KUWAIT ENERGY plc GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2013
F-46
4.
CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY
(CONTINUED)
Recoverability of exploration and evaluation costs
Under the modified full cost method of accounting for exploration and evaluation (“E&E”) costs, such costs are
capitalised as intangible assets by reference to appropriate cost pools, and are assessed for impairment when
circumstances suggest that the carrying amount may exceed its recoverable value. This assessment involves
judgement as to (i) the likely future commerciality of the asset and when such commerciality should be
determined, and (ii) future revenues and costs pertaining to any wider cost pool with which the asset in question is
associated, and the discount rate to be applied to such revenues and costs for the purpose of deriving a recoverable
value. Note 16 discloses the carrying amounts of the Group’s E&E assets as well as details of impairment charges
arising during the year.
Impairment of oil and gas properties
Determining whether oil and gas properties are impaired requires management to estimate the future net revenue
from oil and gas reserves attributable to the Group’s interest in that field. This requires estimates to be made of, in
particular, future oil and gas prices, production volumes, capital/operating expenditures and an asset specific
discount rate. A net impairment loss of USD 1,801 thousand (2012: reversal of USD 540 thousand) was
recognised during the year, as described further in note 9.
Assets held for sale
The measurement of assets held for sale at the lower of their carrying amount and fair value less costs to sell
requires management to estimate their fair value less costs to sell. An impairment loss of USD 236,940 thousands
was recognised during the year on classification of the assets of the Group’s Russia and Ukraine operations as
held for sale. The determination of fair value less costs to sell is inherently subjective. In determining the fair
value less costs to sell, management has considered the political situation in these countries, independent reserves
reports relating to these assets and expressions of interest from potential buyers. Further details are provided in
note 14.
Commercial reserves
Both impairment and depletion of the cost of oil and gas properties requires estimates to be made of quantities of
commercial oil and gas reserves, which are based on estimates determined by qualified petroleum engineers.
Management believes these reserves to be commercially productive and will provide revenues to the Group
adequate to recover remaining net un-depreciated and un-depleted capitalised oil and gas properties as at
31 December 2013.
Business combinations
In a business combination, the acquiree’s identifiable assets, liabilities and contingent liabilities that meet the
conditions for recognition under IFRS 3
Business Combinations
are recognised at their fair values at the
acquisition date, except for non-current assets (or disposal groups) that are classified as held for sale in
accordance with IFRS 5
Non-current Assets Held for Sale and Discontinued Operations
, which are recognised
and measured at fair value less costs to sell. The Group’s management determines the fair values of the acquiree’s
identifiable assets, liabilities, contingent liabilities and non-current assets classified as held for sale. Further
details in respect of the current year acquisition are provided in note 15.
