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KUWAIT ENERGY plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended 30 June 2014
20
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Financial liabilities and equity (continued)
Convertible loans
Convertible loans, currently held by the Group are classified as “fair value through profit or loss”. These borrowings
are initially and subsequently measured at fair value and any change in the fair value is recognised in the income
statement. The transaction costs paid on these borrowings are also recognised in the income statement.
Offsetting
Financial assets and financial liabilities are offset and the net amount reported in the consolidated statement of
financial position if, and only if, there is a currently enforceable legal right to offset the recognised amounts and
there is an intention to settle on a net basis, or to realise the assets and settle the liabilities simultaneously.
Oil and gas assets
Oil and gas exploration and evaluation expenditure
The Group adopts the successful efforts method of accounting for exploration and evaluation expenditure. Pre-
licence costs are expensed in the period in which they are incurred. All license acquisition, exploration and
evaluation costs and directly attributable administration costs are initially capitalised in cost centres by well, field or
exploration area, as appropriate. Interest payable is capitalised insofar as it relates to specific development activities.
These costs are then written off as exploration costs in the income statement unless commercial reserves have been
established or the determination process has not been completed and there are no indications of impairment. All field
development costs are capitalised as property, plant and equipment. Property, plant and equipment related to
production activities is amortised in accordance with the Group’s depletion and amortisation accounting policy.
Tangible non-current assets used in acquisition, exploration and evaluation are classified with tangible non-current
assets as property, plant and equipment. To the extent that such tangible assets are consumed in exploration and
evaluation the amount reflecting that consumption is recorded as part of the cost of the intangible asset.
Upon successful conclusion of the appraisal programme and determination that commercial reserves exist, such costs
are transferred to tangible non-current assets as property, plant and equipment. Exploration and evaluation costs
carried forward are assessed for impairment as described below.
Proceeds from the farm out of exploration and evaluation assets are credited against the relevant cost centre. Any
overall surplus arising in a cost centre is credited to the consolidated statement of income.
Depreciation and depletion
Depletion is provided on oil and gas assets in production on a field-by-field basis using the unit of production
method, based on proven and probable reserves on a field-by-field basis, applied to the sum of the total capitalised
exploration, evaluation and development costs on a field-by-field basis, together with estimated future development
costs on a field by field basis. The effects of changes in estimates in the unit of production calculations are accounted
for prospectively over the estimated remaining proven and probable reserves of each field.
Impairment of value
Where there has been a change in economic conditions or in the expected use of an asset that indicates a possible
impairment in an asset, management tests the recoverability of the net book value of the asset by comparison with
the estimated discounted future net cash flows, using a discount rate adjusted for the risk specific to each asset, based
on management’s expectations of future oil prices and future costs. Any identified impairment is charged to the
consolidated statement of income.
Intangible non-current assets are considered for impairment at least annually by reference to the indicators in IFRS 6.
Commercial reserves
Proven and probable oil and gas reserves as defined in the Petroleum Resources Management System (“PRMS”) are
considered as commercial reserves.
Proven reserves include reserves that are confirmed with a high degree of certainty through an analysis of the
development history and a volume method analysis of the relevant geological and engineering data. Proven reserves
are those that, based on the available evidence and taking into account technical and economic factors, have a better
than 90% chance of being produced.