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GoodwillGoodwill arising on the acquisition of a subsidiary or ajointly controlled entity represents the excess of the costof acquisition over the Group’s interest in the net fair valueof the identifiable assets, liabilities and contingent liabilitiesof the subsidiary or jointly controlled entity recognisedat the date of acquisition. Goodwill is initially recognisedas an asset at cost and is subsequently measured at costless any accumulated impairment losses.For the purpose of impairment testing, goodwill is allocatedto each of the Group’s cash-generating units expectedto benefit from the synergies of the combination. Cashgeneratingunits to which goodwill has been allocatedare tested for impairment annually, or more frequentlywhen there is an indication that the unit may be impaired.If the recoverable amount of the cash-generating unit isless than the carrying amount of the unit, the impairmentloss is allocated first to reduce the carrying amount of anygoodwill allocated to the unit and then to the other assetsof the unit pro-rata on the basis of the carrying amount ofeach asset in the unit. An impairment loss recognised forgoodwill is not reversed in a subsequent period.On disposal of a subsidiary or a jointly controlled entity,the attributable amount of goodwill is included in the determinationof the profit or loss on disposal.The Group’s policy for goodwill arising on the acquisitionof an associate is described under ‘Investments in associates’above.Oil and gas propertiesExploration and appraisal costsExploration and appraisal costs are accounted for on thesuccessful efforts basis. Costs relating to exploration andappraisal drilling are initially capitalised as intangible oiland gas assets pending determination of the commercialviability of the relevant oil and gas properties.License and data provision costs and costs associatedwith geological and geophysical activities are charged tothe income statement period in which they are incurred.If prospects are subsequently deemed to be unsuccessfulon completion of evaluation, the associated costs arecharged to the income statement in the period. If theprospects are deemed to be commercially viable, suchcosts are transferred to oil and gas properties. The statusof such prospects is reviewed regularly by management.Fields under developmentCosts of exploring and oil and gas field developmentcosts are capitalised as intangible or tangible oil and gasassets. Such costs also include, prospectively, applicableexploration costs and development drilling costs.DepreciationCapitalised exploration and development costs ofproducing domestic and foreign oil and gas propertiesare depreciated using a unit of production method, in theproportion of actual production for the period to the totalestimated remaining commercial reserves of the field.Commercial reservesCommercial reserves are net proved developed oil andgas reserves. Changes in the commercial reserves of fieldsaffecting unit of production calculations are dealt withprospectively over the revised remaining reserves.Reporting currencyThe Company’s and the Group’s financial statements areprepared in Croatian kuna (HRK). The effective exchangerate of the Croatian currency (Kuna) at 31 December 2007was 7.33 kunas per 1 Euro and 4.99 kunas per 1 United Statesdollar (31 December 2006 - 7.34 kunas per 1 Euro and 5.58kunas per 1 United States dollar). Average exchange rate in2007 was 7.34 kunas per 1 EUR and 5.37 kunas per 1 US$ (2006 7.32 kunas per 1 EUR and 5.84 kunas per 1 US$).Property, plant and equipmentProperty, plant and equipment are shown at historicalcost or valuation less accumulated depreciation and anyaccumulated impairment loss, except for land, whichis stated at cost. Property, plant and equipment in use(excluding oil and gas properties) are depreciated on astraight-line basis on the following basis:Annual report 200797