DES.L Regulatory News (DES)

7 Sep 2007 13:01

Desire Petroleum PLC07 September 2007 For immediate release 7 September 2007 Desire Petroleum Plc Transition to International Financial Reporting Standards 1. Introduction Desire Petroleum plc today releases an update on how International FinancialReporting Standards (IFRS) are likely to affect the Group's earnings and netassets. The purpose of this update is to provide information for the June half-yearcomparative, and to document the accounting policies to be used in the currentyear. As an AIM-listed company, the Group is required to adopt International FinancialReporting Standards (IFRS) with effect from 1 January 2007. The first financial information to be reported by the Group in accordance withIFRS will be for the six months to 30 June 2007, but the requirement to presentcomparative information means that a balance sheet prepared in accordance withIFRS at 1 January 2006 is required. This announcement includes the consolidated results of the Group converted froma UK Generally Accepted Accounting Principles (UK GAAP) basis to an IFRS basisfor the period to 30 June 2006, the year to 31 December 2006, and balance sheetsas at 31 December 2005, as at 30 June 2006 and as at 31 December 2006. This document explains the significant accounting policy changes from theaccounting policies adopted under UK GAAP for the year ended 31 December 2006. Attached are the Group Income Statements in IFRS format for the six months ended30 June 2006 and for the year ended 31 December 2006 (section 5), and the GroupBalance Sheets in IFRS format as at 31 December 2005, as at 30 June 2006, and asat 31 December 2006 (Section 6). Appendices 1. Group Balance Sheet - reconciliation UK GAAP to IFRS as at 31 December 2006 2. Group Balance Sheet - reconciliation UK GAAP to IFRS as at 30 June 2006 3. Group Balance Sheet - reconciliation UK GAAP to IFRS as at 31 December 2005 2. Basis of preparation IFRS 1 'First Time Adoption of International Financial Reporting Standards'(IFRS 1) sets out the rules for an entity preparing its first IFRS financialstatements. The entity is required to determine the IFRS accounting policies inaccordance with the IFRS that are in place at the date of transition (1 January2006) and, in general, apply them retrospectively. There are a number ofpossible exemptions from the retrospective application to assist the entity inmaking the transition. The Group has taken the following exemptions: a. Business combinations: the Group has elected not to restate business combinations prior to the transition date (1 January 2006). b. Cumulative translation differences: the Group has elected to adopt the exemption that resets all cumulative translation gains and losses for all foreign operations to zero at the transition date. c. Share-based payments: the Group has elected to exclude share-based arrangements that were granted prior to 8 November 2002 or that have vested prior to the transition date The Group has continued to apply the full cost accounting policy, explainedfurther in the intangible asset accounting policy note in section 7, aspermitted by IFRS 6 'Exploration for and Evaluation of Mineral Resources' (IFRS6) 3. Impact on Profit There is no difference in Operating loss, Loss before tax, or Loss for theperiod between UK GAAP and IFRS for the period ended 30 June 2006 and for theyear ended 31 December 2006. Consequently, no reconciliation between UK GAAP andIFRS is included. The presentation of the Group Income Statement under IFRS isshown in section 5. 4. Impact on Net Assets There is no difference in net assets between UK GAAP and IFRS as at 31 December2005, as at 30 June 2006, and as at 31 December 2006. The presentation of theGroup Balance Sheet under IFRS is shown in section 6. There are some differences within the classification of non-current assets, andwith the classification of other reserves. These are explained in Appendices 1to 3. 5. Group Income Statement in IFRS format Year ended 31.12.06 6 months ended 30.6.06 £'000 £'000 Administrative expenses (669) (332)Share-based payment expense (263) (124)Foreign exchange losses (2,686) (1,626) Operating loss (3,618) (2,082) Finance income 1,135 566 Loss before tax (2,483) (1,516) Income tax expense (336) (168) Loss for the period (2,819) (1,684) 6. Group Balance Sheet in IFRS format As at 31.12.06 As at As at 31.12.05 30.6.06 £'000 £'000 £'000Non-current assetsIntangible assets 6,867 6,544 6,352Property, plant and equipment 1,474 6 2 8,341 6,550 6,354Current assetsTrade and other receivables 654 112 178Cash and cash equivalents 22,812 25,054 26,642 23,466 25,166 26,820 Total assets 31,807 31,716 33,174 Current liabilitiesTrade and other payables (903) (241) (139)Income tax payable (336) (199) (199)Bank overdrafts and loans (40) - (7)Total liabilities (1,279) (440) (345) Net assets 30,528 31,276 32,829 EQUITYShare capital 2,225 2,215 2,214Share premium 45,627 45,389 45,383Retained earnings (17,324) (16,328) (14,768)Total equity 30,528 31,276 32,829 7. Accounting Policies The accounting policies set out below are expected to be formally adopted by theBoard when it prepares its first Annual Report under IFRS for the financial yearended 31 December 2007. First time adoption of IFRS The Group's date of transition to IFRS is 1 January 2006. IFRS 1 'First TimeAdoption of International Financial Reporting Standards' generally requirescompanies to apply their accounting policies retrospectively. There are a numberof possible exemptions from this general rule to assist companies in making thetransition to reporting under IFRS. The Group has taken the followingexemptions: a. Business CombinationsThe Group has elected not to restate business combinations prior to thetransition date (1 January 2006). b. Cumulative translation differencesThe Group has elected to adopt the exemption that resets all cumulativetranslation gains and losses for foreign operations to zero at the transitiondate. c. Share-based paymentsThe Group has elected to exclude share-based arrangements that were grantedprior to 8 November 2002 or that have vested prior to the transition date. Basis of preparation The consolidated financial statements have been prepared in accordance withInternational Financial Reporting Standards (IFRS), and International FinancialReporting Interpretations Committee (IFRIC) interpretations as adopted by theEuropean Union, and with those parts of the Companies Act 1985 applicable tocompanies reporting under IFRS. The consolidated financial statements have beenprepared under the historic cost convention Basis of consolidation The Group accounts consolidate the accounts of the Holding Company and all itssubsidiary undertakings, all of which were made up to 31 December 2007. Goodwill and intangible assets a. Goodwill When the fair value of the consideration for an acquired undertaking exceeds thefair value of its separable net assets, the difference is treated as purchasedgoodwill and is capitalised. When the fair value of the consideration for anacquired undertaking is less than the fair value of its separable net assets,the difference is taken directly to the income statement. Goodwill is notamortised but is reviewed at least annually for impairment. b. Acquired intangibles Intangible assets, which are capable of being recognised separately and measuredreliably on acquisition of a business, are capitalised at fair value onacquisition. Where these assets have a finite life, they are amortised over theperiod that they are expected to generate benefits, but generally not exceedingten years. c. Research and development Research expenditure is recognised as an expense as incurred. Costs incurred ondevelopment projects are recognised as intangible assets when it is probablethat the project will be a technological and commercial success. Otherdevelopment expenditure is recognised as an expense as incurred. d. Computer software Computer software costs are amortised over their expected useful lives, asfollows: Computer software 20% straight-line basis e. Oil and gas expenditure The Group applies the full-cost method of accounting, in accordance with IFRS 6'Exploration for and Evaluation of Mineral Resources' (IFRS 6), under whichexpenditure relating to the acquisition, exploration, and evaluation of oil andgas interests, including an appropriate share of directly attributable overheadsand relevant financing cost, is capitalised. If no discoveries are made, theaccumulated capitalised costs will be written off through the income statement.Where the facts and circumstances indicate that exploration and evaluationcosts exceed their recoverable amount, the intangible costs are tested forimpairment. The cost of plant acquired to carry out exploration activities is treated as atangible asset. The depreciation of such plant is capitalised as intangibleassets. Property, Plant and Equipment (PPE) a. Oil and gas interests The Group applies the full-cost method of accounting, in accordance with IFRS 6'Exploration for and Evaluation of Mineral Resources' (IFRS 6), and theStatement of Recommended Practice 'Accounting for Oil and Gas Exploration,Development, Production and Decommissioning Activities', under which expenditurerelating to the development of oil and gas interests, including an appropriateshare of directly attributable overheads and relevant financing cost, iscapitalised in cost pools on the basis of income generating units. Capitalised costs are amortised on a unit of production basis, over proven andprobable reserves, taking account of estimates of future costs of developmentrelating to those reserves. Depreciation of plant acquired to carry out exploration activities iscapitalised as intangible assets. b. Other Tangible fixed assets are stated at cost or valuation less depreciation.Depreciation is provided at rates calculated to write off the cost or valuation,less estimated residual value of each asset, over its expected useful life, asfollows: Equipment and fixtures 20% straight-line basis Consortia and farm out agreements In addition to holding licences on its own account, the Group is a member ofconsortia. The Group's proportionate share of the consortia costs are includedin intangible assets or PPE, as appropriate. During the year, the Groupcontinued with a farm out agreement with a third party in respect of certainlicences. The Group's proportionate share of the costs is included in intangibleassets. Investments Investments in subsidiary undertakings are shown at cost less provision forestimated impairments in value. Foreign currencies a. Functional and presentation currency Items included in the financial statements of each of the Group's entities aremeasured using the currency of the primary economic environment in which theentity operates ('the functional currency'). The consolidated financialstatements are presented in Sterling, which is the company's functional andpresentation currency. b. Transactions and balances Transactions denominated in foreign currencies are translated into thefunctional currency at the exchange rate prevailing at the dates of thetransactions. Monetary assets and liabilities denominated in foreign currenciesare translated into the functional currency at the exchange rates ruling at theyear-end. Foreign exchange gains and losses resulting from the settlement of suchtransactions, and from the translation at year-end exchange rates of monetaryassets and liabilities denominated in foreign currencies are recognised in theincome statement, except when deferred in equity as qualifying cash flow hedgesand qualifying investment hedges. Exchange differences arising from the translation of the balance sheets andincome statements of foreign operations into Sterling are recognised as aseparate component of equity on consolidation. When a foreign operation is sold,such exchange differences are recognised in the income statement as part of thegain or loss on sale. Taxation a. Current income tax Current tax, including UK corporation tax, is provided on amounts expected to bepaid or recovered using the tax rates and laws that have been enacted orsubstantially enacted by the balance sheet date. b. Deferred income tax Deferred income tax is provided in full, using the liability method, ontemporary differences arising between the tax bases of assets and liabilitiesand their carrying amounts in the consolidated financial statements. Deferredincome tax is determined using tax rates and laws that have been enacted orsubstantially enacted by the balance sheet date and are expected to apply whenthe related deferred income tax asset is realised or the deferred income taxliability is settled. Deferred income tax assets are recognised to the extent that it is probable thatfuture taxable profits will be available against which the temporary differencescan be utilised. Deferred income tax is provided on temporary differences arising on investmentsin subsidiaries, except where the timing of the reversal of the temporarydifferences are controlled by the Group, and it is probable that the temporarydifferences will not reverse in the foreseeable future. Financial instruments The Group uses certain financial instruments in its operating and investingactivities that are appropriate to its strategy and circumstances. Financial instruments currently comprise cash and short-term debtors andcreditors. The Group regularly reviews the funding opportunities available toit in order to finance its operations, including considering the use ofborrowings, as well as equity, to fund short-term cash requirements. The main risks arising from the Group's present use of financial instruments arecurrently exchange rate risk relating to the Group's non-Sterling cashresources. The addition of any borrowings to the Group's portfolio of financialinstruments would introduce interest rate risk. Share-based compensation The Group operates equity-settled, share-based compensation plans. The economiccost of awarding shares and share options is recognised as an expense in theincome statement equivalent to the fair value of the benefit awarded. The fairvalue is determined by reference to option pricing models. The charge isrecognised in the income statement over the vesting period of the award. Group Balance Sheet - reconciliation from UK GAAP to IFRS at 31 December 2006 Previously IFRS 6 IAS 38 IFRS 1 Restated under reported under IFRS UK GAAP (Note 1) (Note 2) (Note 3) £'000 £'000 £'000 £'000 £'000Non-current assetsIntangible assets 8,331 (1,466) 2 6,867Property, plant and equipment 10 1,466 (2) 1,474 8,341 - - 8,341Current assetsTrade and other receivables 654 654Cash and cash equivalents 22,812 22,812 23,466 23,466 Total assets 31,807 31,807 Current liabilitiesTrade and other payables (903) (903)Income tax payable (336) (336)Bank overdrafts and loans (40) (40)Total liabilities (1,279) (1,279) Net assets 30,528 30,528 EQUITYShare capital 2,225 2,225Share premium 45,627 45,627Other reserves 13,343 (13,343) -Retained earnings (30,667) 13,343 (17,324)Total equity 30,528 - 30,528 Note 1: Under IFRS 6, the cost of plant acquired to carry out explorationactivities is treated as Property, Plant and Equipment (PPE). UK GAAP includedsuch costs in intangible assets. Accordingly, these assets have now beenreclassified as PPE. Note 2: IAS 38 requires that software costs are capitalised as intangibleassets. UK GAAP included such costs as PPE. Accordingly, these assets have nowbeen reclassified as intangible assets. Note 3: Under IFRS 1, the Group has elected not to restate business combinationsprior to the transition date of 1 January 2006. Accordingly, the merger reservearising prior to the transition date has now been reclassified as retainedearnings. Distributable reserves of the company are not affected. These notes also apply to the balance sheet reconciliations from UK GAAP to IFRSas at 30 June 2006 (Appendix 2), and as at 31 December 2005 (Appendix 3). Group Balance Sheet - reconciliation from UK GAAP to IFRS at 30 June 2006 Previously IFRS 6 IAS 38 IFRS 1 IFRS reported under UK GAAP (Note 1) (Note 2) (Note 3) £'000 £'000 £'000 £'000 £'000Non-current assetsIntangible assets 6,543 - 1 6,544Property, plant and equipment 7 - (1) 6 6,550 - - 6,550Current assetsTrade and other receivables 112 112Cash and cash equivalents 25,054 25,054 25,166 25,166 Total assets 31,716 31,716 Current liabilitiesTrade and other payables (241) (241)Income tax payable (199) (199)Bank overdrafts and loans - -Total liabilities (440) (440) Net assets 31,276 31,276 EQUITYShare capital 2,215 2,215Share premium 45,389 45,389Other reserves 13,343 (13,343) -Retained earnings (29,671) 13,343 (16,328)Total equity 31,276 - 31,276 Group Balance Sheet - reconciliation from UK GAAP to IFRS at 31 December 2005 Previously IFRS 6 IAS 38 IFRS 1 IFRS reported under UK GAAP (Note 1) (Note 2) (Note 3) £'000 £'000 £'000 £'000 £'000Non-current assetsIntangible assets 6,351 - 1 6,352Property, plant and equipment 3 - (1) 2 6,354 - - 6,354Current assetsTrade and other receivables 178 178Cash and cash equivalents 26,642 26,642 26,820 26,820 Total assets 33,174 33,174 Current liabilitiesTrade and other payables (139) (139)Income tax payable (199) (199)Bank overdrafts and loans (7) (7)Total liabilities (345) (345) Net assets 32,829 32,829 EQUITYShare capital 2,214 2,214Share premium 45,383 45,383Other reserves 13,343 (13,343) -Retained earnings (28,111) 13,343 (14,768)Total equity 32,829 - 32,829 This information is provided by RNS The company news service from the London Stock Exchange