27th Sep 2005 07:01
JKX Oil & Gas PLC27 September 2005 First Time Adoption and Restatement of 2004 results under International Financial Reporting Standards Restatement of 2004 results under IFRS JKX Oil & Gas plc (JKX) announces the impact of the transition to the EuropeanUnion (EU) endorsed International Financial Reporting Standards ("IFRS") on theGroup's 2004 results, for both the full year and the half year, withexplanations as to what adjustments have been made. Previously the Groupprepared its financial statements under UK Generally Accepted AccountingPrinciples ("UK GAAP"). As reported in the 2004 Annual Report and in accordance with EU regulations, theGroup will adopt IFRS with effect from 1 January 2005. The Group will reportunder IFRS for the first time at its Interim Results for the six months ended 30June 2005, which are also being announced today, September 27 2005. The firstfull year results to be reported under IFRS will be for the year ended 31December 2005. These interim and final results will include, as comparatives,the restatements under IFRS published today, provided there are no significantchanges to the Standards effective for 2005.The principal adjustments in changing from UK GAAP to IFRS are in the followingstandards: • IFRS 2 - Share-based payment • IAS 10 - Events after the balance sheet date • IAS 12 - Income taxes • IAS 16 - Property, plant and equipment • IAS 21 - Effects of changes in foreign exchange rates The principal changes to the financial information for the year ended 31December 2004 are summarised in the table below: UK GAAP Effects of transition IFRS $000 $000 $000Income statementRevenue 46,594 - 46,594Gross profit 28,167 (114) 28,053Operating profit 23,648 (267) 23,381Profit before tax 23,666 (267) 23,399 Cents Cents CentsEarnings per share - basic 14.08 (0.35) 13.73Earnings per share - diluted 13.40 (0.33) 13.07 UK GAAP Effects of transition IFRS $000 $000 $000Balance sheetNet assets 100,253 73 100,326 1. Introduction The Council of the European Union announced in June 2002 that listed companiesin Europe would be required to adopt IFRS for accounting periods beginning on orafter 1 January 2005. In line with this requirement, the Group has adopted IFRSas its accounting basis from the beginning of 2005. The adoption of IFRS will befirst reflected in the Group's financial statements for the six months ended 30June 2005 (un-audited).This news release sets out how the adoption of IFRS affects the 2004 results andthe financial position of the Group previously reported under UK GAAP. Thisdocument includes: • A summary and explanation of the adjustments arising from IFRS; • Details of the basis of preparation of the financial statements under IFRS; • IFRS consolidated financial information (income statement, balance sheet and cashflow statement) for the year ended 31 December 2004 excluding the impact of IAS 32 and IAS 39; • IFRS consolidated financial information for the six months ended 30 June 2004 excluding the impact of IAS 32 and IAS 39; • IFRS consolidated balance sheet as at 1 January 2004, the opening balance sheet, excluding the impact of IAS 32 and IAS 39; and • Accounting Policies under IFRS. The IFRS consolidated balance sheet as at 1 January 2004 and the financialinformation for the year ended 31 December 2004 have been audited by Ernst &Young LLP. The audit report addressed to the Directors of JKX, is publishedherewith. 2. Analysis of Key Impacts of IFRS on Group Results IFRS 2 - Share-based PaymentsThe Group applied IFRS 2 to its executive share options that remainedoutstanding at 1 January 2005 except the share options granted before 7 November2002. Under UK GAAP no adjustment was made to the financial statements when optionswere granted as under the 2001 executive share option scheme the options weregranted at an exercise price equal to market value. Adjustments were made to thefinancial statements only when the options were exercised. IFRS 2 requires such share based payments by the Group to employees to be fairvalued at grant date using an option pricing model and charged through theincome statement over the vesting period of the relevant awards. The accountingchange has reduced profit by $153,000 in the year ended 31 December 2004 and by$66,000 in the six months ended 30 June 2004.IAS 10 - Events after the balance sheet dateProposed dividends have been recognised in the period when approved or declaredand not in the period they relate to. IAS 12 - Income TaxesIAS 12 requires that deferred tax is recognised on temporary differences arisingbetween tax bases of assets and liabilities and their carrying amounts in thefinancial statements. Deferred tax assets are recognised to the extent that itis probable that future taxable profit will be available against which thetemporary differences can be utilised. Under UK GAAP, the Group recogniseddeferred taxation only on timing differences that arose from the inclusion ofgains and losses in tax assessments in periods different from those in whichthey were recognised in the financial statements. The impact on the taxation charge for the full year ended 31 December 2004 is areduction in the income statement of $226,000 and for the half year to 30 June2004 there is an increase of $362,000. At first time adoption on 1 January 2004there is an increase in deferred tax of $959,000 in the balance sheet due toforeign exchange differences and the recognition of a temporary difference on anasset impairment provision. IAS 16 - Property, Plant and EquipmentUnder UK GAAP the Group applied the 'successful efforts' accounting policy whichrequired all costs associated with unsuccessful exploration and pre-licencecosts to be written off to the Profit and Loss Account. The Group has elected tocontinue its existing policy for such activities as permitted under IFRS 6 -Exploration for and Evaluation of Mineral Resources and so no adjustments arerequired. Under UK GAAP the Group's oil and gas properties were depreciated with referenceto the aggregate production and reserves of the fields of which they areconsidered to form a part (the unit of production method). A field was defined,in accordance with the UK Statement of Recommended Practice (SORP) as an areaconsisting of a single reservoir or multiple reservoirs all grouped on orrelated to the same individual geological structural feature and/orstratigraphic condition. Under IAS 16 each component part of an item of property, plant and equipmenttypically those with a cost that is significant in relation to the total cost ofthe item shall be depreciated separately. Consequently certain fields andrelated infrastructure are required to be analysed into components and therelated assets depreciated, mainly using the UOP method over the reserves thatthe assets specifically serve. Compressors have been identified separately andconsidered to have a 10 year life, these are being depreciated on a straightline basis. The overall effect of this adjustment is to increase thedepreciation charge, net of deferred tax, by $114,000 in the year ended 31December 2004 and by $57,000 in the six months ended 30 June 2004. Although anincrease in depreciation can be seen in these re-statements, the depreciationcharge in future periods will be reduced accordingly as this timing differenceunwinds. IAS 21 - Effects of changes in foreign exchange ratesIn adopting IFRS, JKX has assessed the more detailed requirements under IAS 21on foreign currencies and this has resulted in JKX Oil & Gas plc and JKX ItaliaLtd changing their functional currencies to Pounds Sterling and the Eurorespectively. In JKX Italia Ltd this has the effect of increasing the intangibleassets by $499,000 in the year ended 31 December 2004 and by $273,000 in the sixmonths ended 30 June 2004. 3. Basis of Preparation The consolidated financial information for the six months ended 30 June 2004 andthe year ended 31 December 2004 and the opening balance sheet at 1 January 2004have been prepared using policies in accordance with IFRS for the first-time.The rules for first-time adoption of applying IFRS are set out in IFRS 1 -First-time adoption of International Financial Reporting Standards. IFRS 1states that a company should use the same accounting policies in its openingbalance sheet and throughout all periods presented in its first IFRS financialstatements. The Standard requires these policies to comply with IFRSs effectiveat the reporting date of the first published financial statements (31 December2005) under IFRS. The International Standards adopted by the Group are subject to ongoing reviewand endorsement by the EU and possible amendment by interpretive guidance fromthe International Financial Reporting Interpretations Committee ("IFRIC") andthe accounting profession. The IFRS information presented in this document hasbeen prepared on the basis of current interpretations of standards. Where the Group's UK GAAP financial information was based on estimates, the sameestimates have been applied in preparing the IFRS financial information. WhereIFRS requires estimates that were not previously required under UK GAAP, theyhave been based only on those factors existing on the relevant balance sheetdate. This is consistent with treating information received after the balancesheet date as non adjusting events under IAS 10 - Events after the Balance SheetDate. Estimates not previously required under UK GAAP primarily relate tofinancial instruments, embedded derivatives and share-based payments. IFRS 1 allows exemptions from the application of certain IFRS's to assistcompanies with the transition process. Accordingly the Group has made thefollowing first time accounting policy choices: • IFRS 2 - Share-based Payments is applied to all share based awards made after 7 November 2002 that did not vest before 1 January 2005 • IFRS 3 - Business combinations prior to 1 January 2004 have not been restated • IAS 32 - Financial Instruments: Disclosure and Presentation, and IAS 39 - Financial Instruments: Recognition and Measurement, will be applied prospectively from 1 January 2005 and as such the 2004 restated information presented excludes adjustments required on adoption of these Standards With the adoption of IAS 32 and IAS 39 under the new accounting policies theGroup will have to recognise a liability and an equity component for convertibleloan notes which are regarded as compound instruments. The fair value of theliability component is estimated using the prevailing market interest rate forsimilar non-convertible debt. The difference between the net proceeds of issueof the convertible loan notes and the fair value assigned to the liabilitycomponent, representing the embedded option to convert the liability into equityof the Group, is included in equity (capital reserves). The Group, as a first time adopter, has adopted early (with effect from 1January 2004) the following Standard that is not mandatory as at 31 December2005, the reporting date of the Group's first IFRS financial statements. Thefinancial statements to 31 December 2004 are prepared under the previousaccounting policies. • IFRS 6 - Exploration for and Evaluation of Mineral Resources. The Standard provides for the continuance of the Group's existing policy of successful efforts for exploration and evaluation expenditure and accordingly the Group has elected to adopt IFRS 6. The financial statements have been prepared under the historical costconvention. Group Income Statement for the year ended 31 December 2004 -------- $000's--------------------------------------------- --------Revenue 46,594--------------------------------------------- --------Cost of sales (18,541)--------------------------------------------- --------Gross profit 28,053--------------------------------------------- --------General and administrative expenses (4,672)--------------------------------------------- --------Operating profit 23,381--------------------------------------------- --------Finance revenue 564--------------------------------------------- --------Finance cost (546)--------------------------------------------- --------Profit before tax 23,399--------------------------------------------- --------Taxation (4,120)--------------------------------------------- --------Profit for the year 19,279--------------------------------------------- --------(Profit)/loss attributable to minority interests (53)--------------------------------------------- --------Profit attributable to equity shareholders 19,226--------------------------------------------- -------- --------------------------------------------- --------Earnings per share (in cents)--------------------------------------------- --------- basic earnings per 10p ordinary share 13.73--------------------------------------------- --------- diluted earnings per 10p ordinary share 13.07--------------------------------------------- -------- Group Balance Sheet as at 31 December 2004 $000'sAssetsNon-current assetsIntangible assets 14,927Property plant and equipment 65,353Other non-current assets 3,090 83,370Current assetsInventories 194Trade and other receivables 11,923Cash and cash equivalents 39,134 51,251LiabilitiesCurrent liabilitiesConvertible loan note (17,662)Current tax liabilities (1,696)Trade and other payables (12,944) (32,302)Net current assets/(liabilities) 18,949Non-current liabilitiesProvisions (475)Deferred tax liability (1,518) (1,993)Minority interests -Net assets 100,326EquityShare capital 21,582Share premium 22,127Merger reserve 30,680 Other reserves Capital redemption reserve 587 Equity - share options 171 Equity - foreign currency translation differences 499 Retained earnings 24,587 Total shareholders' equity 100,233 Minority interests - equity 93 Total equity 100,326 Group Cash Flow Statement for the year ended 31 December 2004 $000'sCash flows from operating activitiesCash generated from operations 29,851Interest received 571Interest paid (498)Payment made in respect of share options exercised (41)Tax paid (3,040)Net cash from operating activities 26,843Cash flows from investing activitiesProceeds from sale of property, plant and equipment 17Proceeds from sale of US asset 233Purchase of property, plant and equipment (25,044)Net cash used in investing activities (24,794)Cash flows from financing activitiesNet proceeds from issue of ordinary share capital 8,049Convertible loan note 17,662Short term borrowings 2,482Repayment of borrowings (9,476)Dividends paid to shareholders (1,303)Net cash (used) in financing activities 17,414Net (decrease)/increase in cash in the period 19,463Cash and cash equivalents at 1 January 19,671Cash and cash equivalents at 31 December 39,134 Restatement of 2004 Results under IFRS Accounting Policies The accounting policies set out below have been adopted to prepare the 2004financial information under EU endorsed International Financial ReportingStandards ("IFRS") restated results. These will be the principal accountingpolicies used for the Group's future financial statements prepared under IFRS. Basis of preparation The consolidated financial information for the six months ended 30 June 2004 andthe year ended 31 December 2004 and the opening balance sheet at 1 January 2004have been prepared in accordance with IFRS for the first-time. The rules forfirst-time adoption of IFRS are set out in IFRS 1 - First-time adoption ofInternational Financial Reporting Standards. IFRS 1 states that a company shoulduse the same accounting policies in its opening balance sheet and throughout allperiods presented in its first IFRS financial statements. The Standard requiresthese policies to comply with IFRSs effective at the reporting date of the firstpublished financial statements (31 December 2005) under IFRS. The International Standards adopted by the Group are subject to ongoing reviewand endorsement by the EU and possible amendment by interpretive guidance fromthe International Financial reporting Interpretations Committee ("IFRIC") andthe accounting profession. The IFRS information presented in this document hasbeen prepared on the basis of current interpretations of standards. Where the Group's UK GAAP financial information was based on estimates, the sameestimates have been applied in preparing the IFRS financial information. WhereIFRS requires estimates that were not previously required under UK GAAP, theyhave been based only on those factors existing on the relevant balance sheetdate. This is consistent with treating information received after the balancesheet date as non adjusting events under IAS 10 - Events after the Balance SheetDate. Estimates not previously required under UK GAAP primarily relate tofinancial instruments, embedded derivatives and share-based payments. IFRS 1 allows exemptions from the application of certain IFRS's to assistcompanies with the transition process. Accordingly the Group has made thefollowing first time accounting policy choices: • IFRS 2 - Share-based Payments is applied to all share based awards made after 7 November 2002 that did not vest before 1 January 2005 • IFRS 3 - Business combinations prior to 1 January 2004 have not been restated • IAS 32 - Financial Instruments: Disclosure and Presentation, and IAS 39 - Financial Instruments: Recognition and Measurement, will be applied prospectively from 1 January 2005 and as such the 2004 restated information presented excludes adjustments required on adoption of these Standards The Group, as a first time adopter, has adopted early (with effect from 1January 2004) the following Standard that is not mandatory as at 31 December2005, the reporting date of the Group's first IFRS financial statements. Thefinancial statements to 31 December 2004 are prepared under the previousaccounting policies. • IFRS 6 - Exploration for and Evaluation of Mineral Resources. The Standard provides for the continuance of the Group's existing policy of successful efforts for exploration and evaluation expenditure and accordingly the Group has elected to adopt IFRS 6. The financial statements have been prepared under the historical cost convention. Basis of consolidation The consolidated financial statements incorporate the financial statements ofthe Company and entities controlled by the Company (its subsidiaries) made up to31 December each year. Control is achieved where the Company has the power togovern the financial and operating policies of an enterprise so as to obtainbenefits from its activities. Business combinations On acquisition, the assets and liabilities of a subsidiary are measured at theirfair values at the date of acquisition. Any excess of the cost of acquisitionover the fair values of the identifiable net assets acquired is recognised asgoodwill. The interest of minority shareholders is stated at the minority'sproportion of the fair values of the assets and liabilities recognised. All significant intercompany transactions and balances between group enterprisesare eliminated on consolidation. Interests in joint ventures A joint venture is a contractual arrangement whereby the Group and other partiesundertake an economic activity that is subject to joint control. Where a group company undertakes its activities under joint venture arrangementsdirectly, the Group's share of jointly controlled assets and any liabilitiesincurred jointly with other venturers are recognised in the financial statementsof the relevant company and classified according to their nature. Liabilitiesand expenses incurred directly in respect of interests in jointly controlledassets are accounted for on an accrual basis. Income from the sale or use of theGroup's share of the output of jointly controlled assets, and its share of jointventure expenses, are recognised when it is probable that the economic benefitsassociated with the transactions will flow to/from the Group and their amountcan be measured reliably. Interests in associates An associate is an entity over which the Group is in a position to exercisesignificant influence, but not control or joint control. The results and the assets and liabilities of associates are incorporated inthese financial statements using the equity method of accounting. Ukrainian business environment Ukraine continues to display emerging market characteristics, and itslegislation and business practices regarding banking operations, foreigncurrency transactions and taxation is constantly evolving as the new governmentattempts to manage the economy. Risks inherent in conducting business in anemerging market economy include, but are not limited to, volatility in thefinancial markets and the general economy. Uncertainties over the development ofthe tax and legal environment, as well as difficulties associated with theconsistent application of current laws and regulations, have continued. As at 31December 2004, oil and gas assets based in Ukraine represent approximately 82%of the Group's oil and gas assets. The Group's operations and financial position may be affected by theseuncertainties. The Group's financial statements do not include any adjustmentsto reflect the possible future effects on the recoverability, and classificationof assets or the amounts or classifications of liabilities that may result fromthese uncertainties. Foreign currencies The presentation currency of the Group is the US Dollar. Financial statements offoreign currency denominated subsidiaries are translated into US Dollars wherebythe results of the overseas operations are generally translated at the averagerate of exchange for the year. On consolidation, the assets and liabilities ofthe Group's non-US dollar functional currency subsidiaries are retranslated intoUS dollars at the exchange rates prevailing on the balance sheet date. Exchangedifferences arising, if any, are classified as equity and transferred to theGroup's translation reserve. Such translation differences are only recognised asincome or as expenses in the period in which any such operation is disposed of. Transactions in foreign currencies are recorded at the rates of exchange rulingat the transaction dates. Monetary assets and liabilities denominated in suchcurrencies are re-translated at the rates prevailing on the balance sheet date,with any profits and losses being included in the profit or loss account for theperiod. Property, plant and equipment Property plant and equipment are carried at cost, less any recognised impairmentloss. Cost includes purchase price and construction costs for qualifying assetsand borrowing costs capitalised in accordance with the Group's accountingpolicy. Depreciation of these assets commences when the assets are ready fortheir intended use. Depreciation is charged so as to write off the cost over their estimated usefullives, using the straight-line method, for the following classes of assets: Motor vehicles - four yearsEquipment - five to ten yearsComputer equipment - three years Assets held under finance leases are depreciated over their expected usefullives on the same basis as owned assets or, where shorter, the term of therelevant lease. The estimated useful lives of property plant and equipment and their residualvalues are reviewed on an annual basis and, if necessary, changes in usefullives are accounted for prospectively. The gain or loss arising on the disposal or retirement of an asset is determinedas the difference between the sales proceeds and the carrying amount of theasset and is recognised in the profit and loss account for the relevant period. Oil and gas assets Exploration and development expenditure is accounted for under the 'successfulefforts' method. Exploration and evaluation costs are capitalised within intangible assets inaccordance with IFRS 6. Development expenditure is accounted for in accordancewith IAS16. All lease and licence acquisition costs, geological and geophysical costs andother direct costs of exploration, evaluation and development are capitalised asintangible or property plant and equipment. Intangible assets comprise costsrelating to the exploration and evaluation of properties which the directorsconsider to be unevaluated until reserves are appraised as commercial, at whichtime they are transferred to property plant and equipment following animpairment review and depreciated accordingly. Where properties are appraised tohave no commercial value, the associated costs are treated as an impairment lossin the period in which the determination is made. Amortisation Costs relating to evaluated properties are amortised on a field by field unit ofproduction method based on commercial proven and probable reserves. The amortisation calculation takes account of the estimated future developmentcosts and is based on current price levels. Changes in reserves and costestimates are recognised prospectively. Impairment At each balance sheet date, the Group reviews the carrying amounts of its pp&eand intangible assets to determine whether there is any indication that thoseassets have suffered an impairment loss. This includes exploration and appraisalcosts capitalised which are assessed for impairment in accordance with IFRS 6.If any such indication exists, the recoverable amount of the asset is estimatedin order to determine the extent of the impairment loss (if any). Where it isnot possible to estimate the recoverable amount of an individual asset, theGroup estimates the recoverable amount of the cash-generating unit to which theasset belongs. Recoverable amount is the greater of net selling price and value in use. Inassessing value in use, the estimated future cash flows are discounted to theirpresent value using a pre-tax discount rate that reflects current marketassessments of the time value of money and the risks specific to the asset. If the recoverable amount of an asset or cash-generating unit is estimated to beless than its carrying amount, the carrying amount of the asset orcash-generating unit is reduced to its recoverable amount. Impairment losses arerecognised as an expense immediately. Each cash-generating unit or group ofunits to which an exploration and evaluation asset is allocated is not largerthan the Group's primary or secondary reporting format in accordance with IAS 14(Segmental reporting). Where an impairment loss subsequently reverses, the carrying amount of the asset(cash-generating unit) is increased to the revised estimate of its recoverableamount, but so that the increased carrying amount does not exceed the carryingamount that would have been determined had no impairment loss been recognisedfor the asset (cash-generating unit) in prior years. A reversal of an impairmentloss is recognised as income immediately. Decommissioning Provision is made for the cost of decommissioning assets at the time when theobligation to decommission arises. Such provision represents the estimateddiscounted liability for costs which may be incurred in removing productionfacilities and site restoration at the end of the producing life of each field.A corresponding item of property plant and equipment is also created at anamount equal to the provision. This is subsequently depreciated as part of thecapital costs of the production facilities. Any change in the present value ofthe estimated expenditure is reflected as an adjustment to the provision and theproperty plant and equipment. Inventories Inventories are stated at the lower of cost and net realisable value. Costcomprises direct materials and, where applicable, direct labour costs and thoseoverheads that have been incurred in bringing the inventories to their presentlocation and condition. Cost is calculated using the weighted average method.Net realisable value represents the estimated selling price less all estimatedcosts of completion and costs to be incurred in marketing, selling anddistribution. Leasing Assets held under finance leases and hire purchase contracts, which are thosewhere substantially all the risks and rewards of ownership of the asset havepassed to the Group, are capitalised in the balance sheet, at their fair valueat the date of acquisition or, if lower, at the present value of the minimumlease payments. The corresponding liability to the lessor is included in thebalance sheet as a finance lease obligation. Lease payments are apportionedbetween finance charges and reduction of the lease obligation so as to achieve aconstant rate of interest on the remaining balance of the liability. All other leases are classified as operating leases. Rentals payable underoperating leases are charged to income on a straight-line basis over the term ofthe relevant lease. Trade receivables Trade receivables are stated at their nominal value as reduced by appropriateallowances for estimated irrecoverable amounts. Cash and cash equivalents Cash and cash equivalents comprise cash in hand and current balances with banksand similar institutions, which are readily convertible to known amounts ofcash. Cash equivalents are short-term with an maturity of less than 3 months,highly liquid investments that are readily convertible to known amounts of cashand which are subject to an insignificant risk of changes in value. Investments Investments are initially measured at cost, including transaction costs andstated at cost less impairment losses. Bank borrowings Interest-bearing bank loans and overdrafts are recorded at the proceedsreceived, net of direct issue costs. Finance charges, including premiums payableon settlement or redemption, are accounted for on an accrual basis and are addedto the carrying amount of the instrument to the extent that they are not settledin the period in which they arise. Convertible loan notes The Group has elected to adopt IAS 32 and IAS 39 at 1 January 2005 and thereforethese financial statements through to 31 December 2004 have been prepared underthe previous accounting policies. Convertible loan notes are regarded as compound instruments, consisting of aliability component and an equity component. At the date of issue, the fairvalue of the liability component is estimated using the prevailing marketinterest rate for similar non-convertible debt. The difference between the netproceeds of issue of the convertible loan notes and the fair value assigned tothe liability component, representing the embedded option to convert theliability into equity of the Group, is included in equity (capital reserves). Issue costs are apportioned between the liability and equity components of theconvertible loan notes based on their relative carrying amounts at the date ofissue. The portion relating to the equity component is charged directly againstequity. The interest expense on the liability component is calculated by applying theprevailing market interest rate for similar non-convertible debt to theliability component of the instrument. The difference between this amount andthe interest paid is added to the carrying amount of the convertible loan note. Trade payables Trade payables are stated at their nominal value. Financial instruments The Group has elected to adopt IAS 32 and IAS 39 from 1 January 2005 andaccordingly there are no adjustments to the restatements within this paper. The Group may use derivative financial instruments (primarily foreign currencyforward contracts) to hedge its risks associated with foreign currencyfluctuations relating to certain firm commitments and forecasted transactions.Any such derivatives are initially recorded at cost, if any, and are remeasuredto fair value at subsequent reporting dates. Changes in the fair value of derivative financial instruments that aredesignated and are effective as hedges of future cash flows relating to firmcommitments and forecasted transactions are recognised directly in equity. Ifthe hedged firm commitment or forecasted transaction results in the recognitionof an asset or a liability, then, at the time the asset or liability isrecognised, the associated gains or losses on the derivative that had previouslybeen recognised in equity are included in the initial measurement of the assetor liability. For hedges that do not result in the recognition of an asset or aliability, amounts deferred in equity are recognised in the income statement inthe same period in which the hedged firm commitment or forecasted transactionaffects net profit or loss. Ineffective amounts of the hedge are recognised inthe income statement. Changes in the fair value of derivative financial instruments that do notqualify for hedge accounting are recognised in the income statement as theyarise. Hedge accounting is discontinued when the hedging instrument expires or is sold,terminated, or exercised, or no longer qualifies for hedge accounting. At thattime, any cumulative gain or loss on the hedging instrument recognised in equityis retained in equity until the forecasted transaction occurs. If a hedgedtransaction is no longer expected to occur, the net cumulative gain or lossrecognised in equity is transferred to net profit or loss for the period. The Group had no hedges for the six month reporting period ended 30 June 2005. Share options The Group operates an equity-settled, share-based compensation plan for thedirectors and senior management. The fair value of the grant of share optionsare recognised as an expense. The total amount to be expensed over the vestingperiod is determined by reference to the fair value of the options at the dateof grant. At each subsequent balance sheet date the Group calculates theestimated cumulative charge for each award having regard to any change in thenumber of options that are expected to vest and the expired portion of thevesting period. The change in this cumulative charge since the last balancesheet is expensed. Once an option vests, no further adjustment is made to theaggregate amount expensed.Pension costs The Group contributes to the pension scheme of the qualifying employees' choice.Contributions are charged to the profit and loss account as they become payable. Taxation Income tax expense represents the sum of the tax currently payable and deferredtax. The tax currently payable is based on taxable profit for the year. Taxableprofit differs from net profit as reported in the income statement because itexcludes items of income or expense that are taxable or deductible in otheryears and it further excludes items that are never taxable or deductible. TheGroup's liability for current tax is calculated using tax rates that have beenenacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differencesbetween the carrying amount of assets and liabilities in the financialstatements and the corresponding tax basis used in the computation of taxableprofit, and is accounted for using the balance sheet liability method. Deferredtax liabilities are generally recognised for all taxable temporary differencesand deferred tax assets are recognised to the extent that it is probable thattaxable profits will be available against which deductible temporary differencescan be utilised. Such assets and liabilities are not recognised if the temporarydifference arises from goodwill or from the initial recognition (other than in abusiness combination) of other assets and liabilities in a transaction thataffects neither the tax profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differencesarising on investments in subsidiaries and associates, and interests in jointventures, except where the Group is able to control the reversal of thetemporary difference and it is probable that the temporary difference will notreverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheetdate and reduced to the extent that it is no longer probable that sufficienttaxable profit will be available to allow all or part of the asset to berecovered. Any such reduction shall be reversed to the extent that it becomesprobable that sufficient taxable profit will be available. Deferred tax is calculated at the tax rates that are expected to apply in theperiod when the liability is settled or the asset realised based on tax ratesand laws substantively enacted. Deferred tax is charged or credited in theincome statement, except when it relates to items charged or credited directlyto equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when there exists a legal andenforceable right to offset and they relate to income taxes levied by the sametaxation authority and the Group intends to settle its current tax assets andliabilities on a net basis. Revenue recognition Sales of goods are recognised when the significant risks and rewards ofownership have passed to the buyer and it can be reliably measured. Interest income is recognised as the interest accrues, by reference to the netcarrying amount at the effective interest rate applicable. Borrowing costs Borrowing costs directly attributable to the acquisition, construction orproduction of qualifying assets, which are assets that necessarily take asubstantial period of time to get ready for their intended use or sale, areadded to the cost of those assets, until such time as the assets aresubstantially ready for their intended use or sale. All other borrowing costs are recognised in the income statement account in theperiod in which they are incurred. Independent Auditors' Report to the Directors of JKX Oil & Gas plc on the preliminary IFRS Financial Statements for the year ended 31 December 2004 We have audited the accompanying preliminary International Financial ReportingStandards ("IFRS") financial information of JKX Oil & Gas plc (the Company) forthe year ended 31 December 2004 which comprises the Group Income Statement forthe year ended 31 December 2004 and the Group Balance Sheet as at 31 December2004 and the Group Cash Flow for the year ended 31 December 2004, together withthe related accounting policies note set out on pages 9 to 16. This report is made solely to the directors in accordance with our engagementletter dated 21 December 2004. Our audit work has been undertaken so that wemight state to the directors those matters we are required to state to them inan auditors' report and for no other purpose. To the fullest extent permitted bylaw, we do not accept or assume responsibility or liability to anyone other thanthe Company for our audit work, for this report, or for the opinions we haveformed. Respective responsibilities of directors and auditors These preliminary IFRS financial statements are the responsibility of theCompany's directors and have been prepared as part of the Company's conversionto IFRS. They have been prepared in accordance with the basis set out inaccounting policies on pages 9 to 16, which describes how IFRS have been appliedunder IFRS 1, including the assumptions management has made about the standardsand interpretations expected to be effective, and the policies expected to beadopted, when management prepares its first complete set of IFRS financialstatements as at 31 December 2005. Our responsibility is to express an independent opinion on the preliminary IFRSfinancial statements based on our audit. We read the other informationaccompanying the preliminary IFRS financial statements and consider whether itis consistent with the preliminary IFRS financial statements. This otherinformation comprises the description of significant changes in accountingpolices on pages 9 to 16 and reconciliation of 2004 results from UK GAAP to IFRSon pages 19 to 24. Our responsibilities do not extend to any other information. Basis of audit opinion We conducted our audit in accordance with United Kingdom Auditing Standardsissued by the Auditing Practices Board. Those Standards require that we plan andperform the audit to obtain reasonable assurance about whether the preliminaryIFRS financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe preliminary IFRS financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as wellas evaluating the overall presentation of the preliminary IFRS financialstatements. We believe that our audit provides a reasonable basis for ouropinion. Emphasis of matterWithout qualifying our opinion, we draw attention to the fact that theaccounting policies explains why there is a possibility that the preliminaryIFRS financial statements may require adjustment before constituting the finalIFRS financial statements. Moreover, we draw attention to the fact that, underIFRSs only a complete set of financial statements with comparative financialinformation and explanatory notes can provide a fair presentation of theCompany's financial position, results of operations and cash flows in accordancewith IFRSs. Opinion In our opinion, the preliminary IFRS financial information for the year ended 31December 2004 has been prepared, in all material respects, in accordance withthe basis set out in the accounting policies on pages 9 to 16, which describeshow IFRS have been applied under IFRS 1, including the assumptions managementhas made about the standards and interpretations expected to be effective, andthe policies expected to be adopted, when management prepares its first completeset of IFRS financial statements as at 31 December 2005. Ernst & Young LLPLondon 27 September 2005 Reconciliation of 2004 Results from UK GAAP to IFRS Consolidated Financial Information for the year ended 31 December 2004 Group Income Statement UK GAAP IFRS 2 IAS 10 IAS 12 IAS 16 IFRS $000's $000's $000's $000's $000's $000's (in IFRS format) Revenue 46,594 - - - - 46,594Cost of sales (18,427) - - - (114) (18,541)Gross profit 28,167 - - - (114) 28,053General andadministrative (4,519) (153) - - - (4,672)expensesOperating 23,648 (153) - - (114) 23,381profitFinance revenue 564 - - - - 564Finance cost (546) - - - - (546)Profit/(loss) 23,666 (153) - - (114) 23,399before taxTaxation (3,894) - - (226) - (4,120)Profit/(loss)for the 19,772 (153) - (226) (114) 19,279year(Profit)/lossattributable tominority (53) - - - - (53)interestsProfit/(loss)attributable toequity 19,719 (153) - (226) (114) 19,226shareholdersDividends (1,460) - 158 - - (1,302) 18,259 (153) 158 (226) (114) 17,924Earnings pershare (incents)- basicearnings per 14.08 (0.11) N/a (0.16) (0.08) 13.7310pordinary share- dilutedearnings per 13.40 (0.10) N/a (0.15) (0.08) 13.0710p ordinaryshare Reconciliation of 2004 Results from UK GAAP to IFRS Consolidated Financial Information for the year ended 31 December 2004 Group Balance Sheet UK GAAP IAS 1 IFRS 2 IAS 10 IAS 12 IAS 16 IAS 21 IAS 27 IFRS $000's $000's $000's $000's $000's $000's $000's $000's $000's (IFRS format)AssetsNon-currentassetsIntangibleassets 14,428 - - - - - 499 - 14,927Propertyplant 65,467 - - - - (114) - - 65,353and equipmentOthernon-currentassets - 3,090 - - - - - - 3,090 79,895 3,090 - - - (114) 499 - 83,370CurrentassetsInventories 194 - - - - - - - 194Trade andotherreceivables 15,013 (3,090) - - - - - - 11,923Cash and cashequivalents 39,134 - - - - - - - 39,134 54,341 (3,090) - - - - - - 51,251LiabilitiesCurrentliabilitiesConvertibleloan note (17,662) - - - - - - - (17,662)Current taxliabilities (1,696) - - - - - - - (1,696)Trade andother (13,724) - - 780 - - - - (12,944)payables (33,082) - - 780 - - - - (32,302)Net currentassets/(liabil 21,259 (3,090) - 780 - - - - 18,949ities)Non-currentliabilitiesProvisions (475) - - - - - - - (475)Deferred taxliability (333) - - - (1,185) - - - (1,518) (808) - - - (1,185) - - - (1,993)Minorityinterests (93) - - - - - - 93 -Net assets 100,253 - - 780 (1,185) (114) 499 93 100,326EquityShare 21,582 - - - - - - - 21,582capitalShare 22,127 - - - - - - - 22,127premiumMerger 30,680 - - - - - - - 30,680reserveOtherreservesCapitalredemptionreserve 587 - - - - - - - 587Equity -share - - 171 - - - - - 171optionsEquity -foreigncurrencytranslation - - - - - - 499 - 499Retainedearnings 25,277 - (171) 780 (1,185) (114) - - 24,587Totalshareholders'equity 100,253 - - 780 (1,185) (114) 499 - 100,233Minorityinterests -equity - - - - - - - 93 93Total 100,253 - - 780 (1,185) (114) 499 93 100,326equity Reconciliation of 2004 Results from UK GAAP to IFRS Consolidated Financial Information for the year ended 31 December 2004 Group Cash Flow Statement UK GAAP IFRS 2 IAS 10 IFRS 12 IAS 16 IFRS $000's $000's $000's $000's $000's $000's (IFRS format)Cash flows fromoperatingactivitiesCash generatedfrom 29,851 - - - - 29,851operationsInterest received 571 - - - - 571Interest paid (498) - - - - (498)Payment made inrespectof share options (41) - - - - (41)exercisedTax paid (3,040) - - - - (3,040)Net cash fromoperating 26,843 - - - - 26,843activitiesCash flows frominvestingactivitiesProceeds fromsale ofproperty, plant 17 - - - - 17andequipmentProceeds fromsale of US 233 - - - - 233assetPurchase ofproperty, (25,044) - - - - (25,044)plant andequipmentNet cash used ininvesting (24,794) - - - - (24,794)activitiesCash flows fromfinancingactivitiesNet proceeds fromissueof ordinary share 8,049 - - - - 8,049capitalConvertible loan 17,662 - - - - 17,662noteShort term 2,482 - - - - 2,482borrowingsRepayment of (9,476) - - - - (9,476)borrowingsDividends paid toshareholders (1,303) - - - - (1,303)Net cash (used)in 17,414 - - - - 17,414financingactivitiesNet (decrease)/increase 19,463 - - - - 19,463in cash in theperiodCash and cashequivalents at 1 19,671 - - - - 19,671JanuaryCash and cashequivalents at 31December 39,134 - - - - 39,134 Reconciliation of 2004 Results from UK GAAP to IFRS Un-audited Consolidated Financial Information for the six months ended 30 June 2004 Group Income Statement UK GAAP IFRS 2 IAS 10 IAS 12 IAS 16 IFRS $000's $000's $000's $000's $000's $000's (IFRS format)Revenue 19,773 - - - - 19,773Cost of sales (9,346) - - - (57) (9,403)Gross profit 10,427 - - - (57) 10,370General andadministrative (2,020) (66) - - - (2,086)expensesOperating profit 8,407 (66) - - (57) 8,284Finance revenue 117 - - - - 117Finance cost (32) - - - - (32)Profit/(loss) 8,492 (66) - - (57) 8,369before taxTaxation (1,289) - - 362 - (927)Profit/(loss) forthe 7,203 (66) - 362 (57) 7,442period(Profit)/lossattributable tominority 15 - - - - 15interestsProfit/(loss)attributable toequity 7,218 (66) - 362 (57) 7,457shareholdersDividends (663) - (1) - - (664) 6,555 (66) (1) 362 (57) 6,793Earnings per share(in cents)- basic earningsper 10p 5.25 (0.05) N/a 0.26 (0.04) 5.42ordinary share- diluted earningsper 5.07 (0.05) N/a 0.26 (0.04) 5.2410p ordinary share Reconciliation of 2004 Results from UK GAAP to IFRS Un-audited Consolidated Financial Information for the six months ended 30 June 2004 Group Balance Sheet UK GAAP IFRS 2 IAS 10 IAS 12 IAS 16 IAS 21 IAS 27 IFRS $000's $000's $000's $000's $000's $000's $000's $000's (IFRS format)AssetsNon-currentassetsIntangibleassets 11,337 - - - - 273 - 11,610Propertyplant 52,180 - - - (57) - - 52,123and equipment 63,517 - - - (57) 273 - 63,733CurrentassetsInventories 290 - - - - - - 290Trade andotherreceivables 11,982 - - - - - - 11,982Cash and cashequivalents 23,173 - - - - - - 23,173 35,445 - - - - - - 35,445LiabilitiesCurrentliabilitiesLoan (2,660) - - - - - - (2,660)capitalCurrent taxliabilities (596) - - - - - - (596)Trade andother (5,541) - 621 - - - - (4,920)payables (8,797) - 621 - - - - (8,176)Net currentassets/(liabil 26,648 - 621 - - - - 27,269ities)Non-currentliabilitiesProvisions (325) - - - - - - (325)Deferred taxliability (1,233) - - (597) - - - (1,830) (1,558) - - (597) - - - (2,155)Minorityinterests (75) - - - - - 75 -Net assets 88,532 - 621 (597) (57) 273 75 88,847EquityShare 21,579 - - - - - - 21,579capitalShare 22,113 - - - - - - 22,113premiumMerger 30,680 - - - - - - 30,680reserveOtherreservesCapitalredemptionreserve 587 - - - - - - 587Equity -share - 84 - - - - - 84optionsEquity -foreigncurrencytranslationdifferences - - - - - 273 - 273Retainedearnings 13,573 (84) 621 (597) (57) - - 13,456Totalshareholders'equity 88,532 - 621 (597) (57) 273 - 88,772Minorityinterests -equity - - - - - - 75 75Total 88,532 - 621 (597) (57) 273 75 88,847equity Reconciliation of 2004 Results from UK GAAP to IFRS Consolidated Financial Information as at 1 January 2004 Group Balance Sheet UK GAAP IFRS 2 IAS 10 IAS 12 IAS 21 IAS 27 IFRS $000's $000's $000's $000's $000's $000's $000's (IFRS format)AssetsNon-currentassetsIntangibleassets 10,230 - - - 299 - 10,529Propertyplant 47,463 - - - - - 47,463and equipment 57,693 - - - 299 - 57,992CurrentassetsInventories 44 - - - - - 44Trade andother 11,073 - - - - - 11,073receivablesCash and cashequivalents 19,671 - - - - - 19,671 30,788 - - - - - 30,788LiabilitiesCurrentliabilitiesLoan (6,994) - - - - - (6,994)capitalCurrent taxliabilities (1,011) (1,011)Trade andother (5,917) - 622 - - - (5,295)payables (13,922) - 622 - - - (13,300)Net currentassets/(liabili 16,866 - 622 - - - 17,488ties)Non-currentliabilitiesProvisions (344) - - - - - (344)Deferred taxliability (210) - - (959) - - (1,169) (554) - - (959) - - (1,513)Minorityinterests (90) - - - - 90 -Net assets 73,915 - 622 (959) 299 90 73,967EquityShare 20,435 - - - - - 20,435capitalShare 15,195 - - - - - 15,195premiumMerger 30,680 - - - - - 30,680reserveOtherreservesCapitalredemptionreserve 587 - - - - - 587Equity -share - 18 - - - - 18optionsEquity -foreigncurrencytranslationdifferences - - - - 299 - 299Retainedearnings 7,018 (18) 622 (959) - - 6,663Totalshareholders'equity 73,915 - 622 (959) 299 - 73,877Minorityinterests -equity - - - - - 90 90Total 73,915 - 622 (959) 299 90 73,967equity This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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