Annual Report 2007 in PDF - Cairn Energy PLC

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NOTES TO THE ACCOUNTS CONTINUED 1. Accounting Policies (continued) (j) Investments The Company’s investments in subsidiaries are carried at cost less provisions resulting from impairment. The recoverable value of investments is the higher of its fair value less costs to sell and value in use. Value in use is based on the discounted future net cash flows of the oil and gas assets held by the subsidiary. 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. (k) Inventory Inventories of oil and condensate held at the Balance Sheet date are valued at net realisable value based on the estimated selling price in accordance with established industry practice. (l) Financial instruments A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Financial assets are categorised as financial assets held at fair value through profit or loss, held-to-maturity investments, loans and receivables and available-for-sale financial assets. The Group holds financial assets which are classified as either available-for-sale financial assets or loans and receivables, with the exception of derivative financial instruments which are held at fair value through profit or loss. Financial liabilities generally substantiate claims for repayment in cash or with another financial asset. Financial liabilities are categorised as either fair value through profit or loss or held at amortised cost. All of the Group’s financial liabilities are held at amortised cost, with the exception of derivative financial instruments which are held at fair value through profit or loss. Financial instruments are generally recognised as soon as the Group becomes party to the contractual regulations of the financial instrument. Derivative financial instruments The Group uses derivative financial instruments such as foreign currency options to hedge its risks associated with foreign currency fluctuations. Such derivative financial instruments are designated upon initial recognition as at fair value through profit or loss. The derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. Any gains or losses arising from changes in fair value on derivatives during the year are taken directly to the Income Statement. The Group did not apply hedge accounting for derivative financial instruments held during the current or prior year. Available-for-sale financial assets Available-for-sale financial assets are those non-derivative financial assets that are not classified as loans and receivables. The Group’s available-for-sale financial assets represent listed equity shares which are held at fair value (the quoted market price). Movements in the fair value during the year are recognised directly in equity and are disclosed in the Statement of Recognised Income and Expense. The cumulative gain or loss that arises on subsequent disposal of available for sale financial assets will be recycled through the Income Statement. Loans and other receivables Trade receivables, loans and other receivables that have fixed or determinable payments that are not quoted on an active market are classified as ‘loans and receivables’. Loans and receivables are measured at amortised cost using the effective interest method less any impairment. Trade and other receivables are recognised when invoiced. Interest income is recognised by applying the effective interest rate, except for short-term receivables where the recognition of interest would be immaterial. The carrying amounts of loans and other receivables are tested at each reporting date to determine whether there is objective material evidence of impairment, for example, overdue trade debt. Any impairment losses are recognised through the use of an allowance account. When a trade receivable is uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognised in the Income Statement or the Balance Sheet in accordance with where the original receivable was recognised. Bank deposits Bank deposits with an original maturity of over three months are held as a separate category of current asset and presented on the face of the Balance Sheet. 80 CAIRN ENERGY PLC ANNUAL REPORT 2007
NOTES TO THE ACCOUNTS CONTINUED Cash and cash equivalents Cash and cash equivalents comprise cash at bank and short-term deposits with an original maturity of three months or less. For the purposes of the consolidated Statement of Cash Flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts. Trade payables and other non-derivative financial liabilities Trade payables and other creditors are non-interest-bearing and are measured at cost. Interest-bearing bank loans and borrowings All interest-bearing bank loans and borrowings represent amounts drawn under the Group’s revolving credit facilities, classified according to the length of time remaining under the respective facility. Loans are initially measured at fair value less directly attributable transaction costs. After initial recognition, interest-bearing loans are subsequently measured at amortised cost using the effective interest method. Interest payable is accrued in the Income Statement using the effective interest rate method. Finance leases Assets held under finance leases are recognised as assets of the Group at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the Balance Sheet as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged to the Income Statement, unless they are directly attributable to qualifying assets, in which case they are capitalised in accordance with the Group’s general policy on borrowing costs (see below). The Group has reviewed the terms and conditions of the lease arrangements and determined that all risks and rewards of ownership lie with the Group and has therefore accounted for the contracts as finance leases. Borrowing costs Borrowing costs are recognised in the Income Statement in the period in which they are incurred except for borrowing costs incurred on borrowings directly attributable to development projects which are capitalised within the development/producing asset. (m) Equity Equity instruments issued by Cairn are recorded at the proceeds received, net of direct issue costs, allocated between share capital and share premium. (n) Taxation The tax expense represents the sum of current tax and deferred tax. The current tax is based on taxable profit/(loss) for the year. Taxable profit/(loss) differs from net profit/(loss) as reported in the Income Statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the Balance Sheet date. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit/(loss). Deferred income tax liabilities are recognised for all taxable temporary differences except in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in Joint Ventures where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. A deferred income tax liability is not recognised if a temporary difference arises on initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profits will be available against which the deductible temporary differences, carry-forward of unused tax assets and unused tax losses can be utilised, except where the deferred income tax asset relating to the deductible temporary timing difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. In respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in Joint Ventures, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profits will be available against which the temporary differences can be utilised. The carrying amount of deferred income tax assets are reviewed at each Balance Sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the deferred income tax asset to be utilised. CAIRN ENERGY PLC ANNUAL REPORT 2007 81
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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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2007 marked the beginning of a new
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Page 33 and 34: CAIRN INDIA CAPITAL EXPENDITURE FOR
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Page 37 and 38: 2007 ACCOUNTS Risk Factors 36 Corpo
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Page 43 and 44: CORPORATE GOVERNANCE STATEMENT CONT
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Page 55 and 56: DIRECTORS’ REPORT CONTINUED Elect
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Page 59 and 60: DIRECTORS’ REMUNERATION REPORT Re
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Page 75 and 76: GROUP INCOME STATEMENT For the year
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Page 131 and 132: 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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