Prospectus re Admission to the Official List - Heritage Oil

ii) DerivativesDerivatives are recognised initially at fair value; attributable transaction costs are recognised inthe profit or loss when incurred. Subsequent to initial recognition, derivatives are measured atfair value. Embedded derivatives are separated from the host contract and accounted forseparately if the economic characteristics and risks of the host contract and the embeddedderivative are not closely related, a separate instrument with the same terms as the embeddedderivative would meet the definition of a derivative, and the combined instrument is notmeasured at fair value through the income statement.The fair value of derivative financial instruments is based on their listed market prices, ifavailable. If a listed market price is not available, then fair value is estimated by discounting thedifference between the contractual forward price and the current forward price for the residualmaturity of the contract using a risk-free interest rate (based on government bonds).iii) Compound financial instrumentsCompound financial instruments issued by the Group comprise convertible bonds that can beconverted to share capital at the option of the holder, and the number of shares to be issued doesnot vary with changes in their fair value.The convertible bonds are separated into liability and derivative liability components (being thebondholders’ conversion option). The liability component of a compound financial instrument isrecognised initially at fair value, determined by reference to market interest rates for equivalentbonds which do not contain conversion features. Subsequent to initial recognition, the liabilitycomponent is measured at amortised cost using the effective interest method. The fair value ofthe derivative liability component is determined using a Black-Scholes option-pricing model andthis amount is recorded as a liability. The Black-Scholes model contains assumptions anddeterminations pertaining to volatility, risk-free interest rates, and the terms of the options.4 Segment informationThe Group has a single class of business which is international exploration, development andproduction of petroleum oil and natural gas.The Group operates in a number of geographical areas based on location of operations and assets,being Russia, Oman, Uganda, Democratic Republic of Congo (‘‘DRC’’), Congo, Iraq, and Pakistan.Year ended 31 December 2005Depreciation,External Segment Total Capital depletion andrevenue result Total assets liabilities additions amortisation$ $ $ $ $ $Russia ........... — (478,269) 6,087,436 6,739 6,080,697 —Oman............ 841,766 (64,698) 6,189,028 47,247 387,764 441,355Uganda (1) ......... 342,359 145,554 27,858,240 420,905 6,323,678 —DRC ............ — (35,745) 12,494 — — —Congo (2) .......... 6,499,307 3,510,441 15,089,178 434,849 2,629,596 1,110,547Iraq ............. — (1,948,967) — — — —Pakistan .......... — (391,145) — — — —Unallocated—Corporate ....... 330,290 (8,999,396) 25,110,159 11,732,241 694,900 297,2758,013,722 (8,262,225) 80,346,535 12,641,981 16,116,635 1,849,177193