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KUWAIT ENERGY PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended 30 June 2016
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3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Oil and gas assets
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 licence acquisition, exploration and evaluation costs
and directly attributable administration costs are initially capitalised as intangible exploration and evaluation assets in
cost centres by well, field or exploration area, as appropriate. Borrowing costs are capitalised insofar as they relate to
qualifying assets.
These costs are then written off as exploration costs in the income statement unless commercial reserves have been
established (see below) or the determination process has not been completed and there are no indications of
impairment.
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, associated
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.
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.
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, depletion and amortisation
Depletion, depletion and amortisation is provided on oil and gas assets in production using the unit of production
method, which is the ratio of oil and gas production in the period to the estimated quantities of proven and probable
entitlement reserves at the end of the period plus the production in the period, generally on a field-by-field basis, or a
grouping of fields where those field are reliant on a common infrastructure. Costs used in the unit of production
calculation comprise the net book value of capitalised costs, together with estimated future development costs
required to recover the proven and probable reserves remaining. The effects of changes in estimates in the unit of
production calculations are accounted for prospectively.
Impairment of oil and gas assets
Where there has been a change in economic conditions that indicates a possible impairment in a discovery field, the
recoverability of the net book value relating to that field is assessed by comparison with the higher of fair value less
costs to sell or value in use. The value in use, is calculated as the estimated future cash flows based on management’s
expectations of future oil and gas prices and the future costs of developing and producing the proved and probable
reserves, discounted using a discount rate adjusted for the risk specific to each asset. Where there is evidence of
economic interdependency between fields, such as common infrastructure, the fields are grouped as a single cash-
generating unit for impairment purposes.
Any identified impairment is charged to the consolidated statement of income. Where conditions giving rise to
impairment subsequently reverse, the effect of the impairment charge is also reversed as a credit to the income
statement, net of any depletion, depreciation and amortisation that would have been charged since the impairment.