Star Energy Regulatory News (STAR)

31 Aug 2007 07:01

Star Energy Group PLC31 August 2007 31st August 2007 Star Energy Group plc ("Star Energy" or "Company") First Time Adoption of International Financial Reporting Standards (IFRS) - Preliminary Restatement of 2006 Financial Information Star Energy Group plc, the gas storage and onshore UK oil and gas E&P company,is pleased to announce the restatement of its 2006 financial information underIFRS. Star Energy Group plc prepared its financial statements under UK GenerallyAccepted Accounting Principles (UK GAAP) until 31 December 2006. From 1 January2007, in line with AIM listing requirements, the Group will prepare itsconsolidated financial statements in accordance with International AccountingStandards (IAS) and International Financial Reporting Standards (IFRS), asadopted by the European Union (EU). The Company's anticipated accounting policies under IFRS, together withreconciliations from the 2006 financial information previously released under UKGAAP to IFRS are provided below. The Company's first published results to be prepared on an IFRS basis will bethose for the six months ending 30 June 2007 which will include comparative IFRSfinancial statements for the six months ended 30 June 2006 and for the yearended 31 December 2006. As previously notified, these results will be announcedon 7 September 2007. The forthcoming interim results announcement will include a reconciliation ofthe result for the six months ended 30th June 2007 from UK GAAP to IFRS. - Ends - Enquiries: Star Energy 020 7766 5680 Colin Judd / Mark Harty ABN Amro 020 7678 7106 Andrew Foster 1. Introduction Star Energy Group plc ('Star Energy' or 'the Group') prepared its financialstatements under UK Generally Accepted Accounting Principles (UK GAAP) until 31December 2006. From 1 January 2007, the Group will prepare its consolidatedfinancial statements in accordance with International Accounting Standards (IAS)and International Financial Reporting Standards (IFRS), as adopted by theEuropean Union (EU). Star Energy will present one year of comparative IFRS financial information forthe year ended 31 December 2006, and consequently the date of transition to IFRSfor the Group is 1 January 2006 being the first day of the comparative period ('transition date'). The first published results to be prepared on an IFRS basiswill be those for the six months ending 30 June 2007, which will includecomparative IFRS financial statements for the six months ended 30 June 2006 andfor the year ended 31 December 2006. This summary provides an analysis of the effects of the change from UK GAAP toIFRS on Star Energy's financial statements including: - • A summary of the basis of preparation of the disclosed information • Significant accounting policies Star Energy will adopt under IFRS • The consolidated balance sheet as at 31 December 2006 and the consolidated income statement and the consolidated cash flow statement for the year ended 31 December 2006 showing the changes arising from the transition from UK GAAP to IFRS together with reconciling notes. • The consolidated balance sheet as at 30 June 2006 and the consolidated income statement and consolidated cash flow statement for the six months ended 30 June 2006 showing the changes arising from the transition from UK GAAP to IFRS together with reconciling notes. • The consolidated balance sheet as at the transition date (1 January 2006) showing the changes arising from the transition from UK GAAP to IFRS together with reconciling notes. 2. Summary impact of IFRS on the Group's financial information A summarised impact on the Group's reported consolidated 31 December 2006financial information from the adoption of IFRS is shown below together with keyreconciliations (a detailed analysis is provided from page 9 onwards): IFRS UK GAAP Change £'000 £'000 % Retained profit for the year ended 31 December 2006 4,970 3,750 32.5 Pence Pence Basic earnings per share for the year ended 31 December 2006 6.26 4.72 32.6Diluted earnings per share for the year ended 31 December 2006 6.14 4.63 32.6 £'000 £'000 Net assets as at 31 December 2006 86,605 95,342 (9.2) There was no impact on the net cash flow for the year ended 31 December 2006from the adoption of IFRS. Reconciliation of profit: £'000 Profit for the year ended 31 December 2006 under UK GAAP 3,750 IFRS 6: Full cost accounting was applied under UK GAAP whereas under IFRS, (1,215)Exploration for and successful efforts accounting has been adopted. This resulted in anEvaluation of additional charge to the income statement in respect of wells drilledMineral Reserves during the year for which commercial reserves were not discovered. IAS 39: Under UK GAAP, derivative financial instrument contracts did not 3,153 impact the profit and loss account until the period to which theFinancial related transaction arose. Under IFRS, such contracts are shown inInstruments the balance sheet at fair value and period to period movements reflected in the income statement or through an equity reserve. IAS 39: The Group has a senior debt facility. Under UK GAAP, the finance (93) charge in respect of this facility was interest paid less arrangementFinancial fees unwound during the period. Under IFRS, the finance cost isInstruments calculated at the effective interest rate. Accounting policy The accounting policy for emissions credits was amended on adoption (102)change of IFRS such that no value is attributed to emissions credits granted to the Group. IAS 12: The above adjustments result in a net deferred tax charge to the (523)Income Taxes income statement. Profit for the year ended 31 December 2006 under IFRS 4,970 Reconciliation of net assets: £'000 Net assets as at 31 December 2006 under UK GAAP 95,342 IFRS 6: Full cost accounting was applied under UK GAAP whereas under IFRS, (2,190)Exploration for and successful efforts accounting has been adopted.Evaluation ofMineral Reserves IAS 39: Under UK GAAP, derivative financial instrument contracts were not (9,875)Financial reflected on the balance sheet. Under IFRS, such contracts are shownInstruments in the balance sheet at fair value. IAS 39: The Group's senior debt facility was stated at debt outstanding less (93) unamortised arrangement fees under UK GAAP. Under IFRS, the seniorFinancial debt facility is unwound using the effective interest rate and theInstruments carrying value reflects this unwinding. IAS 16: Under IFRS, the monetary value of any holidays carried forward by (16) employees at the year end must be accrued for. There was no suchEmployee Benefits requirement under UK GAAP. Accounting policy The accounting policy for emissions credits was amended on adoption (307)change of IFRS such that no value is attributed to emissions credits granted to the Group. IAS 12: The above adjustments create a net reduction to the deferred tax 3,744Income Taxes liability. Net assets as at 31 December 2006 under IFRS 86,605 3. Basis of preparation of IFRS information The financial information has been prepared in accordance with InternationalFinancial Reporting Standards adopted as at 31 December 2006 and applying toaccounting periods beginning on or after 1 January 2007. Despite a 'stable platform' currently being in place, it is possible that therestated information presented in this document may be subject to change priorto its inclusion in the 2007 Annual Report and Accounts which will include theGroup's first annual audited financial statements under IFRS. Such changes mayoccur due to interpretive guidance issued by the International FinancialReporting Interpretation Committee (IFRIC) or to align to developing industrypractice. On the first time adoption of IFRS, the general principle for applying IFRS isone of full retrospective application. IFRS 1 'First Time Adoption ofInternational Financial Reporting Standards' does, however, allow the first timeadopter certain exemptions from this principle. IFRS 1 contains both mandatoryand optional exemptions. From the optional exemptions, Star Energy has electednot to restate financial information for business combinations which occurredprior to 1 January 2006. This document and the financial statements contained within do not constitutestatutory accounts within the meaning of section 240 of the Companies Act 1985.The comparatives for the year ended 31 December 2006 and the period ended 30June 2006 are not the Group's full statutory accounts for that year/period. Acopy of the statutory accounts for the year ended 31 December 2006 has beendelivered to the Registrar of Companies. The audited report on those accountswas unqualified, did not include references to any matters to which the auditorsdrew attention by way of emphasis without qualifying their report and did notcontain a statement under section 237(2)/(3) of the Companies Act 1985. 4. Accounting policies General These financial statements are presented in UK sterling which, given it is thecurrency in which the majority of the Group's transactions are denominated, isalso the functional currency of the Group. Accounting convention The financial statements have been prepared in accordance with InternationalFinancial Reporting Standards (IFRS) as adopted by the European Union. The accounts are prepared under the historical cost convention except for therevaluation of certain financial instruments. Basis of consolidation The consolidated financial statements incorporate the financial statements ofStar Energy Group plc and entities controlled by Star Energy Group plc (itssubsidiaries) made up to 31 December each year. Control is achieved where StarEnergy Group plc has the power to govern the financial and operating policies ofan investee entity so as to obtain benefits from its activities. On acquisition, the assets, liabilities and contingent liabilities of asubsidiary are measured at their fair values at the date of acquisition. Any interest of minority shareholders isstated at the minority's proportion of the fair values of the assets andliabilities recognised. The results of subsidiaries acquired or disposed of during the year are includedin the consolidated income statement from the effective date of acquisition orup to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements ofsubsidiaries to bring the accounting policies used into line with those used byother members of the Group. All significant intercompany transactions and balances between group entitiesare eliminated on consolidation. Segment reporting The Group's primary form of segmental reporting will be by business segment. Itssecondary form of segmental reporting will be geographic. A business segment is a group of assets or operations that are subject to risksand returns that are different to those of other business segments. The Group'sprimary business segment is that of gas storage and its secondary businesssegment is that of oil exploration and production. The Group also has acorporate cost centre. Interest in associates An associate is an entity in which the Group has a long-term equity interest andover which it has significant influence, but not control, through participationin the financial and operating policy decisions of the investee. The results, assets and liabilities of associates are incorporated in thesefinancial statements using the equity method of accounting. Interests inassociates are carried in the balance sheet at cost as adjusted bypost-acquisition changes in the Group's share of the net assets of theassociate, less any impairment in the value of individual investments. Where theGroup's share of any retained loss in an associate exceeds its investment, theGroup's investment is reduced to zero. Should the associate subsequently reportprofits, the Group resumes recognising its share of those profits only after itsshare of the profits equals the share of losses not recognised. Where a groupentity transacts with an associate of the Group, unrealised profits and lossesare eliminated to the extent of the Group's interest in the relevant associate. Jointly controlled assets A small proportion of the Group's exploration, development and productionactivities are conducted as co-licensee in joint operations with othercompanies. The financial statements reflect the relevant proportions ofproduction, capital expenditure and operating costs applicable to the Group'sinterest. Where a group entity is party to a jointly controlled asset, the groupentity will account directly for its part of the income and expenditure, assets,liabilities and cash flows. Such arrangements are reported in the consolidatedfinancial statements on the same basis. Where the Group farms-in to a farm-outagreement, it accounts for its proportion of revenues, costs, assets andliabilities in accordance with the provisions of the farm-out agreement. Oil and gas assets: exploration and evaluation ('E&E') The Group applies the successful efforts method of accounting for E&E costs,having regard to the requirements of IFRS 6: 'Exploration for and Evaluation ofMineral Resources'. - Recognition E&E assets comprise costs of E&E activities that are ongoing at the balancesheet date, pending determination of whether or not commercial reserves exist.Such E&E assets may include costs of licence acquisition, technical services andstudies, seismic acquisition, exploration drilling and testing and directlyattributable overheads but do not include costs incurred prior to havingobtained the legal rights to explore an area, which are expensed directly to theincome statement as they are incurred. The Group's definition of commercial reserves is proven and probable reserves.Proven and probable reserves are defined as the estimated quantities of crudeoil and natural gas which geological, geophysical and engineering datademonstrate with a specified degree of certainty to be recoverable in futureyears from known reservoirs and which are considered commercially producible.There should be a 50% statistical probability that the actual quantity ofrecoverable reserves will be more than the amount estimated as proven andprobable reserves and a 50% statistical probability that it will be less. Tangible assets used in E&E activities (such as the Group's vehicles, drillingrigs, seismic equipment and other property, plant and equipment used by theGroup's exploration function) are classified as Property, plant and equipment.However, to the extent that such a tangible asset is consumed in developing anintangible E&E asset, the amount reflecting that consumption is recorded as partof the cost of the intangible asset. Such intangible costs include directlyattributable overheads, including the depreciation of property plant andequipment utilised in E&E activities, together with the cost of other materialsconsumed during the E&E phases. Oil and gas assets: exploration and evaluation ('E&E') - Treatment of E&E assets at conclusion of appraisal activities Intangible E&E assets related to each exploration licence/prospect are notamortised and are carried forward until the existence (or otherwise) ofcommercial reserves has been determined. If commercial reserves are discovered,the related E&E assets are reclassified as development and production assetswithin tangible assets. If, however, by the conclusion of appraisal activities,commercial reserves have not been discovered, the capitalised costs are chargedto the income statement as an expense. The cost of E&E assets also includes thecost of acquisitions and purchases of such assets, borrowing costs incurredwhich are specifically attributable to the assets and directly attributableoverheads. Oil and gas assets: development and production - Recognition Development and production assets are accumulated on a field by field basis andrepresent the cost of developing the commercial reserves discovered and bringingthem into production, together with the exploration and evaluation expendituresincurred in finding commercial reserves transferred from intangible explorationand evaluation assets as outlined in the 'Oil and gas assets: exploration andevaluation' accounting policy above. The cost of development and production assets also includes the cost ofacquisitions and purchases of such assets, borrowing costs incurred duringconstruction, directly attributable overheads and the cost of recognisingprovisions for future restoration and decommissioning in accordance with the 'Decommissioning' accounting policy set out below. - Depreciation of producing assets The net book values of producing assets are depreciated on a field by fieldbasis using the unit of production method by reference to the ratio ofproduction in the period to the related commercial reserves of the field at thebeginning of the period, taking into account future development expendituresnecessary to bring those reserves into production. - Impairment An impairment test is performed whenever events and circumstances arising duringthe development or production phase indicate that the carrying value of adevelopment or production asset may exceed its recoverable amount. The aggregatecarrying value is compared against the expected recoverable amount of the cashgenerating unit, generally by reference to the present value of the future netcash flows expected to be derived from production of commercial reserves. Thepresent value of future cash flows is calculated on the basis of future oil andgas prices, exchange rates and cost levels as forecasted at the balance sheetdate. The cash generating unit applied for impairment test purposes is generally thefield, except that a number of field interests may be grouped together as asingle cash generating unit where the cash flows of each field areinterdependent. Where the carrying value of a field is less than the presentvalue of its future cash flows a provision is made by way of an additionaldepletion charge which is reflected in cost of sales. - Asset disposals Proceeds from the disposal of an asset, or part thereof, are taken to the incomestatement together with the requisite net book value of the asset, or partthereof, being sold. - Decommissioning Where a material liability for the removal of production facilities and siterestoration at the end of the productive life of a field exists, a provision fordecommissioning is recognised. The amount recognised is the present value ofestimated future expenditure determined in accordance with local conditions andrequirements. A tangible fixed asset of an amount equivalent to the provision isalso created and depreciated on a unit of production basis. Changes in estimatesare recognised prospectively, with corresponding adjustments to the provisionand the associated fixed asset. The gas storage assets are considered to have infinite useful economic lives andtherefore no provision is made. Annual assessments are conducted to support thecontinuation of this policy. Property, plant and equipment other than oil and gas assets Property, plant and equipment other than oil and gas assets are stated at costless accumulated depreciation and any provision for impairment. Depreciation ischarged on such assets, with the exception of freehold land, so as to write offthe cost, less estimated residual value, on a straight-line basis over theiruseful lives of between three and 25 years. Other intangible fixed assets The Group participates in the EU Emissions Trading Scheme. This is a 'cap andtrade' scheme under which organisations are awarded emissions credits to covercarbon dioxide emissions. Under this scheme, the Group receives an allocation ofemissions credits for each calendar year within a phase. These emissions creditscan either be used to offset against carbon dioxide production or sold during aphase. Emissions credits granted to the Group are recorded at nil value at the time ofgrant. It is not the Group's policy to revalue or mark to market emissionscredits granted to it. Emissions credits which the Group has purchased arerecognised at the price paid. The carrying value of all the emissions creditsheld by the Group will be assessed at each reporting date to assess the need forany impairment to the overall carrying value of emissions credits held. The Group's actual carbon dioxide production is set against the emissionscredits allocation for each year and is reflected in the income statement at anamount equivalent to the average of the cost of the credits booked. If the Groupdoes not have sufficient emissions credits to offset its carbon dioxideproduction, a liability will be recorded at the reporting date based on theprevailing market price of emissions credits. Inventories Inventories are stated at the lower of cost and net realisable value. Taxation The tax expense represents the sum of the tax currently payable and deferredtax. Current tax, including UK Corporation and any overseas tax, is provided atamounts expected to be paid (or recovered) using the tax rates and laws thathave been enacted or substantially enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differencesbetween the carrying amounts of assets and liabilities in the financialinformation and the corresponding tax bases used in the computation of taxableprofit, and is accounted for using the balance sheet liability method. Deferredtax liabilities are generally recognised for all taxable temporary differencesand deferred tax assets are recognised to the extent that it is probable thattaxable profits will be available against which deductible temporary differencescan be utilised. Such assets and liabilities are not recognised if the temporarydifference arises from goodwill or from the initial recognition (other than in abusiness combination) of other assets and liabilities in a transaction thataffects neither the tax profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differencesarising on investments in subsidiaries and associates, and interests in jointventures, except where the Group is able to control the reversal of thetemporary difference and it is probable that the temporary difference will notreverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheetdate and reduced to the extent that it is no longer probable that sufficienttaxable profits will be available to allow all or part of the asset to berecovered. Deferred tax is calculated at the tax rates that are expected to apply in theperiod when the liability is settled or the asset is realised. Deferred tax ischarged or credited in the income statement, except when it relates to itemscharged or credited directly to equity, in which case the deferred tax is alsodealt with in equity. Cash and cash equivalents Cash and cash equivalents comprise cash on hand, deposits with a maturity ofthree months or less and other short-term highly liquid investments that arereadily convertible into known amounts of cash and overdrafts repayable ondemand. Bank overdrafts are shown within borrowings in current liabilities onthe balance sheet. Financial instruments Financial assets and financial liabilities are recognised at fair value on theGroup's balance sheet when the Group becomes party to the contractual provisionsof the instrument. - Trade receivables Trade receivables do not carry any interest and are stated at their fair valueas reduced by appropriate allowances for estimated irrecoverable amounts. - Trade payables Trade payables are not interest-bearing and are stated at their fair value. - Bank borrowings and loan notes Interest-bearing bank borrowings are recorded at the proceeds received, net ofdirect issue costs. Finance charges are accounted for on an accruals basis tothe income statement using the effective interest method and are added to thecarrying amount of the instrument to the extent that they are not settled in theperiod in which they arise. - Equity instruments Equity instruments issued by Star Energy Group plc are recorded at the proceedsreceived, net of direct issue costs. - Derivative financial instruments and hedge accounting The Group uses derivative financial instruments to manage its exposure primarilyto fluctuations in the price of crude oil but also to fluctuations in foreignexchange rates and interest rates. The Group does not hold or issue derivativefinancial instruments for speculative purposes and it is the Group's policy thatno trading in financial instruments shall be undertaken. Derivative financial instruments are stated at fair value. To qualify for hedge accounting, the derivative must be 'highly effective' inachieving its objective and this effectiveness must be documented at inceptionand throughout the period of the hedge relationship. The hedge must be assessedon an ongoing basis and determined to have been 'highly effective' throughoutthe financial reporting periods for which the hedge was contracted in order toqualify for hedge accounting. - Derivative financial instruments and hedge accounting Where they qualify for hedge accounting, the derivative financial contracts theGroup has in place are classified as cash flow hedges as they are designed tohedge exposure to variability in cash flows attributable to forecastedtransactions. The portion of the gains and losses on the hedging instrument thatis determined to be an effective hedge is taken to equity and the ineffectiveportion, as well as any change in time value, is recognised in the incomestatement. The gains and losses taken to equity are subsequently transferred tothe income statement during the period in which the hedged transaction affectsthe income statement or if the hedge is subsequently deemed to be ineffective.Gains or losses on derivatives that do not qualify for hedge accountingtreatment (either from inception or during the life of the instrument) are takendirectly to the income statement during the period the gain or loss arises. Provisions From time to time it is necessary for the Group to defend itself against legalclaims that may or may not result in the Group having to make a financialsettlement. Provisions for anticipated settlement costs and associated expensesarising from any legal and other disputes are made where a reliable estimate canbe made of the probable outcome of the dispute. Where it is not possible to makesuch an estimate, no provision is made. Share based payments In accordance with IFRS 2: 'Share-based payments', the Group reflects theeconomic cost of awarding shares and share options to employees by recording anexpense in the income statement equal to the fair value of the benefit awarded.The expense is recognised in the income statement over the vesting period of theaward. Fair value is measured by use of a binomial model which takes into accountconditions attached to the vesting and exercise of the equity instruments. Theexpected life used in the model is adjusted, based on management's bestestimate, for the effects of non-transferability, exercise restrictions andbehavioural considerations. Post retirement benefits The Group operates a defined contribution pension scheme. The assets of thescheme are held separately from those of the Group in an independentlyadministered fund. The amount charged to the income statement represents thecontributions payable to the scheme in respect of the accounting period. Revenue recognition Turnover relating to oil is recognised when the oil is received by the customer.Electricity turnover is recognised on a monthly basis calculated from meterreadings. Turnover relating to natural gas is recognised when the gas istransferred to the customer. Gas storage rental income is recognised inaccordance with the relevant lease agreement. Foreign currencies Transactions in foreign currencies are recorded using the rate of exchangeruling at the date of the transaction. Monetary assets and liabilitiesdenominated in foreign currencies are translated using the rate of exchangeruling at the balance sheet date. Exchange gains or losses on translation areincluded in the income statement. Gas storage Gas storage facilities are considered to be leased to customers under operatinglease contracts. The total income arising over the duration of the contract isrecognised evenly throughout the course of the contract subsequent to the gasstorage asset being completed and becoming fully operational. Leases Operating leases and the corresponding rental charges are charged to the incomestatement on a straight-line basis over the life of the lease. Assets underfinance leases are included under tangible fixed assets at their capital valueand depreciated over their useful lives. Capital value is defined as the amountequal to the fair value of the leased property or, if lower, the present valueof the minimum lease payments, each determined at the inception of the lease.Lease payments consist of capital and finance charge elements; the financecharge element is charged to the income statement. Maintenance expenditure Expenditure on major maintenance, refits or repairs is capitalised where itfulfils one of the following: - enhances the life or performance of an asset above its originally assessed standard of performance; - replaces an asset, or part thereof, which was separately depreciated and which is then written off; - restores the economic benefits of an asset which has been fully depreciated. All other maintenance expenditure is charged to the income statement asincurred. 5. Preliminary consolidated financial information for the year ended 31 December 2006 restated for IFRS Consolidated income statement for the year ended 31 December 2006 UK GAAP as Effect of IFRS presented in transition IFRS format to IFRS Note £'000 £'000 £'000 REVENUE 73,310* - 73,310Cost of sales: - Depletion, depreciation and (a),(d) (11,342) (1,102) (12,444) amortisation Losses/(gains) on oil price (b) (16,213)* 1,745 (14,468) derivative contracts Gains on foreign exchange contracts (b) - 478 478 Other costs of sales (20,121) - (20,121) Total cost of sales (47,676) 1,121 (46,555) GROSS PROFIT 25,634 1,121 26,755General and administration costs (5,797) - (5,797)Other income (d) 242 (215) 27Loss on sale of fixed assets (2) - (2) OPERATING PROFIT 20,077 906 20,983Finance income 792 - 792Finance costs (b),(c) (6,197) 837 (5,360) Finance costs - net (5,405) 837 (4,568)Share of net loss in associate (97) - (97) PROFIT BEFORE INCOME TAX 14,575 1,743 16,318Income tax expense (e) (10,825) (523) (11,348) PROFIT FOR THE YEAR 3,750 1,220 4,970 EARNINGS PER SHARE Pence Pence Pence Basic 4.72 1.54 6.26 Diluted 4.63 1.51 6.14 *Within the 'UK GAAP as presented in IFRS Format' column the following should benoted: under UK GAAP net realised losses on oil price derivative contracts wereadjusted for against turnover. Under IFRS, such net losses are included withincost of sales. The reclassification in respect of these losses was £16,213,000. Consolidated balance sheet as at 31 December 2006 UK GAAP as Effect of IFRS presented in transition to IFRS format IFRS Note £'000 £'000 £'000ASSETSNON-CURRENT ASSETSExploration and evaluation assets (f) 1,887 (1,887) -Property, plant and equipment (g) 184,598 (303) 184,295Intangible assets (h) 895 (307) 588Investment in associate 4 - 4Derivative financial Instruments (i) - 934 934 Total non-current assets 187,384 (1,563) 185,821 CURRENT ASSETSInventories 1,134 - 1,134Receivables and prepayments 10,235 - 10,235Derivative financial instruments (i) - 1,250 1,250Cash and cash equivalents 6,456 - 6,456 Total current assets 17,825 1,250 19,075 TOTAL ASSETS 205,209 (313) 204,896 EQUITY AND LIABILITIES CURRENT LIABILITIESTrade and other payables (k) (8,689) (16) (8,705)Financial liabilities: Borrowings (j) (9,372) 327 (9,045) Derivative financial (i) - (11,648) (11,648)instruments Total current liabilities (18,061) (11,337) (29,398) NON-CURRENT LIABILITIESFinancial liabilities: Borrowings (j) (66,116) (420) (66,536) Derivative financial (i) - (411) (411)instrumentsDeferred tax liabilities (l) (18,573) 3,744 (14,829)Provisions (7,117) - (7,117) Total non-current liabilities (91,806) 2,913 (88,893) NET ASSETS 95,342 (8,737) 86,605 EQUITYShare capital 7,937 - 7,937Share premium account 125,457 - 125,457Merger reserve (45,093) - (45,093)Equity reserve (m) - (6,957) (6,957)Retained earnings (n) 7,041 (1,780) 5,261 TOTAL EQUITY 95,342 (8,737) 86,605 Consolidated cash flow statement for the year ended 31 December 2006 UK GAAP as Effect of IFRS presented in transition IFRS format to IFRS £'000 £'000 £'000 PROFIT BEFORE INCOME TAX 14,575 1,743 16,318Adjustments for:Depletion, depreciation and amortisation 11,050 1,102 12,152Loss on disposal of property plant and equipment 2 - 2Fair value gains on financial instruments - (2,223) (2,223)Non cash items 405 215 620Finance costs - net 5,417 (837) 4,580Changes in working capital:Increase in inventories (773) - (773)Increase in trade and other receivables (1,047) - (1,047)Decrease in trade and other payables (7,774) - (7,774) CASH GENERATED FROM OPERATIONS 21,855 - 21,855Taxation paid (5,283) - (5,283)Interest paid (6,647) - (6,647) NET CASH GENERATED FROM OPERATIONS 9,925 - 9,925 CASH FLOWS FROM INVESTING ACTIVITIESPurchase of property, plant and equipment (PPE) (24,825) - (24,825)Purchase of interest in associate (100) - (100)Interest received 503 - 503 NET CASH USED IN INVESTING ACTIVITIES (24,422) - (24,422) CASH FLOW FROM FINANCING ACTIVITIESProceeds from borrowings 4,970 - 4,970Repayments of borrowings (1,391) - (1,391) NET CASH USED IN FINANCING ACTIVITIES 3,579 - 3,579 NET DECREASE IN CASH, CASH EQUIVALENTS AND BANK OVERDRAFTS (10,918) - (10,918)Cash, cash equivalents and bank overdrafts at beginning of 17,283 - 17,283the periodExchange losses on cash and bank overdrafts 91 - 91 CASH, CASH EQUIVALENTS AND BANK OVERDRAFTS AT THE END OF 6,456 - 6,456THE YEAR The transition from UK GAAP to IFRS did not impact on the net cash flowmovements for the year ended 31 December 2006. The adjustments made reflectthose made to the Consolidated income statement for the year ended 31 December2006. Notes to the reconciliations for the year ended 31 December 2006 The following notes explain the reconciliations between the UK GAAP financialstatements, as derived from the Annual Report for the year ending 31 December2006 and the IFRS comparative information. Income statement (a) Adoption of successful efforts accounting Under UK GAAP, the Group used full cost accounting whereas, under IFRS, theGroup is using successful efforts accounting. Successful efforts accounting isadopted as a proactive measure as it is considered more relevant under the IFRSregime than full cost accounting. Under full cost accounting, fixed assetexpenditure relating to oil and gas assets was accumulated in one cost pool andthe DD&A charge was calculated on the entire cost pool. Under successful effortsaccounting, exploration and evaluation expenditure which fails to discovercommercial reserves is written off to the income statement in the period thedetermination is made. The impact of this accounting policy change was to increase the DD&A charge of£1,215,000. This related to the write-off of expenditure incurred during 2006relating to a well in Denmark in which Star Energy had a 20% interest. This wellwas plugged and abandoned during 2006. (b) Derivative financial instruments: Under UK GAAP unrealised gains or losses on oil price derivative contractsrelating to expected future sales of crude oil were only accounted for when therelated physical transaction occurred. Similarly, unrealised gains or losses onforward interest rate contracts and forward foreign exchange contracts wererecognised during the period in which the transaction related. Under IFRS (IAS 39: 'Financial Instruments: Recognition and Measurement')derivative financial instruments are reflected in the balance sheet at fairvalue. It is the Group's policy to apply hedge accounting where the derivativefinancial instruments have been documented appropriately (of which all have) andmeet the hedge effectiveness criteria. To meet the hedge effectivenesscriteria, the ratio of the change in fair value of the expected cash flows ofthe hedging instrument to the change in fair value of the hedged item must liewithin the range 80% to 125%. Where the hedge effectiveness criteria is met and hence hedge accounting isapplied, changes in the fair value of the effective portion of a derivativefinancial instrument are reflected in the Equity reserve. Where the hedgeeffectiveness criteria is not met, and hence hedge accounting can not beapplied, changes in the fair value of the financial instrument are reflected inthe income statement. As such, the IFRS impact on financial instruments results from: - Fair value movements relating to derivative financial instruments that do not qualify for hedge accounting because the effectiveness criteria have not been met. Fair value movements are therefore fully recognised in the income statement. - The ineffective portion relating to derivative financial instruments that do meet the hedge effectiveness criteria and hence qualify for hedge accounting. This ineffective portion is the amount by which the change in the hedging instrument exceeds the change in the hedged item - this occurs when the ratio of the change in fair values of the expected cash flows of the hedging instrument to the change in fair value of the hedged item lies within the range of 101% to 125%. Oil price Foreign Interest rate TOTAL derivative exchange derivative contracts contracts contracts £'000 £'000 £'000 £'000 Gain included within Cost of sales 1,745 478 - 2,223Gain included within Finance costs - - 930 930Gain arising from transition to IFRS 1,745 478 930 3,153 (c) Borrowing costs The Group has a senior debt facility. Under UK GAAP, the amount reported asoutstanding at the balance sheet date was the gross amount of debt lessunamortised arrangement fees. Under IFRS (in accordance with IAS 39: 'FinancialInstruments: Recognition and Measurement'), the entire senior debt facility(including the arrangement fees) is amortised based on the effective interestrate. The effective interest rate used is that of the date of transition (aspermitted by IFRS 1: 'First Time Adoption of International Financial ReportingStandards'). This change is methodology results in an additional charge for the year of£93,000 which is reflected in Finance costs. (d) Emissions credits The Group participates in the EU Emissions Trading Scheme. This is a 'cap andtrade' scheme under which organisations are awarded emissions credits to covercarbon dioxide emissions. Under this scheme, the Group receives an allocation ofemissions credits for each calendar year within a phase. These emissions creditscan be used to offset against carbon dioxide production or sold during a phase. Under UK GAAP, the emissions credits were included in the balance sheet as anintangible fixed asset, recorded at the market price and exchange rateprevailing on the first day of a phase. The Group's actual carbon dioxideproduction was offset against the emissions credits allocation for each year wasreflected in the profit and loss account. Although under IFRS there remains no accounting standard in respect of emissioncredits, due to the high level of volatility within the emissions creditsmarket, it was considered that the financial statements would be more reliableif the emissions credits granted to the Group were attributed a nil value at thetime of grant. This revised accounting policy is considered to be in accordancewith the principles and framework of IFRS. As a consequence of this accounting policy change, the DD&A charge decreases by£113,000 and Other income decreases by £215,000. (e) Taxation Deferred tax adjustments arise in respect of the adjustments (a) to (d) outlinedabove. Deferred tax is calculated at 30%, this being the rate at which it isexpected the adjustments will impact the profit for the purposes of Corporationtax. Balance sheet (f) Adoption of successful efforts accounting Under UK GAAP no distinction was made between exploration and evaluation assetsand property, plant and equipment. Under IFRS (IFRS 6: 'Exploration for andEvaluation of Mineral Resources'), these two asset categories are required to bedisclosed separately on the face of the balance sheet. Exploration and evaluation (E&E) assets comprise costs of E&E activities thatare ongoing at the balance sheet date, pending determination of whether or notcommercial reserves exist. As at 31 December 2006, assets with a net book valueof £1,887,000 were identified for which it was determined that no commercialreserves exist and as such was required to be written off. Of this total,£672,000 related to an asset the Group held at the transition date and£1,215,000 related to a well in Denmark in which Star Energy holds a 20%interest which was abandoned during 2006. (g) Impairment - change of basis of assessment Under UK GAAP, producing assets were considered for impairment on a cost poolbasis. Under IFRS, producing assets are considered for impairment on a field byfield basis. As a result of having to consider impairment of producing assets ona more disaggregated basis, a write down of £303,000 in the carrying value wasdeemed to be required. This was recognised upon transition to IFRS. (h) Emissions credits For the reasons discussed in (d) above, the accounting policy was revised onadoption of IFRS. Under UK GAAP emissions credits where included as intangible fixed assets on thebalance sheet at the market price and exchange rate prevailing on the first dayof a phase. The revised accounting policy attributes a nil value to emissionscredits granted to the Group. As a result, the carrying value of £307,000relating to emissions credits is removed from the balance sheet. (i) Derivative financial instruments Under IFRS (in accordance with IAS 39: 'Financial Instruments: Recognition andMeasurement'), unrealised gains and losses arising from marking to marketderivative financial instrument contracts which relate to future transactionsbut which were open as at 31 December 2006 are recognised in the balance sheet. As at 31 December 2006 the Group recognised the following mark-to-market amountsin respect of derivative financial instruments: Current Non-current Current Non-current assets assets liabilities liabilitiesContract type: £'000 £'000 £'000 £'000 Oil price derivative contracts 80 567 (11,548) (311)Interest rate - - (100) (100)Exchange rate 1,170 367 - -TOTAL 1,250 934 (11,648) (411) (j) Borrowings The Group has a senior debt facility. Under UK GAAP, the amount reported asoutstanding at the balance sheet date was the gross amount of debt lessunamortised arrangement fees. Under IFRS (in accordance with IAS 39: 'FinancialInstruments: Recognition and Measurement'), the entire senior debt facility(including the arrangement fees) is amortised based on the effective interestrate. This change in methodology gives rise to a change in the amountsclassified as current and non-current liabilities: UK GAAP IFRS Credit/ (charge) to the Income Statement £'000 £'000 £'000 Current liabilities (9,269) (8,942) 327Non-current liabilities (65,916) (66,336) (420)TOTAL (75,185) (75,278) (93) (k) Employee costs Under IFRS (in accordance with IAS 19: 'Employee Benefits') the Group mustrecognise the monetary value of any holidays its employees carry forward at thebalance sheet date. As at 31 December 2006, the total monetary value of holidayscarried forward by the Group's employees was £16,000. (l) Taxation Deferred tax adjustments arise in respect of the adjustments (f) to (k) outlinedabove. Deferred tax is calculated at 30%, this being the rate at which it isexpected the adjustments will unwind and impact for the purposes of Corporationtax. (m) Equity reserve The effective portion of those derivative financial instrument contracts thatqualify for hedge accounting for which the unrealised gains or losses wererecognised within assets or liabilities are accounted for in the Equity reserve.As at 31 December 2006 this amounted to £9,938,000. A deferred tax asset of £2,981,000 arising on the effective portion of thederivative financial instruments which qualify for hedge accounting is alsoaccounted for via the Equity reserve. (n) Retained earnings The adjustments (f) to (m), excluding those accounted for via the Equityreserve, result in a £1,780,000 decrease in closing retained earnings. 6. Preliminary consolidated financial information for the six months ended 30 June 2006 restated for IFRS Consolidated Income Statement for the six months ended 30 June 2006 UK GAAP as Effect of IFRS presented in transition IFRS format to IFRS Note £'000 £'000 £'000 REVENUE 38,087* - 38,087Cost of sales: - Depletion, depreciation and (5,518) - (5,518) amortisation Losses on oil price derivative (a) (8,890)* (409) (9,299) contracts Losses on foreign exchange (a) - (8) (8) contracts Other costs of sales (10,032) - (10,032) Total cost of sales (24,440) (417) (24,857) GROSS PROFIT 13,647 (417) 13,230General and administration costs (2,871) - (2,871)Other income (c) 100 (80) 20 OPERATING PROFIT 10,876 (497) 10,379Finance income 236 - 236Finance costs (a),(b) (2,923) 562 (2,361) Finance costs - net (2,687) 562 (2,125) PROFIT BEFORE INCOME TAX 8,189 65 8,254Income tax expense (5,465) (20) (5,485) PROFIT FOR THE PERIOD 2,724 45 2,769 EARNINGS PER SHARE Pence Pence Pence Basic 3.43 0.08 3.51 Diluted 3.36 0.08 3.44 *Within the 'UK GAAP as presented in IFRS Format' column the following should benoted: under UK GAAP net realised losses on oil price derivative contracts wereadjusted for against turnover. Under IFRS, such losses are included within costof sales. The reclassification in respect of these net losses was £8,890,000. Consolidated balance sheet as at 30 June 2006 UK GAAP as Effect of IFRS presented in transition IFRS format to IFRS Note £'000 £'000 £'000ASSETSNON-CURRENT ASSETSExploration and evaluation assets (e) 1,260 (672) 588Property, plant and equipment (f) 181,674 (303) 181,371Intangible assets (g) 436 (436) -Investments 100 - 100Derivative financial Instruments (h) - 243 243 Total non-current assets 183,470 (1,168) 182,302 CURRENT ASSETSInventories 439 - 439Receivables and prepayments 11,682 - 11,682Derivative financial instruments (h) - 40 40Cash and cash equivalents 7,128 - 7,128 Total current assets 19,249 40 19,289 TOTAL ASSETS 202,719 (1,128) 201,591 EQUITY AND LIABILITIES CURRENT LIABILITIESTrade and other payables (g),(i) (8,933) 135 (8,798)Financial liabilities: Borrowings (j) (5,097) 210 (4,887) Derivative financial instruments (h) - (19,313) (19,313)Current tax liabilities (1,812) - (1,812) Total current liabilities (15,842) (18,968) (34,810) NON-CURRENT LIABILITIESFinancial liabilities: Borrowings (j) (71,276) (215) (71,491) Derivative financial instruments (h) - (9,396) (9,396)Deferred tax liabilities (k) (13,752) 8,912 (4,840)Provisions (7,820) - (7,820) Total non-current liabilities (92,848) (699) (93,547) NET ASSETS 94,029 (20,795) 73,234 EQUITYShare capital 7,937 - 7,937Share premium account 125,457 - 125,457Merger reserve (45,093) - (45,093)Equity reserve (l) - (17,840) (17,840)Retained earnings (m) 5,728 (2,955) 2,773 TOTAL EQUITY 94,029 (20,795) 73,234 Consolidated cash flow statement for the six months ended 30 June 2006 UK GAAP as Effect of IFRS presented in IFRS transition to format IFRS £'000 £'000 £'000 PROFIT BEFORE INCOME TAX 8,189 65 8,254Adjustments for:Depletion, depreciation and amortisation 5,482 - 5,482Profit on disposal of property plant and equipment (15) - (15)Fair value losses on financial instruments - 417 417Non cash items (80) 80 -Finance costs - net 2,687 (562) 2,125Changes in working capital:Increase in inventories (78) - (78)Decrease in trade and other receivables 1,667 - 1,667Decrease in trade and other payables (12,746) - (12,746) CASH GENERATED FROM OPERATIONS 5,106 - 5,106Taxation paid (2,001) - (2,001)Interest paid (3,874) - (3,874) NET CASH GENERATED FROM OPERATIONS (769) - (769) CASH FLOWS FROM INVESTING ACTIVITIESPurchase of property, plant and equipment (PPE) (14,479) - (14,479)Interest received 315 - 315 NET CASH USED IN INVESTING ACTIVITIES (14,164) - (14,164) CASH FLOW FROM FINANCING ACTIVITIESProceeds from borrowings 5,170 - 5,170Repayments of borrowings (369) - (369) NET CASH USED IN FINANCING ACTIVITIES 4,801 - 4,801 NET DECREASE IN CASH, CASH EQUIVALENTS AND BANK (10,132) - (10,132)OVERDRAFTSCash, cash equivalents and bank overdrafts at beginning 17,283 - 17,283of the periodExchange losses on cash and bank overdrafts (23) - (23) CASH, CASH EQUIVALENTS AND BANK OVERDRAFTS AT THE END OF 7,128 - 7,128THE PERIOD The transition from UK GAAP to IFRS did not impact on the net cash flowmovements for the six months ended 30 June 2006. The adjustments made reflectthose made to the Consolidated income statement for the six months ended 30 June2006. Notes to the reconciliations for the six months ended 30 June 2006 The following notes explain the reconciliations between the UK GAAP financialstatements, as derived from the Interim Report for the six months to 30 June2006 and the IFRS comparative information. Income statement (a) Derivative financial instruments: Under UK GAAP unrealised gains or losses on oil price derivative contractsrelating to expected future sales of crude oil were only accounted for when therelated physical transaction occurred. Similarly, unrealised gains on gains orlosses on forward interest rate contracts and forward foreign exchange contractswere recognised during the period in which the transaction related. Under IFRS (IAS 39: 'Financial Instruments: Recognition and Measurement')derivative financial instruments are reflected in the balance sheet at fairvalue. It is the Group's policy to apply hedge accounting where the derivativefinancial instruments have been documented appropriately (of which all have) andmeet the hedge effectiveness criteria. To meet the hedge effectivenesscriteria, the ratio of the change in fair value of the expected cash flows ofthe hedging instrument to the change in fair value of the hedged item must liewithin the range 80% to 125%. Where the hedge effectiveness criteria is met and hence hedge accounting isapplied, changes in the fair value of the effective portion of a derivativefinancial instrument are reflected in the Equity reserve. Where the hedgeeffectiveness criteria is not met, and hence hedge accounting can not beapplied, changes in the fair value of the financial instrument are reflected inthe income statement. As such, the IFRS impact on financial instruments results from: - Fair value movements relating to derivative financial instruments that do not qualify for hedge accounting because the effectiveness criteria have not been met. Fair value movements are therefore fully recognised in the income statement. - The ineffective portion relating to derivative financial instruments that do meet the hedge effectiveness criteria and hence qualify for hedge accounting. This ineffective portion is the amount by which the change in the hedging instrument exceeds the change in the hedged item - this occurs when the ratio of the change in fair values of the expected cash flows of the hedging instrument to the change in fair value of the hedged item lies within the range of 101% to 125%. Oil price Foreign Interest rate TOTAL derivative exchange derivative contracts contracts contracts £'000 £'000 £'000 £'000 Loss included within Cost of sales (409) (8) - (417)Gain included within Finance costs - - 567 567 Gain arising from transition to IFRS (409) (8) 567 150 (b) Borrowing costs The Group has a senior debt facility. Under UK GAAP, the amount reported asoutstanding at the balance sheet date was the gross amount of debt lessunamortised arrangement fees. Under IFRS (in accordance with IAS 39: 'FinancialInstruments: Recognition and Measurement'), the entire senior debt facility(including the arrangement fees) is amortised based on the effective interestrate. The effective interest rate used is that of the date of transition (aspermitted by IFRS 1: 'First Time Adoption of International Financial ReportingStandards'). This change is methodology results in an additional charge for theperiod of £5,000 which is reflected in Finance costs. (c) Emissions credits The Group participates in the EU Emissions Trading Scheme. This is a 'cap andtrade' scheme under which organisations are awarded emissions credits to covercarbon dioxide emissions. Under this scheme, the Group receives an allocation ofemissions credits for each calendar year within a phase. These emissions creditscan be used to offset against carbon dioxide production or sold during a phase. Under UK GAAP, the emissions credits were included in the balance sheet as anintangible fixed asset, recorded at the market price and exchange rateprevailing on the first day of a phase. The Group's actual carbon dioxideproduction was offset against the emissions credits allocation for each year wasreflected in the profit and loss account. Although under IFRS there remains no accounting standard in respect of emissioncredits, due to the high level of volatility within the emissions creditsmarket, it was considered that the financial statements would be more reliableif the emissions credits granted to the Group were attributed a nil value at thetime of grant. This revised accounting policy is considered to be in accordancewith the principles and framework of IFRS. As a consequence of this accounting policy change, Other income decreases by£80,000. (d) Taxation Deferred tax adjustments arise in respect of the adjustments (a) to (c) outlinedabove. Deferred tax is calculated at 30%, this being the rate at which it isexpected the adjustments will impact the profit for the purposes of Corporationtax. Balance sheet (e) Adoption of successful efforts accounting Under UK GAAP no distinction was made between exploration and evaluation assetsand property, plant and equipment. Under IFRS (IFRS 6: 'Exploration for andEvaluation of Mineral Resources'), these two asset categories are required to bedisclosed separately on the face of the balance sheet. Exploration and evaluation (E&E) assets comprise costs of E&E activities thatare ongoing at the balance sheet date, pending determination of whether or notcommercial reserves exist. As at 30 June 2006, an asset with a net book value of£672,000 was identified (which related to a field the Group held at thetransition date) for which it was determined that no commercial reserves existand as such was required to be written off. (f) Impairment - change of basis of assessment Under UK GAAP, producing assets were considered for impairment on a cost poolbasis. Under IFRS, producing assets are considered for impairment on a field byfield basis. As a result of having to consider impairment of producing assets ona more disaggregated basis, a write down of £303,000 in the carrying value wasdeemed to be required. This was recognised upon transition to IFRS. (g) Emissions credits For the reasons discussed in (c) above, the accounting policy was revised onadoption of IFRS. Under UK GAAP emissions credits where included as intangible fixed assets on thebalance sheet at the market price and exchange rate prevailing on the first dayof a phase. The revised accounting policy attributes a nil value to emissionscredits granted to the Group. As a result, the carrying value of £285,000relating to emissions credits is removed from the balance sheet (being areduction in Intangible assets of £436,000 and a reduction in Trade and otherpayables of £151,000). (h) Derivative financial instruments Under IFRS (in accordance with IAS 39: 'Financial Instruments: Recognition andMeasurement'), unrealised gains and losses arising from marking to marketderivative financial instrument contracts which relate to future transactionsbut which were open as at 30 June 2006 are recognised in the balance sheet. As at 30 June 2006 the Group recognised the following mark-to-market amounts inrespect of derivative financial instruments: Current Non-current Current Non-current assets assets liabilities liabilitiesContract type: £'000 £'000 £'000 £'000 Oil price derivative contracts 40 243 (18,781) (8,823)Interest rate - - (226) (338)Exchange rate - - (306) (235) TOTAL 40 243 (19,313) (9,396) (i) Employee costs Under IFRS (in accordance with IAS 19: 'Employee Benefits') the Group mustrecognise the monetary value of any holidays its employees carry forward at thebalance sheet date. As at 30 June 2006, the total monetary value of holidayscarried forward by the Group's employees was £16,000. (j) Borrowings The Group has a senior debt facility. Under UK GAAP, the amount reported asoutstanding at the balance sheet date was the gross amount of debt lessunamortised arrangement fees. Under IFRS (in accordance with IAS 39: 'FinancialInstruments: Recognition and Measurement'), the entire senior debt facility(including the arrangement fees) is amortised based on the effective interestrate. This change in methodology gives rise to a change in the amountsclassified as current and non-current liabilities: UK GAAP IFRS Credit/ (charge) to the Income Statement £'000 £'000 £'000 Current liabilities (4,774) (4,564) 210Non-current liabilities (71,276) (71,491) (215) TOTAL (75,185) (75,278) (5) (k) Taxation Deferred tax adjustments arise in respect of the adjustments (e) to (j) outlinedabove. Deferred tax is calculated at 30%, this being the rate at which it isexpected the adjustments will unwind and impact for the purposes of Corporationtax. (l) Equity reserve The effective portion of those derivative financial instrument contracts thatqualify for hedge accounting for which the unrealised gains or losses wererecognised within assets or liabilities are accounted for in the Equity reserve.As at 30 June 2006 this amounted to £25,486,000. A deferred tax asset of £7,646,000 arising on the effective portion of thederivative financial instruments which qualify for hedge accounting is alsoaccounted for via the Equity reserve. (m) Retained earnings The adjustments (e) to (l), excluding those accounted for via the Equityreserve, result in a £2,995,000 decrease in closing retained earnings. 7. Preliminary transition date (1 January 2006) balance sheet restated for IFRS UK GAAP as Effect of IFRS presented in transition to IFRS format IFRS Note £'000 £'000 £'000ASSETSNON-CURRENT ASSETSExploration and evaluation assets (a) 1,260 (672) 588Property, plant and equipment (b) 172,592 (303) 172,289Intangible assets (c) 205 (205) -Derivative financial Instruments (d) - 477 477 Total non-current assets 174,057 (703) 173,354 CURRENT ASSETSInventories 361 - 361Receivables and prepayments 8,118 - 8,118Derivative financial instruments (d) - 176 176Cash and cash equivalents 17,283 - 17,283 Total current assets 25,762 176 25,938 TOTAL ASSETS 199,819 (527) 199,292 EQUITY AND LIABILITIES CURRENT LIABILITIESTrade and other payables (e) (17,557) (16) (17,573)Financial liabilities: Borrowings (f) (13,763) (5,775) (19,538) Derivative financial instruments (d) - (14,685) (14,685)Current tax liabilities (1,663) - (1,663) Total current liabilities (32,983) (20,476) (53,459) NON-CURRENT LIABILITIESFinancial liabilities: Borrowings (f) (57,693) 5,775 (51,918) Derivative financial instruments (d) - (13,308) (13,308)Deferred tax liabilities (g) (10,436) 8,561 (1,875)Provisions (7,663) - (7,663) Total non-current liabilities (75,792) 1,028 (74,764) NET ASSETS 91,044 (19,975) 71,069 EQUITYShare capital 7,937 - 7,937Share premium account 125,457 - 125,457Merger reserve (45,093) - (45,093)Equity reserve (h) - (16,975) (16,975)Retained earnings (i) 2,743 (3,000) (257) TOTAL EQUITY 91,044 (19,975) 71,069 Notes to the reconciliations as at the transition date (a) Adoption of successful efforts accounting Under UK GAAP no distinction was made between exploration and evaluation assetsand property, plant and equipment. Under IFRS (IFRS 6: 'Exploration for andEvaluation of Mineral Resources'), these two asset categories are required to bedisclosed separately on the face of the balance sheet. Exploration and evaluation (E&E) assets comprise costs of E&E activities thatare ongoing at the balance sheet date, pending determination of whether or notcommercial reserves exist. As at 1 January 2006, an asset with a net book valueof £672,000 was identified for which it was determined that no commercialreserves exist and as such was required to be written off. (b) Impairment - change of basis of assessment Under UK GAAP, producing assets were considered for impairment on a cost poolbasis. Under IFRS, producing assets are considered for impairment on a field byfield basis. As a result therefore of having to consider impairment of producingassets on a more disaggregated basis, a write down of £303,000 in the carryingvalue was deemed to be required and this was recognised upon transition to IFRS. (c) Emissions credits The Group participates in the EU Emissions Trading Scheme. This is a 'cap andtrade' scheme under which organisations are awarded emissions credits to covercarbon dioxide emissions. Under this scheme, the Group receives an allocation ofemissions credits for each calendar year within a phase. These emissions creditscan be used to offset against carbon dioxide production or sold during a phase. Under UK GAAP, the emissions credits were included in the balance sheet as anintangible fixed asset, recorded at the market price and exchange rateprevailing on the first day of a phase. The Group's actual carbon dioxideproduction was offset against the emissions credits allocation for each year wasreflected in the profit and loss account. Although under IFRS there remains no accounting standard in respect of emissioncredits, due to the high level of volatility within the emissions creditsmarket, it was considered that the financial statements would be more reliableif the emissions credits granted to the Group were attributed a nil value at thetime of grant. This revised accounting policy is considered to be in accordancewith the principles and framework of IFRS. The accounting policy was revised on adoption of IFRS. As a result, the carryingvalue of £205,000 relating to emissions credits is removed from the balancesheet. (d) Derivative financial instruments Under IFRS (in accordance with IAS 39: 'Financial Instruments: Recognition andMeasurement'), unrealised gains and losses arising from marking to marketderivative financial instrument contracts which relate to future transactionsbut which were open as at 1 January 2006 are recognised in the balance sheet. As at 1 January 2006 the Group recognised the following mark-to-market amountsin respect of derivative financial instruments: Current Non-current Current Non-current assets assets liabilities liabilitiesContract type: £'000 £'000 £'000 £'000 Oil price derivative contracts 176 477 (14,308) (12,554)Interest rate - - (377) (754) TOTAL 176 477 (14,685) (13,308) (e) Employee costs Under IFRS (in accordance with IAS 19: 'Employee Benefits') the Group mustrecognise the monetary value of any holidays its employees carry forward at thebalance sheet date. As at 1 January 2006, the total monetary value of holidayscarried forward by the Group's employees was £16,000. (f) Borrowing costs The Group has a senior debt facility. Under UK GAAP, the amount reported asoutstanding at the balance sheet date was the gross amount of debt lessunamortised arrangement fees. Under IFRS (in accordance with IAS 39: 'FinancialInstruments: Recognition and Measurement'), the entire senior debt facility(including the arrangement fees) is amortised based on the effective interestrate. This change in methodology gives rise to a change in the amountsclassified as current and non-current liabilities: UK GAAP IFRS Credit/ (charge) to the Income Statement £'000 £'000 £'000 Current liabilities (13,146) (18,921) (5,775)Non-current liabilities (57,612) (51,837) 5,775 TOTAL (70,758) (70,758) - (g) Taxation Deferred tax adjustments arise in respect of the adjustments (a) to (f) outlinedabove. Deferred tax is calculated at 30%, this being the rate at which it isexpected the adjustments will unwind and impact for the purposes of Corporationtax. (h) Equity reserve The effective portion of those derivative financial instrument contracts thatqualify for hedge accounting for which the unrealised gains or losses wererecognised within assets or liabilities are accounted for in the Equity reserve.As at 1 January 2006 this amounted to £24,250,000. A deferred tax asset of £7,275,000 arising on the effective portion of thederivative financial instruments which qualify for hedge accounting is alsoaccounted for via the Equity reserve. (i) Retained earnings The adjustments (a) to (h), excluding those accounted for via the Equityreserve, result in a £3,000,000 decrease in retained earnings. 8. Independent Review Report to the Board of Directors of Star Energy Group plc Introduction We have been instructed by Star Energy Group plc ('the Company') to review theconversion statement in respect of the six months ended 30 June 2006, the yearended 31 December 2006 and at the date of transition being 1 January 2006, setout on pages 1 to 25. This conversion statement includes: • Income statements in respect of the period ended 30 June 2006 and the year ended 31 December 2006; • Earnings per share figures in respect of the period ended 30 June 2006 and the year ended 31 December 2006; • Balance sheets as at 30 June 2006, 31 December 2006 and as at the date of transition being 1 January 2006; • Cash flow statements in respect of the period ended 30 June 2006 and the year ended 31 December 2006; • Reconciliation of profit as previously stated to profit under IFRS in respect of the year ended 31 December 2006; • Reconciliation of net assets as previously stated to net assets under IFRS as at 31 December 2006; • accompanying notes and explanatory information. As disclosed in Note 3, the next annual financial statements of the Company willbe prepared in accordance with IFRS as adopted for use in the European Union.This conversion statement has been prepared in accordance with the requirementsof IFRS 1 'First-time adoption of International Financial Reporting Standards'. We have read the other information contained in the conversion statement andconsidered whether it contains any apparent misstatements or materialinconsistencies with the financial information. No person is entitled to rely onthis report unless such a person is a person entitled to rely upon this reportby virtue of and for the purpose of our terms of engagement or has beenexpressly authorised to do so by our prior written consent. Save as above, we donot accept responsibility for this report to any other person or for any otherpurpose and we hereby expressly disclaim any and all such liability. Directors' responsibilities The conversion statements, including the financial information containedtherein, is the responsibility of, and has been approved by the directors. Thedirectors are responsible for preparing the conversion statement in accordancewith the principles set out in IFRS 1 "First-time adoption of InternationalFinancial Reporting Standards'. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/04 issued by the Auditing Practices Board for use in the United Kingdom. Areview consists principally of making enquiries of management, applyinganalytical and certain substantive procedures to the financial information andunderlying financial data and based thereon, assessing whether the accountingpolicies and presentation have been appropriately applied unless otherwisedisclosed. A review excludes audit procedures such as tests of controls andverification of assets, liabilities and transactions. It is substantially lessin scope than an audit performed in accordance with International AuditingStandards and therefore provides a lower level of assurance than an audit.Accordingly we do not express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the information contained in the conversion statement aspresented in respect of the six months ended 30 June 2006, the year ended 31December 2006 and at the date of transition being 1 January 2006. BDO Stoy Hayward LLP Chartered Accountants London 30 August 2007 This information is provided by RNS The company news service from the London Stock Exchange