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)

Taxation (continued)

Deferred tax

Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the financial

statements of the relevant subsidiaries and the corresponding tax bases used in the computation of taxable profit, and

are accounted for using the liability method. Deferred tax liabilities are generally recognised for all taxable

temporary differences, and deferred tax assets are generally recognised for all deductible temporary differences to

the extent that it is probable that taxable profits will be available against which those deductible temporary

differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from

goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a

transaction that affects neither the taxable profit nor the accounting profit.

The carrying amount of deferred tax assets is 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 asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the

liability is settled or the asset realised, based on tax rates (and tax laws) that have been enacted or substantively

enacted by the balance sheet date. The measurement of deferred tax liabilities and assets reflects the tax

consequences that would follow from the manner in which the Group expects, at the reporting date, to recover or

settle the carrying amount of its assets and liabilities.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets

against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the

Group intends to settle its current tax assets and liabilities on a net basis.

JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY

In the application of the Group’s accounting policies, which are described in note 3, management is required to make

judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily

apparent from other sources. The estimates and associated assumptions are based on historical experience and other

factors that are considered to be relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are

recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the

revision and future periods if the revision affects both current and future periods.

Critical accounting judgements

Carrying value of intangible exploration and evaluation assets

The amounts for intangible exploration and evaluation assets represent active exploration projects. These amounts

will be written off to the income statement as exploration costs unless commercial reserves are established or the

determination process is not completed and there are no indications of impairment in accordance with the Group’s

accounting policy. The process of determining whether there is an indicator of impairment or calculating the

impairment requires critical judgement.

The key areas in which management have applied judgement are as follows: the Group’s intention to proceed with a

future work programme for a prospect or licence; the likelihood of licence renewal or extension; and the success of a

well result or geological or geophysical survey. Further details are provided in note 16.

Key sources of estimation uncertainty

The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the

balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and

liabilities within the next financial year.

Recoverability of exploration and evaluation costs

Under the Group’s accounting policy for exploration and evaluation (“E&E”) costs, such costs are capitalised as

intangible assets, and are assessed for impairment when circumstances suggest that the carrying amount may exceed

its recoverable value. This assessment involves judgement as to (i) the likely future commerciality of the asset and

when such commerciality should be determined, and (ii) future revenues and costs pertaining to the asset with which

question is associated, and the discount rate to be applied to such revenues and costs for the purpose of deriving a