30th Aug 2005 07:00
Burren Energy PLC30 August 2005 30 August 2005 Burren Energy Plc ("Burren") Restatement of 2004 Financial Information under International Financial Reporting Standards Burren today publishes its restated consolidated financial information for theyear ended 31 December 2004 under International Financial Reporting Standards("IFRS"), together with a reconciliation to its UK GAAP financial informationfor the same period, showing the impact of the transition to IFRS. Burren intends to announce its results, under IFRS, for the half year ended 30June 2005 on 19 September 2005. The restated 2004 half year IFRS comparativefinancial information will be included in that statement. Henceforth Burren intends to report in US dollars, being the currency in whichsubstantially all of its business is transacted, and so the 2004 UK GAAPfinancial information has been translated into US dollars, based on ratesprevailing at that time, for comparative purposes. In summary, for the yearended 31 December 2004 earnings per share under IFRS were 4% lower than under UKGAAP on both a basic and a diluted basis. Cash flows are unaffected by thetransition, although the presentation of the cash flow statement has changedslightly. The principal changes to the financial information for the year ended 31December 2004 are summarised in the table below : UK GAAP UK GAAP Effects of IFRS transition £million US$million US$million US$millionIncome Statement Turnover 87.1 159.9 25.9 185.8Gross Profit 56.5 103.5 (5.6) 97.9Operating Profit 49.0 90.0 (2.8) 87.2Profit before Tax 48.5 89.0 (2.8) 86.2Profit for the Financial 38.8 71.2 (2.8) 68.4Year UK pence US cents US cents US centsEarnings per Share - basic 28.4 52.1 (2.0) 50.1Earnings per Share - diluted 27.1 49.7 (1.8) 47.9 £million US$million US$million US$millionBalance Sheet Net Assets 139.4 267.1 (4.3) 262.8 The increase in turnover arises from the difference in treatment of realisedlosses on oil price derivative contracts : under UK GAAP these were netted offagainst turnover, whereas under IFRS, since hedge accounting treatment for thesecontracts is not achievable, the losses have been added back to turnover and anequal amount has been included in cost of sales. The reduction in profit arises primarily from unrealised losses on themark-to-market of outstanding oil price derivative contracts which do notqualify for hedge accounting (Burren has elected to adopt IAS 32 & 39 witheffect from 1 January 2004), offset by the write-back of certain chargesrelating to share incentive schemes which are now to be spread over the vestingperiod. The text of the report, which can be found on the Company's website togetherwith a copy of the presentation to analysts to be given today, is reproduced infull below. A conference call for analysts will be hosted today Tuesday 30 August at 10.30am UK time by Andrew Rose, Chief Financial Officer and Bradley Mervis, GroupReporting Co-ordinator. Please call +44 (0)1296 480100, access code C658657 toaccess this conference call. A replay facility will be available from 1 hour after the conference call forthose unable to attend. You can access this by dialling +44 (0)1296 618700,access code 240698. ENQUIRIES: Burren Energy PLC Tel: 0207 484 1900Andrew Rose, Finance Directorwww.burren.co.uk Gavin Anderson & Company Tel: 0207 554 1400Deborah Walter / Charlotte Stone Notes to Editors Burren Energy is an independent oil and gas exploration and production group,headquartered in London. It is focused on four principal regions: the Caspianregion of the former Soviet Union, West Africa, North Africa and through astrategic investment stake in the Hindustan Oil Exploration Company, India. Thecompany is listed on the London Stock Exchange ("BUR"). Burren's total proven & probable oil reserves as at 31 December 2004 were 245.5Mmbbls, on a working interest basis. In the Caspian region of Turkmenistan,Burren has a 100 per cent. working interest in the Nebit Dag PSA, which containsthe Burun oil and gas field with proven and probable oil reserves on a workinginterest basis of 129.1 Mmbbls. In the Republic of Congo (Brazzaville), Burrenhas interests in the M'Boundi, Kouakouala and Pointe Indienne fields withaggregate proven and probable oil reserves of 116.4 Mmbbls, again on a workinginterest basis. Significant exploration and development programmes are underwayin Turkmenistan and the Congo, and exploration is expected to commence in Egyptin 2005. 1. Introduction In 2004, Burren Energy plc ("Burren" or the "Group") prepared its consolidatedfinancial statements under UK generally accepted accounting principles ("UKGAAP"). With effect from 1 January 2005, Burren is required to prepare itsconsolidated financial statements in accordance with International FinancialReporting Standards ("IFRS"). The Group will therefore prepare both itsconsolidated financial statements and its parent company financial statementsfor the year ended 31 December 2005 in compliance with IFRS. Burren will presentone year of comparative IFRS financial information for the year ended 31December 2004 ("2004"), and consequently the date of transition to IFRS for theGroup is 1 January 2004 being the first day of the comparative period("transition date"). The first published results to be prepared on an IFRS basiswill be those for the half year ending 30 June 2005, which will includecomparative IFRS financial statements for the half year ended 30 June 2004. The financial statements for the half-year ended 30 June 2005 and the yearending 31 December 2005 will be presented in US Dollars, following the decisionby the Group to adopt US Dollars as its presentation currency henceforth (see"Changes in presentation of Financial Information" in Section 2 below). Set out in this document are extracts from Burren's consolidated financialstatements for the year ended 31 December 2004 restated under IFRS in USdollars, including the income statement, cash flow statement and balance sheet,showing in each case the equivalent statement under UK GAAP and reconciliationsbetween UK GAAP and IFRS. These statements constitute preliminary comparative2004 IFRS financial information in the context of the financial statements forthe year ended 31 December 2005. This document also includes the Group's balancesheet under IFRS at the transition date, together with a reconciliation to theequivalent UK GAAP balance sheet at that date. The financial information and related information relating to the year ended 31December 2004 and the transition date balance sheet have been audited byDeloitte & Touche LLP. 2. Summary Impact of IFRS on Group Results The principal changes to the Group's reported consolidated 2004 financialinformation from the adoption of IFRS are as follows : UK GAAP UK GAAP Effects of IFRS transition £million US$million US$million US$millionIncome Statement Turnover 87.1 159.9 25.9 185.8Gross Profit 56.5 103.5 (5.6) 97.9Operating Profit 49.0 90.0 (2.8) 87.2Profit before Tax 48.5 89.0 (2.8) 86.2Profit for the Financial 38.8 71.2 (2.8) 68.4Year UK pence US cents US cents US centsEarnings per Share - basic 28.4 52.1 (2.0) 50.1Earnings per Share - diluted 27.1 49.7 (1.8) 47.9 £million US$million US$million US$millionBalance Sheet Net Assets 139.4 267.1 (4.3) 262.8 These changes arise from the following principal factors: (i) Changes in Presentation of Financial Information : • IAS 1 : The form and presentation of the UK GAAP financial statements has been changed to be in compliance with IAS 1. • IAS 16 : "Tangible fixed assets" has been renamed "Property, Plant & Equipment" and certain amounts reclassified to Intangible Fixed Assets (see also IFRS 6 below) • IAS 7 : In the Cash Flow Statement under IFRS cash flows have been grouped under three main headings : cash flows from operating activities, from investing activities and from financing activities. This has led to some presentational changes compared with UK GAAP, for example tax paid has been included within operating activities. There is no change to the net movement in cash and cash equivalents. • IAS 21 : The Group has chosen to adopt US dollars as the presentation currency from 1 January 2005 since substantially all of the Group's business is transacted in US dollars. The restated IFRS financial information herein is therefore presented in US dollars and the £ denominated UK GAAP statements are translated into US dollars for ease of comparison. It is possible that the format and presentation of the primary financialstatements will change in the event that further guidance is issued by the IASBor as best practice develops. (ii) Changes in Accounting Policies: • IFRS 2 : The fair value of deferred share awards granted in employee share incentive schemes have been fair valued at the grant date and charged to the income statement pro rata over the vesting period. Under UK GAAP the awards were valued on an intrinsic value basis which took no account of potential future share price movements and were charged to income in the financial year or years to which the award related. • IFRS 6 : Under UK GAAP, intangible fixed assets represented pre-license acquisition costs and exploration and evaluation ("E&E") costs of individual license interests held outside the depreciable cost pools pending determination of commerciality. Under IFRS 6, intangible assets have been adjusted to write off pre-license acquisition costs and to include certain E &E costs that under UK GAAP had been capitalised in a full cost pool within tangible fixed assets. • IAS 10 : Proposed dividends have been recognised in the period in which they are declared rather than in the year to which they relate. • IAS 32 and 39 : Oil price derivative contracts, which under UK GAAP were previously only accounted for when the related physical transaction occurred, do not qualify for hedge accounting treatment under IFRS in the absence of documentation demonstrating hedge effectiveness at the inception of the contract. Accordingly, contracts outstanding at balance sheet dates have been recorded at their fair value in the balance sheet and unrealised gains or losses arising have been taken through the income statement. In addition, realised losses previously netted off against turnover have been shown within cost of sales. • IAS 16 : Development & production assets within Property, Plant and Equipment have been depreciated according to the unit of production method on an individual field basis, whereas under UK GAAP they were grouped into regional cost pools and depreciated accordingly. Following a detailed review of the impact of IAS 12 (Income Taxes) no transitionadjustments to current or deferred tax have been identified. 3. Basis of Preparation European law requires that the Group's financial statements for the year ending31 December 2005 are prepared on the basis of IFRS as endorsed for use in theEuropean Union. IFRS are subject to amendment or interpretation by theInternational Accounting Standards Board ("IASB") and there is an ongoingprocess of review and endorsement by the European Commission. The financialinformation contained in this document has been prepared on the basis of IFRSthat the Directors expect to be applicable as at 31 December 2005. For the reasons outlined above, it is possible that the restated informationpresented in this document may be subject to change before its inclusion in the2005 Annual Report, which will contain the Group's first complete financialstatements prepared in accordance with IFRS. The financial information has been prepared in accordance with InternationalFinancial Reporting Standards and IFRIC interpretations and with those parts ofthe Companies Act 1985 applicable to companies reporting under IFRS. Thefinancial information is prepared under the historical cost basis. The enclosedpreliminary comparative financial information is the first financial informationto be prepared in accordance with IFRS and the date of the transition to IFRS is1 January 2004. IFRS 1 "First-time Adoption of International Financial Reporting Standards" setsout the requirements for first time adoption of IFRS. Generally, IFRS 1 requiresaccounting policies to be adopted that are compliant with IFRS and that thesepolicies be applied retrospectively to all periods presented. The directors have not revised estimates required under IFRS that were alsorequired under UK GAAP as at 1 January 2004 and 31 December 2004. In addition,where estimates are required under IFRS which were not required under UK GAAP,they have been based on information known at the time, and not on subsequentevents. Elections made pursuant to IFRS 1 "First Time Adoption" are as follows: • IFRS 2 "Share Based Payment Transactions" has not been applied toawards under employee share incentive schemes granted before 7 November 2002 orwhich vested before 1 January 2005. • IFRS 3 "Business Combinations" has not been applied retrospectively tobusiness combinations before 1 January 2004. Thus both the classification of thebusiness combination and the measurement of fair values determined at the timeof the business combination have been maintained. • Cumulative foreign exchange translation differences for allsubsidiaries which do not use US dollars as a functional currency have been setto zero. • IAS 32 "Financial Instruments : Disclosure and Presentation" and IAS 39"Financial Instruments : Recognition and Measurement" have been adopted witheffect from the transition date to provide full comparability between 2005 IFRSstatements and 2004 comparatives. • IFRS 6 "Exploration for and Evaluation of Mineral Resources" has beenadopted with effect from the transition date to provide full comparabilitybetween 2005 IFRS statements and 2004 comparatives. The remaining available elections were reviewed by the Directors and consideredto be either not applicable or not appropriate. 4. Statement of Directors' Responsibilities The Directors consider, in preparing the preliminary comparative IFRS financialinformation on the basis set in Sections 6 and 7, that the Company and the Grouphave used appropriate accounting policies, consistently applied and supported byreasonable and supportable judgements and estimates, including the assumptionsthe Directors have made about the standards and interpretations expected to beeffective, and the policies expected to be adopted, when they prepare its firstcomplete set of IFRS financial statements as at 31 December 2005 and that allaccounting standards which they consider to be applicable have been followed. 5. Accounting policies The accounting policies which Burren has adopted in relation to the preliminarycomparative financial information, and which it currently intends to adopt forthe purposes of its 2005 IFRS interim and annual financial statements, are setout below. (a) Basis of Preparation The preliminary comparative financial information (the "financial information")has been prepared in accordance with International Financial Reporting Standardsand IFRIC interpretations and with those parts of the Companies Act 1985applicable to companies reporting under IFRS. The financial information isprepared under the historical cost basis. The financial information is the firstfinancial information to be prepared in accordance with IFRS and the date of thetransition to IFRS is 1 January 2004. The financial information is presented in US dollars being the functionalcurrency of the Group because it is the currency of the primary economicenvironment in which the Group operates. Operations denominated in othercurrencies are included in this financial information in accordance with thepolicies set out in note (l) of this Section. The financial information does not constitute statutory accounts within themeaning of section 240 of the Companies Act 1985. (b) Basis of consolidation The consolidated financial information incorporates the financial information 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 investee entity so as toobtain benefits from its activities. On acquisition, the assets and liabilities and contingent liabilities of asubsidiary are measured at their fair values at the date of acquisition. Anyexcess of the cost of acquisition over the fair values of the identifiable netassets acquired is recognised as goodwill. Subject to the election adopted withrespect to IFRS 3 pursuant to IFRS 1 (see Section 3), any deficiency of the costof acquisition below the fair values of the identifiable net assets acquired(i.e. discount on acquisition) is credited to profit and loss in the period ofacquisition. The results of subsidiaries acquired or disposed of during the yearare included in the consolidated income statement from the effective date ofacquisition or up to the effective date of disposal, as appropriate.Where necessary, adjustments are made to the financial statements ofsubsidiaries to bring the accounting policies used into line with those used bythe group.All intra-group transactions, balances, income and expenses are eliminated onconsolidation. (c) Oil and Gas Assets: Exploration and Evaluation The Group applies the full cost method of accounting for Exploration andEvaluation ("E&E") costs, having regard to the requirements of IFRS 6"Exploration for and Evaluation of Mineral Resources". Under the full costmethod of accounting, costs of exploring for and evaluating oil and gasproperties are accumulated and capitalised by reference to appropriate costpools. Such cost pools are based on geographic areas and are not larger than asegment. The Group currently has three cost pools: the Caspian Region, WestAfrica, and North Africa. Set out below is our current interpretation of theprinciples set out in IFRS 6 and other IFRSs, as they apply to companiesreporting under full cost accounting principles. It should be noted thatguidance on certain aspects of full cost accounting has not yet been provided bythe IASB or IFRIC including, for example, the treatment of costs that do notmeet the definitions of E&E costs under IFRS 6 and the treatment of expenditurerelating to activities for which the technical feasibility and commercialviability were not ultimately demonstrable. Accordingly, amendments may berequired to the accounting policies set out below in future periods. Recognition E&E assets comprise (i) costs of E&E activities that are ongoing at the balancesheet date, pending determination of whether or not commercial reserves existand (ii) costs of E&E that, whilst representing part of the E&E activitiesassociated with adding to the commercial reserves of an established cost pool,did not result in the discovery of commercial reserves. Such E&E costs mayinclude costs of license acquisition, technical services and studies, seismicacquisition, exploration drilling and testing, but do not include costs incurredprior to having obtained the legal rights to explore an area, which are expenseddirectly to the income statement as they are incurred. The Group's definition of commercial reserves is proven and probable reserves. Tangible assets used in E&E activities (such as the company's vehicles, drillingrigs, seismic equipment and other property, plant and equipment used by thecompany's exploration function) are classified as property plant and equipment.However, to the extent that such a tangible asset is consumed in developing anintangible E&E asset, the amount reflecting that consumption is recorded as partof the cost of the intangible asset. Such intangible costs include directlyattributable overhead, including the depreciation of property plant andequipment utilised in E&E activities, together with the cost of other materialsconsumed during the exploration and evaluation phases. Intangible E&E assets related to each exploration licence/prospect are notdepreciated and are carried forward until the existence (or otherwise) ofcommercial reserves has been determined. If commercial reserves have beendiscovered, the related E&E assets are assessed for impairment on a cost poolbasis as set out below and any impairment loss is recognised in the incomestatement. The carrying value, after any impairment loss, of the relevant E&Eassets is then reclassified as development and production assets. Intangible E&E assets that relate to E&E activities that are determined not tohave resulted in the discovery of commercial reserves remain capitalised asintangible E&E assets at cost less accumulated amortisation, subject to meetinga pool-wide impairment test as set out below. Such E&E assets are amortised on aunit of production basis over the life of the commercial reserves of the pool towhich they relate. Impairment E&E assets are assessed for impairment when facts and circumstances suggest thatthe carrying amount may exceed its recoverable amount. Such indicators includethe point at which a determination is made as to whether or not commercialreserves exist. Where the E&E assets concerned fall within the scope of an established full costpool, the E&E assets are tested for impairment together with all development andproduction assets associated with that cost pool, as a single cash generatingunit. The aggregate carrying value is compared against the expected recoverableamount of the pool, generally by reference to the present value of the futurenet cash flows expected to be derived from production of commercial reserves.Where the E&E assets to be tested fall outside the scope of any established costpool, there will generally be no commercial reserves and the E&E assetsconcerned will generally be written off in full. Any impairment loss is recognised in the income statement as additionaldepreciation, and separately disclosed. It is initially recorded against thecarrying value of the related E&E asset. To the extent the impairment exceedsthe carrying value of the E&E asset, a separate impairment test is conducted onthe development and production assets. (d) Oil and Gas Assets: Development & Production Recognition Development and production assets are accumulated on a field by field basis andrepresent the cost of developing the commercial reserves discovered and bringingthem into production, together with the E&E expenditures incurred in findingcommercial reserves transferred from intangible E&E assets as outlined inaccounting policy (c) above. The cost of development and production assets also includes the cost ofacquisitions and purchases of such assets, directly attributable overheads, andthe cost of recognising provisions for future restoration and decommissioning inaccordance with accounting policy (f). Depreciation of producing assets The net book values of producing assets are depreciated on field by field basisusing the unit of production (UOP) method by reference to the ratio ofproduction in the period and the related commercial reserves of the field,taking into account future development expenditures necessary to bring thosereserves into production. Impairment An impairment test is performed whenever events and circumstances arising duringthe development or production phase indicate that the carrying value of adevelopment or production asset may exceed its recoverable amount. The aggregatecarrying value is compared against the expected recoverable amount of the cashgenerating unit, generally by reference to the present value of the future netcash flows expected to be derived from production of commercial reserves. Thecash generating unit applied for impairment test purposes is generally thefield, except that a number of field interests may be grouped as a single cashgenerating unit where the cash flows of each field are interdependent. To the extent an impairment trigger is identified on an individual field whichrepresents a material component of a full cost pool, an additional impairmenttest is also conducted in respect of the overall pool. (e) Acquisitions, asset purchases and disposals Acquisitions of oil and gas properties are accounted for under the acquisitionmethod in accounting policy (b) where the transaction meets the definition of abusiness combination. Transactions involving the purchases of an individual field interest, or a groupof field interests, that do not qualify as a business combination are treated asasset purchases, irrespective of whether the specific transactions involved thetransfer of the field interests directly or the transfer of an incorporatedentity. Accordingly, no goodwill arises, and the consideration is allocated tothe assets and liabilities purchased on an appropriate basis. Proceeds on disposal are applied first to the carrying amount of the specificintangible asset or development/production asset disposed of and any surplus isapplied against the carrying amount of any unsuccessful E&E assets included inthe relevant cost pool. Any remaining excess is recorded as a gain on disposalin the income statement. Revaluation reserve The Group records any fair value uplift on piecemeal acquisition of explorationand production subsidiaries within the relevant fixed asset caption, with therelated balance being transferred to a revaluation reserve. Where depreciation,depletion and amortisation charges are increased following such a fair valueuplift, an amount equal to the increase is transferred annually from therevaluation reserve to the profit and loss reserve as a movement in equity. (f) Decommissioning Where a material liability for the removal of production facilities and siterestoration at the end of the productive life of a field exists, a provision fordecommissioning is recognised. The amount recognised is the present value ofestimated future expenditure determined in accordance with local conditions andrequirements. A tangible fixed asset of an amount equivalent to the provision isalso created and depreciated on a unit of production basis. Changes in estimatesare recognised prospectively, with corresponding adjustments to the provisionand the associated fixed asset. There were no material decommissioningliabilities at 31 December 2004 and 2003. (g) Property, plant and equipment other than Oil and Gas assets Property, plant and equipment other than Oil and Gas assets are stated at costless accumulated depreciation and any provision for impairment. Depreciation ischarged so as to write off the cost, less estimated residual value, of assets ona straight-line basis over their useful lives as follows: Plant and equipment : 4 yearsOffice furniture : 4 yearsBarges and tugs : 20 years 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 income. (h) Oil and Gas Overlift and Underlift Underlifts of entitlement to crude oil production are recorded as a debtor andmeasured at the lower of production cost, including depreciation, and marketvalue, whereas overlifts are recorded as a creditor and measured at marketvalue. (i) Inventories Inventories are stated at the lower of weighted average cost and net realisablevalue. Net realisable value represents the estimated selling price less allestimated costs of completion and costs to be incurred in marketing, selling anddistribution. Provision is made for obsolete, slow-moving or defective itemswhere appropriate. (j) Revenue Recognition Oil sales revenue represents amounts invoiced (exclusive of sales related taxes)for the Group's share of oil sales in the year. Such revenue is recognised whenoil has been lifted and title has passed. (k) Shipping repairs and renewals Ships are dry-docked periodically and the costs are expensed as incurred. Othermaintenance costs are carried out and expensed as incurred. (l) Foreign Currencies Transactions in currencies other than US dollars ("foreign currencies") arerecorded in US dollars at the rates of exchange prevailing on the dates of thetransactions. At each balance sheet date, monetary assets and liabilities thatare denominated in foreign currencies are retranslated into US dollars at therates prevailing on the balance sheet date. Non-monetary assets and liabilitiescarried at fair value that are denominated in foreign currencies are translatedat the rates prevailing at the date when the fair value was determined. Gainsand losses arising on retranslation are included in net profit or loss for theperiod, except for exchange differences arising on non-monetary assets andliabilities where the changes in fair value are recognised directly in equity. In order to hedge its exposure to certain foreign exchange risks, the group mayenter into forward contracts and options (see below for details of the group'saccounting policies in respect of such derivative financial instruments). On consolidation, the assets and liabilities of the group's subsidiaries whichdo not use US dollars as their functional currency, are translated into USdollars at exchange rates prevailing on the balance sheet date. Income andexpense items are translated at the average exchange rates for the period unlessexchange rates fluctuate significantly. Exchange differences arising, if any,are classified as equity and transferred to the group's translation reserve.Such translation differences are recognised as income or as expenses in theperiod in which the operation is disposed of. In accordance with the transitional provisions of IFRS 1 cumulative foreignexchange translation differences for all subsidiaries which do not use USdollars as a functional currency have been set to zero. (m) Leases Leases are classified as finance leases whenever the terms of the lease transfersubstantially all the risks and rewards of ownership to the lessee. All otherleases are classified as operating leases. Assets held under finance leases are recognised as assets of the group at theirfair value or, if lower, at the present value of the minimum lease payments,each determined at the inception of the lease. 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. Financecharges are charged directly against income. Rentals payable under operating leases are charged to income on a straight-linebasis over the term of the relevant lease. (n) Taxation The tax expense represents the sum of the tax currently payable and deferredtax. Current tax, including UK corporation and overseas tax, is provided at amountsexpected to be paid (or recovered) using the tax rates and laws that have beenenacted or substantially enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differencesbetween the carrying amounts of assets and liabilities in the financialinformation and the corresponding tax bases 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 profits will be available to allow all or part of the asset to berecovered. Deferred tax is calculated at the tax rates that are expected to apply in theperiod when the liability is settled or the asset is realised. Deferred tax ischarged or credited in the income statement, except when it relates to itemscharged or credited directly to equity, in which case the deferred tax is alsodealt with in equity. (o) Financial instruments Financial assets and financial liabilities are recognised at fair value on thegroup's balance sheet when the group becomes a party to the contractualprovisions of the instrument. Trade receivables Trade receivables do not carry any interest and are stated at their nominalvalue as reduced by appropriate allowances for estimated irrecoverable amounts. Trade payables Trade payables are not interest-bearing and are stated at their nominal value. Bank borrowings and loan notes Interest-bearing bank borrowings and loan notes are recorded at the proceedsreceived, net of direct issue costs. Finance charges, including premiums payableon settlement or redemption and direct issue costs, are accounted for on anaccruals basis to the profit and loss account using the effective interestmethod and are added to the carrying amount of the instrument to the extent thatthey are not settled in the period in which they arise. Equity instruments Equity instruments issued by the Company and Group are recorded at the proceedsreceived, net of direct issue costs. Derivative financial instruments and hedge accounting The group's activities expose it primarily to fluctuations in the price of crudeoil. The group uses forward crude oil sales contracts, swaps and options tohedge these exposures. The group does not use derivative financial instrumentsfor speculative purposes. The use of financial derivatives is governed by the group's policies approved bythe board of directors, which provide written principles and limits on the useof financial derivatives. Changes in the fair value of derivative financial instruments that aredesignated and effective as hedges of future cash flows are recognised directlyin equity and the ineffective portion is recognised immediately in the incomestatement. If the cash flow hedge of a firm commitment or forecasted transactionresults in the recognition of an asset or a liability, then, at the time theasset or liability is recognised, the associated gains or losses on thederivative that had previously been recognised in equity are included in theinitial measurement of the asset or liability. For hedges that do not result inthe recognition of an asset or a liability, amounts deferred in equity arerecognised in the income statement in the same period in which the hedged itemaffects net profit or loss. For an effective hedge of an exposure to changes in the fair value, the hedgeditem is adjusted for changes in fair value attributable to the risk being hedgedwith the corresponding entry in profit or loss. Gains or losses fromre-measuring the derivative, or for non-derivatives the foreign currencycomponent of its carrying amount, are recognised in profit or loss. 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. Derivatives embedded in other financial instruments or other host contracts aretreated as separate derivatives when their risks and characteristics are notclosely related to those of host contracts and the host contracts are notcarried at fair value with unrealised gains or losses reported in the incomestatement. (p) Share-based paymentsThe group has applied the requirements of IFRS 2 Share-based Payments. Inaccordance with the transitional provisions of IFRS 1, IFRS 2 has been appliedto all grants of equity instruments after 7 November 2002 that had not vested by1 January 2005. The group issues equity-settled share-based payments to certain employees.Equity-settled share-based payments are measured at fair value at the date ofgrant. The fair value determined at the grant date is expensed on astraight-line basis over the vesting period, based on the group's estimate ofshares that will eventually vest. Fair value is measured by use of a binomial model where there are conditionsattached to the vesting and exercising of equity instruments. The expected lifeused in the model is adjusted, based on management's best estimate, for theeffects of non-transferability, exercise restrictions, and behaviouralconsiderations. 6. Preliminary Group Financial Information for the year ended 31 December 2004restated for IFRS CONSOLIDATED INCOME STATEMENT for the year ended 31 December 2004 UK GAAP Effect of (See transition Section 1) UK GAAP to IFRS IFRS Note £ '000 US$ '000 US$ '000 US$ '000 Revenue (a) 87,102 159,884 25,903 185,787Cost of sales- depreciation (b) (16,133) (29,613) (569) (30,182)- losses on oil price derivative (a) - - (30,964) (30,964)contracts- other cost of sales (14,461) (26,720) - (26,720) --------- -------- -------- --------Total cost of sales (30,594) (56,333) (31,533) (87,866) --------- -------- -------- --------Gross profit 56,508 103,551 (5,630) 97,921 Administrative expenses- charge in respect of incentive (d) (4,537) (8,328) 2,810 (5,518)schemes- other administrative expenses (2,931) (5,205) - (5,205) --------- -------- ------- -------- Total administrative expenses (7,468) ( 13,533) 2,810 (10,723)Other operating expensesWrite off of pre-licence costs (c) - - (12) (12) --------- -------- ------- -------- Operating profit 49,040 90,018 (2,832) 87,186Interest and investment income 370 678 - 678Finance costs (932) (1,709) - (1,709) --------- -------- ------- -------- Profit on ordinary activities 48,478 88,987 (2,832) 86,155before taxTax on profit on ordinary (f) (9,669) (17,748) - (17,748)activities Profit attributable to equity 38,809 71,239 (2,832) 68,407holders of parent companyDividends proposed (e) (4,113) (7,550) 7,550 - --------- -------- ------- ------- Retained profit for the year 34,696 63,689 4,718 68,407 ========= ======== ======= ======= UK pence US cents US cents US centsEarnings per share - basic 28.40 52.13 (2.06) 50.07Earnings per share - diluted 27.07 49.69 (1.79) 47.90 CONSOLIDATED BALANCE SHEET as at 31 December 2004 UK GAAP Effect of (See transition Section 1) UK GAAP to IFRS IFRS Note £ '000 US$ '000 US$ '000 US$ '000ASSETSNon-current assetsIntangible assets other than (g) 1,982 3,796 4,585 8,381goodwillProperty, plant and equipment (h) - - 253,826 253,826Tangible fixed assets (h) 135,594 259,783 (259,783) - ------- ------- -------- ------- 137,576 263,579 (1,372) 262,207Current assetsInventory 529 1,015 - 1,015Trade and other receivables 19,664 37,673 - 37,673Cash and cash equivalents 20,858 39,962 - 39,962 ------- ------- -------- ------- 41,051 78,650 - 78,650 ------- ------- -------- -------Total assets 178,627 342,228 (1,372) 340,857 LIABILITIESCurrent liabilitiesTrade and other payables (i) (26,699) (51,150) 7,550 (43,600)Oil price derivative contracts (j) - - (10,528) (10,528)Short term borrowings (303) (580) - (580) ------- ------- -------- ------- (27,002) (51,730) (2,978) (54,708)Non-current liabilitiesBorrowings (2,151) (4,121) - (4,121)Provisions (10,057) (19,268) - (19,268) ------- ------- -------- -------- (12,208) (23,389) - (23,389) ------- ------- -------- -------- Total liabilities (39,210) (75,119) (2,978) (78,097) ------- ------- -------- -------- NET ASSETS 139,417 267,110 (4,350) 262,760 ======= ======= ======== ========EquityCalled up share capital 23,706 45,419 - 45,419Share premium account 45,623 87,409 - 87,409Other reserves 1,616 3,096 - 3,096Merger reserve (6,638) (12,716) - (12,716)Revaluation reserve 14,247 27,295 - 27,295Shares to be issued (k) 3,892 7,457 (3,093) 4,364Profit and loss account (l) 56,971 109,150 (1,257) 107,893 ------- ------- ------- ------- TOTAL EQUITY 139,417 267,110 (4,350) 262,760 ======= ======= ======= ======= CONSOLIDATED CASH FLOW STATEMENT for the year ended 31 December 2004 Effect of UK GAAP transition (see to IFRS Section l) UK GAAP (see note m) IFRS Note £ '000 US$ '000 US$ '000 US$ '000Operating activitiesCash flow generated by operations (n) 54,582 100,189 (12) 100,177Taxation paid (71) (130) - (130) ------- -------- --------- -------- Net cash from operating activities 54,511 100,059 (12) 100,047 ------- -------- --------- -------- Investing activitiesPurchases of intangible assets other (1,272) (2,335) (2,256) (4,591)than goodwillPurchases of property, plant and (o) - - (87,347) (87,347)equipmentPurchases of tangible fixed assets (o) (48,821) (89,615) 89,615 - ------- -------- --------- -------- Net cash used in investing activities (50,093) (91,950) 12 (91,938) ------- -------- --------- -------- Financing activitiesInterest received 321 589 - 589Interest paid (308) (565) - (565)Arrangement and facility fee (282) (518) - (518)Interest element of finance lease (338) (620) - (620)rentalsIssue of ordinary share capital 590 1,083 - 1,083Receipt from loans 196 360 - 360Repayment of loans (2,452) (4,501) - (4,501)Capital element of finance lease rentals (2,075) (3,809) - (3,809) -------- -------- --------- -------- Net cash used in financing activities (4348) (7,981) - (7,981) -------- -------- --------- -------- Net increase in cash and cash 70 128 - 128equivalentsCash and cash equivalents at beginning 20,788 37,123 - 37,123of yearEffect of foreign exchange rate changes - 2,711 - 2,711 Cash and cash equivalents at end of year 20,858 39,962 - 39,962 Notes to reconciliations for the year ended 31 December 2004 The following notes explain the reconciliations between the UK GAAP financialstatements, as derived from the 31 December 2004 annual report and translatedinto US dollars, and the IFRS preliminary comparative financial information. Consolidated Income Statement (a) Oil Price Derivative Contracts Under UK GAAP realised losses on oil price derivative contracts were netted offagainst turnover. Under IFRS hedge accounting treatment for the outstandingcontracts is not achievable owing to the absence of documentation demonstratingthe effectiveness of the contract from the outset. Realised losses on thesecontracts, amounting to US$25,903,000, have therefore been included in cost ofsales and revenue has been increased by an equivalent amount. Under UK GAAP unrealised gains and losses on oil price derivative contractsrelating to expected future sales of crude were only accounted for when therelated physical transaction occurred. However under IFRS such contracts aremarked to market and the fair value recognised in the balance sheet. Theresultant movement in fair values is recognised in the profit and loss account :this amounted to a loss of US$5,061,000. Together with realised losses ofUS$25,903,000 this resulted in a total loss on oil price derivatives contractsof US$30,964,000. (b) Depreciation Under UK GAAP costs carried within each regional cost pool, which may contain anumber of individual fields, were depreciated on a unit of production basis byreference to that cost pool. Under IFRS costs are still depreciated on a unit ofproduction basis but by reference to specific fields. The accounting change hasincreased depreciation by US$569,000 for the year ended 31 December 2004. (c) Pre-licence costs Under UK GAAP all costs incurred prior to having obtained the license rightswere included within intangible fixed assets. Under IFRS such expenditure has tobe written off in full in the year in which it occurs. Cost of sales hastherefore increased by US$12,000. (d) Charge in respect of share incentive schemes The Group operates a number of share incentive schemes. Under UK GAAP deferredshare awards were valued at their intrinsic value at the balance sheet date(having no regard to potential future share price movements) and charged to theincome statement in the financial year to which the award related. IFRS requires deferred share awards granted by the Company to employees to bevalued at fair value at the grant date. Such fair value should be based on amodel appropriate to value the inherent optionality of the incentive schemesincluding but not limited to potential future share price movements, and chargedto the income statement pro rata over the vesting period of the related awards. The transitional provisions of IFRS 2 allow that share incentive options grantedbefore 7 November 2002 or which vested before 1 January 2005 are exempt fromrestatement. On this basis restatements have only been required for thefollowing two schemes: Performance Share Plan The cost in relation to this plan, which consists of share options grantedbefore the Initial Public Offering ("IPO"), and vesting over a 3 year period,was fully charged to the income statement in 2004 under UK GAAP as the relatedperformance criteria had been met in full. Under IFRS this charge is spread overthe vesting period. This has resulted in a credit to the income statement ofUS$772,000. Annual Profit Share Scheme (APSS) This scheme includes both a cash and a deferred share element, with sharesissued under the latter vesting over a 3 year period. The cost of both elementsof this scheme was fully charged to the income statement in 2004 under UK GAAP.However under IFRS the deferred share element of this charge is spread over thevesting period. This has resulted in a credit to the income statement ofUS$2,038,000. This accounting change has therefore reduced the charge in respect of shareincentive schemes by US$2,810,000. (e) Dividends proposed Under UK GAAP proposed dividends were recognised in the financial year inrespect of which they relate, even if such dividends were declared subsequent tothe balance sheet date. Under IFRS they are recognised in the period in whichthey are formally declared. The change in timing of recognising proposed dividends increased reportedretained earnings of the Group as at 31 December 2004 by US$7,550,000, being the2004 dividend proposed in 2005. (f) TaxationThere was no impact on current or deferred tax charges for the year ended 31December 2004. This was because the adjustments either increased the size of adeferred tax asset that has not been treated as recoverable or because theyarose in a jurisdiction with a zero percentage tax rate. Consolidated Balance Sheet (g) Intangible assets other than goodwill Under UK GAAP, intangible fixed assets represented pre-license acquisition costsand exploration and evaluation ("E&E") costs of individual license interestsheld outside the depreciable cost pools pending determination of commerciality.Under IFRS, intangible assets have been adjusted to write off cumulativepre-license acquisition costs of US$519,000 and to include E&E costs ofUS$5,104,000 that under UK GAAP had been capitalised in a full cost pool withintangible fixed assets, giving a net increase in intangible assets ofUS$4,585,000. Additional details are provided in the supplemental intangibleassets note in section 8. (h) Property, plant and equipment Under UK GAAP, tangible fixed assets comprised: • oil and gas properties for which the existence or otherwise of commercial reserves had been established, recorded by reference to broad, geographic cost pools. This caption also included certain exploration and evaluation expenditure incurred within the cost pools. • Other fixed assets, including non oil & gas specific plant and equipment, office furniture, barges and tugs. Under IFRS, all amounts previously classified as tangible fixed assets have beenrecorded as Property, Plant and Equipment except for exploration and evaluationexpenditure of US$5,104,000 in relation to non-producing fields for which theexistence of commercial reserves has not yet been determined (reclassified tointangible assets). Additional cumulative depreciation of US$853,000 has alsobeen charged under IFRS, for the reasons described in (b) above. Additionaldetails are provided in the supplemental property, plant and equipment note inSection 8. (i) Trade and other payables The decrease of US$7,550,000 results from the proposed dividend being recognisedunder IFRS in the period in which it was formally declared, being 2005, insteadof in 2004. (j) Unrealised Gains & Losses on Oil price derivative contracts The liability of US$10,528,000 recognised under IFRS represents themark-to-market liability (unrealised loss) of the Brent collar contracts thatwere open at year end based on market quotations. Of this US$ 5,467,000 wasrecognised in the restated balance sheet at the transition date. The differenceof US$5,061,000 has been charged to the 2004 income statement. (k) Shares to be issued The difference between the measurement and accounting treatment of shareincentive scheme awards is described in note (d) above. Under both UK GAAP andIFRS charges made to income in respect of share incentive scheme awards arecredited to a 'Shares to be Issued' reserve. The US$ 3,093,000 reduction in thisreserve reflects the cumulative reduction in share incentive scheme charges toincome, of which US$2,810,000 was credited to the 2004 income statement. (l) Profit and loss account The above adjustments result in a US$1,257,000 reduction in retained earnings.Consolidated cash flow statement (m) Reclassifications from UK GAAP The UK GAAP £ denominated figures are shown after reclassifying certain standardheadings under UK GAAP (being taxation, returns on investments and servicing offinance and capital expenditure) to their equivalents under IFRS. (n) Reclassification of pre-license expenditure Pre-license costs were shown within "Capital expenditure" under UK GAAP. Sincesuch costs are being expensed under IFRS, they have been classified withinoperating cash flows under IFRS. (o) Reclassification of fixed asset expenditure Purchases of tangible fixed assets under UK GAAP have been reclassified topurchases of intangible assets and purchases of property, plant and equipmentunder IFRS. 7. Preliminary Transition Date (1 January 2004) Balance Sheetrestated for IFRS, with notes explaining reconciliation CONSOLIDATED BALANCE SHEET as at 1 January 2004 UK GAAP Effect of (See transition Section 1) UK GAAP to IFRS IFRS Note £ '000 US$ '000 US$ '000 US$ '000AssetsNon-current assetsIntangible assets other than (a) 818 1,461 2,329 3,790goodwillProperty, plant and equipment (b) - - 173,422 173,422Tangible fixed assets 98,860 176,542 (176,542) - ------- ------- -------- ------- 99,678 178,003 (791) 177,212Current assetsInventory 490 876 - 876Trade and other receivables 7,398 13,211 - 13,211Cash and cash equivalents 20,788 37,123 - 37,123 ------- ------- -------- ------- 28,676 51,210 - 51,210 ------- ------- -------- ------- Total assets 128,354 229,213 (791) 228,422 ------- ------- -------- ------- LiabilitiesCurrent liabilitiesTrade and other payables (c) (14,783) (26,399) 303 (26,096)Oil price derivative contracts (d) - - (5,467) (5,467)Short term borrowings - - - -Related Shares:
Burford Capital