REG-Cadogan Petroleum: Annual Financial Report <Origin Href="QuoteRef">CADP.L</Origin> - Part 4
26/04/2016 14:10
- Part 4: For the preceding part double click ID:nPRrQ1408c
Purchases of property, plant and equipment (261) (1,611)
Purchases of intangible exploration and evaluation (281) (468)
assets
Proceeds from sale of property, plant and equipment 5 84
Interest received 118 852
Net cash used in investing activities (1,119) (4,167)
Financing activities
Proceeds from short-term borrowings 13,187 17,327
Repayments of short-term borrowings (12,225) -
Net cash from financing activities 962 17,327
Net increase/(decrease) in cash and cash 1,083 (7,483)
equivalents
Effect of foreign exchange rate changes (603) (74)
Cash and cash equivalents at beginning of year 48,927 56,484
Cash and cash equivalents at end of year 49,407 48,927
Consolidated Statement of Changes in Equity for the year ended 31 December 2015
Share Cumulative Non-controlling Total
capital Retained translation interest $'000
$'000 earnings reserves $'000
$'000 $'000
Reorgani-sation Equity
$'000 attributable
to owners of
the Company
As at 1 January 2014 13,337 282,871 (120,838) 1,589 176,959 339 177,298
Net loss for the year - (59,271) - - (59,271) (41) (59,312)
Other comprehensive loss - - (28,153) - (28,153) - (28,153)
Total comprehensive loss - (59,271) (28,153) - (87,424) (41) (87,465)
for the year
As at 1 January 2015 13,337 223,600 (148,991) 1,589 89,535 298 89,833
Net loss for the year - (23,261) - - (23,261) (22) (23,283)
Other comprehensive loss - - (11,521) - (11,521) - (11,521)
Total comprehensive loss - (23,261) (11,521) - (34,782) (22) (34,804)
for the year
As at 31 December 2015 13,337 200,339 (160,512) 1,589 54,753 276 55,029
Notes to the Consolidated Financial Statements
For the year ended 31 December 2015
1.General information
Cadogan Petroleum plc (the "Company", together with its subsidiaries the
"Group"), is registered in England and Wales under the Companies Act 2006. The
address of the registered office is c/o Bridgehouse Company Secretaries Ltd,
Unit 205, Clerkenwell Workshops, 31 Clerkenwell Close, London EC1R 0AT. The
nature of the Group's operations and its principal activities are set out in
the Operations Review on pages 8 to 9 and the Financial Review on pages 10 to
12.
2.Adoption of new and revised Standards
The accounting policies applied are consistent with those adopted and disclosed
in the Group financial statements for the year ended 31 December 2014, except
for changes arising from the adoption of the following new accounting
pronouncements which became effective in the current reporting period:
* Amendments to IAS 19 Employee Benefits: Defined Benefit Plans -Employee
Contributions.
* Annual Improvements to IFRSs 2010-2012 cycle
* Annual Improvements to IFRSs 2011-2013 cycle
The adoption of these new accounting pronouncements has not had a significant
impact on the accounting policies, methods of computation or presentation
applied by the Group. The Group has not early adopted any other amendment,
standard or interpretation that has been issued but is not yet effective. It is
expected that where applicable, these standards and amendments will be adopted
on each respective effective date.
New IFRS accounting standards, amendments and interpretations not yet adopted
The following new IFRS accounting standards in issue but not yet effective are
expected to have a significant impact on the Group:
IFRS 15 Revenue from Contracts with Customers
IFRS 15 will replace IAS 18 Revenue and IAS 11 Construction Contracts and
establishes a unified framework for determining the timing, measurement and
recognition of revenue. The principle of the new standard is to recognise
revenue as performance obligations are met rather than based on the transfer of
risks and rewards.
The effective date of the standard has been deferred to 1 January 2018 to allow
companies more time to deal with transitional issues of application.
The Group is currently reviewing the potential impact of adopting IFRS 15 with
the primary focus being understanding those sales contracts where the timing
and amount of revenue recognised could differ under IFRS 15, which may occur
for example if contracts with customers incorporate performance obligations not
currently recognised separately, or where such contracts incorporate variable
consideration. As the Group's revenue is predominantly derived from
arrangements in which the transfer of risks and rewards coincides with the
fulfilment of performance obligations, the timing and amount of revenue
recognised is unlikely to be materially affected for the majority of sales.
IFRS 15 also includes disclosure requirements including qualitative and
quantitative information about contracts with customers to help users of the
financial statements understand the nature, amount, timing and uncertainty of
revenue.
In addition to the potential accounting implications outlined above, the
implementation of IFRS 15 is expected to impact the Group's systems, processes
and controls. The Group will start developing a transition plan to identify and
implement the required changes during 2016.
IFRS 9 Financial Instruments
IFRS 9 will replace IAS 39 Financial Instruments: Recognition and Measurement
and addresses the following three key areas:
* Classification and measurement establishes a single, principles-based
approach for the classification of financial assets, which is driven by
cash flow characteristics and the business model in which an asset is held.
This is expected to have a number of presentational impacts on the Group
financial statements including changes in the presentation of gains and
losses on financial assets and liabilities carried at fair value on the
balance sheet.
* Impairment introduces a new 'expected credit loss' impairment model,
requiring expected credit losses to be recognised from when financial
instruments are first recognised. The transition to this model is expected
to result in changes in the systems and computational methods used by the
Group to assess receivables and similar assets for impairment. However,
given the profile of the Group's counterparty exposures, this is not
expected to have a material impact on the amounts recorded in the financial
statements.
* Hedge Accounting aligns the accounting treatment with risk management
practices of an entity, including making a broader range of exposures
eligible for hedge accounting and introducing a more principles-based
approach to assessing hedge effectiveness. The adoption of IFRS 9 will not
require changes to existing hedging arrangements but may provide scope to
apply hedge accounting to a broader range of transactions in the future.
IFRS 9 is effective for annual reporting periods beginning on or after 1
January 2018.
The Group's implementation activities to date have principally focused on
gaining a high level understanding of the likely effects of IFRS 9 given the
nature of financial instruments held by the Group. A more detailed impact
analysis and transition activities will be undertaken during 2016.
IFRS 16 Leases
IFRS 16 replaces the following standards and interpretations: IAS 17 Leases and
IFRIC 4 Determining whether an Arrangement contains a Lease. The new standard
provides a single lessee accounting model for the recognition, measurement,
presentation and disclosure of leases. IFRS 16 applies to all leases including
subleases and requires lessees to recognise assets and liabilities for all
leases, unless the lease term is 12 months or less, or the underlying asset has
a low value. Lessors continue to classify leases as operating or finance.
IFRS 16 was issued in January 2016 and applies to annual reporting periods
beginning on or after 1 January 2019. The Group will evaluate the potential
impact of IFRS 16 on the financial statements and performance measures. This
will include an assessment of whether any arrangements the Group enters into
will be considered a lease under IFRS 16.
Standards and Interpretations in issue but not effective
The following new amendments and interpretations in issue but not yet effective
are not expected to have a significant impact on the Group:
* Amendments to IAS 1 Presentation of Financial Statements: Disclosure
Initiative provides guidance on the use of judgement in presenting
financial statement information, including: the application of materiality;
order of notes; use of subtotals; accounting policy referencing and
disaggregation of financial and non-financial information.
* Amendments to IAS 27 Equity Method in Separate Financial Statements will
allow entities to use the equity method in their separate financial
statements to measure investments in subsidiaries, joint ventures and
associates.
* Amendments to IAS 16 Property, Plant and Equipment and IAS 38 Clarification
of Acceptable Methods of Depreciation clarify that a revenue based method
of depreciation or amortisation is generally not appropriate.
* Amendments to IFRS 10 Consolidated Financial Statements and IAS 28 Joint
Ventures: Sale or Contribution of Assets between an Investor and its
Associate or Joint Venture remove an inconsistency between the two
standards on the accounting treatment for gains and losses arising on the
sale or contribution of assets by an investor to its associate or joint
venture. Following the amendment, such gains and losses may only be
recognised to the extent of the unrelated investor's interest, except where
the transaction involves assets that constitute a business.
* Amendments to IFRS 11 Accounting for Acquisitions of Interests in Joint
Operations and IAS 28 Investments in Associates and Joint Ventures clarify
the accounting for the acquisition of an interest in a joint operation
where the activities of the operation constitute a business.
Other issued standards and amendments that are not yet effective are not
expected to have an impact on the financial statements.
3. Significant accounting policies
a) Basis of accounting
The financial statements have been prepared in accordance with International
Financial Reporting Standards ("IFRS") as issued by the International
Accounting Standards Board ("IASB") and as adopted by the European Union
("EU"), and therefore the Group financial statements comply with Article 4 of
the EU IAS Regulation.
The financial statements have been prepared on the historical cost convention
basis, except for share-based payments, accounting for the WGI transaction and
other financial assets and liabilities, which have been measured at fair values
and using accounting policies consistent with IFRS.
The principal accounting policies adopted are set out below:
b) Going concern
The Group's business activities, together with the factors likely to affect
future development, performance and position are set out in the Strategic
Report on pages 3 to 19. The financial position of the Group, its cash flow and
liquidity position are described in the Financial Review on pages 10 to 12.
The Group's cash balance at 31 December 2015 was $49.4 million (2014: $48.9
million) excluding $0.9 million (2014: $0.5 million) of Cadogan's share of cash
and cash equivalents in joint ventures. It includes $20 million of restricted
cash held in UK bank which represent security of borrowings (note 24). The
Directors believe that the funds available at the date of the issue of these
financial statements are sufficient for the Group to manage its business risks
successfully.
The Group's forecasts and projections, taking into account reasonably possible
changes in trading activities, operational performance, start dates and flow
rates for commercial production and the price of hydrocarbons sold to Ukrainian
customers, show that there are reasonable expectations that the Group will be
able to operate on funds currently held and those generated internally, for the
foreseeable future.
The Group continues to pursue its farm-out campaign, which, if successful, will
enable it to farm-out a portion of its interests in its oil and gas licences to
spread the risks associated with further exploration and development.
After making enquiries and considering the uncertainties described above, the
Directors have a reasonable expectation that the Company and the Group have
adequate resources to continue in operational existence for the foreseeable
future and consider the going concern basis of accounting to be appropriate
and, thus, they continue to adopt the going concern basis of accounting in
preparing the annual financial statements. In making its statement the
Directors have considered the recent political and economic situation in
Ukraine, as described further in the note 4 (e).
c) Basis of consolidation
The consolidated financial statements incorporate the financial statements of
the Company and entities controlled by the Company (its subsidiaries) made up
to 31 December each year. IFRS 10 defines control to be investor control over
an investee when it is exposed, or has rights, to variable returns from its
involvement with the investee and has the ability to control those returns
through its power over the investee.
The results of subsidiaries acquired or disposed of during the year are
included in the consolidated income statement from the effective date of
acquisition or up to the effective date of disposal, as appropriate. Where
necessary, adjustments are made to the financial statements of subsidiaries to
bring accounting policies used into line with those used by the Group. All
intra-group transactions, balances, income and expenses are eliminated on
consolidation.
Non-controlling interests in subsidiaries are identified separately from the
Group's equity therein. Those interests of non-controlling shareholders that
are present ownership interests entitling their holders to a proportionate
share of net assets upon liquidation may be initially measured at fair value or
at the non-controlling interests' proportionate share of the fair value of the
acquiree's identifiable net assets. The choice of measurement is made on an
acquisition-by-acquisition basis. Other non-controlling interests are initially
measured at fair value.
Subsequent to acquisition, the carrying amount of non-controlling interests is
the amount of those interests at initial recognition plus the non-controlling
interests' share of subsequent changes in equity. Total comprehensive income is
attributed to non-controlling interests even if this results in the
non-controlling interests having a deficit balance.
Changes in the Group's interests in subsidiaries that do not result in a loss
of control are accounted for as equity transactions. The carrying amount of the
Group's interests and the non-controlling interests are adjusted to reflect the
changes in their relative interests in the subsidiaries. Any difference between
the amount by which the non-controlling interests are adjusted and the fair
value of the consideration paid or received is recognised directly in equity
and attributed to the owners of the Company.
When the Group loses control of a subsidiary, the profit or loss on disposal is
calculated as the difference between (i) the aggregate of the fair value of the
consideration received and the fair value of any retained interest and (ii) the
previous carrying amount of the assets (including goodwill), less liabilities
of the subsidiary and any non-controlling interests. Amounts previously
recognised in other comprehensive income in relation to the subsidiary are
accounted for (i.e. reclassified to profit or loss or transferred directly to
retained earnings) in the same manner as would be required if the relevant
assets or liabilities are disposed of. The fair value of any investment
retained in the former subsidiary at the date when control is lost is regarded
as the fair value on initial recognition for subsequent accounting under IAS 39
Financial Instruments: Recognition and Measurement or, when applicable, the
costs on initial recognition of an investment in an associate or jointly
controlled entity.
d) Business combinations
The acquisition of subsidiaries is accounted for using the acquisition method.
The cost of the acquisition is measured at the aggregate of the fair values, at
the date of exchange, of assets given, liabilities incurred or assumed, and
equity instruments issued in exchange for control of the acquiree.
Acquisition-related costs are recognised in profit or loss as incurred. The
acquiree's identifiable assets, liabilities and contingent liabilities that
meet the conditions for recognition under IFRS 3 Business Combinations are
recognised at their fair value at the acquisition date, except for non-current
assets (or disposal groups) that are classified as held for resale in
accordance with IFRS 5 Non-Current Assets held for sale and Discontinued
Operations. These are recognised and measured at fair value less costs to sell.
e) Investments in joint ventures
A joint venture is a joint arrangement whereby the parties that have joint
control of the arrangement have rights to the net assets of the arrangement. A
joint venture firm recognises its interest in a joint venture as an investment
and shall account for that investment using the equity method in accordance
with IAS 28 Investments in Associates and Joint Ventures.
Under the equity method, the investment is carried on the balance sheet at cost
plus changes in the Group's share of net assets of the entity, less
distributions received and less any impairment in value of the investment. The
Group Consolidated Income Statement reflects the Group's share of the results
after tax of the equity-accounted entity, adjusted to account for depreciation,
amortisation and any impairment of the equity accounted entity's assets. The
Group Statement of Comprehensive Income includes the Group's share of the
equity-accounted entity's other comprehensive income.
Financial statements of equity-accounted entities are prepared for the same
reporting year as the Group. The Group assesses investments in equity-accounted
entities for impairment whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. If any such indication of
impairment exists, the carrying amount of the investment is compared with its
recoverable amount, being the higher of its fair value less costs of disposal
and value in use. If the carrying amount exceeds the recoverable amount, the
investment is written down to its recoverable amount.
The Group ceases to use the equity method of accounting from the date on which
it no longer has joint control over the joint venture or significant influence
over the associate, or when the interest becomes classified as an asset held
for sale.
f) Revenue recognition
Revenue is measured at the fair value of the consideration received or
receivable and represents amounts receivable for hydrocarbon products and
services provided in the normal course of business, net of discounts, value
added tax ('VAT') and other sales-related taxes. Sales of hydrocarbons are
recognised when the title has passed. Revenue from services is recognised in
the accounting period in which services are rendered. The main types of
services provided by the Group are drilling and civil works services.
Interest income is accrued on a time basis, by reference to the principal
outstanding and at the effective interest rate applicable, which is the rate
that exactly discounts estimated future cash receipts through the expected life
of the financial asset to that asset's net carrying amount on initial
recognition.
To the extent that revenue arises from test production during an evaluation
programme, an amount is charged from evaluation costs to cost of sales, so as
to reflect a zero net margin.
g) Foreign currencies
The individual financial statements of each Group company are presented in the
currency of the primary economic environment in which it operates (its
functional currency). The functional currency of the Company is pounds
sterling. For the purpose of the consolidated financial statements, the results
and financial position of each Group company are expressed in US dollars, which
is the presentation currency for the consolidated financial statements.
In preparing the financial statements of the individual companies, transactions
in currencies other than the functional currency of each Group company
('foreign currencies') are recorded in the functional currency at the rates of
exchange prevailing on the dates of the transactions. At each balance sheet
date, monetary assets and liabilities that are denominated in foreign
currencies are retranslated into the functional currency at the rates
prevailing on the balance sheet date. Non-monetary assets and liabilities
carried at fair value that are denominated in foreign currencies are translated
at the rates prevailing at the date when the fair value was determined.
Non-monetary items that are measured in terms of historical cost in a foreign
currency are not retranslated. Foreign exchange differences on cash and cash
equivalents are recognised in operating profit or loss in the period in which
they arise.
Exchange differences are recognised in the profit or loss in the period in
which they arise except for exchange differences on monetary items receivable
from or payable to a foreign operation for which settlement is neither planned
nor likely to occur. This forms part of the net investment in a foreign
operation which is recognised in the foreign currency translation reserve and
in profit or loss on disposal of the net investment.
For the purpose of presenting consolidated financial statements, the results
and financial position of each entity of the Group are translated into US
dollars as follows:
* assets and liabilities of the Group's foreign operations are translated at
the closing rate on the balance sheet date;
* income and expenses are translated at the average exchange rates for the
period, unless exchange rates fluctuate significantly during that period,
in which case the exchange rates at the date of the transactions are used;
and
* all resulting exchange differences arising, if any, are recognised in other
comprehensive income and accumulated equity (attributed to non-controlling
interests as appropriate), transferred to the Group's translation reserve.
Such translation differences are recognised as income or as expenses in the
period in which the operation is disposed of.
Goodwill and fair value adjustments arising on the acquisition of a foreign
entity are treated as assets and liabilities of the foreign entity and
translated at the closing rate.
The relevant exchange rates used were as follows:
Year ended 31 December 2015 Year ended 31 December 2014
GBP/USD USD/UAH GBP/USD USD/UAH
Closing rate 1.4805 24.2731 1.5534 16.0960
Average rate 1.5289 22.0584 1.6481 12.1705
h) Taxation
The tax expense represents the sum of the tax currently payable and deferred
tax.
The tax currently payable is based on taxable profit for the year. Taxable
profit differs from net profit as reported in the consolidated income statement
because it excludes items of income or expense that are taxable or deductible
in other years and it further excludes items that are never taxable or
deductible. The Group's liability for current tax is calculated using tax rates
that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is the tax expected to be payable or recoverable on differences
between the carrying amounts of assets and liabilities in the financial
statements and the corresponding tax bases used in the computation of taxable
profit. This is accounted for using the balance sheet liability method.
Deferred tax liabilities are generally recognised for all taxable temporary
differences and deferred tax assets are recognised to the extent that it is
probable that taxable profits will be available against which deductible
temporary differences can be utilised. Such assets and liabilities are not
recognised if the temporary difference arises from the initial recognition of
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. Deferred tax liabilities are
recognised for taxable temporary differences arising on investments in
subsidiaries and associates, and interests in joint ventures, except where the
Group is able to control the reversal of the temporary difference and it is
probable that the temporary difference will not reverse in the foreseeable
future.
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 is calculated at the tax rates that are expected to
apply in the period when the liability is settled or the asset is realised.
Deferred tax is charged or credited in the income statement, except when it
relates to items charged or credited in other comprehensive income, in which
case the deferred tax is also dealt with in other comprehensive income.
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.
i) Other property, plant and equipment
Property, plant and equipment ('PP&E') are carried at cost less accumulated
depreciation and any recognised impairment loss. Depreciation and amortisation
is charged so as to write-off the cost or valuation of assets, other than land,
over their estimated useful lives, using the straight-line method, on the
following bases:
Buildings 4%
Fixtures and equipment 10% to 30%
The gain or loss arising on the disposal or retirement of an asset is
determined as the difference between the sales proceeds and the carrying amount
of the asset and is recognised in income.
j) Impairment of development and production assets and other property, plant
and equipment
At each balance sheet date, the Group reviews the carrying amounts of its PP&E
to determine whether there is any indication that those assets have suffered an
impairment loss. If any such indication exists, the recoverable amount of the
asset is estimated in order to determine the extent of the impairment loss (if
any). Where the asset does not generate cash flows that are independent from
other assets, the Group estimates the recoverable amount of the cash-generating
unit to which the asset belongs. The recoverable amount is the higher of fair
value less costs to sell and value in use. In assessing value in use, the
estimated future cash flows are discounted to their present value using a
pre-tax discount rate that reflects current market assessments of the time
value of money and the risks specific to the asset for which the estimates of
future cash flows have not been adjusted.
If the recoverable amount of an asset (or cash-generating unit) is estimated to
be less than its carrying amount, the carrying amount of the asset
(cash-generating unit) is reduced to its recoverable amount. An impairment loss
is recognised as an expense immediately.
Where an impairment loss subsequently reverses, the carrying amount of the
asset (cash-generating unit) is increased to the revised estimate of its
recoverable amount, but so that the increased carrying amount does not exceed
the carrying amount that would have been determined had no impairment loss been
recognised for the asset (cash-generating unit) in prior years. A reversal of
an impairment loss is recognised as income immediately.
k) Intangible exploration and evaluation assets
The Group applies the modified full cost method of accounting for intangible
exploration and evaluation ('E&E') expenditure which complies with requirement
set out in IFRS 6 Exploration for and Evaluation of Mineral Resources. Under
the modified full cost method of accounting, expenditure made on exploring for
and evaluating oil and gas properties is accumulated and initially capitalised
as an intangible asset, by reference to appropriate cost centres being the
appropriate oil or gas property. E&E assets are then assessed for impairment on
a geographical cost pool basis.
E&E assets comprise costs of (i) E&E activities which are in progress at the
balance sheet date, but where the existence of commercial reserves has yet to
be determined (ii) E&E expenditure which, whilst representing part of the E&E
activities associated with adding to the commercial reserves of an established
cost pool, did not result in the discovery of commercial reserves.
Costs incurred prior to having obtained the legal rights to explore an area are
expensed directly to the income statement as incurred.
Exploration and Evaluation costs
E&E expenditure is initially capitalised as an E&E asset. Payments to acquire
the legal right to explore, costs of technical services and studies, seismic
acquisition, exploratory drilling and testing are also capitalised as
intangible E&E assets.
Tangible assets used in E&E activities (such as the Group's vehicles, drilling
rigs, seismic equipment and other property, plant and equipment) are normally
classified as PP&E. However, to the extent that such assets are consumed in
developing an intangible E&E asset, the amount reflecting that consumption is
recorded as part of the cost of the intangible asset. Such intangible costs
include directly attributable overheads, including the depreciation of PP&E
items utilised in E&E activities, together with the cost of other materials
consumed during the exploration and evaluation phases.
E&E assets are not amortised prior to the conclusion of appraisal activities.
Treatment of E&E assets at conclusion of appraisal activities
Intangible E&E assets related to each exploration property are carried forward,
until the existence (or otherwise) of commercial reserves has been determined.
If commercial reserves have been discovered, the related E&E assets are
assessed for impairment on individual assets basis as set out below and any
impairment loss is recognised in the income statement. Upon approval of a
development programme, the carrying value, after any impairment loss, of the
relevant E&E assets is reclassified to the development and production assets
within PP&E.
Intangible E&E assets that relate to E&E activities that are determined not to
have resulted in the discovery of commercial reserves remain capitalised as
intangible E&E assets at cost less accumulated amortisation, subject to meeting
a pool-wide impairment test in accordance with the accounting policy for
impairment of E&E assets set out below.
Impairment of E&E assets
E&E assets are assessed for impairment when facts and circumstances suggest
that the carrying amount may exceed its recoverable amount. Such indicators
include, but are not limited to, those situations outlined in paragraph 20 of
IFRS 6 Exploration for and Evaluation of Mineral Resources and include the
point at which a determination is made as to whether or not commercial reserves
exist.
Where there are indications of impairment, the E&E assets concerned are tested
for impairment. Where the E&E assets concerned fall within the scope of an
established full cost pool, they are tested for impairment together with all
development and production assets associated with that cost pool, as a single
cash generating unit.
The aggregate carrying value of the relevant assets is compared against the
expected recoverable amount of the pool, generally by reference to the present
value of the future net cash flows expected to be derived from production of
commercial reserves from that pool. Where the assets fall into an area that
does not have an established pool or if there are no producing assets to cover
the unsuccessful exploration and evaluation costs, those assets would fail the
impairment test and be written off to the income statement in full.
Impairment losses are recognised in the income statement as additional
depreciation and amortisation and are separately disclosed.
Reclassification from development and production assets back to exploration and
evaluation
Where development efforts are unsuccessful in the target geological formation
of the licence area but the Company see a potential for oil and gas discoveries
in other geological formations of the same licence area, reclassification of
recoverable amount of assets from development and production assets back to
exploration and evaluation is appropriate following the impermanent assessment.
l) Development and production assets
Development and production assets are accumulated on a field-by-field basis and
represent the cost of developing the commercial Reserves discovered and
bringing them into production, together with E&E expenditures incurred in
finding commercial Reserves transferred from intangible E&E assets.
The cost of development and production assets comprises the cost of
acquisitions and purchases of such assets, directly attributable overheads,
finance costs capitalised, and the cost of recognising provisions for future
restoration and decommissioning.
Depreciation of producing assets
Depreciation is calculated on the net book values of producing assets on a
field-by-field basis using the unit of production method. The unit of
production method refers to the ratio of production in the reporting year as a
proportion of the Proved and Probable Reserves of the relevant field, taking
into account future development expenditures necessary to bring those Reserves
into production.
Producing assets are generally grouped with other assets that are dedicated to
serving the same Reserves for depreciation purposes, but are depreciated
separately from producing assets that serve other Reserves.
m) Inventories
Oil and gas stock and spare parts are stated at the lower of cost and net
realisable value. Costs comprise direct materials and, where applicable, direct
labour costs and those overheads that have been incurred in bringing the
inventories to their present location and condition. Cost is allocated using
the weighted average method. Net realisable value represents the estimated
selling price less all estimated costs of completion and costs to be incurred
in marketing, selling and distribution.
n) Financial instruments
Recognition of financial assets and financial liabilities
Financial assets and financial liabilities are recognised on the Group's
balance sheet when the Group becomes a party to the contractual provisions of
the instrument.
Derecognition of financial assets and financial liabilities
The Group derecognises a financial asset only when the contractual rights to
cash flows from the asset expire; or it transfers the financial asset and
substantially all the risks and rewards of ownership of the asset to another
entity. If the Group neither transfers nor retains substantially all the risks
and rewards of ownership and continues to control the transferred asset, the
Group recognises its retained interest in the asset and an associated liability
for the amount it may have to pay. If the Group retains substantially all the
risks and rewards of ownership of a transferred financial asset, the Group
continues to recognise the financial asset and also recognises a collateralised
borrowing for the proceeds received.
The Group derecognises financial liabilities when the Group's obligations are
discharged, cancelled or expired.
Financial assets
The Group classifies its financial assets in the following categories: loans
and receivables; available-for-sale financial assets; held to maturity
investments; and financial assets at fair value through profit or loss
("FVTPL"). The classification depends on the purpose for which the financial
assets were acquired. Management determines the classification of its
financial assets at initial recognition and re-evaluates this designation at
every reporting date.
Loans and receivables are non-derivative financial assets with fixed or
determinable payments that are not quoted in an active market. They are
included in current assets, except for those with maturities greater than
twelve months after the balance sheet date which will then be classified as
non-current assets. Loans and receivables are classified as "other receivables"
and "cash and cash equivalents" in the balance sheet.
Trade and other receivables
Trade and other receivables are measured at initial recognition at fair value,
and are subsequently measured at amortised cost using the effective interest
rate method.
Cash and cash equivalents
Cash and cash equivalents comprise cash on hand, on-demand deposits, and other
short-term highly liquid investments that are readily convertible to a known
amount of cash with three months or less remaining to maturity and are subject
to an insignificant risk of changes in value.
Restricted cash balances represent components of cash and cash equivalents that
are not available for use by the Group.
Financial assets at FVTPL
Financial assets at FVTPL are stated at fair value, with any gains or losses
arising on remeasurement recognised in pro?t or loss which is included in the
'Other gains and losses' line item in the consolidated income statement.
Impairment of financial assets
Financial assets, other than those at FVTPL, are assessed for indicators of
impairment at each balance sheet date. Appropriate allowances for estimated
irrecoverable amounts are recognised in profit or loss when there is objective
evidence that the asset is impaired. The allowance recognised is measured as
the difference between the asset's carrying amount of the financial asset and
the present value of estimated future cash flows discounted at the effective
interest rate computed at initial recognition.
Evidence of impairment could include:
* significant financial difficulty of the issuer or counterparty;
* default or delinquency in interest or principal payments; or
* it becoming probable that the borrower will enter bankruptcy or financial
re-organisation.
For certain categories of financial assets, such as trade receivables, assets
that are assessed not to be impaired individually are, in addition, assessed
for impairment on a collective basis.
The carrying amount of the financial assets is reduced by the impairment loss
directly for all financial assets with the exception of trade receivables,
where the carrying amount is reduced through the use of an allowance account.
Subsequent recoveries of amounts previously written off are credited against
the allowance account. Changes in the carrying amount of the allowance account
are recognised in profit or loss.
If, in a subsequent period, the amount of the impairment loss decreases and the
decrease can be related objectively to an event occurring after the impairment
was recognised, the previously recognised impairment loss is reversed through
profit or loss to the extent that the carrying amount of the investment at the
date the impairment is reversed does not exceed what the amortised cost would
have been had the impairment not been recognised.
Financial liabilities
Financial liabilities are classi?ed as either ?nancial liabilities 'at FVTPL'
or 'other ?nancial liabilities'
Financial liabilities at FVTPL
Financial liabilities at FVTPL are stated at fair value, with any resultant
gain or loss recognised in profit or loss and is included in the 'Other gains
and losses' line item in the income statement. Fair value is determined in the
manner described in note 28.
Trade payables and short-term borrowings
Trade payables and short-term borrowings are initially measured at fair value,
and are subsequently measured at amortised cost, using the effective interest
rate method.
o) Provision
Provisions are recognised when the Group has a present obligation (legal or
constructive) as a result of a past event, it is probable that the Group will
be required to settle that obligation and a reliable estimate can be made of
the amount of the obligation. The amount recognised as a provision is the best
estimate of the consideration required to settle the present obligation at the
balance sheet date, taking into account the risks and uncertainties surrounding
the obligation. When a provision is measured using the cash flows estimated to
settle the present obligation, its carrying amount is the present value of
those cash flows.
p) Decommissioning
A provision for decommissioning is recognised in full when the related
facilities are installed. The decommissioning provision is calculated as the
net present value of the Group's share of the expenditure expected to be
incurred at the end of the producing life of each field in the removal and
decommissioning of the production, storage and transportation facilities
currently in place. The cost of recognising the decommissioning provision is
included as part of the cost of the relevant asset and is thus charged to the
income statement on a unit of production basis in accordance with the Group's
policy for depletion and depreciation of tangible non-current assets. Period
charges for changes in the net present value of the decommissioning provision
arising from discounting are included within finance costs.
4. Critical accounting judgements and key sources of estimation uncertainty
In the application of the Group's accounting policies, which are described in
note 3, the Directors are required to make judgements, estimates and
assumptions about the carrying amounts of the 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 the current and
future periods.
The following are the critical judgements and estimates that the Directors have
made in the process of applying the Group's accounting policies and that have
the most significant effect on the amounts recognised in the financial
statements:
a) Impairment of E&E
The outcome of ongoing exploration, and therefore the recoverability of the
carrying value of intangible exploration and evaluation assets, is inherently
uncertain. Management makes the judgements necessary to implement the Group's
policy with respect to exploration and evaluation assets and considers these
assets for impairment at least annually with reference to indicators in IFRS 6.
b) Impairment of development and production assets
IAS 36 Impairment of Assets require that a review for impairment to be carried
out if events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable.
Management assessed whether any impairment triggers were present at 31 December
2015 and concluded that there were no impairment indicators for the PP&E assets
of the Group.
c) Impairment of investment in joint ventures
The Group's investments in joint ventures are accounted for using the equity
method. The carrying value of the Group's investments is reviewed at each
balance sheet date. This review requires estimation of the future cash flows
expected to be received by the Group mainly from the joint ventures'
exploration and evaluation assets. As of 31 December 2015 exploration and
evaluation assets of the joint venture entity LLC Industrial Company
Gazvydobuvannya have been assessed for impairment through calculation of the
recoverable amount as a fair value less cost to sell. As a result impairment
has been recognised in the accounts of the joint venture and the Group's share
was included in the consolidated financial statements as share of losses in
joint ventures. Further details are provided in note 19.
Assessment of political and economic situation in Ukraine impact on Group
operations
In 2015, an armed conflict with separatists continued in certain parts of
Luhansk and Donetsk regions, and a peaceful resolution of the conflict did not
occur as it was foreseen by the Minsk agreements. In 2015, the Ukrainian
economy was going through a recession, a gross domestic product has contracted
by 10% (2014: 7%), and an annual inflation rate reached 43% (2014: 25%).
Unfavourable conditions on markets where Ukraine's primary commodities where
traded were influencing further devaluation of the Ukrainian Hryvnia against
major foreign currencies. The Ukrainian companies and banks continued to
suffer from lack of funding from domestic and international financial markets.
The National Bank of Ukraine (the "NBU") extended its range of measures that
were introduced in 2014 and aimed at limiting the outflow of foreign currency
from the country, inter alia, a mandatory sale of foreign currency earnings,
certain restrictions on purchases of foreign currencies on the interbank market
and on usage of foreign currencies for settlement purposes, limitations on
remittances abroad.
In early 2015, the Government of Ukraine agreed with the IMF a four-year
program for USD 17.5 billion loan aimed at supporting the economic
stabilization of Ukraine. The program defines economic reforms that must be
undertaken by the Government of Ukraine to reinstate a sustainable economic
growth in the mid-term perspective. In 2015, political and economic
relationships between Ukraine and the Russian Federation remained strained that
led to a significant reduction in trade and economic cooperation. On 1 January
2016, a free-trade element of Ukraine's association agreement with the European
Union is coming into force. In late 2015, the Russian Federation denounced the
free trade zone agreement with Ukraine and further trade restrictions were
announced by both countries.
Stabilization of the economic and political situation depends, to a large
extent, upon the ability of the Ukrainian Government to continue reforms and
the efforts of the NBU to further stabilize the banking sector, as well as upon
the ability of the Ukrainian economy in general to respond adequately to
changing markets. Nevertheless, further economic and political developments,
as well as the impact of the above factors on the Group, its customers, and
contractors are currently difficult to predict.
Management is monitoring how the political and economic situation may affect
the Group operations, and has considered whether adjustments are required to
the carrying values of assets and the appropriateness of the going concern
assumption. As a result management have concluded that there were no
significant adverse consequences in relation to the Group's operations, cash
flows and assets that impact the 2015 financial statements, apart from
continuous uncertainty related to key assumptions used by management in
assessment of the recoverable amount of production assets as described above.
Management noted that none of the Group's assets are located in areas of
current conflict. Though not predictable and quite improbable, any further
escalations of the political crisis may impact the Group's normal business
activities, and increase the risks relating to its business operations,
financial status and maintenance of its Ukrainian production licences.
5. Segment information
Segment information is presented on the basis of management's perspective and
relates to the parts of the Group that are defined as operating segments.
Operating segments are identified on the basis of internal reports provided to
the Group's chief operating decision maker ("CODM"). The Group has identified
its top management team as its CODM and the internal reports used by the top
management team to oversee operations and make decisions on allocating
resources serve as the basis of information presented. These internal reports
are prepared on the same basis as these consolidated financial statements.
Segment information is analysed on the basis of the type of activity, products
sold or services provided.
The majority of the Group's operations are located within Ukraine.
Segment information is analysed on the basis of the types of goods supplied by
the Group's operating divisions. The Group's reportable segments under IFRS 8
are therefore as follows:
Exploration and Production
* E&P activities on the production licences for natural gas, oil and
condensate
Service
* Drilling services to exploration and production companies
* Civil works to exploration and production companies
Trading
* Import of natural gas and diesel from European countries
* Local purchase and sales of natural gas operations with physical delivery
of natural gas
The accounting policies of the reportable segments are the same as the Group's
accounting policies described in Note 3. Sales between segments are carried out
at market prices. The segment result represents operating profit under IFRS
before unallocated corporate expenses. Unallocated corporate expenses include
management remuneration, representative expenses and expenses incurred in
respect of the maintenance of office premises. This is the measure reported to
the CODM for the purposes of resource allocation and assessment of segment
performance.
The Group does not present information on segment assets and liabilities as the
CODM does not review such information for decision-making purposes.
As of 31 December 2015 and for the year then ended the Group's segmental
information was as follows:
Exploration Service Trading Consolidated
and
Production
$'000 $'000 $'000 $'000
Sales of hydrocarbons 521 - 74,565 75,086
Other revenue - 354 - 354
Sales between segments 1,314 - (1,314) -
Total revenue 1,835 354 73,251 75,440
Cost of sales (1,932) (250) (67,380) (69,562)
Administrative expenses (548) - (641) (1,189)
Interest on short-term - - (2,411) (2,411)
borrowings (Note 13)
Segment results (645) 104 2,819 2,278
Unallocated administrative - - - (4,926)
expenses
Other income, net - - - 1,235
Impairment(1) - - - (10,480)
Share of losses in joint - - - (12,844)
ventures(2)
Net foreign exchange gains - - - 2,494
Loss before tax (22,243)
(1) Impairment loss recognised in 2015 of $10.3 million related to exploration
and production segment.
(2) Share of losses in joint ventures includes $9.1 million of impairment loss
that relates to exploration and production segment.
As of 31 December 2014 and for the year then ended the Group's segmental
information was as follows:
Exploration Service Trading Consolidated
and
Production
$'000 $'000 $'000 $'000
Sales of hydrocarbons 1,291 - 30,253 31,544
Other revenue - 846 233 1,079
Sales between segments 1,077 - (1,077) -
Total revenue 2,368 846 29,409 32,623
Cost of sales (2,579) (386) (26,848) (29,813)
Administrative expenses (1,347) - (379) (1,726)
Interest on short-term - -
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