Annual Report 2010

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ACCOUNTING PRINCIPLES Inventories Inventories of consumable well supplies are stated at the lower of cost and net realisable value, cost being determined on a weighted average cost basis. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. Inventories of hydrocarbons are stated at the lower of cost and net realisable value. Under or overlifted positions of hydrocarbons are valued at market prices prevailing at the balance sheet date. An underlift of production from a ﬁeld is included in the current receivables and valued at the reporting date spot price or prevailing contract price and an overlift of production from a ﬁeld is included in the current liabilities and valued at the reporting date spot price or prevailing contract price. On ﬁelds where the Group is required to contribute to site restoration costs, a provision is recorded to recognise the future commitment. An asset is created, as part of the oil and gas property, to represent the discounted value of the anticipated site restoration liability and depleted over the life of the ﬁeld on a unit of production basis. The corresponding accounting entry to the creation of the asset recognises the discounted value of the future liability. The discount applied to the anticipated site restoration liability is subsequently released over the life of the ﬁeld and is charged to ﬁnancial expenses. Changes in site restoration costs and reserves are treated prospectively and consistent with the treatment applied upon initial recognition. Borrowings Cash and cash equivalents Cash and cash equivalents includes cash at bank, cash in hand and interest bearing securities with original maturities of three months or less. Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised costs using the eﬀective interest method, with interest expense recognised on an eﬀective yield basis. The eﬀective interest method is a method of calculating the amortised cost of a ﬁnancial liability and of allocating interest expense over the relevant period. The eﬀective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the ﬁnancial liability, or a shorter period where appropriate. Equity Share capital consists of the registered share capital for the Parent Company. Share issue costs associated with the issuance of new equity are treated as a direct reduction of proceeds. Excess contribution in relation to the issuance of shares is accounted for in the item additional paid-in-capital. Where any Group company purchases the Company’s equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the Company’s equity holders until these shares are cancelled or sold. Where these shares are subsequently sold, any consideration received, net of any directly attributable incremental transaction costs and related income tax eﬀects, is included in equity attributable to the Company’s equity holders. The change in fair value of other shares and participations is accounted for in the fair value reserve. Upon the realisation of a change in value, the change in fair value recorded will be transferred to the income statement. The change in fair value of hedging instruments is accounted for in the hedge reserve. Upon settlement of the hedge instrument, the change in fair value remains in other comprehensive income until the hedged item eﬀects the income statement. The currency translation reserve contains unrealised translation diﬀerences due to the conversion of the functional currencies into the presentation currency. Retained earnings contain the accumulated results attributable to the shareholders of the Parent Company. Revenue Revenues from the sale of oil and gas are recognised in the income statement net of royalties taken in kind. Sales of oil and gas are recognised upon delivery of products and customer acceptance or on performance of services. Incidental revenues from the production of oil and gas are oﬀset against capitalised costs of the related cost centre until quantities of proven and probable reserves are determined and commercial production has commenced. Service income, generated by providing technical and management services to joint ventures, is recognised as other income. The ﬁscal regime in the area of operations deﬁnes whether royalties are payable in cash or in kind. Royalties payable in cash are accrued in the accounting period in which the liability arises. Royalties taken in kind are subtracted from production for the period to which they relate. Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets are added to the cost of those assets. Qualifying assets are assets that take a substantial period of time to complete for their intended use or sale. Investment income earned on the temporary investment of speciﬁc borrowings pending to be used for the qualifying asset is deducted from the borrowing costs eligible for capitalisation. This applies on the interest on borrowings to ﬁnance ﬁelds under development which is capitalised within oil and gas properties until production commences. All other borrowing costs are recognised in proﬁt or loss in the period in which they occur. Interest on borrowings to ﬁnance the acquisition of producing oil and gas properties is charged to income as incurred. Provisions A provision is reported when the Company has a legal or constructive obligation as a consequence of an event and when it is more likely than not that an outﬂow of resources is required to settle the obligation and a reliable estimate can be made of the amount. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reﬂects current market assessments of the time value of money and the risks speciﬁc to the obligation. The increase in the provision due to passage of time is recognised as ﬁnancial expense. Leases For a lease to qualify as a ﬁnance lease, substantially all of the risks and beneﬁts of ownership must pass to the lessee. In all other cases the lease will be classiﬁed as an operating lease. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. 74 Lundin Petroleum ANNUAL REPORT 2010

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