Prospectus re Admission to the Official List - Heritage Oil

n) BorrowingsBorrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings aresubsequently measured at amortised cost. Any difference between the proceeds (net oftransaction costs) and the redemption amount is recognised in the income statement over theperiod of the borrowings using the effective interest method.Convertible bonds are separated into liability and derivative liability components (being thebondholders’ conversion option) and each component is recognised separately. On initialrecognition, the fair value of the liability component of a convertible bond is determined using amarket interest rate for an equivalent non convertible bond. This amount is recorded as a liabilityon an amortised cost basis using the effective interest method until extinguished on conversion ormaturity of the bonds. The fair value of the derivative liability component (see also 1 (q)) isdetermined using a Black-Scholes option-pricing model, and this amount is recorded as a liability.Borrowings are removed from the balance sheet when the obligation specified in the contract isdischarged, cancelled or expired. The difference between the carrying amount of a financialliability that has been extinguished or transferred to another party and the consideration paid,including any non-cash assets transferred or liabilities assumed, is recognised in finance incomeor costs.Borrowings are classified as current liabilities unless the Group has an unconditional right todefer settlement of the liability for at least 12 months after the balance sheet date.o) Borrowing costsBorrowing costs incurred for the construction of any qualifying asset are capitalised during theperiod of time that is required to complete and prepare the asset for its intended use or sale.Other borrowing costs are expensed.The capitalisation rate used to determine the amount of borrowing costs to be capitalised is theweighted average interest rate applicable to the Group’s outstanding borrowings during theperiod. For the period ended 30 September 2007, this was 10.24% (31 December 2006—2.64%;30 September 2006—2.97%; 31 December 2005—nil%).p) ProvisionsAsset retirement obligationsProvision is made for the estimated cost of any asset retirement obligations when the Group has apresent legal or constructive obligation as a result of past events, it is probable that an outflow ofresources will be required to settle the obligation and the amount has been reliably estimated.Provisions are not recognised for future operating losses. Asset retirement obligation expense iscapitalised in the relevant asset category unless it arises from the normal course of productionactivities.Provisions are measured at the present value of management’s best estimate of expenditurerequired to settle the present obligation at the balance sheet date. The discount rate used todetermine the present value reflects current market assessments of the time value of money andthe risks specific to the liability.Subsequent to the initial measurement of the asset retirement obligation, the obligation isadjusted at the end of each period to reflect the passage of time and changes in the estimatedfuture cash flows underlying the obligation. The increase in the provision due to the passage oftime is recognised as finance costs whereas increase due to changes in the estimated future cashflows are capitalised.q) Derivative financial liabilitiesDerivatives are initially recognised at fair value on the date a derivative contract is entered intoand are subsequently remeasured to their fair value at each reporting date. Changes in the fairvalue are recognised immediately in the income statement.r) Revenue recognitionRevenue from the sale of petroleum and natural gas is recorded when the significant risks andrewards of ownership of the product is transferred to the buyer. For sales of oil and gas this is186