Prospectus re Admission to the Official List - Heritage Oil

3 Critical accounting estimates, assumptions and judgementsIn the process of applying the Corporation’s accounting policies, which are described in note 1,management makes estimates and assumptions concerning the future. The resulting accountingestimates will, by definition, seldom equal the related actual results. The estimates and assumptionsthat have a significant risk of causing a material adjustment to the carrying amounts of assets andliabilities within the next financial year are discussed below:a) Recoverability of exploration and evaluation costsUnder the modified full cost method of accounting for E&E costs, certain costs are capitalised asintangible assets by reference to appropriate cost pools, and are assessed for impairment whencircumstances suggest that the carrying amount may exceed its recoverable value.Such circumstances include, but are not limited to:i) the period for which the entity has the right to explore in the specific area has expired duringthe period, or will expire in the near future, and is not expected to be renewed;ii) substantive expenditure on further exploration for and evaluation of mineral resources in thespecific area is neither budgeted nor planned;iii) exploration for and evaluation of mineral resources in the specific area have not led to thediscovery of commercially viable quantities of mineral resources and the entity has decidedto discontinue such activities in the specific area; andiv) sufficient data exist to indicate that, although a development in the specific area is likely toproceed, the carrying amount of the exploration and evaluation asset is unlikely to berecovered in full from successful development or by sale.This assessment involves judgement as to (i) the likely future commerciality of the asset and whensuch commerciality should be determined, and (ii) future revenues and costs pertaining to anywider cost pool with which the asset in question is associated, and (iii) the discount rate to beapplied to such revenues and costs for the purpose of deriving a recoverable value. Note 10discloses the carrying amounts of the Group’s E&E assets. Consequently, major uncertaintiesaffect the recoverability of these costs which is dependent on the Group achieving commercialproduction or the sale of the assets.b) Reserve estimatesEstimates of recoverable quantities of proven and probable reserves include assumptionsregarding commodity prices, exchange rates, discount rates, production and transportation costsfor future cash flows. It also requires interpretation of complex and difficult geological andgeophysical models in order to make an assessment of the size, shape, depth, and quality ofreservoirs and their anticipated recoveries. The economic, geological and technical factors usedto estimate reserves may change from period to period. Changes in reported reserves can impactasset carrying values and the asset retirement obligation due to changes in expected future cashflows. Reserves are integral to the amount of depletion charged to the income statement and thecalculation of inventory.The level of estimated commercial reserves is also a key determinant in assessing whether thecarrying value of any of the Group’s development and production assets has been impaired.c) Fair value of financial instrumentsThe Group’s accounting policies and disclosures require the determination of the fair value offinancial instruments. Fair values have been determined for measurement and/or disclosurepurposes based on the following methods:i) Non-derivative financial instrumentsThese comprise investments in equity and debt securities, trade and other receivables, cash andcash equivalents, loans and borrowings and trade and other payables. Non-derivative financialinstruments are recognised initially at fair value plus, for instruments not at fair value throughprofit or loss, any directly attributable transaction costs.Fair value is calculated based on the present value of future principal and interest cash flows,discounted at the applicable market rate of interest at the reporting date.192