Prospectus re Admission to the Official List - Heritage Oil

2. Changes in accounting policies:(a) Asset retirement obligations:Effective January 1, 2004, the Corporation adopted a new Canadian accounting standard forasset retirement obligations. This standard focuses on the recognition and measurement ofliabilities related to legal obligations associated with the future retirement of property, plant andequipment. Under this standard, these obligations are initially measured at fair value determinedas the estimated future costs discounted to the present value and subsequently adjusted for theaccretion of the discount factor and any changes in the underlying cash flows. The assetretirement cost is capitalized to the related asset and amortized into earnings over time. Theeffect of adoption of the new standard on the financial statements is disclosed in note 5.Prior to January 1, 2004, an estimate of future abandonment and restoration costs was providedfor using the unit of production method over estimated gross proved reserves.(b) Full cost ceiling test:Effective January 1, 2004, the Corporation adopted a new Canadian guideline on the applicationof full cost accounting, described in note 1(e). The guideline modifies how impairment is tested.Prior to January 1, 2004, an impairment loss was recognized when the carrying amount of a costcentre exceeded its recoverable amount. The recoverable amount was the sum of theundiscounted cash flows expected from the production of proved reserves plus the lower of costor market of unproved interests less estimated future costs for administration, financing and siterestoration. The cash flows were estimated using period end prices and costs.Adoption of the new guideline had no effect on the Corporation’s financial statements.(c)Stock-based compensation:Effective January 1, 2004, the Corporation retroactively adopted the revised Canadian accountingstandard for stock-based compensation and other stock-based payments described in note 1(l),without restatement of prior periods.Prior to January 1, 2004, no compensation cost was recorded for stock options granted toemployees and directors. The Corporation previously disclosed the pro forma effect ofaccounting for these awards under the fair value based method.The effect of adoption of the revised standard on the financial statements is disclosed innote 6(g).3. Property and equipment:2005 2004$ $Petroleum and natural gas interests and equipment ............... 73,159,179 54,514,733Drilling equipment ...................................... 2,693,618 2,055,006Building .............................................. 11,984,701 11,984,701Other ................................................ 931,289 297,69288,768,787 68,852,132Accumulated depletion and depreciation ....................... (16,385,852) (14,769,035)72,382,935 54,083,097230