Annual Report 2005 (6 MB) - Lundin Petroleum

take a substantial period of time to get ready for their intended use
or sale. Investment income earned on the temporary investment
of specifi c borrowings pending to be used for the qualifying asset
is deducted from the borrowing costs eligible for capitalisation.
This applies on the interest on borrowings to fi nance fi elds under
development which is capitalised within oil and gas properties
until production commences. All other borrowing costs are
recognised in profi t or loss in the period in which they occur.
Interest on borrowings to fi nance the acquisition of producing oil
and gas properties is charged to income as incurred.
Leases
For a lease to qualify as a fi nance lease, substantially all of the risks
and benefi ts of ownership must pass to the lessee. In all other
cases the lease will be classifi ed as an operating lease. Payments
made under operating leases (net of any incentives received from
the lessor) are charged to the income statement on a straight-line
basis over the period of the lease.
Employment benefi ts
Short term employee benefi ts
Short-term employment benefi ts such as salaries, social premiums
and holiday pay, are expensed when incurred.
Pension obligations
Pensions are the most common long-term employee benefi t.
The pension schemes are funded through payments to insurance
companies. The Group’s pension obligations consist mainly of
defi ned contribution plans. A defi ned contribution plan is a
pension plan under which the Group pays fi xed contributions. The
Group has no further payment obligations once the contributions
have been paid. The contributions are recognised as an expense
when they are due.
The Group has one obligation under a defi ned benefi t plan. The
relating liability recognised in the balance sheet is valued at the
discounted estimated future cash outfl ows as calculated by an
external actuarial expert. Actuarial gains and losses are charged to
the income statement. The Group does not have any designated
plan assets.
Share-based payments
Lundin Petroleum recognises cash-settled share-based payments
in the income statement as expenses and as a liability in relation
to the incentive warrants programme. The liability in relation to
incentive warrants programmes is valued at fair value at grant date
of the options using the Black & Scholes option pricing method.
The fair value of the incentive warrant programme is charged
to personnel costs over the vesting period. The fair value of the
liability under the incentive warrant programme is remeasured at
each reporting date recognising changes that aff ect the number
of options expected to vest. At vesting date the liability is adjusted
for the fi nal number of options vested.
Income taxes
The main components of tax are current and deferred. Current tax
is tax that is to be paid or received for the year in question and
> 55 <
also includes adjustments of current tax attributable to previous
periods.
Deferred income tax is provided in full, using the liability method,
on temporary diff erences arising between the tax bases of assets
and liabilities and their carrying amounts in the consolidated
fi nancial statements. However, the deferred income tax is not
accounted for if it arises from initial recognition of an asset or
liability in a transaction other than a business combination that at
the time of the transaction aff ects neither accounting nor taxable
profi t or loss. Deferred income tax is determined using tax rates
(and laws) that have been enacted or substantially enacted by
the balance sheet and are expected to apply when the related
deferred income tax asset is realised or the deferred income tax
liability is settled.
Deferred income tax assets are recognised to the extent that it is
probable that future taxable profi t will be available against which
the temporary diff erences can be utilised.
Lundin Petroleum divides the tax accounts between corporation
tax and petroleum tax. Petroleum Revenue Tax (PRT) is classifi ed
as Petroleum tax and charged as a tax expense on taxable fi eld
profi ts included in the income statement.
Segment reporting
The primary basis the Group uses for segmental reporting is at a
country level due to the unique nature of each countries operations,
commercial terms or fi scal environment. The secondary basis the
Group uses for segmental reporting is oil and gas operations for
which reference is made to the fi nancial statements as a whole.
Related party transactions
Lundin Petroleum recognises the following related parties:
associated companies, jointly controlled entities, members or the
family of the key management personnel or other parties that are
partly, direct or indirect, controlled by key management personnel
or of its family.
Critical accounting estimates and judgements
The management of Lundin Petroleum has to make estimates
and judgements when preparing the Financial Statements of the
Group. Uncertainties in the estimates and judgements could have
an impact on the carrying amount of assets and liabilities and the
Group’s result. The most important estimates and judgements in
relation thereto are:
Estimates in oil and gas reserves
The business of the Group is the exploration for, development
of and production of oil and gas reserves. Estimates of oil and
gas reserves are used in the calculations for impairment tests
and accounting for depletion and site restoration. Changes in
estimates in oil and gas reserves, resulting in diff erent future
production profi les, will aff ect the discounted cash fl ows used in
impairment testing, the anticipated date of site decommissioning
and restoration and the depletion charges in accordance with the
unit of production method.