Annual Report 2010

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ACCOUNTING PRINCIPLES Transactions and balances Monetary assets and liabilities denominated in foreign currencies are translated at the rates of exchange prevailing at the balance sheet date and foreign exchange currency diﬀerences are recognised in the income statement. Transactions in foreign currencies are translated at exchange rates prevailing at the transaction date. Exchange diﬀerences are included in ﬁnancial income/expenses in the income statement except deferred exchange diﬀerences on qualifying cash ﬂow hedges which are recorded in other comprehensive income. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the balance sheet rate of exchange. Presentation currency The balance sheets and income statements of foreign Group companies are translated for consolidation purposes using the current rate method. All assets and liabilities of the subsidiary companies are translated at the balance sheet date rates of exchange, whereas the income statements are translated at average rates of exchange for the year, except for transactions where it is more relevant to use the rate of the day of the transaction. The translation diﬀerences which arise are recorded directly in the foreign currency translation reserve within other comprehensive income. Upon disposal of a foreign operation the translation diﬀerences relating to that operation will be transferred from equity to the income statement and included in the result on sale. Translation diﬀerences arising from net investments in subsidiaries, used for ﬁnancing exploration activities, are recorded directly in other comprehensive income. For the preparation of the annual ﬁnancial statements, the following currency exchange rates have been used. 2010 Average 1 USD equals NOK 1 USD equals Euro 1 USD equals Rouble 1 USD equals SEK 6.0345 0.7537 30.3570 7.1954 2010 Period end 5.8564 0.7484 30.5493 6.7097 2009 Average 6.2650 0.7177 31.6803 7.6223 2009 Period end 5.7767 0.6942 29.9556 7.1165 Net capitalised costs to reporting date, together with anticipated future capital costs for the development of the proved and probable reserves determined at the balance sheet date price levels, are depleted based on the year’s production in relation to estimated total proved and probable reserves of oil and gas in accordance with the unit of production method. Depletion of a ﬁeld area is charged to the income statement once production commences. Proved reserves are those quantities of petroleum which, by analysis of geological and engineering data, can be estimated with reasonable certainty to be commercially recoverable, from a given date forward, from known reservoirs and under current economic conditions, operating methods and governmental regulations. Proved reserves can be categorised as developed or undeveloped. If deterministic methods are used, the term reasonable certainty is intended to express a high degree of conﬁdence that the quantities will be recovered. If probabilistic methods are used, there should be at least a 90 percent probability that the quantities actually recovered will equal or exceed the estimates. Probable reserves are those unproved reserves which analysis of geological and engineering data suggests are more likely than not to be recoverable. In this context, when probabilistic methods are used, there should be at least a 50 percent probability that the quantities actually recovered will equal or exceed the sum of estimated proved plus probable reserves. Proceeds from the sale or farm-out of oil and gas concessions in the exploration stage are oﬀset against the related capitalised costs of each cost centre with any excess of net proceeds over all costs capitalised included in the income statement. In the event of a sale in the exploration stage any deﬁcit is included in the income statement. Impairment tests are performed annually or when there are facts and circumstances that suggest that the net book value of capitalised costs within each ﬁeld area cost centre less any provision for site restoration costs, royalties and deferred production or revenue related taxes is higher than the anticipated future net revenue from oil and gas reserves attributable to the Group’s interest in the related ﬁeld areas. Capitalised costs can not be carried unless those costs can be supported by future cash ﬂows from that asset. Provision is made for any impairment, where the net carrying value, according to the above, exceeds the recoverable amount, which is the higher of value in use and fair value less costs to sell, determined through estimated future discounted net cash ﬂows using prices and cost levels used by Group management in their internal forecasting. If there is no decision to continue with a ﬁeld speciﬁc exploration programme, the costs will be expensed at the time the decision is made. Classification of assets and liabilities Non-current assets, long-term liabilities and provisions consist for the most part solely of amounts that are expected to be recovered or paid more than twelve months after the balance sheet date. Current assets and current liabilities consist solely of amounts that are expected to be recovered or paid within twelve months after the balance sheet date. Oil and gas properties Oil and gas operations are recorded at historical cost less depletion. All costs for acquiring concessions, licences or interests in production sharing contracts and for the survey, drilling and development of such interests are capitalised on a ﬁeld area cost centre basis. Costs directly associated with an exploration well are capitalised until the determination of reserves is evaluated. If it is determined that a commercial discovery has not been achieved, these exploration costs are charged to the income statement. During the exploration and development phases, no depletion is charged. The ﬁeld will be transferred from the non-production cost pool to the production cost pool within oil and gas properties once production commences, and accounted for as a producing asset. Routine maintenance and repair costs for producing assets are expensed to the income statement when they occur. Other tangible fixed assets Other tangible ﬁxed assets are stated at cost less accumulated depreciation. Depreciation is based on cost and is calculated on a straight line basis over the estimated economic life of 20 years for real estate and 3 to 5 years for oﬃce equipment and other assets. Additional costs to existing assets are included in the assets’ net book value or recognised as a separate asset, as appropriate, only when it is probable that future economic beneﬁts associated with the item will ﬂow to the Group and the cost of the item can be measured reliably. The net book value of any replaced parts is written oﬀ. Other additional expenses are deemed to be repair and maintenance costs and are charged to the income statement when they are incurred. The net book value is written down immediately to its recoverable amount when the net book value is higher. The recoverable amount is the higher of an asset’s fair value less cost to sell and value in use. 72 Lundin Petroleum ANNUAL REPORT 2010

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