83
The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and
assumptions that affect the application of policies and the reported amounts of assets and liabilities, impairment in the
value of certain Group assets, the useful lives of tangible and intangible assets and the reported amounts of revenues and
costs during a given period. Although these judgments, estimates and assumptions are based on historical experience, the
current condition of the Group and the Directors’ expectations of future events, actual results may differ from these
estimates and cause the Group’s future results of operations or financial condition to vary significantly from that
presented in this Offering Memorandum. The judgments, estimates and assumptions underlying the Group’s critical
accounting policies are reviewed on an ongoing basis.
Revenue recognition
Revenues from the production of oil and gas are recognised on the basis of the Group’s net interest in those properties
(the entitlement method). The revenue recognition according to the entitlement method is based on actual production in
the period, and revenue is recognised when the title passes from the Group to its customer, regardless of when cash is
received by the Group for the sale.
Reserves and resources
Under the unit of production method, the Group’s estimates of its 2P net entitlement reserves determine its level of
depletion, depreciation and amortisation charges. Information about the Group’s balance sheet carrying amount with
respect of intangible exploration and evaluation assets and the depletion, depreciation and amortisation charged is given
in Note 16 to the Group’s consolidated financial statements included herein. The Group also uses estimates of 2P
reserves to determine impairment charges and reversals with regard to intangible exploration and evaluation assets and
property, plant and equipment.
The Group’s 2P reserves are estimated or audited by GCA with reference to available geological and engineering data,
and only include volumes for which commercial recovery, including access to market, is assured with reasonable
certainty. Estimates of oil and gas reserves are inherently imprecise, require the application of judgments and are subject
to regular revision, either upward or downward, based on new information derived from, among other things, the drilling
of additional wells, observation of long-term reservoir performance under producing conditions and changes in economic
factors, including oil and gas prices and contract terms. Changes to the Group’s estimates of its 2P net entitlement
reserves will affect the Group’s depletion, depreciation and amortisation charges in a given period as well as the balance
sheet carrying value with respect to its intangible exploration and evaluation assets.
Capitalised costs and intangible non-current assets
The Group applies the modified full cost method of accounting for exploration, appraisal and development costs, having
regard to the requirements of IFRS 6,
Exploration for and Evaluation of Mineral Resources
. Under the modified full cost
method of accounting, costs of exploration, appraisal and development (including directly attributable overheads, such as
depreciation costs for capitalised assets),
interest payable and currency exchange differences directly related to financing
development projects) under the Group’s licences are capitalised as intangible exploration and evaluation assets or as
property, plant and equipment on the Group’s consolidated balance sheet, as explained further below, by reference to
separate cost pools for the relevant fields.
Intangible exploration and evaluation assets comprise (i) expenditures on exploration and appraisal activities that are
ongoing at the balance sheet date, pending determination of whether or not commercial reserves exist for a given field
and (ii) costs of exploration and appraisal activities that, whilst representing part of the exploration and appraisal
activities associated with adding to the commercial reserves of a given cost pool, have not resulted in the discovery of
commercial reserves for that field. The Group recognises a separate cost pool for each of its countries of operation.
The application of the modified full cost method of accounting for exploration, appraisal and development costs requires
the Directors to make certain judgments, estimates and assumptions, including with regard to the impairment of both
intangible exploration and evaluation assets and property plant and equipment.
Pre-licence costs
Exploration and appraisal costs incurred by the Group prior to having obtained the legal rights to explore an area under
licence are not capitalised, and are recognised as operating costs within cost of sales in the Group’s consolidated income
statement as they are incurred.
