Annual Report 2010

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ACCOUNTING PRINCIPLES Employee benefits Short-term employee benefits Short-term employee beneﬁts such as salaries, social premiums and holiday pay, are expensed when incurred. Pension obligations Pensions are the most common long-term employee beneﬁt. The pension schemes are funded through payments to insurance companies. The Group’s pension obligations consist mainly of deﬁned contribution plans. A deﬁned contribution plan is a pension plan under which the Group pays ﬁxed contributions. The Group has no further payment obligations once the contributions have been paid. The contributions are recognised as an expense when they are due. The Group has one obligation under a deﬁned beneﬁt plan. The relating liability recognised in the balance sheet is valued at the discounted estimated future cash outﬂows as calculated by an external actuarial expert. Actuarial gains and losses are charged to the income statement. The Group does not have any designated plan assets. Share-based payments Lundin Petroleum recognises cash-settled share-based payments in the income statement as expenses during the vesting period and as a liability in relation to the long-term incentive plan. The liability is measured at fair value and revalued using the Black & Sholes pricing model at each balance sheet date and at the date of settlement, with any change in fair value recognised in the income statement for the period. Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to Executive Management, which, due to the unique nature of each country’s operations, commercial terms or ﬁscal environment, is at a country level. Information for segments is only disclosed when applicable. Related party transactions Lundin Petroleum recognises the following related parties: associated companies, jointly controlled entities, members or the family of the key management personnel or other parties that are partly, directly or indirectly, controlled by key management personnel or of its family or of any individual that controls, or has joint control or signiﬁcant inﬂuence over the entity. Critical accounting estimates and judgements The management of Lundin Petroleum has to make estimates and judgements when preparing the ﬁnancial statements of the Group. Uncertainties in the estimates and judgements could have an impact on the carrying amount of assets and liabilities and the Group’s result. The most important estimates and judgements in relation thereto are: Estimates in oil and gas reserves The business of the Group is the exploration for, development of and production of oil and gas reserves. Estimates of oil and gas reserves are used in the calculations for impairment tests and accounting for depletion and site restoration. Changes in estimates in oil and gas reserves, resulting in diﬀerent future production proﬁles, will aﬀect the discounted cash ﬂows used in impairment testing, the anticipated date of site decommissioning and restoration and the depletion charges in accordance with the unit of production method. Investments in associated companies The Group determines if the carrying value for investments in associated companies has suﬀered any impairment where any objective evidence of impairment exists. This assessment is performed to identify where the carrying value exceeds its recoverable amount. The recoverable amounts have been determined based on value in use calculations. Assessments used in these calculations include judgement of the future cash ﬂows, discount rates and exchange rates. Site restoration provision Amounts used in recording a provision for site restoration are estimates based on current legal and constructive requirements and current technology and price levels for the removal of facilities and plugging and abandoning of wells. Due to changes in relation to these items, the future actual cash outﬂows in relation to the site decommissioning and restoration can be diﬀerent. To reﬂect the eﬀects due to changes in legislation, requirements and technology and price levels, the carrying amounts of site restoration provisions are reviewed on a regular basis. The eﬀects of changes in estimates do not give rise to prior year adjustments and are treated prospectively over the estimated remaining commercial reserves of each ﬁeld. While the Group uses its best estimates and judgement, actual results could diﬀer from these estimates. Income taxes The main components of tax are current and deferred. Tax is recognised in the income statement, except to the extent that it relates to items recognised in other comprehensive income or directly in equity, in which case it is matched. Current tax is tax that is to be paid or received for the year in question and also includes adjustments of current tax attributable to previous periods. Deferred income tax is a non-cash charge provided, using the liability method, on temporary diﬀerences arising between the tax bases of assets and liabilities and their carrying values in the consolidated ﬁnancial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction aﬀects neither accounting nor taxable proﬁt or loss. Deferred income tax is provided on temporary diﬀerences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary diﬀerence is controlled by the Group and it is probable that the temporary diﬀerence will not reverse in the foreseeable future. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised to the extent that it is probable that future taxable proﬁt will be available against which the temporary diﬀerences can be utilised. Deferred tax assets are oﬀset against deferred tax liabilities in the balance sheet where they relate to the same jurisdiction in accordance with IAS 12. 75

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