ANNUAL REPORT 2011 - Connacher Oil and Gas

AR 2011
PG 52
3.2 Inventories
Inventories are stated at the lower of cost or net realizable value. Cost comprises direct purchase and blending costs, costs of production and other
indirect costs and is determined using the weighted average cost method. Net realizable value is the estimated selling price in the ordinary course of
business less costs to complete and sell.
3.3 Exploration and Evaluation assets (“E&E”)
E&E expenditures incurred prior to acquiring the legal right to explore are charged to expense as incurred and recorded as E&E expense in net
earnings (loss).
All costs directly associated with exploration and evaluation of oil and gas activities are initially capitalized. E&E costs are those expenditures where
technical feasibility and commercial viability has not been yet been determined and include license and unproved property acquisition costs, geological
and geophysical costs and costs of drilling exploratory wells.
E&E costs are not amortized except for the costs associated with unproved land which are amortized to expense over the lease term. E&E assets are
transferred to property, plant and equipment when they are determined to meet technical feasibility and commercial viability.
The carrying amount of E&E assets is tested for impairment in accordance with note 3.6 annually, upon transfer to property, plant and equipment,
when an area is determined not to be technically feasible and commercially viable or the company decides not to continue with its activity.
3.4 Property, plant and equipment (“PP&E”)
Recognition and measurement
Property, plant and equipment is initially recognized at cost which represents all costs directly associated with the development of petroleum and
natural gas reserves where technical feasibility and commercial viability have been determined. Such costs include drilling costs of development wells,
tangible costs of facilities and infrastructure construction, costs of optimization and enhanced recovery projects, proved property acquisition costs,
asset decommissioning costs, transfers from E&E assets and borrowing costs relating to qualifying assets.
Expenditures on major maintenance repairs comprise the cost of replacement assets or parts of assets, inspection costs and overhaul costs. Where
an asset or part of an asset that was separately depreciated is replaced and it is probable that future economic benefits associated with the item
will flow to the company, the expenditure is capitalized and the carrying amount of the replaced asset is derecognized. Major inspection and overhaul
costs associated with major maintenance programs are capitalized and amortized over the period to the next inspection. Normal overhaul and repair
and maintenance costs are charged to net earnings (loss) when incurred.
Property, plant and equipment are subsequently carried at cost less accumulated depletion, depreciation, amortization and impairment. Gains and losses
on disposals are determined by comparing disposal proceeds with the carrying amounts of assets sold and are recognized in net earnings (loss).
Depletion, depreciation, amortization and impairment
Property, plant and equipment relating to petroleum and natural gas properties including related facilities are depleted and depreciated using the unit–
of–production method over the proved and probable reserves before royalties and determined using forecast prices and costs. For the purpose of this
calculation, natural gas is converted to oil on an energy equivalent basis. Estimated future costs to develop proved and probable reserves are included
in costs subject to depletion. Costs of major development projects are excluded from depletion and depreciation until the asset is available for use.
Property, plant and equipment relating to refining properties are depreciated and amortized using the straight–line method, based on the estimated
useful lives of assets which range from 3 to 16 years.
Property, plant and equipment relating to the corporate office include leasehold improvements and computer and office equipment. Leasehold
improvements are amortized using the straight–line method over the lease term whereas computer and office equipment are amortized using the
declining balance method at 20% to 30% per annum.
The estimates of useful lives of property, plant and equipment are reviewed annually and if, necessary, changes are accounted for prospectively.
Impairment
The carrying amount of property, plant and equipment is reviewed for impairment, in accordance with note 3.6, whenever events or changes in
circumstances indicate the carrying amount may not be recoverable.
3.5 Business combinations and goodwill
Business combinations are accounted for using the acquisition method. The acquired identifiable net assets are measured at their fair value at the
date of acquisition. Any excess of the purchase price over the fair value of the net assets acquired is recognized as goodwill. Any deficiency of the
purchase price below the fair value of the net assets acquired is recorded as a gain in net earnings (loss). Associated transaction costs are expensed
when incurred.