MOL GROUP Annual Report

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At each balance sheet date, the Company re-assesses unrecognized deferred tax assets and the carrying amount of deferred tax assets. Theenterprise recognises a previously unrecognized deferred tax asset to the extent that it has become probable that future taxable profit willallow the deferred tax asset to be recovered. The Company conversely reduces the carrying amount of a deferred tax asset to the extent thatit is no longer probable that sufficient taxable profit will be available to allow the benefit of part or the entire deferred tax asset to be utilised.Current tax and deferred tax are charged or credited directly to equity if the tax relates to items that are credited or charged,in the same or a different period, directly to equity, including an adjustment to the opening balance of reserves resulting froma change in accounting policy that is applied retrospectively.xxxi) ContingenciesContingent liabilities are not recognized in the consolidated financial statements unless they are acquired in a businesscombination. They are disclosed in the Notes unless the possibility of an outflow of resources embodying economic benefitsis remote. A contingent asset is not recognized in the consolidated financial statements but disclosed when an inflow ofeconomic benefits is probable.2.4 Significant accounting judgments and estimatesDeferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets againstcurrent tax liabilities which relate to income taxes imposed by the same taxation authority and the Group intends to settle itscurrent tax assets and liabilities on a net basis.xxviii) Foreign Currency TransactionsForeign currency transactions are recorded in the reporting currency by applying to the foreign currency amount the exchange ratebetween the reporting currency and the foreign currency at the date of the transaction. Exchange rate differences arising on the settlementof monetary items at rates different from those at which they were initially recorded during the periods are recognized in the consolidatedincome statement in the period in which they arise. Monetary assets and liabilities denominated in foreign currencies are retranslated atthe functional currency rate of exchange ruling at the balance sheet date. Items measured at fair value in a foreign currency are translatedusing the exchange rates at the date when the fair value was determined. Foreign exchange differences on trade receivables and payablesare included in operating profit, while foreign exchange differences on borrowings are recorded as financial income or expense.Financial statements of foreign entities are translated at year-end exchange rates with respect to the balance sheet and at the weightedaverage exchange rates for the year with respect to the income statement. All resulting translation differences are included in thetranslation reserve in other comprehensive income. On disposal of a foreign entity, the deferred cumulative amount recognized in othercomprehensive income relating to that particular foreign operation shall be recognized in the income statement. Any exchange differencesthat have previously been attributed to non-controlling interests are derecognised, but they are not reclassified to profit or loss.In case of a partial disposal of a subsidiary without any loss of control in the foreign operation, the proportionate shareof accumulated exchange differences are re-attributed to non-controlling interests and are not recognised in profit orloss. For all other disposals such as associates or jointly controlled entities not involving a change of accounting basis, theproportionate share of accumulated exchange differences is reclassified to profit or loss.Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of theforeign operation and translated at the closing rate.xxix) Earnings Per ShareThe calculation of basic earnings per share is based on the profit attributable to ordinary shareholders using the weighted averagenumber of shares outstanding during the year after deduction of the average number of treasury shares held over the period.The calculation of diluted earnings per share is consistent with the calculation of basic earnings per share while giving effectto all dilutive potential ordinary shares that were outstanding during the period, that is:– the net profit for the period attributable to ordinary shares is increased by the after-tax amount of dividends andinterest recognized in the period in respect of the dilutive potential ordinary shares and adjusted for any otherchanges in income or expense that would result from the conversion of the dilutive potential ordinary shares.– the weighted average number of ordinary shares outstanding is increased by the weighted average number ofadditional ordinary shares which would have been outstanding assuming the conversion of all dilutive potentialordinary shares.xxx) Segmental DisclosureFor management purposes the Group is organised into four major operating business units: Exploration and Production, Refining andMarketing, Gas and Power and Petrochemicals. The business units are the basis upon which the Group reports its segment informationto the management who is responsible for allocating business resources and assessing performance of the operating segments.Critical judgments in applying the accounting policiesIn the process of applying the accounting policies, which are described in note 2.3 above, management has made certainjudgments that have significant effect on the amounts recognized in the financial statements (apart from those involvingestimates, which are dealt with below). These are detailed in the respective notes, however, the most significant judgmentsrelate to the following:Scope of environmental and field abandonment provisionThe Group recognised significant amount of provisions in connection with its operations having environmentalimpact. Regulations, especially environmental legislation do not exactly specify the extent of remediation workrequired or the technology to be applied. Furthermore, since INA Group became part of MOL in the previous year,the extent to which such remediation requirements are identified is also limited. Management uses its previousexperience and its own interpretation of the respective legislation to determine the scope of environmental and fieldabandonment provisions. The amount of environmental provision is HUF 70,027 million and HUF 69,563 million, whilefield abandonment provision amounts to HUF 184,792 million and HUF 188,348 million as of 31 December 2010 and2009, respectively (see Note 20).Application of Successful Efforts method of accounting for exploration expendituresManagement uses judgment when capitalized exploration expenditures are reviewed to determine capability and continuingintent of further development. Carrying amount of capitalized exploration costs is HUF 171,791 million and HUF 202,964million as of 31 December 2010 and 2009, respectively (see Note 4).Sources of estimate uncertaintyThe preparation of financial statements in conformity with IFRS requires the use of estimates and assumptions that affectthe amounts reported in the financial statements and the Notes thereto. Although these estimates are based on themanagement’s best knowledge of current events and actions, actual results may differ from those estimates. These aredetailed in the respective notes, however, the most significant estimates relate to the following:Calculation the fair values of financial instrumentsFair valuation of financial instruments (especially the conversion option embedded in the perpetual exchangeable capitalsecurities issued by a special purpose entity, Magnolia Finance Ltd, see Note 17) is performed by reference to quotedmarket prices or, in absence thereof reflects the market’s or the management’s estimate of the future trend of key driversof such values, including, but not limited to yield curves, foreign exchange and risk-free interest rates, and in case of theconversion option and MOL’s call option on the 7% shareholding owned by CEZ, volatility of MOL share prices and dividendyield. Considering the worldwide financial crisis since 2008 and the consequent hectic changes on the markets of financialinstruments, such fair value measurements contain an increased uncertainty. The management expects this uncertaintyto be decreasing during the forthcoming reporting period. In case of the conversion option embedded in MOL’s perpetualexchangeable capital securities, the market of the underlying convertible instrument has become inactive between October,2008 and September, 2009, together with a significant decline in the market price of MOL shares and of the convertibleinstrument. Therefore the fair value of the conversion option has decreased to nil as of 31 December 2008. Since mid-2009,the valuation of this option was performed with reference to prices on the market of convertible instruments. Further detailsof financial instruments are described in Note 34.Quantification and timing of environmental and field abandonment liabilitiesManagement estimates the future cash outflow associated with environmental and decommissioning liabilities usingcomparative prices, analogies to previous similar work and other assumptions. Furthermore, the timing of these cash flowsreflects managements’ current assessment of priorities, technical capabilities and urgency of such obligations. Both theNotes to the financialstatements106 MOL Group annual report 2010 107
amounts and the timing of these future expenditures are reviewed annually, together with expectations on the rates used todiscount these cash flows. Long-term real discount rates are expected to be 4.8% (2009: 4.9%). Consequently, the carryingamount of these obligations (in case of environmental liabilities HUF 70,027 million and HUF 69,563 million, in case of fieldabandonment provision HUF 184,792 million and HUF 188,348 million as of 31 December 2010 and 2009, respectively, seeNote 20) is exposed to uncertainty.Impairment of non-current assets, including goodwillThe impairment calculation requires an estimate of the recoverable amount of the cash generating units, that is, the higherof fair value less costs to sell and value in use. Value in use is usually determined on the basis of discounted estimated futurenet cash flows. The most significant variables in determining cash flows are discount rates, terminal values, the period forwhich cash flow projections are made, as well as the assumptions and estimates used to determine the cash inflows andoutflows, including commodity prices, operating expenses, future production profiles and the global and regional supplydemandequilibrium for crude oil, natural gas and refined products. While such cash flows for each non-current asset orinvestment reflects the management’s best estimate for the future, these estimates are exposed to an increased uncertaintyas a result of the general economic recession experienced worldwide and also in the Central-Eastern European region wherethe Group operates. Discount rates were derived from the USD-based weighted average cost of capital for the Group (2010:8.4%, 2009: 8.0%) Increase in the rate reflects the increased risk factors due to the worldwide recession. In each case theserates are adjusted for segment-, country- and project-specific risks, as applicable. Impairment recorded in the consolidatedincome statement amounts to HUF 17,548 million and HUF 13,066 million in 2010 and 2009, respectively. These chargesinclude an impairment loss HUF 15,074 million on other intangible assets (2009: HUF 1,612 million and also impairmentloss of HUF 4,656 million on goodwill) an impairment loss of HUF 10,017 million (2009: HUF 9,059 million) and a reversal ofimpairment of HUF 7,543 million (2009: HUF 2,261 million) on property, plant and equipment. Carrying amount of goodwillis HUF 71,031 million and HUF 70,126 million as of 31 December 2010 and 2009, respectively (see Note 4).Availability of taxable income against which deferred tax assets can be recognizedDeferred tax assets are recognized for all unused tax losses to the extent that it is probable that taxable profit will be availableagainst which the losses can be utilised. Significant management judgment is required to determine the amount of deferredtax assets that can be recognized, based upon the likely timing and level of future taxable profits together with future taxplanning strategies. The carrying value of such recognized deferred tax assets was HUF 10,290 million and HUF 28,064million as of 31 December 2010 an 2009, respectively (see Note 30).Actuarial estimates applied for calculation of retirement benefit obligationsThe cost of defined benefit plans is determined using actuarial valuations. The actuarial valuation involves makingassumptions about discount rates, future salary increases and mortality or fluctuation rates. Due to the long term nature ofthese plans, such estimates are subject to significant uncertainty. Provision for retirement benefit is HUF 15,144 million andHUF 14,416 million at 31 December 2010 and 2009, respectively (see Note 20).Outcome of certain litigationsMOL Group entities are parties to a number of litigations, proceedings and civil actions arising in the ordinary course ofbusiness. Management uses estimations when the most likely outcome of these actions is assessed and provision isrecognized on a consistent basis. Provision for legal claims is HUF 20,067 million and HUF 18,161 million at 31 December2010 and 2009, respectively (see Note 20 and 35).2.5 Issued but not yet effective International Financial Reporting StandardsAt the date of authorisation of these financial statements, the following standards and interpretations were in issue but notyet effective:IAS 24 - Related Party DisclosureThe amendments to IAS 24 Related Party Disclosures become effective for financial years beginning on or after 1 January2011 and must be applied retrospectively. The revised standard simplifies the disclosure requirements for entities that arecontrolled, jointly controlled or significantly influenced by a government and clarifies the definition of a related party. As aresult, such a reporting entity is exempt from the general disclosure requirements in relation to transactions and balanceswith the government and government-related entities. The amendment has no impact on the disclosures of the Group.IAS 32 Financial Instruments: PresentationThe amendment to IAS 32 is effective for annual periods beginning on or after 1 February 2010 and requires that rights,options and warrants to acquire a fixed number of an entity’s own equity instruments for a fixed price of any currency areequity instruments if certain criteria are met. The amendment will have no impact on the financial position of the Group.IFRIC 14 – IAS 19-The limit on a Defined Benefit Asset, Minimum Funding Requirements and their InteractionThe amendment to IFRIC 14 Prepayments of a minimum funding requirement was issued to remove the unintended consequencein IFRIC 14 that in some cases entities are not permitted to recognize as an asset some voluntary prepayments for minimumfunding contributions. The amendment becomes effective 1 January 2011 and has no material impact on the Group.IFRIC 19 Extinguishing Financial Liabilities with Equity InstrumentsThis interpretation addresses the accounting by an entity that issues equity instruments to settle financial liability. The equityinstrument is measured at fair value and the financial liability is derecognized, fully or partly, based on the “considerationpaid”. The interpretation is effective for annual periods beginning on or after 1 July 2010 and will have no material impacton the Group.Improvements to IFRSsIn May 2010 the Board issued its first collection of amendments to its standards, primarily to remove inconsistencies andclarify wording. These amendments will be effective from 1 January 2011 unless otherwise stated. The Group has not yetadopted the following amendments but it is anticipated that these changes will have no material effect on the Group’sfinancial statements.IFRS 1 First-time Adoption of International Financial Reporting StandardsThe annual improvements to IFRS 1 include: a) accounting policy changes in the year of IFRS adoption - if a first-timeadopter changes its accounting policies or the use of exemptions in IFRS 1 after it has published its interim financial reportin accordance with IAS 34 but before its first IFRS financial statements, it should explain those changes; b) revaluation basisas deemed cost – clarifies that a first-time adopter is permitted to use event-driven fair value as deemed cost during thefirst IFRS period and c) use of deemed cost for operations subject to rate regulation for certain items of property, plant andequipment or intangibles.IFRS 3 Business CombinationsAmendment to IFRS 3 specifies that the option to measure non-controlling interests either at fair value or at proportionateshare of the acquiree’s net identifiable assets applies only to non-controlling interests that are present ownership interests.All other components of non-controlling interests should be measured at their acquisition date fair value, unless anothermeasurement basis is required by IFRSs.IFRS 3 specifies that requirements to measure awards of the acquirer that replace acquiree share-based payment transactionswith regards to IFRS 2 applies also to such transactions of the acquiree that are not replaced. The amendment also clarifiesthat market-based measurement of replacement awards applies to all replacement awards regardless of whether the acquireris obliged to replace the awards or does so voluntarily.Notes to the financialstatementsIFRS 9 Financial Instruments – Classification and measurementThe IFRS 9 was issued on 12 November 2009 and is intended to replace IAS 39 Financial Instruments: Recognition andmeasurement. The standard introduces new requirements for classifying and measuring financial assets that must be appliedstarting 1 January 2013. According to IFRS 9 all financial assets are initially recognised at fair value plus transaction costs. Thestandard also eliminates the available-for-sale and held-to-maturity categories currently existing in IAS 39. Classification ofcurrently existing financial instruments of the Group will change accordingly.The last amendment to IFRS 3 clarifies that IAS 32, IAS 39 and IFRS 7 do not apply to contingent consideration from a businesscombination which occurred before the effective date of the revised standard IFRS 3 in 2008.All amendments to IFRS 3 are effective for annual period beginning on or after 1 July 2010.IFRS 7 Financial Instruments: DisclosuresThe improvement to IFRS 7 clarifies disclosure requirements regarding credit risk and collateral held in order to enable usersbetter to understand the nature and extent of risks arising from financial instruments.108 MOL Group annual report 2010 109
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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 50 and 51: vi) HedgingFor the purpose of hedge
Page 52 and 53: off. Upon determination of economic
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
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6 Assurance statements6.1 Independe
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CorporateCorporate GovernanceCorpor
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The Board of Directors prepares a f
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The chairman of the Supervisory Boa
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The main role of Financial Risk Man
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7.10.11.8.9.7. Mr. József Molnár
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6. Mr. József Simola (44)Corporate
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7.Mr. József Kohán (59)Member of
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Ownership Structure31.12.2009 31.12
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GlossaryAverage production costTota
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Putting into productionAccomplishme
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Content tableTopic of interestCover
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Statementresponsibilityofundersigne
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MOL GROUP Annual Report

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