ANNUAL REPORT 2011 - Connacher Oil and Gas

AR 2011
PG 54
Current tax expense is based on the results for the period as adjusted for items that are not taxable or not deductible. Current tax is calculated
using tax rates and laws that have been enacted or substantively enacted at the end of the reporting period. Management periodically evaluates
positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. Provisions are established where
appropriate on the basis of amounts expected to be paid to the tax authorities.
Deferred tax is recognized in the balance sheet using the liability method of accounting for income taxes, on temporary differences arising between
the tax bases of assets and liabilities and their carrying amounts. Deferred tax is calculated using tax rates and laws that have been enacted or
substantively enacted at the end of the reporting period, and which are expected to apply when the related deferred tax asset is realized or the
deferred tax liability is settled.
3.9 Provisions
Decommissioning liabilities
The company recognizes a decommissioning liability for abandoning petroleum and natural gas wells, related facilities, compressors and plants,
removal of equipment from leased acreage and for returning such land to its original condition, in the period in which a well or related asset is drilled,
constructed or acquired. The decommissioning liability is estimated using the present value of the estimated expected future cash outflows at a
risk–free interest rate. The obligation is reviewed regularly by management, based upon current costs, laws and regulations, public expectations,
technology, and industry standards. The liability is initially capitalized as part of the carrying amount of the related property, plant and equipment
The effects of changes to the liability resulting from revisions to the timing or the amount of the original estimate of the provision are reflected on a
prospective basis, generally by adjustment to the carrying amount of the related property, plant and equipment. Actual abandonment and reclamation
expenditures are charged against the liability as incurred and obligations related to properties disposed are removed.
The company also has decommissioning obligations with respect to certain of its refinery assets due to various legal obligations to clean and/or dispose
of various component parts of the refinery at the time they are retired. However, these component parts can be used for extended and indeterminate
periods of time as long as they are properly maintained and/or upgraded. It is the Company’s practice and current intent to maintain its refinery assets
and continue making improvements to the assets based on technological advances. As such, the present value of such obligations is minimal.
Premium on flow–through common shares
Under Canadian income tax legislation, a company is permitted to issue flow–through shares whereby the company is obligated to incur qualifying
expenditures related to petroleum and natural gas exploration activities and to renounce the related income tax deductions to the investors. Generally,
due to the benefit of transferring the tax deduction to the investors, the shares issued on flow–through basis are offered at prices higher than the
prevailing quoted prices of the shares. Accordingly, the proceeds from issuance of these shares are allocated between share capital and the liability
to incur these qualifying expenditures The amounts allocated to share capital represents the quoted price of the existing shares whereas the liability
represents the difference between the quoted price of the existing shares and the amount the investor pays for the flow-through shares. The liability is
reversed when qualifying expenditures are renounced and reported within deferred income tax in net earnings (loss).
3.10 Employee benefits
Employee retirement plans
The company maintains a funded defined benefit pension plan and defined contribution savings plans.
A valuation of the defined benefit plan is carried out annually by independent actuaries, using the projected unit credit method to calculate the
defined benefit obligation. Pension cost primarily represents the increase in the actuarial present value of the obligation for pension benefits based
on employee service during the year and the interest on this obligation in respect of employee service in previous years, net of the expected return
on plan assets. Plan assets are valued at fair value. The present value of the accumulated benefit obligation is determined by actuaries. The expected
return on plan assets is based on market expectations at the beginning of the fiscal period for returns over the entire life of the benefit obligation.
Actuarial gains and losses are recognized as income or expense when the net cumulative unrecognized actuarial gains and losses at the end of the
previous reporting year exceed 10% of the higher of the defined benefit obligation and the fair value of plan assets at that date. These gains and
losses are recognized in net earnings (loss) over the expected average remaining working lives of the employees participating in the plan.
For defined contribution saving plans, the cost is the amount of employer contributions payable for the period.
Share–based compensation plans
Directors, employees and consultants of the company receive remuneration in the form of share–based payment transactions, whereby those
individuals render services as consideration for equity instruments. The company maintains a stock option plan, share award incentive plan and share
unit plan. Share–based compensation is initially recognized over the vesting period at the fair value on the date of grant with a corresponding increase
to contributed surplus for equity–settled plans and to trade and accrued payables for cash–settled plans. Equity–settled plans are subsequently not
remeasured whereas the cash–settled plans are remeasured to fair value at each reporting period–end. Fair value on the date of grant is estimated
using either a Black–Scholes option pricing model or the closing price of the common shares, as defined in the plans. Upon the issue of shares under
the plans, the proceeds received on exercise of stock options and the amounts previously recognized in contributed surplus for the plans are credited
to share capital.