Prospectus re Admission to the Official List - Heritage Oil

effective as hedges, both at inception and over the term of the instrument, as the term andnotional amount do not exceed the Corporation’s firm commitment or forecasted transaction andthe underlying basis of the instrument matches the Corporation’s exposure.The Corporation enters into hedges of its exposure to petroleum and natural gas commodityprices by entering into crude oil and natural gas swap contracts, options or collars when it isdeemed appropriate. These derivative contracts, accounted for as hedges, are not recognized onthe balance sheet. Realized gains and losses on these contracts are recognized in petroleum andnatural gas revenue in the same period in which the revenues associated with the hedgedtransaction are recognized. Premiums paid or received are deferred and amortized to earningsover the term of the contract.(k) Foreign currency translation:Monetary items denominated in foreign currencies are translated to U.S. dollars at exchangerates in effect at the balance sheet date and non-monetary items are translated at rates ofexchange in effect when the assets were acquired or obligations incurred. Revenue and expensesare translated at rates in effect at the time of the transactions. Foreign exchange gains and lossesare included in earnings.(l)Stock based compensation plan:The Corporation has a stock-based compensation plan, which is described in note 6. TheCorporation accounts for all stock-based payments granted on or after January 1, 2002, using thefair value based method.Under the fair value based method, stock-based payments are measured at the fair value of theconsideration received, or the fair value of the equity instruments issued, or liabilities incurred,whichever is more reliably measurable. The fair value of stock-based payments to non-employeesis periodically re-measured until counterparty performance is complete, and any change therein isrecognized over the period and in the same manner as if the Corporation had paid cash instead ofpaying with or using equity instruments. The cost of stock-based payments to non-employees thatare fully vested and non-forfeitable at the grant date is measured and recognized at that date.No compensation cost is recorded for all other stock-based employee awards granted prior toJanuary 1, 2004. Consideration paid by employees on the exercise of stock options is recorded asshare capital. The Corporation discloses the pro forma effect of accounting for these awardsunder the fair value based method.(m) Per share amounts:Basic per share amounts are computed by dividing net earnings by the weighted average sharesoutstanding during the reporting period. Diluted per share amounts are computed similar tobasic per share amounts except that the weighted average shares outstanding are increased toinclude additional shares from the assumed exercise of stock options, if dilutive. The number ofadditional shares is calculated by assuming that outstanding stock options were exercised and thatthe proceeds from such exercises were used to acquire common shares at the average marketprice during the reporting period.(n) Measurement uncertainty:The amounts recorded for depletion and depreciation of petroleum and natural gas interests andthe provision for asset retirement obligation costs are based on estimates. The cost recoveryceiling test is based on estimates of proved reserves, production rates, petroleum and natural gasprices, future costs and other relevant assumptions. By their nature, these estimates are subject tomeasurement uncertainty and the effect on the consolidated financial statements of changes insuch estimates in future periods could be significant.(o) Comparative figures:Certain prior year balances have been reclassified to conform to the current year’s presentation.229