ADES.L Regulatory News (ADES)

ADES reissues its Consolidated Financial Statements for 2018

Reflects adjustment in date of recognition of derivative instrument

No impact from adjustments on the Company's actual cash flows or liquidity

2019 guidance remains unchanged

(London & Dubai, 5 April 2019) ADES International Holding PLC ("ADES" or the "Group"), a leading oil & gas drilling and production services provider in the Middle East and North Africa (MENA), announces the reissuance of its Consolidated Financial Statements for the year ended 31 December 2018 (previously disclosed on 25 March 2019), following an internal redetermination of the accounting treatments of certain transactions.

Subsequent to the signing of the 2018 accounts we identified areas were the accounting treatments of certain items should be reclassified or restated. After prompt and in depth assessment by the Company, it was determined jointly with the auditors that adjustments were required and would be best dealt with through the reissuance of the 2018 annual accounts. It should be noted that:

· There is no impact from any of the restatement adjustments on the Company's actual cash flows or liquidity;

· All restatement adjustments are non-cash in nature and do not affect the underlying financial position and the Operating Profit, Normalised Net Profit and EBITDA for the year ended 31 December 2018, which remain unchanged;

· There is no impact expected on 2019 normalised numbers;

· 2019 guidance remains unchanged.

The Group has entered into an interest rate swap ("IRS") derivative effective from 21 November 2018 until 22 March 2023 that is classified as a trading derivative measured at fair value through profit or loss from the trading date of the IRS. Upon the date of the invoicing of the first scheduled net interest settlement amount in respect of the IRS, which was subsequent to the date of the approval of the previously issued Consolidated Financial Statements on 25 March 2019, this transaction was internally brought to the Management's attention in order to determine the appropriate date for its recognition in the accounting records.

Following due review, it was determined that the accounting recognition should have commenced in November 2018. Accordingly, the Board of Directors has decided to recall and adjust the Previously Issued Consolidated Financial Statements to account for the IRS by recording the negative fair value of the derivative amounting to US$ 4.3 million in the consolidated statement of financial position and the corresponding fair value loss in the consolidated statement of comprehensive income as at 31 December 2018. Note 29 to the reissued Consolidated Financial Statements, set out at the end of this announcement, contains further details of this adjustment.

Management have also updated the subsequent events disclosure (note 30) for events that occurred after the date of the previously issued Consolidated Financial Statements; added additional explanatory footnotes for segment disclosure and updated capital expenditures in note 4; separately disclosed additions through business combinations in note 16; and reclassified (i) an amount of US$ 24,885,216 between 'inventories' and 'purchase of property and equipment' line items and (ii) US$ 567,960 between 'trade and other payables' and 'purchase of property and equipment' line items in the consolidated statement of cash flows to improve the presentation and reconcile the implications of business acquisitions.

The reissuance of the Consolidated Financial Statements as at and for the year ended 31 December 2018 has resulted in the following adjustments:

· The negative fair value of the IRS derivative amounting to US$ 4.3 million has been recorded as derivative financial instrument in the consolidated statement of financial position, which resulted in an increase in total non-current liabilities by US$ 3.1 million and an increase in the current liabilities by US$ 1.2 million as at 31 December 2018. Please refer to the Consolidated Statement of Financial Position.

· The negative fair value of the IRS derivative amounting to US$ 4.3 million has been recorded in the consolidated statement of profit and loss, resulting in a decrease in profit for the year attributable to equity holders for the year to US$ 71.0 million as at 31 December 2018, compared to US$ 75.4 million which was in the previously issued financial statements. This resulted in a decrease in total equity to US$ 420.1 million, as at 31 December 2018, compared to US$ 424.4 million which was in the previously issued financial statements. Please refer to the Consolidated Statement of Comprehensive Income.

· An amount of US$ 24.9 million has been reclassified between 'inventories' and 'purchase of property and equipment' line items and US$ 567,960 has been reclassified between 'trade and other payables' and 'purchase of property and equipment' line items in the consolidated statement of cash flows, increasing the net cash flows from operating activities to US$ 51.2 million compared to US$ 26.9 million which was in the previously issued financial statements and increasing the net cash flows used in investing activities to US$ (379.4) million compared to US$ (355.1) million which was in the previously issued financial statements. Please refer to the Consolidated Statement of Cash Flows.

The reissued Financial Statements for the year ended 31 December 2018 are attached below.

-Ends-

Enquiries

NOTES TO EDITORS

About ADES International Holding

ADES International Holding extends oil and gas drilling and production services through its subsidiaries and is a leading service provider in the Middle East and North Africa, offering onshore and offshore contract drilling as well as workover and production services. Its c.4,000 employees serve clients including major national oil companies ("NOCs") such as Saudi Aramco and Kuwait Oil Company as well as joint ventures of NOCs with global majors including BP and Eni. While maintaining a superior health, safety and environmental record, the Group currently has a fleet of thirty-four onshore drilling rigs, thirteen jack-up offshore drilling rigs, a jack-up barge, and a mobile offshore production unit ("MOPU"), which includes a floating storage and offloading unit. For more information, visit investors.adihgroup.com

Forward-looking statements

Certain statements contained in this announcement, including any information as to the Group's strategy, plans or future financial or operating performance constitute "forward looking statements". These forward-looking statements can be identified by the use of forward looking terminology, including the terms "believes", "estimates", "anticipates", "projects", "expects", "intends", "aims", "plans", "predicts", "may", "will", "seeks" or "should" or, in each case, their negative or other variations or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events or intentions. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this announcement and include statements regarding the intentions, beliefs or current expectations of the Directors of the Company concerning, amongst other things, the Group's results of operations, financial condition and performance, prospects, growth and strategies and the industry in which the Group operates.

By their nature, forward looking statements address matters that involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Forward looking statements are not guarantees of future performance and the Group's actual results of operations and financial condition, and the development of the business sector in which the Group operates, may differ materially from those suggested by the forward-looking statements contained in this announcement. In addition, even if the Group's results of operations and financial condition, and the development of the industry in which the Group operates, are consistent with the forward- looking statements contained in this announcement, those results or developments may not be indicative of results or developments in subsequent periods.

ADES International Holding PLC (formerly "ADES International Holding Ltd")

and its Subsidiaries

CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2018

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 December 2018

The accompanying notes 1 to 30 form an integral part of these consolidated financial statements.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

At 31 December 2018

The accompanying notes 1 to 30 form an integral part of these consolidated financial statements.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 31 December 2018

The accompanying notes 1 to 30 form an integral part of these consolidated financial statements.

CONSOLIDATED STATEMENT OF CASH FLOWS

For the year ended 31 December 2018

The accompanying notes 1 to 30 form an integral part of these consolidated financial statements.

* Net of "proceeds from interest-bearing loans and borrowings" and "payments of loan transaction costs" represents "borrowings drawn during the year" amounting to USD 569,304,756 as disclosed in Note 19.

** It does not include unpaid portion of the finance lease included as Office premises in Property and equipment (note 16) amounting to USD 5,959,533.

1 BACKGROUND

1.1 Corporate Information

ADES International Holding PLC (the "Company" or the "Parent") was incorporated and registered in the Dubai International Financial Centre (DIFC) on 22 May 2016 with registered number 2175 under the Companies Law - DIFC Law No. 2 of 2009 (and any regulations thereunder) as a private company limited by shares. The Company's shares are listed on the Main Market of the London Stock Exchange. The Company's name has changed from ADES International Holding Ltd to ADES International Holding PLC during 2018. The Company's registered office is at level 5, Index tower, Dubai International Financial Centre, PO Box 507118, Dubai, United Arab Emirates. The principal business activity of the Company is to act as a holding company and managing office. The Company and its subsidiaries (see below) constitute the Group (the "Group"). The Company is owned by ADES Investments Holding Ltd., a company incorporated on 22 May 2016 under the Companies Law, DIFC Law no. 2 of 2009.

The Group is a leading oil and gas drilling and production services provider in the Middle East and Africa. The Group services primarily include offshore and onshore contract drilling and production services. The Group currently operates in Egypt, Algeria, Kuwait and the Kingdom of Saudi Arabia. The Group's offshore services include drilling and workover services and Mobile Offshore Production Unit (MOPU) production services, as well as accommodation, catering and other barge-based support services. The Group's onshore services primarily encompass drilling and work over services. The Group also provides projects services (outsourcing various operating projects for clients, such as maintenance and repair services).

The Consolidated financial statements of the Group include:

** Advanced Energy Systems (ADES) (S.A.E) has branches in the Kingdom of Saudi Arabia and Algeria.

*** Precision Drilling Company holds 47.5% interest in United Precision Drilling Company W.L.L, a Kuwait entity which handles the operations of the rigs in Kuwait.

In 2016, pursuant to a reorganisation plan (the "Reorganisation") the ultimate shareholders of the Subsidiary:

(i) established the Company as a new holding company with share capital of USD 1,000,000 and made an additional capital contribution of USD 30,900,000 for additional shares that were allotted on 23 March 2017. No such reorganisations took place in 2018 and 2017.

(ii) transferred their shareholdings in Advanced Energy System (ADES) (S.A.E.) to the Company for a total consideration of USD 38,520,807 comprising of cash of USD 29,710,961 and the assumption of shareholder obligation of USD 8,809,846.

1.2 REISSUANCE OF THE CONSOLIDATED FINANCIAL STATEMENTS

The Management have decided to recall and reissue the consolidated financial statements of the Group for the year ended 31 December 2018 previously approved by the Board of Directors on 24 March 2019 (the "Previously Issued Consolidated Financial Statements") in order to record an interest rate swap which was not recorded in the Previously Issued Consolidated Financial Statements as explained below.

The Group has entered into an interest rate swap "IRS" derivative for a notional amount of US$ 241,500,000 effective from 21 November 2018 until 22 March 2023 that is classified as a trading derivative measured at fair value through profit or loss from the trading date of the IRS. Upon the date of the invoicing of the first scheduled net interest settlement amount in respect of the IRS, which was subsequent to the date of the approval of the previously issued Consolidated Financial Statements on 24 March 2019, this transaction was internally brought to management's attention to determine the appropriate date for recognition in the accounting records. Following due review, it was determined that the accounting recognition should have commenced in November 2018. Accordingly, the Board of Directors has decided to recall and adjust the Previously Issued Consolidated Financial Statements to account for the IRS by recording the negative fair value of the derivative amounting to US$ 4.3 million in the consolidated statement of financial position and the corresponding fair value loss in the consolidated statement of comprehensive income as at 31 December 2018. Refer note 29 for the details.

Management have also updated the subsequent events disclosure (note 30) for the events that occurred after the date of the Previously Issued Consolidated Financial Statements; added additional explanatory foot note for segment disclosure and updated capital expenditures in note 4; separately disclosed additions through business combinations in note 16; and reclassified (i) an amount of USD 24,885,216 between 'inventories' and 'purchase of property and equipment' line items and (ii) USD 567,960 between 'trade and other payables' and 'purchase of property and equipment' line items in the consolidated statement of cash flows to improve the presentation.

The Board of Directors have approved the reissuance of Consolidated Financial Statements to the relevant authorities on 4 April 2019.

2 SIGNIFICANT ACCOUNTING POLICIES

2.1 BASIS OF PREPARATION

The Consolidated financial statements have been prepared under the historical cost basis, except for derivative financial instrument carried at fair value which includes the interest rate swap classified as held for trading

These financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and applicable requirements of United Arab Emirates laws and in compliance with the applicable provisions of the Companies Law pursuant to DIFC Law No. 5 of 2018.

The consolidated financial statements are presented in United States Dollars ("USD"), which is the Company's functional and presentation currency.

Basis of consolidation

The consolidated financial statements comprise the financial statements of the Company and its subsidiaries as at 31 December 2018. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Group controls an investee if, and only if, the Group has:

(a) Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee)

(b) Exposure, or rights, to variable returns from its involvement with the investee, and

(c) The ability to use its power over the investee to affect its returns

Generally, there is a presumption that a majority of voting rights results in control. To support this presumption and when the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including:

(a) The contractual arrangement with the other vote holders of the investee

(b) Rights arising from other contractual arrangements

(c) The Group's voting rights and potential voting rights

The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated financial statements from the date the Group gains control until the date the Group ceases to control the subsidiary.

Profit or loss and each component of other comprehensive income (OCI) are attributed to the equity holders of the parent of the Group and to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the consolidated financial statements of subsidiaries to bring their accounting policies into line with the Group's accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. Subsidiaries are fully consolidated from the date of acquisition or incorporation, being the date on which the Group obtains control, and continue to be consolidated until the date when such control ceases. The Consolidated financial statements of the subsidiaries are prepared for the same reporting period as the Group, using consistent accounting policies.

A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Group loses control over a subsidiary, it:

- Derecognises the assets (including goodwill) and liabilities of the subsidiary

- Derecognises the carrying amount of any non-controlling interests

- Derecognises the cumulative translation differences recorded in equity

- Recognises the fair value of the consideration received

- Recognises the fair value of any investment retained

- Recognises any surplus or deficit in profit or loss

- Reclassifies the parent's share of components previously recognised in OCI to profit or loss or retained earnings, as appropriate, as would be required if the Group had directly disposed of the related assets or liabilities

Business combinations and acquisition of non-controlling interests

Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, which is measured at acquisition date fair value, and the amount of any non-controlling interests in the acquiree. For each business combination, the Group elects whether to measure the non-controlling interests in the acquiree at fair value or at the proportionate share of the acquiree's identifiable net assets. Acquisition-related costs are expensed as incurred and included in administrative expenses.

When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree.

Contingent consideration, resulting from business combinations, is valued at fair value at the acquisition date. Contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity. Contingent consideration classified as an asset or liability that is a financial instrument and within the scope of IFRS 9 Financial Instruments, is measured at fair value with the changes in fair value recognised in the statement of profit or loss in accordance with IFRS 9. Other contingent consideration that is not within the scope of IFRS 9 is measured at fair value at each reporting date with changes in fair value recognised in profit or loss.

Goodwill is initially measured at cost (being the excess of the aggregate of the consideration transferred and the amount recognised for non-controlling interests and any previous interest held over the net identifiable assets acquired and liabilities assumed). If the fair value of the net assets acquired is in excess of the aggregate consideration transferred, the Group re-assesses whether it has correctly identified all of the assets acquired and all of the liabilities assumed and reviews the procedures used to measure the amounts to be recognised at the acquisition date. If the reassessment still results in an excess of the fair value of net assets acquired over the aggregate consideration transferred, then the gain is recognised in profit or loss.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group's cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.

Where goodwill has been allocated to a cash-generating unit (CGU) and part of the operation within that unit is disposed of, the goodwill associated with the disposed operation is included in the carrying amount of the operation when determining the gain or loss on disposal. Goodwill disposed in these circumstances is measured based on the relative values of the disposed operation and the portion of the cash-generating unit retained.

A contingent liability recognised in a business combination is initially measured at its fair value. Subsequently, it is measured at the higher of the amount that would be recognised in accordance with the requirements for provisions in IAS 37 Provisions, Contingent Liabilities and Contingent Assets or the amount initially recognised less (when appropriate) cumulative amortisation recognised in accordance with the requirements for revenue recognition.

Business combination involving entities under common control

Transactions involving entities under common control where transaction does not have any substance, the Group adopts the pooling of interest method. Under the pooling of interest method, the carrying value of assets and liabilities are used to account for these transactions. No goodwill is recognised as a result of the combination. The only goodwill recognised is any existing goodwill relating to either of the combining entities. Any difference between the consideration paid and the carrying value of net assets acquired is reflected as "Reserve" within equity.

A number of factors are considered in evaluating whether the transaction has substance including the following:

· the purpose of transaction;

· the involvement of outside parties in the transaction, such as non-controlling interests or other third parties;

· whether or not the transactions are conducted at fair values;

· the existing activities of the entities involved in the transaction; and

· whether or not it is bringing entities together into a "reporting entity" that did not exist before.

Periods prior to business combination involving entities under common control are not restated.

Interest in a joint venture

A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.

The considerations made in determining joint control are similar to those necessary to determine control over subsidiaries.

The Group's investment in joint venture are accounted for using the equity method. Under the equity method, the investment in joint venture is initially recognised at cost. The carrying amount of the investment is adjusted to recognise changes in the Group's share of net assets of the joint venture since the acquisition date. Goodwill relating to the joint venture is included in the carrying amount of the investment and is not tested for impairment separately.

The consolidated statement of profit or loss reflects the Group's share of the results of operations of joint venture. Any change in OCI of those investees is presented as part of the Group's OCI. In addition, when there has been a change recognised directly in the equity of the joint venture, the Group recognises its share of any changes, when applicable, in the statement of changes in equity. Unrealised gains and losses resulting from transactions between the Group and the joint venture are eliminated to the extent of the interest in the joint venture.

The aggregate of the Group's share of profit or loss of a joint venture is shown on the face of the consolidated statement of profit or loss outside operating profit and represents profit or loss after tax and non-controlling interests in the subsidiaries of the joint venture.

The financial statements of the joint venture are prepared for the same reporting period as the Group. When necessary, adjustments are made to bring the accounting policies in line with those of the Group.

After application of the equity method, the Group determines whether it is necessary to recognise an impairment loss on its investment in joint venture. At each reporting date, the Group determines whether there is objective evidence that the investment in the joint venture is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between the recoverable amount of the joint venture and its carrying value, and then recognises the loss as 'Share of profit of an associate and a joint venture' in the consolidated statement of profit or loss.

Upon loss of joint control over the joint venture, the Group measures and recognises any retained investment at its fair value. Any difference between the carrying amount of the joint venture upon loss of joint control and the fair value of the retained investment and proceeds from disposal is recognised in profit or loss.

2.2 CHANGES IN THE ACCOUNTING POLICIES AND DISCLOSURES

(a) New and amended standards and interpretations

The Group applied for the first time certain standards and amendments, which are effective for annual periods beginning on or after 1 January 2018. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.

Although these new standards and amendments applied for the first time in 2018, they did not have a material impact on the consolidated financial statements of the Group. The nature and the impact of each new standard or amendment is described below:

IFRS 15 Revenue from Contracts with Customers

IFRS 15 supersedes IAS 11 Construction Contracts, IAS 18 Revenue and related interpretations and it applies, with limited exceptions, to all revenue arising from contracts with its customers. IFRS 15 establishes a five-step model to account for revenue arising from contracts with customers and requires that revenue be recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer.

IFRS 15 requires entities to exercise judgement, taking into consideration all of the relevant facts and circumstances when applying each step of the model to contracts with their customers. The standard also specifies the accounting for the incremental costs of obtaining a contract and the costs directly related to fulfilling a contract.

The Group has adopted IFRS 15 with effect from 1 January 2018 using the modified retrospective method of adoption with effect of initially applying this standard recognised at the date of initial application. Accordingly, the information presented for 2017 has not been restated, and has been presented as previously reported under accounting policies disclosed in consolidated financial statements of the Group as per IAS 18 and related interpretations. The adoption of IFRS 15 did not have any material impact on the Group except for the recognition of contract assets for those revenues that are earned but not billed to the customers. Therefore, upon adoption of IFRS 15, the Group reclassified USD 12,975,535 from other receivables to Contract assets as at 1 January 2018.

IFRS 9 Financial Instruments

IFRS 9 Financial Instruments replaces IAS 39 Financial Instruments: Recognition and Measurement for annual periods beginning on or after 1 January 2018, bringing together all three aspects of the accounting for financial instruments: classification and measurement; impairment; and hedge accounting.

The Group has applied IFRS 9 with the initial application date of 1 January 2018. The Group has opted exemption not to restate comparative information with respect to reclassification and measurement (including impairment) requirements. Accordingly, the information presented for 2017 is under accounting policies disclosed in annual financial statements of the Company as per IAS 39 and related interpretations.

IFRS 9 resulted in changes in accounting policies with no change to the amounts recognised, and therefore no transition adjustment is presented.

(a) Classification and measurement

IFRS 9 retains most of the existing requirements of IAS 39 for the classification and measurement of financial liabilities, though, it has removed held to maturity, loans and receivables and available-for-sale classification under IAS 39 for financial assets.

Adoption of IFRS 9 has not had a significant effect on the Group's accounting policies related to financial liabilities. The impact of IFRS 9 on the classification and measurement of financial assets of the Company is set out below.

Except for certain trade receivables and contract assets, under IFRS 9, the Group initially measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit and loss, transaction costs. On initial recognition, a financial asset is classified and measured under IFRS 9 as follows:

· Amortised costs

· FVOCI, debt instruments

· FVOCI, equity instruments

· FVTPL

The classification is based on two criteria:

· The business model for managing the assets; and

· Whether the instruments' contractual cash flows represent 'solely payments of principal and interest' on the principal amount outstanding (the 'SPPI criterion').

The assessment of the business model was made as of 1 January 2018, the date of initial application. Accordingly, the trade receivables and contract assets, due from related parties and cash and bank balances have been classified as at amortised cost on adoption of IFRS 9.

As at 31 December 2017, the Group classified its instrument in Egyptian Chinese Drilling Company (ECDC) as available for sale investment in its 2017 consolidated financial statements. The Group has changed its classification to equity instruments at fair value through other comprehensive income. However, during the year, the Group acquired joint control over ECDC (refer to note 11), which resulted in the change of classification of this asset to investment in a joint venture.

There were no changes to the carrying values of the above financial assets on transition to new classification and measurement per IFRS 9.

(b) Impairment

The adoption of IFRS 9 has fundamentally changed the Group's accounting for impairment losses for financial assets by replacing incurred loss approach under IAS 39 with a forward-looking expected credit loss (ECL) approach.

ECL are based on the difference between contractual cash flows due in accordance with the contract and all the cash flows that the Company expect to receive. The shortfall is then discounted at an approximation to the asset's original effective interest rate.

For Trade and other receivables and contract assets, the Group has applied the standard's simplified approach and has calculated the ECLs based on lifetime expected credit losses. The Group has established a provision matrix that is based on the Group's historical credit loss experience, adjusted for forward-looking factors specific to the debtors and economic environment.

The Group considers a financial asset in default when contractual payments are past due. However, in certain cases, the Group may also consider a financial asset to be in default when internal or external information indicates that the Group is likely to receive the outstanding contractual amounts in full before taking into account any credit enhancements held by the Group. The adoption of the ECL requirements of IFRS 9 did not result in any significant changes in impairment allowances.

(c) Hedge accounting

IFRS 9 does not change the general principles of how an entity accounts for effective hedges. The Company do not have hedge instruments and hence the adoption of IFRS 9 did not have any impact on the Group's consolidated financial statements.

Several other amendments and interpretations became effective as of 1 January 2018 and apply for the first time in 2018, but do not have an impact on the consolidated financial statements of the Group. These amendments and interpretations are summarised below:

· Clarifications to IFRS 15 Revenue from Contracts with Customers

· IFRIC Interpretation 22 Foreign Currency Transactions and Advance Consideration

· Amendments to IAS 40 Transfers of Investment Property

· Amendments to IFRS 2 Classification and Measurement of Share-based Payment Transactions

· Amendments to IFRS 4 Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts

· Amendments to IAS 28 Investments in Associates and Joint Ventures - Clarification that measuring investees at fair value through profit or loss is an investment-by-investment choice

· Amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards - Deletion of short-term exemptions for first-time adopters.

(b) Standards, amendments and interpretations in issue but not effective

The standards and interpretations that are issued, but not yet effective are disclosed below. These standards and interpretations will become effective for annual periods beginning on or after the dates as respectively mentioned there against. The Group intends to adopt these standards, if applicable, when they become effective.

· Amendments to IFRS 10 and IAS 28: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (effective date not decided)

· IFRS 16 Leases (effective date: 1 January 2019)

· IFRS 17 Insurance Contracts (effective date: 1 January 2021)

· IAS 19 Plan Amendment, Curtailment or Settlement (effective date: 1 January 2019)

· Amendments to IFRS 9: Prepayment Features with Negative Compensation (effective date: 1 January 2019)

· Amendments to IAS 28: Long-term interests in associates and joint ventures (effective date: 1 January 2019)

· Annual Improvements 2015-2017 Cycle (effective date: 1 January 2019)

• IFRS 3 Business Combinations

• IFRS 11 Joint Arrangements

• IAS 12 Income Taxes

• IAS 23 Borrowing Costs

· IFRIC Interpretation 23 Uncertainty over Income Tax Treatment (effective date: 1 January 2019)

These standards, interpretations and improvements are not expected to a have a material impact on the consolidated financial statements of the Group, except for IFRS16 Leases for which management is in the process of carrying out impact analysis. Management anticipates that all of the above Standards and Interpretations will be adopted by the Group to the extent applicable to them from their effective dates.

IFRS 16 Leases

IFRS 16 was issued in January 2016 and it replaces IAS 17 - Leases and related IFRIC 4, SIC 15 and SIC 27. It introduces a single, on-balance sheet lease accounting model for lessees. At the commencement date of a lease, the lessee recognises a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. There is a recognition exemption for short-term leases, which will be recognised on a straight-line basis as expense in profit or loss and leases of low value assets. Lessees shall remeasure the lease liability and adjust the right-of-use asset on occurrence of certain events such as change in the lease term, future lease payments resulting from a change in an index or rate used to determine those payments.

The standard is effective for annual periods beginning on or after 1 January 2019 and requires to make more extensive disclosures than under IAS 17. Early adoption is permitted. The Group plans to apply IFRS 16 initially on 1 January 2019, using a modified retrospective approach. Therefore, the cumulative effect of adopting IFRS 16 will be recognised as an adjustment to the opening balance of retained earnings at 1 January 2019, with no restatement of comparative information.

As at 31 December 2018, the Group has non-cancellable operating lease commitments of USD 218,556 as disclosed in note 27. A preliminary assessment indicates that these arrangements will meet the definition of a lease under IFRS 16, and hence the Group will recognise a right-of-use asset and liability in respect of all these leases unless they qualify as short-term leases or that are considered of low value upon the application of IFRS 16. The nature of expenses related to those leases will also change because IFRS 16 replaces the straight-line operating lease expense with a depreciation charge for right-of-use assets and interest expense on lease liabilities. Further, the classification of cash flows will be affected as the lease payments will be split into a principal and an interest portion which will be presented as financing and operating cash flows, respectively; operating lease payments are currently presented as operating cash flows.

The Group is in the process of finalizing the analysis of the impact of IFRS 16 at the date of issuance of these consolidated financial statements. In summary, the application of IFRS 16 is expected to result in the Group recognizing on its statement of financial position right-of-use assets with corresponding lease liabilities using an appropriate incremental borrowing rate. The Group does not expect that the application of IFRS 16 will have a significant impact on its equity on transition.

2.3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Current versus non-current classification

The Group presents assets and liabilities in the consolidated statement of financial position based on current/non-current classification. An asset is current when it is:

· Expected to be realised or intended to be sold or consumed in the normal operating cycle;

· Held primarily for the purpose of trading;

· Expected to be realised within twelve months after the reporting period; or

· Cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period.

All other assets are classified as non-current.

A liability is current when:

· It is expected to be settled in the normal operating cycle;

· It is held primarily for the purpose of trading;

· It is due to be settled within twelve months after the reporting period;

Or

· There is no unconditional right to defer the settlement of the liability for at least twelve months after the reporting period.

The Group classifies all other liabilities as non-current.

Revenue recognition

The Group recognises revenue from contracts with customers based on a five-step model as set out in IFRS 15.

Step 1. Identify contract(s) with a customer: A contract is defined as an agreement between two or more parties that creates enforceable rights and obligations and sets out the criteria for every contract that must be met.

Step 2. Identify performance obligations in the contract: A performance obligation is a promise in a contract with a customer to transfer a good or service to the customer.

Step 3 Determine the transaction price: The transaction price is the amount of consideration to which the Group expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties.

Step 4. Allocate the transaction price to the performance obligations in the contract: For a contract that has more than one performance obligation, the Group allocates the transaction price to each performance obligation in an amount that depicts the amount of consideration to which the Group expects to be entitled in exchange for satisfying each performance obligation.

Step 5. Recognise revenue when (or as) the Group satisfies a performance obligation.

The Group satisfies a performance obligation and recognises revenue over time, if one of the following criteria is met:

a) The Group's performance does not create an asset with an alternate use to the Group and the Group has as an enforceable right to payment for performance completed to date.

b) The Group's performance creates or enhances an asset that the customer controls as the asset is created or enhanced.

c) The customer simultaneously receives and consumes the benefits provided by the Group's performance as the Group performs.

For performance obligations where one of the above conditions are not met, revenue is recognised at the point in time at which the performance obligation is satisfied.

When the Group satisfies a performance obligation by delivering the promised goods or services it creates a contract-based asset on the amount of consideration earned by the performance. Where the amount of consideration received from a customer exceeds the amount of revenue recognised this gives rise to a contract liability.

Revenue is measured at the fair value of the consideration received or receivable, taking into account contractually defined terms of payment and excluding taxes and duty. The Group assesses its revenue arrangements against specific criteria to determine if it is acting as principal or agent.

Revenue is recognised to the extent it is probable that the economic benefits will flow to the Group and the revenue and costs, if applicable, can be measured reliably.

Based on the assessment of the customer contracts, the Group has identified one performance obligation for each of its contracts and therefore revenue is recognized over time. Some of the customer contracts may include mobilization and demobilisation activities for which revenue, along with the related cost are amortised over the period of contract life from the date of the completion of mobilization activities.

Dividends

Revenue is recognised when the Group's right to receive the payment is established, which is generally when shareholders approve the dividend.

Interest income

Interest income is recognised as the interest accrues using the effective interest rate method, under which the rate used exactly discounts, estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset.

Contract balances

Contract assets

A contract asset is the right to consideration in exchange of goods or services transferred to the customer. If the Group performs by transferring goods or services to a customer before the customer pays consideration or before payment is due, a contract asset is recognised for earned consideration that is conditional.

Trade receivables

A receivable represents the Group's right to an amount of consideration that is unconditional (i.e., only the passage of time is required before the payment of the consideration is due). Refer to the accounting policies of financial assets in section financial instruments - initial recognition and subsequent measurement.

Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of the asset. All other borrowing costs are expensed in the period in which they incurred. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds.

Cash and cash equivalents

Cash and cash equivalents in the statement of financial position comprise cash at banks and on hand and short-term deposits with a maturity of three months or less, which are subject to an insignificant risk of changes in value.

For the purpose of the consolidated statement of cash flows, cash and cash equivalents consist of cash and short-term deposits, as defined above.

Income tax

Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted, at the reporting date in the countries where the Group operates and generates taxable income. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate. The Group is not subject to income tax in accordance with the Egyptian tax law (Egypt) and DIFC law (UAE). The Subsidiary's Branches are subject to income tax in accordance to Kingdom of Saudi Arabia Law and Algeria Law.

Deferred tax

Deferred tax is provided using the liability method on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes at the reporting date. Deferred tax liabilities are recognised for all taxable temporary differences, except:

· When the deferred tax liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss

· In respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint arrangements, when the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future

Deferred tax assets are recognised for all deductible temporary differences, the carry forward of unused tax credits and any unused tax losses. Deferred tax assets are recognised to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilised, except:

· When the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss

· In respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint arrangements, deferred tax assets are recognised only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized

The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are re-assessed at each reporting date and are recognised to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date.

Foreign currencies

The Group's consolidated financial statements are presented in USD, which is also the Company's functional currency. For each entity, the Group determines the functional currency and items included in the financial statements of each entity are measured using that functional currency. The Group uses the direct method of consolidation and on disposal of a foreign operation, the gain or loss that is reclassified to profit or loss reflects the amount that arises from using this method.

Transactions and balances

Transactions in foreign currencies are initially recorded by the Group's entities at their respective functional currency spot rates at the date the transaction first qualifies for recognition.

Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency spot rates of exchange at the reporting date.

Differences arising on settlement or translation of monetary items are recognised in profit or loss with the exception of monetary items that are designated as part of the hedge of the Group's net investment in a foreign operation. These are recognised in OCI until the net investment is disposed of, at which time, the cumulative amount is reclassified to profit or loss. Tax charges and credits attributable to exchange differences on those monetary items are also recorded in OCI.

Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. The gain or loss arising on translation of non-monetary items measured at fair value is treated in line with the recognition of the gain or loss on the change in fair value of the item (i.e., translation differences on items whose fair value gain or loss is recognised in OCI or profit or loss are also recognised in OCI or profit or loss, respectively).

In determining the spot exchange rate to use on initial recognition of the related asset, expense or income (or part of it) on the derecognition of a non-monetary asset or non-monetary liability relating to advance consideration, the date of the transaction is the date on which the Group initially recognises the non-monetary asset or non-monetary liability arising from the advance consideration. If there are multiple payments or receipts in advance, the Group determines the transaction date for each payment or receipt of advance consideration.

Inventories

Inventories are initially measured at cost and subsequently at lower of cost using weighted average method or net realisable value.

Property and equipment

Assets under construction, property and equipment are stated at cost, net of accumulated depreciation and/or accumulated impairment losses, if any. Such cost includes the cost of replacing parts of the property and equipment and borrowing costs for long-term construction projects if the recognition criteria are met. When significant parts of property and equipment are required to be replaced at intervals, the Group recognises such parts as individual assets with specific useful lives and depreciates them accordingly. Likewise, when a major inspection is performed, its cost is recognised in the carrying amount of the plant and equipment as a replacement if the recognition criteria are satisfied. All other repair and maintenance costs are recognised in the profit or loss as incurred.

Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets as follows:

Rigs include overhaul, environment and safety costs that are capitalised and depreciated over 5 years. No depreciation is charged on assets under construction. The useful lives and depreciation method are reviewed annually to ensure that the method and period of depreciation are consistent with the expected pattern of economic benefits from these assets. Any change in estimated useful life is applied prospectively effective from the beginning of year. Expenditure incurred to replace a component of an item of property and equipment that is accounted for separately is capitalised and the carrying amount of the component that is replaced is written off. Other subsequent expenditure is capitalised only when it increases future economic benefits of the related item of property and equipment. All other expenditure is recognised in the consolidated statement of profit or loss as the expense is incurred.

Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of property and equipment may not be recoverable.

Whenever the carrying amount of property and equipment exceeds their recoverable amount, an impairment loss is recognised in the consolidated statement of profit or loss. The recoverable amount is the higher of fair value less costs to sell of property and equipment and the value in use. The fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. While value in use is the present value of estimated future cash flows expected to arise from the continuing use of property and equipment and from its disposal at the end of its useful life.

Reversal of impairment losses recognised in the prior years are recorded when there is an indication that the impairment losses recognised for the property and equipment no longer exist or have reduced.

An item of property and equipment is derecognised upon disposal or when no further economic benefits are expected from its use or disposal. Any gain or loss arising on de recognition is included in the consolidated statement of profit or loss.

Intangible assets

Intangible assets acquired separately are measured on initial recognition at cost. After initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. Internally generated intangible assets are not capitalised and expenditure is reflected in the consolidated profit and loss in the year in which the expenditure is incurred. The useful lives of intangible assets are assessed as either finite or indefinite. Intangible assets with finite lives are amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life is reviewed at least at each financial year end. Intangible assets are amortised using the straight-line method over their estimated useful lives (5 years).

Financial instruments

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

Financial assets

Initial recognition and measurement

Financial assets are classified, at initial recognition, as subsequently measured at amortised cost, fair value through other comprehensive income (OCI), and fair value through profit or loss.

The classification of financial assets at initial recognition depends on the financial asset's contractual cash flow characteristics and the Group's business model for managing them. With the exception of trade receivables and contract assets that do not contain a significant financing component or for which the Group has applied the practical expedient, the Group initially measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs. Trade receivables and contract assets that do not contain a significant financing component or for which the Group has applied the practical expedient are measured at the transaction price determined under IFRS 15.

In order for a financial asset to be classified and measured at amortised cost or fair value through OCI, it needs to give rise to cash flows that are 'solely payments of principal and interest (SPPI) on the principal amount outstanding. This assessment is referred to as the SPPI test and is performed at an instrument level.

The Group's business model for managing financial assets refers to how it manages its financial assets in order to generate cash flows. The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both.

Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the market place (regular way trades) are recognised on the trade date, i.e., the date that the Group commits to purchase or sell the asset.

Subsequent measurement

For purposes of subsequent measurement, financial assets are classified in four categories:

· Financial assets at amortised cost (debt instruments)

· Financial assets at fair value through OCI with recycling of cumulative gains and losses (debt instruments)

· Financial assets designated at fair value through OCI with no recycling of cumulative gains and losses upon derecognition (equity instruments)

· Financial assets at fair value through profit or loss

The Group's financial assets at amortised cost include trade and other receivables, due from related parties and cash and bank balances. The Group does not have financial assets at fair value through OCI or through profit or loss.

Financial assets at amortised cost (debt instruments)

This category is the most relevant to the Group. The Group measures financial assets at amortised cost if both of the following conditions are met:

· The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows; and

· The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

Financial assets at amortised cost are subsequently measured using the effective interest (EIR) method and are subject to impairment. Gains and losses are recognised in profit or loss when the asset is derecognised, modified or impaired.

Derecognition of financial assets

A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognised (i.e., removed from the Group's consolidated statement of financial position) when:

· The rights to receive cash flows from the asset have expired; or

· The Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a 'pass-through' arrangement and either (a) the Group has transferred substantially all the risks and rewards of the asset, or

· The Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass- through arrangement, it evaluates if, and to what extent, it has retained the risks and rewards of ownership. When it has neither transferred nor retained substantially all of the risks and rewards of the asset, nor transferred control of the asset, the Group continues to recognise the transferred asset to the extent of its continuing involvement. In that case, the Group also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group has retained.

Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.

Impairment of financial assets

The Group recognises an allowance for expected credit losses (ECLs) for all debt instruments not held at fair value through profit or loss. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Group expects to receive, discounted at an approximation of the original effective interest rate. The expected cash flows will include cash flows from the sale of collateral held or other credit enhancements that are integral to the contractual terms.

ECLs are recognised in two stages. For credit exposures for which there has not been a significant increase in credit risk since initial recognition, ECLs are provided for credit losses that result from default events that are possible within the next 12-months (a 12-month ECL). For those credit exposures for which there has been a significant increase in credit risk since initial recognition, a loss allowance is required for credit losses expected over the remaining life of the exposure, irrespective of the timing of the default (a lifetime ECL).

For trade receivables and contract assets, the Group applies a simplified approach in calculating ECLs. Therefore, the Group does not track changes in credit risk, but instead recognises a loss allowance based on lifetime ECLs at each reporting date. The Group has established a provision matrix that is based on its historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment.

The Group considers a financial asset in default when contractual payments are 90 days past due. However, in certain cases, the Group may also consider a financial asset to be in default when internal or external information indicates that the Group is unlikely to receive the outstanding contractual amounts in full before taking into account any credit enhancements held by the Group. A financial asset is written off when there is no reasonable expectation of recovering the contractual cash flows.

Financial liabilities

Initial recognition and measurement

Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, loans and borrowings, payables, or as derivatives designated as hedging instruments in an effective hedge, as appropriate.

All financial liabilities are recognised initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs.

The Group's financial liabilities include trade and other payables, due to related party balances and loans and borrowings including bank overdrafts and other financial liabilities.

Subsequent measurement

The measurement of financial liabilities depends on their classification, as described below:

(i) Trade and other payables

Liabilities are recognised for amounts to be paid in the future for goods or services received, whether billed by the supplier or not.

(ii) Loans and borrowings

This is the category most relevant to the Group. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the EIR method. Gains and losses are recognised in profit or loss when the liabilities are derecognised as well as through the EIR amortisation process.

Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included as finance costs in the consolidated statement of profit or loss. This category generally applies to interest-bearing loans and borrowings.

(iii) Other financial liabilities at amortised cost

Other financial liabilities are initially measured at fair value, net of transaction costs and are subsequently measured at amortised cost using the effective interest method.

The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period.

Derecognition of financial liabilities

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the consolidated statement of profit or loss.

Offsetting of financial instruments

Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statement of financial position if there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, to realise the assets and settle the liabilities simultaneously.

Derivative financial instrument

A derivative is a financial instrument or other contract with all three of the following characteristics:

· Its value changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided that, in the case of a non-financial variable, it is not specific to a party to the contract (i.e., the 'underlying').

· It requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts expected to have a similar response to changes in market factors.

· It is settled at a future date.

The Group enters into derivative transactions with various counterparties. These include interest rate swap. Derivatives are recorded at fair value and carried as assets when their fair value is positive and as liabilities when their fair value is negative. The notional amount and fair value of such derivatives are disclosed separately in Note 29.

Impairment of non-financial assets

The Group assesses at each reporting date whether there is an indication that a non-financial asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset's recoverable amount. An asset's recoverable amount is the higher of an asset's or cash-generating units (CGU) fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs to sell, an appropriate valuation model is used. Impairment losses of continuing operations are recognised in the consolidated statement of profit or loss in those expense categories consistent with the function of the impaired asset.

An assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the Group estimates the asset's or cash-generating unit's recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset's recoverable amount since the last impairment loss was recognised. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in the consolidated statement of profit or loss.

Leases

The determination of whether an arrangement is (or contains) a lease is based on the substance of the arrangement at the inception of the lease. The arrangement is, or contains, a lease if fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset (or assets), even if that asset (or those assets) is not explicitly specified in an arrangement.

Group as a lessee

A lease is classified at the inception date as a finance lease or an operating lease. A lease that transfers substantially all the risks and rewards incidental to ownership to the Group is classified as a finance lease.

Finance leases are capitalised at the commencement of the lease at the inception date fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognised in finance costs in the consolidated statement of profit or loss.

A leased asset is depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term. An operating lease is a lease other than a finance lease. Operating lease payments are recognised as an operating expense in the consolidated statement of profit or loss on a straight-line basis over the lease term.

Group as a lessor

Leases in which the Group does not transfer substantially all the risks and rewards of ownership of an asset are classified as operating leases. Rental income arising is accounted for on a straight-line basis over the lease terms and is included in revenue in the consolidated statement of profit or loss due to its operating nature. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised over the lease term on the same basis as rental income. Contingent rents are recognised as revenue in the period in which they are earned.

Provisions

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and the amount can be reliably estimated. When the Group expects some or all of a provision to be reimbursed, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the consolidated statement of profit or loss net of any reimbursement. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation at the end of the reporting period, using a rate that reflects current market assessments of the time value of money and the risks specific to the obligation. Provisions are reviewed at each statement of financial position date and adjusted to reflect the current best estimate. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision is reversed.

Contingencies

Contingent liabilities are not recognised in the consolidated financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. A contingent asset is not recognised in the consolidated financial statements but disclosed when an inflow of economic benefits is probable.

Legal reserve

According to one of the subsidiaries' articles of association, 5% of the net profit for the prior year of the Subsidiary is transferred to a legal reserve until this reserve reaches 20% of the issued capital. The reserve is used upon a decision from the general assembly meeting based on the proposal of the Board of Directors of the Subsidiary.

Fair value measurement

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either in the principal market for the asset or liability or the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible to the Group.

The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. For assets traded in an active market, fair value is determined by reference to quoted market bid prices. The fair value of interest-bearing items is estimated based on discounted cash flows using interest rates for items with similar terms and risk characteristics. For unquoted assets, fair value is determined by reference to the market value of a similar asset or is based on the expected discounted cash flows. The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.

All assets and liabilities for which fair value is measured or disclosed in the Consolidated financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

· Level 1 - Quoted (unadjusted) market prices in active markets for identical assets or liabilities

· Level 2 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable

· Level 3 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable

Cash dividend and non-cash distribution to equity holders of the Parent

The Group recognises a liability to make cash or non-cash distributions to equity holders of the Parent when the distribution is authorised and the distribution is no longer at the discretion of the Group. A distribution is authorised when it is approved by the shareholders. A corresponding amount is recognised directly in equity. Non-cash distributions are measured at the fair value of the assets to be distributed with fair value remeasurement recognised directly in equity. Upon distribution of non-cash assets, any difference between the carrying amount of the liability and the carrying amount of the assets distributed is recognised in the consolidated statement of profit or loss. 

3 SIGNIFICANT ACCOUNTING ESTIMATES, JUDGEMENTS AND ASSUMPTIONS

Judgments

The preparation of the Group's consolidated financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets, liabilities, and the accompanying disclosures, and the disclosure of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future periods.

In the process of applying the Group's accounting policies, management has made certain judgments, estimates and assumptions in relation to the accounts receivable, customer credit periods and doubtful debts provisions, creditors' payment period, useful lives and impairment of property and equipment, income taxes and various other policy matters. These judgments have the most significant effects on the amounts recognised in the consolidated financial statements.

Property lease classification - Group as lessee

The Group has entered into commercial property lease on its office premises. The Group has determined, based on an evaluation of the terms and conditions of the arrangements, that it obtained all the significant risks and rewards of ownership of this property and accounts for the contracts as finance lease.

Consolidation of an entity in which the Group holds less than a majority of voting right

The Group considers that it controls United Precision Drilling Company W.L.L ("UPDC") even though it owns less than 50% of the voting rights. This is mainly because (a) the Group has a substantive right to direct conclusion of revenue contracts, capital expenditures and operational management; (b) the Group has a significantly higher exposure to variability of returns than its voting rights; (c) the Group is the owner of all drilling rigs and equipment and charters the drilling rigs to UPDC on exclusive basis. Management also considered that non-controlling interest in UPDC is not material as compared to the consolidated financial position.

Estimates and assumptions

Impairment of trade receivables and contract assets

The Group recognises an allowance for expected credit losses (ECLs). The Group applies a simplified approach in calculating ECLs with respect to trade receivables and contract assets. Therefore, the Group does not track changes in credit risk, but instead recognises a loss allowance based on lifetime ECLs at each reporting date. At the consolidated statement of financial position date, gross trade receivables and contract assets were USD 142,071,534 (2017: USD 69,681,069) and the provision for impairment in trade receivables and contract assets was USD 4,944,373 (2017: USD 3,693,766). Any difference between the amounts actually collected in future periods and the amounts expected will be recognised in the consolidated statement of comprehensive income.

Taxes

The Group is exposed to income taxes in certain jurisdictions. Significant judgement is required to determine the total provision for taxes. Uncertainties exist with respect to the interpretation of complex tax regulations, changes in tax laws, and the amount and timing of future taxable income. Given the wide range of international business relationships and the long-term nature and complexity of existing contractual agreements, differences arising between the actual results and the assumptions made, or future changes to such assumptions, could necessitate future adjustments to tax income and expense already recorded. The Group establishes provisions, based on reasonable estimates, for possible consequences of audits by the tax authorities of the respective counties in which it operates. The amount of such provisions is based on various factors, such as experience of previous tax audits and differing interpretations of tax regulations by the taxable entity and the responsible tax authority. Such differences in interpretation may arise for a wide variety of issues depending on the conditions prevailing in the respective domicile of the Group companies. At the consolidated statement of financial position date, income tax payable was USD 3,040,753 (2017: USD 2,288,282).

Impairment of non-financial assets

The Group assesses whether there are any indicators of impairment for all non-financial assets at each reporting date. The non-financial assets are tested for impairment when there are indicators that the carrying amounts may not be recoverable. When value in use calculations are undertaken, management estimates the expected future cash flows from the asset or cash-generating unit and chooses a suitable discount rate in order to calculate the present value of those cash flows.

Useful lives of property, plant and equipment

The Group's management determines the estimated useful lives of its property, plant and equipment for calculating depreciation. This estimate is determined after considering the expected usage of the asset or physical wear and tear. Management reviews the residual value and useful lives annually and future depreciation charge would be adjusted where the management believes the useful lives differ from previous estimates. In 2017, the management revised estimated useful life of rigs from 15 years to 27 years based on the technical assessment effective from 1 January 2017, which resulted in a decrease of depreciation charge by the amount of USD 8,605,090 in 2017.

Impairment of inventories

Inventories are held at the lower of cost and net realisable value. When inventories become old or obsolete, an estimate is made of their net realisable value. At the consolidated statement of financial position date, gross inventories were USD 52,508,041 (2017: USD 20,919,477) with no provisions for slow moving items. Any difference between the amounts actually realised in future periods and the amounts expected will be recognised in the consolidated statement of comprehensive income.

Impairment of dividends receivable

The Group has dividends receivable from Egyptian Chinese Drilling Company (refer to note 11) which is classified as investment in joint venture. As at 31 December 2018, the Group provided provision for impairment in dividends receivable for USD 245,000 (2017: USD 245,000). Any difference between the amounts actually collected in future periods and the amounts expected will be recognised in the consolidated statement of comprehensive income.  

4 SEGMENT INFORMATION

Management has determined the operating segments based on the reports reviewed by the Chief Executive Officer (CEO) that are used to make strategic decisions. As operationally, the Group is only in the oil and gas production and drilling services, the CEO considers the business from a geographic perspective and has identified five geographical segments (2017: four geographical segments). Management monitors the operating results of its segments separately for the purpose of making decisions about resource allocation and performance assessment.

Segment

(i) As per the intersegment lease agreements, Egypt charged KSA and Algeria amounting to USD 35,846,020 and USD 1,450,353, respectively, as a lease charges (2017: 16,672,896 and 11,196,470, respectively). These amounts are not eliminated in segment wise gross profit and profit information as disclosed above.

(ii) Management presents the assets in the segment which holds such assets, while the capital expenditure are presented in the segment where such assets are utilised.

(iii) The comparative figures for capital expenditure and depreciation and amortisation have been reclassified in order to conform to the presentation for the current year.

5 BUSINESS COMBINATIONS

As part of the Group's strategy to expand its fleet and operations, the Group has acquired the assets and entities which are accounted for as business combinations. These business combinations resulted in a bargain purchase transactions because the fair value of assets acquired and liabilities assumed exceeded the total fair value of the consideration paid and the fair value of non- controlling interests.

A. Acquisition of three rigs from Nabors Drilling International II Limited

On 12 June 2018, the Group acquired three jack-up drilling rigs, located in the Kingdom of Saudi Arabia, in their entirety, including all spare parts, equipment and inventory, from Nabors Drilling International II Limited (Nabors). The Group acquired these rigs to expand its operations in the Kingdom of Saudi Arabia. The acquisition has been accounted for using the acquisition method.

Identifiable net assets acquired

The provisional fair values of the identifiable net assets of these rigs as at the date of acquisition were:

*Additional clarifications and analysis is required to determine the acquisition date fair value of property and equipment. Thus, the property and equipment may be subsequently adjusted, with a corresponding adjustment to gain from bargain purchase prior to 12 June 2019 (one year after the transaction).

**In accordance with the purchase and sale agreement, the Group issued 1,590,852 fully paid shares to Nabors, valued at the price as quoted on the London Stock Exchange on 12 June 2018.

From the date of acquisition, the assets contributed USD 27,866,791 of revenue from continuing operations of the Group. It is impracticable to disclose the revenue and profit or loss of the rigs acquired from Nabors for the current reporting period as if the combination had taken place at the beginning of the year, as the acquired assets and entities did not represent a reporting entity and the historical information is not available. The Group acquired the business comprised of the rigs and the related items, rather than the entire entity from Nabors. The amount of profit contributed by these assets from the date of acquisition is also not disclosed, as these rigs do not represent a separate reporting entity and it impracticable to prepare the profit and loss for the rigs.

B. Acquisition of the rigs and subsidiaries from Weatherford Drilling International

On 31 October 2018 and 30 November 2018, the Group acquired the assets from Weatherford Drilling International in Kuwait and The Kingdom of Saudi Arabia (KSA), respectively. The acquisitions have been accounted for using the acquisition method.

The Group acquired the following in Kuwait:

i) Kuwait Assets: 12 onshore rigs and related equipment, drilling contracts, other vendor contracts, certain employees, inventories to be used in the drilling business, the business intellectual property and records related to the drilling business and rig moving equipment; and

ii) 100% interest in PDC Cyprus Holding ("PDC") (pre-qualified shareholder of UPDC for Kuwait Oil Company tender process) which has a 47.5% interest in UPDC, a Kuwait entity which handles the operations of the rigs in Kuwait including the employees and the drilling contracts.

The Group acquired 11 onshore rigs in KSA and related equipment, drilling contracts, other vendor contracts, certain employees, inventories to be used in the drilling business, the business intellectual property and records related to the drilling business.

Identifiable net assets acquired

The provisional fair value of the identifiable assets and liabilities as at the acquisition were:

The gross amount of trade receivables is USD 11,537,905 which approximates to its fair value. It is expected that the full contractual amounts can be collected and management estimated that no allowance for ECL is required.

(i) Outstanding consideration payable for Kuwait assets amounting to USD 12,000,000 is included in trade and other payables (Note 18).

*Additional clarifications and analysis is required to determine the acquisition date fair value of the assets and liabilities acquired. Thus, the assets and liabilities may be subsequently adjusted, with a corresponding adjustment to gain from bargain purchase prior to 31 October 2019 (Kuwait assets) and 30 November 2019 (KSA assets) (one year after the transaction).

*\* This represents share of non-controlling interests over the net assets of UPDC as of the acquisition date.

From the date of acquisition, the acquired assets and entities contributed USD 20,681,056 of revenue from continuing operations of the Group, and UPDC reported the profit of USD 484,232. It is impracticable to disclose the revenue and profit or loss of the combined businesses for the current reporting period, as if the combination had taken place at the beginning of the year, as the acquired assets and entities did not represent a reporting entity and the historical information is not available. The Group acquired the business comprised of the rigs along with the related items and UPDC rather than all the entities owning these businesses from the seller.

6 REVENUE FROM CONTRACT WITH CUSTOMERS

*Projects income represents services relating to outsourcing various operating projects for clients such as manpower, well platform installation, maintenance and repair services.

The disaggregation of revenue in accordance with IFRS 15 is in line with the segments disclosed in Note 4 above as the management monitors the revenue geographically and the only operational revenue stream is mainly drilling services (units operations) and the revenue is recognised over the time of service.

7 COST OF REVENUE

8 GENERAL AND ADMINISTRATIVE EXPENSE

9 FINANCE COSTS

10 INCOME TAX

*Current income tax expense includes withholding taxes on intercompany rentals in the Kingdom of Saudi Arabia amounting to USD 1,979,495 (2017: USD 1,185,800).

**Prior year adjustments represent tax provision recorded in Algeria during 2016 which is released during 2017 based on the tax filings and tax assessment.

The effective tax rate is 5% (2017: 3%, excluding the credit in respect of prior year adjustments).

The Group operates in jurisdictions which are subject to tax at higher rates than the statutory corporate tax rate of 0%, which is applicable to profits in Algeria and Kingdom of Saudi Arabia where applicable tax rate is 26% and 20% respectively.

Egyptian corporations are normally subject to corporate income tax at a statutory rate of 22.5% however the Company has been registered in a Free Zone in Alexandria under the Investment Law No 8 of 1997 which allows exemption from corporate income tax.

11 INVESTMENT IN A JOINT VENTURE

The Group holds 48.75% equity interest in Egyptian Chinese Drilling Company (ECDC) amounting to USD 2,184,382 (2017: USD 1,950,000). The Group acquired the investment on 30 March 2015 from AMAK Drilling and Petroleum Services Co. (a related party) at par value. ECDC is a Joint Stock Company operating in storing and renting machinery and all needed equipment to the petroleum industry.

As at 31 December 2017, the Group has treated this investment as available for sale since it has no representation on the Board. On 5 July 2018, the Shareholders entered into a Shareholders Agreement whereby the Group obtained a joint control over ECDC. While the legal formalities for the change in the articles of association is in progress as of 31 December 2018, as per the Shareholders Agreement the investment became investment in a joint venture effective 5 July 2018. The investment in joint venture is accounted for using equity method of accounting effective from the date of change.

The Group recognised dividends of USD 1,225,000 from Egyptian Chinese Drilling Company during the year ended 31 December 2015 which is outstanding as at 31 December 2018 and 2017 (Note 15).

Summarised financial information of the joint venture and reconciliation with the carrying amount of the investment in the consolidated financial statements are set out below:

Summarised statement of financial position as at 31 December 2018:

Summarised statement of comprehensive income as of 31 December 2018:

\* The summarised statement of the financial positions prepared based on the provisional fair values of the assets and liabilities of ECDC on 5 July 2018. Additional clarifications and analysis is required to determine the fair values of the assets and liabilities of ECDC at the date of the change from financial instrument to the joint venture which may result in adjustments to the net equity of ECDC, with corresponding adjustment to the investment. The Group has one year starting from 5 July 2018 to determine the final fair values. Any such material adjustments will be reflected in the next period financial statements of the Group.

*\* The amount represents 48.75% Group's share in the net profit of the joint venture from 5 July 2018 to 31 December 2018.

The joint venture had no other contingent liabilities or commitments as at 31 December 2018 (2017: USD 82,761). The joint venture cannot distribute its profits without the consent from the two venture partners.

12 BANK BALANCES AND CASH

\* Time deposits represent short-term investment with a local bank in the United Arab Emirates. Time deposits have original maturities of less than 90 days and earns average interest of 2.05% per annum. The finance income reported in the consolidated statement of comprehensive income for the year 2018 amounted to USD 706,400.

** Treasury bills represent short-term investment with original maturity of less than 90 days. As at 31 December 2018, the Group had investment in treasury bills amounting to Nil (2017: USD 127,013,206). The investment in treasury bills matured in January 2018. The finance income reported in the consolidated statement of comprehensive income for the year 2018 amounted to USD 2,032,444 (2017: USD 7,015,552).

13 INVENTORIES

14 TRADE RECEIVABLES AND CONTRACT ASSETS

Trade receivables

Trade receivables are non-interest bearing and are generally on 30 to 90 days terms after which trade receivables are considered to be past due. Unimpaired trade receivables are expected to be fully recoverable on the past experience. It is not the practice of the Group to obtain collateral over receivables and the vast majority are, therefore, unsecured. As at 31 December 2018, there was no impairment of contract assets and hence no ECL has been recorded. The Contract assets have increased as at 31 December 2018 due to the expansion of the operations arising from the acquisition of new businesses during the year as explained in Note 5.

Contract assets

As at 31 December 2018, the Group has contract assets of USD 36,369,649 (2017: Nil). As at 31 December 2017, this was classified as accrued revenues (Note 15). Also, refer to Note 2.2 (a) for the details of the accounting policy.

The movement in the provision for impairment of trade receivables is as follows:

As at 31 December, the aging analysis of un-impaired trade receivables is as follows:

As at 31 December 2018, the largest portion of overdue balances over 90 days is from one customer of the Group, which is a governmental entity. Management believes that the customer will reach certain milestones in 2019 and will be able to fulfil its obligations. The application of forward looking information has no material impact on the ECL provision.

15 PREPAYMENTS AND OTHER RECEIVABLES

*Accrued revenue represents services rendered but not yet billed at the reporting date. As at 31 December 2018, the accrued revenue is presented as contract assets in Note 14.

16 PROPERTY AND EQUIPMENT

16 PROPERTY AND EQUIPMENT (cont'd)