Annual Report 2007 in PDF - Cairn Energy PLC

NOTES TO THE ACCOUNTS
CONTINUED
1. Accounting Policies (continued)
(n) Taxation (continued)
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the periods in which the asset is
realised or the liability is settled, based on tax rates and laws enacted or substantively enacted at the Balance Sheet date.
Deferred tax assets and liabilities are only offset where they arise within the same entity and tax jurisdiction and the group
intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.
(o) Decommissioning
At the end of the producing life of a field, costs are incurred in removing and decommissioning production facilities.
Cairn recognises the full discounted cost of dismantling and decommissioning as an asset and liability when the obligation
arises. The decommissioning asset is included within property, plant & equipment – development/producing assets with the
cost of the related installation. The liability is included within provisions. Revisions to the estimated costs of decommissioning
which alter the level of the provisions required are also reflected in adjustments to the decommissioning asset. The amortisation
of the asset, calculated on a unit of production basis based on proven and probable reserves, is included in the ‘Depletion
and decommissioning charge’ in the Income Statement and the unwinding of the discount on the provision is included within
‘Finance costs’.
(p) Foreign currencies
In the accounts of individual Group companies, Cairn translates foreign currency transactions into the functional currency at
the rate of exchange prevailing at the transaction date. Monetary assets and liabilities denominated in foreign currency are
translated into the functional currency at the rate of exchange prevailing at the Balance Sheet date. Exchange differences arising
are taken to the Income Statement except for those incurred on borrowings specifically allocable to development projects,
which are capitalised as part of the cost of the asset.
Cairn maintains the accounts of the parent and subsidiary undertakings in their functional currency. Where applicable, Cairn
translates parent and subsidiary accounts into the presentational currency, $, using the closing rate method for assets and
liabilities which are translated into $ at the rate of exchange prevailing at the Balance Sheet date and rates at the date of
transactions for Income Statement accounts. Cairn takes exchange differences arising on the translation of net assets of Group
companies whose functional currency is non-$ directly to reserves.
Rates of exchange to $1 were as follows:
82 CAIRN ENERGY PLC ANNUAL REPORT 2007
31 December Average 31 December Average
2007 2007 2006 2006
Sterling 0.504 0.500 0.511 0.543
Indian Rupee 39.400 41.339 44.260 45.277
(q) Employee benefits
Pension schemes
Cairn operates defined contribution pension schemes in the Uk and India. The assets of the schemes are held separately from
those of Cairn and its subsidiaries. Cairn also operates insured benefit schemes for certain Indian and Bangladeshi employees
as required under local legislation. In accordance with IAS 19 ‘Employee Benefits’ these are treated as defined contribution
schemes. The pension cost charged represents contributions payable in the year in accordance with the rules of the schemes.
Share schemes
The cost of awards to employees under Cairn’s LTIP and share option plans, granted after 7 November 2002, are recognised
over the three-year period to which the performance relates. The amount recognised is based on the fair value of the shares as
measured at the date of the award. The shares are valued using either the Black–Scholes model or the binomial model, further
details of which are given in Note 7.
The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which
the performance and/or service conditions are fulfilled, ending on the date on which the relevant employees become fully
entitled to the award (‘the vesting date’). The cumulative expense recognised for equity-settled transactions at each reporting
date until the vesting date reflects the extent to which the vesting period has expired and the Company’s best estimate of
the number of equity instruments that will ultimately vest. The Income Statement charge or credit for a period represents the
movement in cumulative expense as recognised at the beginning and end of that period.