Annual Report 2007 in PDF - Cairn Energy PLC

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NOTES TO THE ACCOUNTS CONTINUED 1. Accounting Policies (continued) (d) Basis of consolidation The consolidated accounts include the results of Cairn Energy PLC and its subsidiary undertakings to the Balance Sheet date. The results of subsidiaries acquired or disposed of during the year are included in the Income Statement and Statement of Cash Flows from the effective date of acquisition or up to the effective date of disposal as appropriate. Cairn allocates the purchase consideration of any acquisition to assets and liabilities on the basis of fair values at the date of acquisition. Any excess of the cost of acquisition over the fair values of the assets and liabilities is recognised as goodwill. Any goodwill arising is recognised as an asset and is subject to annual review for impairment. Goodwill is written off where circumstances indicate that the value of the underlying cash-generating unit including the asset may no longer support the carrying value of goodwill. Any such impairment loss arising is recognised in the Income Statement for the period. Impairment losses relating to goodwill cannot be reversed in future periods. Negative goodwill is credited immediately to the Income Statement. Cairn has used the exemption granted under s230(1)(b) of the Companies Act 1985 that allows for the non-disclosure of the Income Statement of the parent company. The profit attributable to the Company for the year ended 31 December 2007 was $1,170,772,000 (2006: $164,870,000). (e) Joint Ventures Cairn participates in several unincorporated Joint Ventures which involve the joint control of assets used in the Group’s oil and gas exploration and producing activities. Cairn accounts for its share of assets, liabilities, income and expenditure of Joint Ventures in which the Group holds an interest, classified in the appropriate Balance Sheet and Income Statement headings. Cairn’s principal licence interests are jointly controlled assets. A list of Cairn’s interests in unincorporated Joint Ventures is given on page 71. (f) Revenue and other income Revenue from operating activities Revenue represents Cairn’s share of oil, gas and condensate production, recognised on a direct entitlement basis, and tariff income received for third party use of operating facilities and pipelines in accordance with agreements. Other income Income received as operator from Joint Ventures is recognised on an accruals basis in accordance with Joint Venture agreements and is included within ‘Other operating income’ in the Income Statement. Interest income is recognised using the effective interest method on an accruals basis and is recognised within ‘Finance income’ in the Income Statement. (g) Oil and gas intangible exploration/appraisal assets and property, plant & equipment – development/producing assets Cairn follows a successful efforts based accounting policy for oil and gas assets. Costs incurred prior to obtaining the legal rights to explore an area are expensed immediately to the Income Statement. Expenditure incurred on the acquisition of a licence interest is initially capitalised on a licence by licence basis. Costs are held, un-depleted, within exploration/appraisal assets until such time as the exploration phase on the licence area is complete or commercial reserves have been discovered. Exploration expenditure incurred in the process of determining exploration targets is capitalised initially within exploration/ appraisal assets and subsequently allocated to drilling activities. Exploration/appraisal drilling costs are initially capitalised on a well by well basis until the success or otherwise of the well has been established. The success or failure of each exploration/ appraisal effort is judged on a well by well basis. Drilling costs are written off on completion of a well unless the results indicate that hydrocarbon reserves exist and there is a reasonable prospect that these reserves are commercial. Following appraisal of successful exploration wells, if commercial reserves are established and technical feasibility for extraction demonstrated, then the related capitalised exploration/appraisal costs are transferred into a single field cost centre within development/producing assets after testing for impairment (see below). Where results of exploration drilling indicate the presence of hydrocarbons which are ultimately not considered commercially viable, all related costs are written off to the Income Statement. All costs incurred after the technical feasibility and commercial viability of producing hydrocarbons has been demonstrated are capitalised within development/producing assets on a field by field basis. Subsequent expenditure is capitalised only where it either enhances the economic benefits of the development/producing asset or replaces part of the existing development/ producing asset. Any remaining costs associated with the part replaced are expensed. 78 CAIRN ENERGY PLC ANNUAL REPORT 2007
NOTES TO THE ACCOUNTS CONTINUED Net proceeds from any disposal of an exploration asset are initially credited against the previously capitalised costs. Any surplus proceeds are credited to the Income Statement. Net proceeds from any disposal of development/producing assets are credited against the previously capitalised cost. A gain or loss on disposal of a development/producing asset is recognised in the Income Statement to the extent that the net proceeds exceed or are less than the appropriate portion of the net capitalised costs of the asset. Depletion Cairn depletes separately, where applicable, any significant components within development/producing assets, such as fields, processing facilities and pipelines, which are significant in relation to the total cost of a development/producing asset. Cairn depletes expenditure on property, plant & equipment – development/producing assets on a unit of production basis, based on proven and probable reserves on a field by field basis. In certain circumstances, fields within a single development area may be combined for depletion purposes. Impairment Exploration/appraisal assets are reviewed regularly for indicators of impairment and costs are written off where circumstances indicate that the carrying value might not be recoverable. In such circumstances the exploration asset is allocated to development/producing assets within the same geographic segment and tested for impairment. Any such impairment arising is recognised in the Income Statement for the period. Where there are no development/producing assets within a geographic segment, the exploration/appraisal costs are charged immediately to the Income Statement. Impairment reviews on development/producing assets are carried out on each cash-generating unit identified in accordance with IAS 36 ‘Impairment of Assets’. Cairn’s cash-generating units are those assets which generate largely independent cash flows and are normally, but not always, single development areas. At each reporting date, where there are indicators of impairment, the net book value of the cash-generating unit is compared with the associated expected discounted future net cash flows. If the net book value is higher, then the difference is written off to the Income Statement as impairment. Discounted future net cash flows for IAS 36 purposes are calculated using an estimated oil price of $60/bbl (2006: $30/bbl) or the appropriate gas price as dictated by the relevant gas sales contract, escalation for prices and costs of 3%, and a discount rate of 10% (2006: 3% and 10% respectively). Forecasted production profiles are determined on an asset by asset basis, using appropriate petroleum engineering techniques. Where there has been a charge for impairment in an earlier period, that charge will be reversed in a later period where there has been a change in circumstances to the extent that the discounted future net cash flows are higher than the net book value at the time. In reversing impairment losses, the carrying amount of the asset will be increased to the lower of its original carrying value or the carrying value that would have been determined (net of depletion) had no impairment loss been recognised in prior periods. (h) Property, plant & equipment – other Property, plant & equipment are measured at cost less accumulated depreciation and impairment and depreciated over their expected useful economic lives as follows: Depreciation Annual rate (%) method Tenants’ improvements 10–33* straight-line Vehicles and equipment 25–50* straight-line * Depreciation is charged over the shorter of the economic life or the remaining term of the lease. (i) Intangible assets – other Intangible assets have finite useful lives, are measured at cost less accumulated amortisation and impairment, and amortised over their expected useful economic lives as follows: Amortisation Annual rate (%) method Software costs 25–50 straight-line Goodwill arising on business combinations is not amortised but is tested annually for impairment. See Note 1(d) above. CAIRN ENERGY PLC ANNUAL REPORT 2007 79
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ANNUAL REPORT & ACCOUNTS 2007 CAIRN
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CAIRN is an edinburgh based oil and
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CAIRN INDIA performance First comme
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2000 lakshmi disCovery 2001 sarasWa
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THE RESTRUCTURING OF THE GROUP INTO
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ajasthan midstream the government o
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Cambay Basin, India CAIRN ENERGY PL
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Cairn india assets 30% 30% 49% 40%
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Rajasthan, India the increased reso
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Detail heading here relore min ullu
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uk (West Of shetland) Block 214/19
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nePal the security situation in nep
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angladesh reserves sangu gross 2p r
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activities in all operated blocks.
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RESERVES Direct Direct working enti
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NOTICE OF ANNUAL GENERAL MEETING No
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NOTICE OF ANNUAL GENERAL MEETING CO
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GLOSSARY OF TERMS CONTINUED TECHNIC
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