) notwithstanding the fact that the entity could be required by the counterparty to settle in shares at any time. The Group applies IAS 1 (amendment) from 1 January 2010. The amendment does not have a material impact on the Group’s ﬁnancial statements. IAS 27 (Revised), ‘Consolidated and separate financial statements’ (effective from 1 July 2009). The revised standard requires the eﬀects of all transactions with non-controlling interests to be recorded in equity Basis of preparation The consolidated ﬁnancial statements have been prepared under the historical cost convention, as modiﬁed by the revaluation of available for sale ﬁnancial assets and ﬁnancial assets and liabilities (including derivative instruments) at fair value through the proﬁt or loss. During the ﬁrst quarter of 2010, Lundin Petroleum announced its intention to spin-oﬀ the United Kingdom (UK) business. The spin-oﬀ was completed on 6 April 2010 with the sale of the UK business in exchange for shares in the newly incorporated company, EnQuest and the subsequent distribution of the EnQuest shares received to Lundin Petroleum shareholders on 9 April 2010. The results of the UK business are included in the Lundin Petroleum accounts up until the end of the ﬁrst quarter of 2010 and are shown as discontinued operations. On 12 November 2010, Lundin Petroleum completed the distribution of its shares in Etrion Corporation to Lundin Petroleum’s shareholders, in connection with the listing of the shares of Etrion on the NASDAQ OMX Stockholm exchange. On 29 December 2010, Lundin Petroleum completed the sale of its non-operated interests in Salawati Basin and Salawati Island assets in Indonesia to RH Petrogas. The results from Etrion, Salawati Basin and Salawati Island are included in the consolidated accounts up to the date of the distribution/sale and have not been considered as discontinued operations as the operations are not signiﬁcant to the presentation of the Group accounts. Accounting standards, amendments and interpretations effective in 2010 and impact on the Group’s financial statements. IFRIC 9, ‘Reassessment of embedded derivatives and’ IAS 39, ‘financial instruments, recognition and measurement’, effective 1 July 2009. This amendment to IFRIC 9 requires an entity to assess whether an embedded derivative should be separated from a host contract when the entity reclassiﬁes a hybrid ﬁnancial asset out of the fair value though proﬁt or loss category. IFRIC 9 is not relevant to the Group’s operations. IFRIC 16, ‘Hedges of a net investment in a foreign operation’ (effective on or after 1 July 2009). IFRIC 16 clariﬁes the accounting treatment in respect of net investment hedging. This includes the fact that net investment hedging relates to diﬀerences in functional currency not presentation currency, and hedging instruments may be held anywhere in the Group. IFRIC 16 is not relevant to the Group’s operations. 70 Lundin Petroleum ANNUAL REPORT 2010

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