Prospectus re Admission to the Official List - Heritage Oil

The Corporation uses the full cost method of accounting for oil and gas activities. The methodrequires a detailed impairment calculation when events or circumstances indicate a potentialimpairment of the carrying amount of oil and gas assets may have occurred, but at least annually.An impairment loss is recognized when the carrying amount of a cost centre is not recoverableand exceeds its fair value. The carrying amount is assessed to be recoverable when the sum of theundiscounted cash flows expected from proved reserves plus the cost of unproved interests, net ofimpairments, exceeds the carrying amount of the cost centre. When the carrying amount isassessed not to be recoverable, an impairment loss is recognized to the extent that the carryingamount of the cost centre exceeds the sum of the discounted cash flows from proved andprobable reserves plus the cost of unproved interests, net of impairments, of the cost centre. Thecash flows are estimated using expected future product prices and costs and are discounted usinga risk-free interest rate.Drilling rig equipment is depreciated using the unit-of-production method based on 2,740 drillingdays with a 20% salvage value.Corporate capital assets are amortized on a straight-line basis over their estimated useful lives.The building is amortized on a straight-line basic over 40 years.(f)(g)Asset retirement obligations:The Corporation records the fair value of an asset retirement obligation as a liability in theperiod in which it incurs a legal obligation associated with the retirement of tangible long-livedassets that result from the acquisition, construction, development, and/or normal use of theassets. The associated asset retirement costs are capitalized as part of the carrying amount of thelong-lived asset and depleted and depreciated using a unit of production method over estimatedgross proved reserves. Subsequent to the initial measurement of the asset retirement obligations,the obligations are adjusted at the end of each period to reflect the passage of time and changesin the estimated future cash flows underlying the obligation.Deferred development costs:Development costs related to specific projects that in the Corporation’s view have a clearlydefined future market are deferred and amortized on a straight line basis commencing in the yearfollowing that in which the new product development was completed. All other research anddevelopment costs are charged to earnings in the year incurred.(h) Revenue recognition:Revenues from the sale of petroleum and natural gas are recorded when title passes to anexternal party.(i)(j)Income taxes:The Corporation uses the asset and liability method of accounting for income taxes. Under theasset and liability method, future tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases. Future tax assets and liabilities aremeasured using enacted or substantively enacted tax rates expected to apply to taxable income inthe years in which those temporary differences are expected to be recovered or settled. The effecton future tax assets and liabilities of a change in tax rates is recognized in income in the periodthat includes the date of enactment or substantive enactment.Derivative financial instruments:The Corporation uses derivative financial instruments from time to time to hedge its exposure tocommodity price fluctuations. The Corporation does not enter into derivative financialinstruments for trading or speculative purposes.The derivative financial instruments are initiated within the guidelines of the Corporation’s riskmanagement policy. This includes linking all derivatives to specific firm commitments orforecasted transactions. The Corporation believes the derivative financial instruments are228