Annual Report English

KUWAIT ENERGY plc

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the six months ended 30 June 2014

3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Assets held for sale (continued)

must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one

year from the date of classification.

Non-current assets (and disposal groups) classified as held for sale are measured at the lower of their previous

carrying amount and fair value less costs to sell.

Operating leases

Operating lease payments are recognised as an expense on a straight-line basis over the lease term, except where

another systematic basis is more representative of the time pattern in which economic benefits from the leased asset

are consumed. Contingent rentals arising under operating leases are recognised as an expense in the period in which

they are incurred.

In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a

liability. The aggregate benefit of incentives is recognised as a reduction of rental expense on a straight-line basis,

except where another systematic basis is more representative of the time pattern in which economic benefits from the

leased asset are consumed.

Derivative financial instruments

The Group enters into a variety of derivative financial instruments to manage its exposure to interest rate and oil

price fluctuations, including interest rate caps and oil price put options.

Derivatives are initially recognised at fair value at the date the derivative contract is entered into and are

subsequently remeasured to their fair value at the end of each reporting period. The resulting gain or loss is

recognised in the consolidated statement of income immediately unless the derivative is designated and effective as a

hedging instrument, in which event the timing of the recognition in the consolidated statement of income depends on

the nature of the hedge relationship (see below). A derivative with a positive fair value is recognised as a financial

asset while a derivative with a negative fair value is recognised as a financial liability.

Hedge accounting

The Group designates certain hedging instruments which include oil put options as cash flow hedges in order to

mitigate the risk arising from fluctuations in oil prices.

At the inception of the hedge relationship, the Group documents the relationship between the hedging instrument and

the hedged item, along with its risk management objectives and its strategy for undertaking various hedge

transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Group documents whether the

hedging instrument is highly effective in offsetting changes in fair values or cash flows of the hedged item

attributable to the hedged risk.

Note 28 sets out details of the fair values of the derivative instrument used for hedging purposes.

Cash flow hedge

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is

recognised in other comprehensive income. The gain or loss relating to the ineffective portion is recognised

immediately in the consolidated statement of income.

Amounts previously recognised in other comprehensive income and accumulated in equity are reclassified to finance

income or costs in the consolidated statement of income in the periods when the hedged item is recognised in the

consolidated statement of income. However, when the forecast transaction that is hedged results in the recognition of

a non-financial asset or a non-financial liability, the gains and losses previously recognised in other comprehensive

income and accumulated in equity are transferred from equity and included in the initial cost of the non-financial

asset or non-financial liability.

Hedge accounting is discontinued when the Group revokes the hedging relationship, when the hedging instrument

expires or is sold, terminated, or exercised, or when it no longer qualifies for hedge accounting. When a forecast

transaction is expected to occur, any gain or loss accumulated in equity at that time remains separately in equity and

is recognised in the consolidated statement of income when the forecast transaction is ultimately recognised in the

consolidated statement of income. When a forecast transaction is no longer expected to occur, the gain or loss

accumulated in equity is recognised immediately in the consolidated statement of income.