MOL GROUP Annual Report

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vi) HedgingFor the purpose of hedge accounting, hedges are classified as– fair value hedges– cash flow hedges or– hedges of a net investment in a foreign operation.A hedge of the foreign currency risk of a firm commitment is accounted for as a cash flow hedge. At the inception of ahedge relationship, the Group formally designates and documents the hedge relationship to which the Group wishes to applyhedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includesidentification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how theentity will assess the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair valueor cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changesin fair value or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effectivethroughout the financial reporting periods for which they were designated.Hedges which meet the strict criteria for hedge accounting are accounted for as follows:Fair value hedgesFair value hedges are hedges of the Group’s exposure to changes in the fair value of a recognized asset or liability or anunrecognized firm commitment, or an identified portion of such an asset, liability or firm commitment, that is attributableto a particular risk that could affect the income statement.For fair value hedges, the carrying amount of the hedged item is adjusted for gains and losses attributable to the risk beinghedged, the derivative is remeasured at fair value and gains and losses from both are taken to the income statement. For fairvalue hedges relating to items carried at amortised cost, the adjustment to carrying value is amortised through the incomestatement over the remaining term to maturity. Any adjustment to the carrying amount of a hedged financial instrument forwhich the effective interest method is used is amortised to the income statement.Amortisation may begin as soon as an adjustment exists and shall begin no later than when the hedged item ceases to beadjusted for changes in its fair value attributable to the risk being hedged.Hedges of a net investmentHedges of a net investment in a foreign operation, including a hedge of a monetary item that is accounted for as part ofthe net investment, are accounted for in a way similar to cash flow hedges. Gains or losses on the hedging instrumentrelating to the effective portion of the hedge are recognized as other comprehensive income while any gains or lossesrelating to the ineffective portion are recognized in the income statement. On disposal of the foreign operation, thecumulative value of any such gains or losses recognized as other comprehensive income is transferred to the incomestatement.vii) Impairment of Financial AssetsThe Group assesses at each balance sheet date whether a financial asset or group of financial assets is impaired. Impairmentlosses on a financial asset or group of financial assets are recognised only if there is an objective evidence of impairmentdue to a loss event and this loss event significantly impacts the estimated future cash flows of the financial asset or group offinancial assets.Assets carried at amortised costIf there is objective evidence that an impairment loss on loans and receivables carried at amortised cost has beenincurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the presentvalue of estimated future cash flows (excluding future expected credit losses) discounted at the financial asset’soriginal effective interest rate (i.e. the effective interest rate computed at initial recognition). The amount of the lossis recognized in the income statement.The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individuallysignificant, and individually or collectively for financial assets that are not individually significant. If it is determined that noobjective evidence of impairment exists for financial assets, whether significant or not, the asset is included in a group offinancial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment.Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized arenot included in a collective assessment of impairment.If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to anevent occurring after the impairment was recognized, the previously recognized impairment loss is reversed. Any subsequentreversal of an impairment loss is recognized in the income statement, to the extent that the carrying value of the asset doesnot exceed its amortised cost at the reversal date.Notes to the financialstatementsWhen an unrecognized firm commitment is designated as a hedged item, the subsequent cumulative change in the fair value of thefirm commitment attributable to the hedged risk is recognized as an asset or liability with a corresponding gain or loss recognizedin the income statement. The changes in the fair value of the hedging instrument are also recognized in the income statement.The Group discontinues fair value hedge accounting if the hedging instrument expires or is sold, terminated or exercised, thehedge no longer meets the criteria for hedge accounting or the Group revokes the designation.Cash-flow hedgesCash flow hedges are a hedge of the exposure to variability in cash flows that is attributable to a particular risk associatedwith a recognized asset or liability or a highly probable forecast transaction that could affect the income statement. Theeffective portion of the gain or loss on the hedging instrument is recognized directly as other comprehensive income, whilethe ineffective portion is recognized in the income statement.Amounts taken to other comprehensive income are transferred to the income statement when the hedged transactionaffects the income statement, such as when hedged financial income or financial expense is recognized or when a forecastsale or purchase occurs. Where the hedged item is the cost of a non-financial asset or liability, the amounts previously takento equity are transferred to the initial carrying amount of the non-financial asset or liability.If the forecast transaction is no longer expected to occur, amounts previously recognized in equity are transferred to theincome statement. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover,or if its designation as a hedge is revoked, amounts previously recognized in other comprehensive income remain in othercomprehensive income until the forecast transaction occurs. If the related transaction is not expected to occur, the amountis taken to the income statement.Available-for-sale financial investmentsIf an available-for-sale asset is impaired, an amount comprising the difference between its cost (net of anyprincipal payment and amortisation) and its current fair value, less any impairment loss previously recognized inthe income statement, is transferred from other comprehensive income to the income statement. Impairmentlosses recognized on equity instruments classified as available for sale are not reversed; increases in their fair valueafter impairment are recognised directly in other comprehensive income. Impairment losses recognized on debtinstruments classified as available for sale are reversed through the income statement; if the increase in fair valueof the instrument can be objectively related to an event occurring after the impairment loss was recognized in theincome statement.viii) Cash and Cash EquivalentsCash includes cash on hand and cash at banks. Cash equivalents are short-term, highly liquid investments that are readilyconvertible to known amounts of cash with maturity less than three months from the date of acquisition and that are subjectto an insignificant risk of change in value.ix) Trade ReceivablesReceivables are stated at face value less provision for doubtful amounts. Where the time value of money is material,receivables are carried at amortized cost. A provision for impairment is made when there is objective evidence (such asthe probability of insolvency or significant financial difficulties of the debtor) that the Group will not be able to collect allof the amounts due under the original terms of the invoice. Impaired debts are derecognized when they are assessed asuncollectible.98 <strong>MOL</strong> Group annual report 2010 99
If collection of trade receivables is expected within the normal business cycle which is one year or less, they are classified ascurrent assets. If not, they are presented as non-current assets.x) Inventoriesxiii) Depreciation, Depletion and AmortisationDepreciation of each component of an intangible asset and property, plant and equipment is computed on a straight-line basisover their respective useful lives. Usual periods of useful lives for different types of property, plant and equipment are as follows:Inventories, including work-in-progress are valued at the lower of cost and net realisable value, after provision for slowmovingand obsolete items. Net realisable value is the selling price in the ordinary course of business, less the costs ofmaking the sale. Cost of purchased goods, including crude oil and purchased gas inventory, is determined primarily onthe basis of weighted average cost. The acquisition cost of own produced inventory consists of direct materials, directwages and the appropriate portion of production overhead expenses including royalty. Unrealisable inventory is fullywritten off.SoftwareBuildingsRefineries and chemicals manufacturing plantsGas and oil storage and transmission equipmentPetrol service stationsTelecommunication and automatisation equipment3 – 5 years10 – 50 years4 – 20 years7 – 50 years5 – 30 years3 – 10 yearsxi) Property, Plant and EquipmentProperty, plant and equipment are stated at historical cost (or the carrying value of the assets determined as of 1 October1991) less accumulated depreciation, depletion and accumulated impairment loss. When assets are sold or retired, their costand accumulated depreciation are eliminated from the accounts and any gain or loss resulting from their disposal is includedin the consolidated income statement.Depletion and depreciation of production installations and transport systems for oil and gas is calculated for each individualfield or field-dedicated transport system using the unit of production method, based on proved and developed commerciallyrecoverable reserves. Recoverable reserves are reviewed on an annual basis. Transport systems used by several fields andother assets are calculated on the basis of the expected useful life, using the straight-line method. Amortisation of leaseholdimprovements is provided using the straight-line method over the term of the respective lease or the useful life of the asset,whichever period is less. Periodic maintenance costs are depreciated until the next similar maintenance takes place.The initial cost of property, plant and equipment comprises its purchase price, including import duties and non-refundablepurchase taxes and any directly attributable costs of bringing the asset to its working condition and location for its intendeduse, such as borrowing costs. Estimated decommissioning and site restoration costs are capitalized upon initial recognitionor, if decision on decommissioning is made subsequently, at the time of the decision. Changes in estimates thereof adjustthe carrying amount of assets. Expenditures incurred after the property, plant and equipment have been put into operation,such as repairs and maintenance and overhead costs (except from periodic maintenance costs), are normally charged toincome in the period in which the costs are incurred. Periodic maintenance costs are capitalized as a separate component ofthe related assets.Construction in progress represents plant and properties under construction and is stated at cost. This includes cost ofconstruction, plant and equipment and other direct costs. Construction-in-progress is not depreciated until such time as therelevant asset is available for use.The policy for accounting for exploration and development costs of oil and gas reserves is described in xv) below.xii) Intangible AssetsIntangible assets acquired separately are capitalized at cost and from a business acquisition are capitalized at fair valueas at the date of acquisition. Intangible assets are recognized if it is probable that the future economic benefits that areattributable to the asset will flow to the enterprise; and the cost of the asset can be measured reliably.Following initial recognition, the cost model is applied to the class of intangible assets. The useful lives of theseintangible assets are assessed to be either finite or indefinite. Amortisation is charged on assets with a finite usefullife over the best estimate of their useful lives using the straight line method. The amortisation period and theamortisation method are reviewed annually at each financial year-end. Intangible assets, excluding developmentcosts, created within the business are not capitalized and expenditure is charged against income in the year inwhich the expenditure is incurred. Intangible assets are tested for impairment annually either individually or at thecash generating unit level.Research costs are expensed as incurred. Development expenditure incurred on an individual project is carriedforward when its future recoverability can reasonably be regarded as assured. Following the initial recognitionof the development expenditure the cost model is applied requiring the asset to be carried at cost less anyaccumulated impairment losses. Costs in development stage can not be amortized. The carrying value ofdevelopment costs is reviewed for impairment annually when the asset is not yet in use or more frequentlywhen an indicator of impairment arises during the reporting year indicating that the carrying value may not berecoverable.The policy for accounting for exploration and development costs of oil and gas reserves is described in xv) below.The useful life and depreciation methods are reviewed at least annually to ensure that the method and period of depreciationare consistent with the expected pattern of economic benefits from items of property, plant and equipment, and, if necessary,changes are accounted for in the current period.xiv) Impairment of AssetsProperty, plant and equipment and intangible assets are reviewed for impairment whenever events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable. Whenever the carrying amount of an asset exceeds itsrecoverable amount, an impairment loss is recognized in the income statement for items of property, plant and equipment andintangibles carried at cost. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. Thefair value is the amount obtainable from the sale of an asset in an arm’s length transaction while value in use is the present valueof estimated net future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of itsuseful life. Recoverable amounts are estimated for individual assets or, if this is not practicable, for the cash-generating unit.The Group assesses at each reporting date whether there is any indication that previously recognised impairment lossesmay no longer exist or may have decreased. A previously recognised impairment loss is reversed only if there has been achange in the impairment assumptions considered when the last impairment loss was recognised. The reversal is limited sothat the carrying amount of the asset neither exceeds its recoverable amount, nor is higher than its carrying amount net ofdepreciation, had no impairment loss been recognised in prior years.Goodwill is reviewed for impairment, annually or more frequently if events or changes in circumstances indicate that thecarrying value may be impaired. Impairment is determined for goodwill by assessing the recoverable amount of the cashgeneratingunit (or group of cash-generating units), to which the goodwill relates. Where the recoverable amount of the cashgeneratingunit (or group of cash-generating units) is less than the carrying amount of the cash-generating unit (group ofcash-generating units) to which goodwill has been allocated, an impairment loss is recognized. Impairment losses relating togoodwill cannot be reversed in future periods. The Group performs its annual impairment test of goodwill as at 31 December.Intangible assets with indefinite useful lives are monitored for impairment indicators throughout the year and are tested forimpairment at least annually as of 31 December either individually or at the cash generating unit level, as appropriate.xv) Oil and natural gas exploration and development expendituresOil and natural gas exploration and development expenditure is accounted for using the successful efforts method of accounting.Licence and property acquisition costsExploration and property acquisition costs are capitalized as intangible assets and amortized on a straight-line basis over theestimated period of exploration. Each property is reviewed on an annual basis to confirm that drilling activity is planned and itis not impaired. If no future activity is planned, the remaining balance of the licence and property acquisition costs is writtenNotes to the financialstatements100 <strong>MOL</strong> Group annual report 2010 101
Page 1 and 2: MOL GROuP ANNuAL REPORT 2010MOL GRO
Page 4 and 5: Key financial and operating dataKey
Page 6 and 7: Overview of the environmentWorld ec
Page 8 and 9: Exploration and ProductionHIGHLIGHT
Page 10 and 11: OTHER RESuLTSSustainable developmen
Page 12 and 13: upstreaPortfolio EleentsRuSSIASPE 2
Page 14 and 15: ize MOL and INA sales channels in C
Page 16 and 17: PetrochemicalsPetrochemicalsPetroch
Page 18 and 19: Downstream portfolioelementsDomesti
Page 20 and 21: The most important events of 2010Th
Page 22 and 23: Gas and PowerGas and PowerThe Gas a
Page 24 and 25: Financial and Operational Performan
Page 26 and 27: 1.) We have audited the accompanyin
Page 28 and 29: Moderating growth in world economy,
Page 30 and 31: Higher personal expenses due to ful
Page 32 and 33: Unit OPEX slightly increasedStronge
Page 34 and 35: …and in SPE P1 reserves2010 was t
Page 36 and 37: In Slovakia sales volumes recovered
Page 38 and 39: has been granted an IPPC and a Buil
Page 40 and 41: Refining & MarketingCAPEX down by 5
Page 42 and 43: INDEPENDENT AuDITOR’S REPORTMOL H
Page 44 and 45: Consolidated balance sheet31 Decemb
Page 46 and 47: Consolidated cash flow statement31
Page 48 and 49: Joint venturesA joint venture is a
Page 52 and 53: off. Upon determination of economic
Page 54 and 55: At each balance sheet date, the Com
Page 56 and 57: IAS 1 Presentation of Financial Sta
Page 58 and 59: Exploration costsTransfers from exp
Page 60 and 61: 6 Subsidiaries and jointly controll
Page 62 and 63: The purchase price allocation for t
Page 64 and 65: 10 Investments in associated compan
Page 66 and 67: 15 Other current assets16 Cash and
Page 68 and 69: Changes in the number of ordinary,
Page 70 and 71: The following table summarises the
Page 72 and 73: 28 Financial (income) / expense30 I
Page 75 and 76: The Group may use cross currency sw
Page 77 and 78: Capital managementThe primary objec
Page 79 and 80: Operating leasesOperating lease lia
Page 81 and 82: 37 Notes to the consolidated statem
Page 83 and 84: Historical SummaryHistorical Summar
Page 85 and 86: Gross reserves (according to SPE ru
Page 87 and 88: Petrochmical production (kt) 2005 2
Page 89 and 90: InterviewwithGyörgy MosonyiThe str
Page 91 and 92: Objective Result Fulfillment of the
Page 93 and 94: effluents. We found that the persis
Page 95 and 96: The main programme elements are Ext
Page 97 and 98: Employee engagementWe conduct a Gro
Page 99 and 100: Ethical notifications received and
Page 101 and 102:
4 Sustainability data (Performance
Page 103 and 104:
5 Notes on Non-Financial Reporting5
Page 105 and 106:
6 Assurance statements6.1 Independe
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CorporateCorporate GovernanceCorpor
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The Board of Directors prepares a f
Page 111 and 112:
The chairman of the Supervisory Boa
Page 113 and 114:
The main role of Financial Risk Man
Page 115 and 116:
7.10.11.8.9.7. Mr. József Molnár
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6. Mr. József Simola (44)Corporate
Page 119 and 120:
7.Mr. József Kohán (59)Member of
Page 121 and 122:
Ownership Structure31.12.2009 31.12
Page 123 and 124:
GlossaryAverage production costTota
Page 125 and 126:
Putting into productionAccomplishme
Page 127 and 128:
Content tableTopic of interestCover
Page 129:
Statementresponsibilityofundersigne
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MOL GROUP Annual Report

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