ANNUAL REPORT 2011 - Connacher Oil and Gas

AR 2011
PG 51
Impairment of assets
For the purposes of impairment analysis of the company’s assets, the key assumptions used in estimating cash flows are future commodity prices,
expected production volumes and refinery throughput, cost structures and the outlook of market supply and demand conditions appropriate to the
local circumstances and environment. These assumptions and estimates are highly uncertain matters and are subject to change as new information
becomes available. Changes in economic conditions can also affect the rate used to discount future cash flow estimates.
Changes in assumptions could affect the carrying amounts of assets and impairment charges and reversals will affect net earnings (loss).
Information about the carrying amounts of assets and impairments is presented in notes 9 and 10.
Decommissioning liabilities
Provisions are recognized for the future abandonment and reclamation of petroleum, natural gas and refining properties at the end of their economic
lives. The estimated cost is recognized in net earnings (loss) over the life of the reserves on a unit–of–production basis. Changes in the estimates
of costs to be incurred, reserves or in the rate of production will therefore affect net earnings (loss), generally over the remaining economic life of
petroleum and natural gas assets.
Estimates of the amounts of decommissioning provisions recognized are based on current legal and constructive requirements, technology and price
levels. Because actual outflows can differ from estimates due to changes in laws, regulations, public expectations, technology, industry standards,
prices and conditions, and can take place many years in the future, the carrying amounts of such provisions are regularly reviewed and adjusted to
take account of such changes. The interest rate used to discount the cash flows is reviewed quarterly.
Information about decommissioning liabilities is presented in note 14.
Taxation
Tax provisions are recognized when it is considered probable that there will be a future outflow of funds to a taxing authority. In such cases, provision
is made for the amount that is expected to be settled, where this can be reasonably estimated. This requires the application of judgment as to the
ultimate outcome, which can change over time depending on facts and circumstances. A change in estimate of the likelihood of a future outflow and/
or in the expected amount to be settled would be recognized in net earnings (loss) in the period in which the change occurs.
Deferred tax assets are recognized only to the extent it is considered probable that those assets will be recoverable. This involves an assessment
of when those deferred tax assets are likely to be realized, and a judgment as to whether or not there will be sufficient taxable profits available to
offset the tax assets when they do reverse. This requires assumptions regarding future profitability and is therefore inherently uncertain. To the extent
assumptions regarding future profitability change, there can be an increase or decrease in the amounts recognized in respect of deferred tax assets
as well as in the amounts recognized in net earnings (loss) in the period in which the change occurs.
Tax provisions are based on enacted or substantively enacted laws. Changes in those laws could affect amounts recognized in net earnings (loss)
both in the period of change, which would include any impact on cumulative provisions, and in future periods.
Financial instruments
The company records its financial instruments at fair value on inception and at each reporting period depending on their subsequent classification.
The calculation of the fair value requires judgment around expected outcome and is based on multiple variables such as the company’s credit risk and
interest rate spread. The estimated fair value of the financial instruments, by their very nature, is subject to measurement uncertainty.
Other significant areas of judgment
The estimates of net realizable value of inventory involve estimating future selling prices and accordingly, are subject to measurement uncertainty.
The amounts for pension assets, obligations and pension costs charged to net earnings (loss) depend on certain actuarial and economic assumptions,
which are subject to measurement uncertainty.
Amounts recorded for share–based compensation expense are based, in part, on the historical volatility of the company’s share price, which may not
be indicative of future volatility. Accordingly, those amounts are subject to measurement uncertainty.
3. SIGNIFICANT ACCOUNTING POLICIES
3.1 Basis of consolidation
The consolidated financial statements include the financial statements of Connacher and its subsidiaries, being those which are controlled by the
company. Control exists when the company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its
activities. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the
date that control ceases, using consistent accounting policies. All inter–company balances and transactions, including gains and losses arising from
such transactions, are eliminated.