ANNUAL REPORT 2011 - Connacher Oil and Gas

AR 2011
PG 55
3.11 Leases
Agreements under which payments are made to owners in return for the right to use an asset for a period are accounted for as leases. Leases that
transfer substantially all the risks and rewards of ownership are recognized at the commencement of the lease term as finance leases within property,
plant and equipment and liabilities at the fair value of the leased asset or, if lower, at the present value of the minimum lease payments. Finance lease
payments are apportioned between interest expense and a reduction of the liability. All other leases are recorded as operating leases, and the costs
are recognized in net earnings (loss) on a straight–line basis.
3.12 Foreign currency
Foreign currency transactions
Transactions denominated in foreign currencies are translated to the respective functional currencies of the entities at monthly average exchange rates.
Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency at the exchange rate
prevailing on the reporting date. Foreign exchange gains and losses resulting from the translation and settlement are recognized in net earnings (loss).
Foreign operations
The assets and liabilities of foreign operations are translated to Canadian dollars at exchange rates at the reporting date, while their statements of
operations, other comprehensive income (loss) and cash flows are translated at monthly average rates. The resulting foreign currency differences
are recognized in other comprehensive income (loss). Upon divestment of all or part of an interest in, or upon liquidation of, a foreign operation, the
cumulative currency translation differences are generally recognized in net earnings (loss). Foreign exchange gains or losses arising from monetary
assets and liabilities that form part of the net investment in the foreign operation are recognized in other comprehensive income (loss).
3.13 Financial instruments
Financial instruments consist of financial assets, financial liabilities and derivative financial instruments and are initially recognized at fair value plus,
in the case of a financial assets or financial liability not at fair value through profit or loss, transactions costs. Measurement in subsequent periods
depends on whether the financial instrument has been classified as “fair value through profit or loss”, “loans and receivables”, “available–for–sale”,
“held–to–maturity”, or “financial liabilities measured at amortized cost“ as follows:
Financial assets
Financial assets comprise cash, trade and accrued receivable and investment in equity securities.
Trade and accrued receivables are classified as “loans and receivables” and recorded at amortized cost less any impairment.
Investments in equity securities are classified as available–for–sale and are carried at fair value, less any impairment. Unrealized gains and losses
other than impairments are recognized in other comprehensive income (loss). On disposal, net gains and losses previously deferred in accumulated
other comprehensive income (loss) are recognized in net earnings (loss).
Financial liabilities
Financial liabilities comprise trade and accrued payables, Senior Notes, Convertible Debentures and the amounts outstanding under the Revolving
Credit Facility.
Trade and accrued payables and Senior Notes are classified as “financial liabilities measured at amortized cost” and are measured at amortized cost
using the effective interest rate method.
Convertible Debentures are classified as “fair value through profit and loss” whereby they are carried at the fair value at each reporting date.
Unrealized gains and losses on remeasurement to fair value at each reporting period–end are recognized in net earnings (loss).
Transaction costs relating to the Revolving Credit Facility are amortized over its term using the straight line method. The Facility is measured at
amortized cost, net of transaction costs, in the event that amounts are drawn and outstanding under the Facility at the reporting period-end. In the
event no amounts are outstanding at the reporting period-end, unamortized transaction costs are included in other assets.
Derivative financial instruments
Derivative financial instruments comprise investments in share purchase warrants, risk management contracts and embedded derivatives.
The investment in share purchase warrants is classified as “fair value through profit and loss” whereby it is carried at the fair value at the reporting
date. Unrealized gains and losses on remeasurement to fair value at each reporting period–end are recognized in net earnings (loss).
The company enters into certain risk management contracts in order to reduce its exposure to market risks from fluctuations in commodity prices,
foreign currency and interest rates. These instruments are not used for speculative purposes. The company has not designated its risk management
contracts as effective accounting hedges and thus has not applied hedge accounting. As a result, all risk management contracts are classified as
“fair value through profit and loss” and recorded on the balance sheet at fair value at each reporting date. Realized gains or losses from financial
risk management contracts are recognized in net earnings (loss) as the contracts are settled. Unrealized gains and losses are recognized in net