Prospectus re Admission to the Official List - Heritage Oil

) ConsolidationThe consolidated financial statements incorporate the assets and liabilities of all subsidiaries ofthe Corporation as at 31 December 2005 and 2006 and 30 September 2006 and 2007 and theresults of all subsidiaries for the periods then ended.Subsidiaries are all entities (including special purpose entities) over which the Corporation hasthe power to govern the financial and operating policies so as to obtain benefits from its activitiesgenerally accompanying a shareholding of more than one half of the voting rights. The existenceand effect of potential voting rights that are currently exercisable or convertible are consideredwhen assessing whether the Corporation controls another entity. Subsidiaries are fullyconsolidated from the date on which control is transferred to the Corporation. They arede-consolidated from the date that control ceases. The Corporation together with its subsidiariesare referred to as the Group.The purchase method of accounting is used to account for the acquisition of subsidiaries by theGroup. The cost of an acquisition is measured as the fair value of the assets given, equityinstruments issued and liabilities incurred or assumed at the date of exchange, plus costs directlyattributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilitiesassumed in a business combination are measured initially at their fair values at the acquisitiondate, irrespective of the extent of any minority interest. The excess of the cost of acquisition overthe fair value of the Group’s share of the net fair value of the identifiable assets, liabilities andcontingent liabilities acquired is recorded as goodwill. If the cost of acquisition is less than the fairvalue of the net assets of the subsidiary acquired, the difference is recognised immediately in theincome statement.Inter-company transactions, balances and unrealised gains on transactions between Groupentities (the Corporation and its subsidiaries) are eliminated. For the purposes of consolidation,the accounting policies of subsidiaries have been changed where necessary to ensure consistencywith the policies adopted by the Corporation.c) Segment reportingThe Corporation’s primary segment reporting format is geographical. A geographical segment isengaged in providing products or services within a particular economic environment, that aresubject to risks and returns, that are different from those of segments operating in othereconomic environments.d) Joint VenturesThe majority of exploration, development and production activities are conducted jointly withothers under contractual arrangement and, accordingly, the Group only reflects its proportionateinterest in such assets, liabilities, revenues and expenses.e) Exploration and evaluation expenditureThe Group applies a modified full cost method of accounting for exploration and evaluation(‘E&E’) costs, having regard to the requirements of IFRS 6 ‘‘Exploration for and Evaluation ofMineral Resources’’. Under the modified full cost method of accounting, costs of exploring forand evaluating oil and gas properties are capitalised on a licence or prospect basis and theresulting assets are tested for impairment by reference to appropriate cost pools. Such cost poolsare based on geographic areas and are not larger than a segment. The Group had six cost pools:Uganda, Russia, Oman, Democratic Republic of Congo (‘‘DRC’’), Pakistan and Congo duringthe periods under review.E&E costs related to each licence/prospect are initially capitalised within ‘‘Intangible explorationassets’’. Such E&E costs may include costs of licence acquisition, technical services and studies,seismic acquisition, exploration drilling and testing and the projected costs of retiring the assets(if any), but do not include costs incurred prior to having obtained the legal rights to explore anarea, which are expensed directly to the income statement as they are incurred.Tangible assets acquired for use in E&E activities are classified as property, plant and equipment;however, to the extent that such a tangible asset is consumed in developing an intangible E&Easset, the amount reflecting that consumption is recorded as part of the cost of the intangibleasset.182