KUWAIT ENERGY plc GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2011
F-134
3.
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Oil and gas assets
Oil and gas exploration, evaluation and development expenditure
The Group uses the modified full cost method of accounting for exploration, evaluation (together “E&E”)and
development expenditure, whereby all expenditures incurred in connection with the acquisition, exploration,
evaluation and development of oil and gas assets, including directly attributable overheads, interest payable and
exchange differences directly related to financing development projects, are capitalised in separate geographical
cost pools.
Cost pools are established on the basis of geographical area having regard to the operational and financial
organisation of the Group. Intangible acquisition, exploration and evaluation costs incurred in a geographical
area where the Group has no established cost pool are initially capitalised as intangible non-current assets
except where they fall outside the scope of IFRS 6
“Exploration for and Evaluation of Mineral Resources”
whereby they are expensed as incurred subject to other guidance under IFRS.
Tangible non-current assets used in acquisition, exploration and evaluation are classified with tangible non-
current assets as property, plant and equipment. To the extent that such tangible assets are consumed in
exploration and evaluation the amount reflecting that consumption is recorded as part of the cost of the
intangible asset.
Upon successful conclusion of the appraisal programme and determination that commercial reserves exist, such
costs are transferred to tangible non-current assets as property, plant and equipment. Exploration and evaluation
costs carried forward are assessed for impairment as described below.
Proceeds from the farm out of exploration and evaluation assets are credited against the relevant cost centre.
Any overall surplus arising in a cost centre is credited to the consolidated statement of income.
Depreciation and depletion
Depletion is provided on oil and gas assets in production on a field by field basis using the unit of production
method, based on proven and probable reserves on a field by field basis, applied to the sum of the total
capitalised exploration, evaluation and development costs on a field by field basis, together with estimated
future development costs on a field by field basis at current prices. Oil and gas assets which have a similar
economic life are aggregated for depreciation purposes. The effects of changes in estimates in the unit of
production calculations are accounted for prospectively over the estimated remaining proven and probable
reserves of each field.
Impairment of value
Where there has been a change in economic conditions or in the expected use of an asset that indicates a
possible impairment in an asset, management tests the recoverability of the net book value of the asset by
comparison with the estimated discounted future net cash flows based on management’s expectations of future
oil prices and future costs. Any identified impairment is charged to the consolidated statement of income.
Intangible non-current assets are considered for impairment at least annually by reference to the indicators in
IFRS 6. Where there is an indication of impairment of an exploration and evaluation asset which is within a
geographic pool where the Group either has tangible oil and gas assets with commercial reserves or other
intangible E&E assets pending determination, the exploration asset is assessed for impairment together with all
other cash generating units and related tangible and intangible assets in that geographic pool. Where the
exploration asset is in an area where the Group has no established pool and no other E&E assets pending
determination, the exploration asset is tested for impairment separately and, where determined to be impaired, is
written off.
