64
65
KUWAIT ENERGY plc AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2011
17
3.
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Oil and gas assets (Continued)
Commercial reserves
Proven & probable oil and gas reserves
as defined in the Petroleum Resources Management System (“PRMS”)
are considered as commercial reserves.
Proven reserves include reserves that are confirmed with a high degree of certainty through an analysis of the
development history and a volume method analysis of the relevant geological and engineering data. Proven
reserves are those that, based on the available evidence and taking into account technical and economic factors,
have a better than 90% chance of being produced.
Probable reserves are those reserves in which hydrocarbons have been located within the geological structure
with a lesser degree of certainty because fewer wells have been drilled and certain operational tests have not
been conducted. Probable reserves are those reserves that, on the available evidence and taking into account
technical and economic factors, have a better than 50% chance of being produced.
These reserves are being calculated under existing economic and operating conditions, i.e., prices and costs as
at the date the estimate is made. Prices include consideration of changes in existing prices provided by
contractual arrangements and management’s forecast of future prices.
These estimates, made by the Group’s engineers
and periodically evaluated by independent reservoir engineers,
are reviewed annually and revised, either upward or downward, as warranted by additional data. Revisions are
necessary due to changes in, among other things, reservoir performance, prices, economic conditions and
governmental restrictions.
Other fixed assets
Other fixed assets are stated at cost less accumulated depreciation and any accumulated impairment losses. Cost
includes the purchase price and directly associated costs of bringing the asset to a working condition for its
intended use. Depreciation is calculated based on the estimated useful lives of the applicable assets on a
straight-line basis, on the following basis:
Office equipments 5 years
Motor vehicles 5 years
Furnitures and fittings 10 years
The estimated useful lives, residual values and depreciation method are reviewed at each year end, with the
effect of any changes in estimate accounted for on a prospective basis.
Maintenance and repairs, replacements and improvements of minor importance are expensed as incurred.
Significant improvements and replacement of assets are capitalised.
The gain or loss arising on the disposal or retirement of other fixed assets is determined as the difference
between the sales proceeds and the carrying amount of the asset and is recognised in the consolidated statement
of income.
Operating leases
Operating lease payments are recognised as an expense on a straight-line basis over the lease term, except
where another systematic basis is more representative of the time pattern in which economic benefits from the
leased asset are consumed. Contingent rentals arising under operating leases are recognised as an expense in the
period in which they are incurred.
In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a
liability. The aggregate benefit of incentives is recognised as a reduction of rental expense on a straight-line
basis, except where another systematic basis is more representative of the time pattern in which economic
benefits from the leased asset are consumed.
KUWAIT ENERGY plc AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2011
18
3.
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Derivative financial instruments
The Group enters into a variety of derivative financial instruments to manage its exposure to interest rate and
oil price fluctuations, including interest rate caps and oil put options.
Derivatives are initially recognised at fair value at the date the derivative contract is entered into and are
subsequently remeasured to their fair value at the end of each reporting period. The resulting gain or loss is
recognised in the consolidated statement of income immediately unless the derivative is designated and
effective as a hedging instrument, in which event the timing of the recognition in the consolidated statement of
income depends on the nature of the hedge relationship (see below). A derivative with a positive fair value is
recognised as a financial asset while a derivative with a negative fair value is recognised as a financial
liability.
Hedge accounting
The Group designates certain hedging instruments which include oil put options as cash flow hedges in order
to mitigate the risk arising from fluctuations in oil prices.
At the inception of the hedge relationship, the Group documents the relationship between the hedging
instrument and the hedged item, along with its risk management objectives and its strategy for undertaking
various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Group
documents whether the hedging instrument is highly effective in offsetting changes in fair values or cash flows
of the hedged item attributable to the hedged risk.
Note 23 sets out details of the fair values of the derivative instrument used for hedging purposes.
Cash flow hedges
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow
hedges is recognised in other comprehensive income. The gain or loss relating to the ineffective portion is
recognised immediately in the consolidated statement of income.
Amounts previously recognised in other comprehensive income and accumulated in equity are reclassified to
finance income or costs in the consolidated statement of income in the periods when the hedged item is
recognised in the consolidated statement of income. However, when the forecast transaction that is hedged
results in the recognition of a non-financial asset or a non-financial liability, the gains and losses previously
recognised in other comprehensive income and accumulated in equity are transferred from equity and included
in the initial cost of the non-financial asset or non-financial liability.
Hedge accounting is discontinued when the Group revokes the hedging relationship, when the hedging
instrument expires or is sold, terminated, or exercised, or when it no longer qualifies for hedge accounting.
When a forecast transaction is expected to occur, any gain or loss accumulated in equity at that time remains
separately in equity and is recognised in the consolidated statement of income when the forecast transaction is
ultimately recognised in the consolidated statement of income. When a forecast transaction is no longer
expected to occur, the gain or loss accumulated in equity is recognised immediately in the consolidated
statement of income.
Revenue recognition
Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and
revenue can be reliably measured.
Revenue represents the value of sales exclusive of related sales taxes of oil and gas arising from upstream
operations when the oil has been lifted and the title has passed.
Interest income is recognised on an accrual basis in accordance with the substance of the relevant agreement.
Kuwait Energy Plc And Subsidiaries
Notes To The Consolidated Financial Statements
For The Year Ended 31 December 2011
Kuwait Energy Plc And Subsidiaries
Notes To The Consolidated Financial Statements
For The Year Ended 31 December 2011
