ANNUAL REPORT 2011 - Connacher Oil and Gas

AR 2011
PG 86
27.6 Asset Retirement Obligation (“ARO”) / Decommissioning liabilities
Under previous GAAP, the asset retirement obligation was measured at estimated fair value determined using estimated future cash outflows
discounted using a credit–adjusted risk free interest rate and the liability was not remeasured to reflect period end discount rates. Under IFRS, the
asset retirement obligation has been named “decommissioning liabilities”, fair value is measured as the best estimate of the future expenditures to be
incurred discounted at a risk free interest rate, and decommissioning liabilities are remeasured using the period end discount rate.
In conjunction with the IFRS 1 exemption regarding petroleum and natural gas properties discussed above, the company was required to remeasure
its decommissioning liabilities upon transition to IFRS and recognize the difference in Retained Earnings (Deficit). The application of this exemption
resulted in a $20.9 million increase to decommissioning liabilities on the company’s consolidated balance sheet as at January 1, 2010 and a charge
to Retained Earnings (Deficit) of $15.6 million net of tax benefits of $5.2 million. Subsequent IFRS remeasurements of decommissioning liabilities are
recorded through property, plant and equipment with an offsetting adjustment to decommissioning liabilities. As at December 31, 2010, excluding the
January 1, 2010 adjustment, the company’s decommissioning liabilities increased by $10.9 million which primarily reflects the remeasurement of the
obligation using the company’s discount rate of 3.2 percent as at December 31, 2010. The use of the lower discount rate resulted in a decrease in
the provision for unwinding of the discount totaling $812,000 for the year ended December 31, 2010.
27.7 Investment in Associate
As at January, 1, 2010 and December 31, 2010, the company owned 26.9 million Petrolifera common shares, representing 22 percent as at January
1, 2010 and 18.5 percent as at December 31, 2010 of Petrolifera’s issued and outstanding common shares, and 6.8 million Petrolifera share
purchase warrants. Petrolifera was accounted for as an equity investment in associate. The following are the key differences in IFRS compared to
previous GAAP.
• Petrolifera was a public company and prepared 2010 and previous financial statements in accordance with Canadian generally accepted
accounting principles similar to the company’s reporting in 2010 and previous years. Accordingly, the company’s share of loss, other
comprehensive loss, dilution loss and associated deferred tax recorded in 2010 and previous years were based on previous GAAP amounts
reported by Petrolifera. As a part of the company’s transition to IFRS, the company recorded the adjustments to its share of loss, other
comprehensive loss and dilution loss with a corresponding effect on the investment account balance and Retained Earnings (Deficit) reflecting the
adjustments to conform Petrolifera’s financial position and results of operations in accordance with IFRS and the accounting policies adopted by
the company on the transition date.
• In 2009, Petrolifera completed an equity financing under which Petrolifera issued 66.5 million common share units. Each unit was comprised of
one Petrolifera common share and one–half Petrolifera share purchase warrant. Connacher subscribed for 13,556,000 units at a cost of $11.9
million. Each full Petrolifera share purchase warrant entitled the holder to purchase one Petrolifera common share at a price of $1.20 per common
share for a period of two years from issuance. These share purchase warrants were listed on Toronto Stock Exchange.
Under previous GAAP, the total cost of $11.9 million was recorded as an investment in equity–accounted for investment on the consolidated balance
sheet. Under IFRS, share purchase warrants meet the definition of a derivative asset that should be bifurcated from the host contract (investment in
associate) and recorded at fair value on each reporting period end with changes recorded in net earnings (loss). As a result, the company recorded
the fair value of share purchase warrants on January 1, 2010 by increasing other assets and decreasing deficit. In addition, the company recorded an
unrealized loss of $2.2 million in 2010 representing the change in fair value of this derivative financial asset.
• In April 2010, Petrolifera issued common shares as a part of equity financing and the company did not subscribe for shares in this financing.
Accordingly, the company’s equity interest in Petrolifera was reduced to 18.5 percent from 22 percent. The reduction in the ownership interest
resulted in a dilution loss which is required to be recorded under both under previous GAAP and IFRS in net earnings (loss). However, the amount
of dilution loss under IFRS is different due to IFRS adjustments recorded in the investment account balance as discussed above. Further, IFRS
requires the reclassification at the time of dilution of a proportionate amount of gain or loss previously recognized in other comprehensive loss to
net earnings (loss). Accordingly, the company recorded a transfer of $422,000 in 2010 from other comprehensive loss to net earnings (loss) and
reported within share of interest in associate.
• As explained in note 8.2, under IFRS, assets relating to the investment in Petrolifera were classified as assets held for sale on December 31,
2010. Equity accounting ceased on December 31, 2010 and the carrying amount of the investment in associate was reclassified as assets
held for sale and recorded at the lower of its carrying amount and fair value less costs to sell. Under previous GAAP, the accounting standard
for classification of assets and liabilities as held for sale was not applicable to the disposition of an investment in associate and accordingly, no
classification of asset held for sale was reported. However, under previous GAAP, the company recognized impairment to record the investment at
its fair value.