rd 33 Annual Report 2014 Financial Reports
Kuwait Foreign Petroleum Exploration Company K.S.C. (Closed) CONSOLIDATED FINANCIAL STATEMENTS 31 December 2014 Independent Auditor s Report Consolidated Statement of Financial Position Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements 34-35 36 37 38 39 40 41-77 33 rd Annual Report 2014 33
INDEPENDENT AUDITOR S REPORT TO THE SHAREHOLDERS OF KUWAIT FOREIGN PETROLEUM EXPLORATION COMPANY K.S.C. (CLOSED) Report on the Consolidated Financial Statements We have audited the accompanying consolidated financial statements of Kuwait Foreign Petroleum Exploration Company K.S.C. (Closed) (the Parent Company ) and its subsidiaries (collectively the Group ), which comprise the consolidated statement of financial position as at 31 December 2014, consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Consolidated Financial Statements Management of the Parent Company is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatements, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Group s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 34 Kuwait Foreign Petroleum Exploration Co. K.S.C. (Closed) and Subsidiaries
Opinion In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of the Group as at 31 December 2014, and its financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards. Other matters Our audit was made for the purpose of forming an opinion on the accompanying consolidated financial statements. The supplementary information set out on page 77 is presented for the purpose of additional analysis and is not part of the consolidated financial statements. This supplementary information is the responsibility of the Group s management. We did not audit the supplementary information and express no opinion on it. Report on Other Legal and Regulatory Requirements Furthermore, in our opinion, proper books of accounts have been kept by the Parent Company and the consolidated financial statements, together with the contents of the report of the Parent Company s board of directors relating to these consolidated financial statements, are in accordance therewith. We further report that we obtained all the information and explanations that we required for the purpose of our audit and that the consolidated financial statements incorporate all information that is required by the Companies Law No 25 of 2012, as amended and its executive regulation, and by the Parent Company s Memorandum of incorporation and Articles of Association, as amended, that an inventory count was duly carried out and that, to the best of our knowledge and belief, no violation of the Companies Law No 25 of 2012, as amended and its executive regulation, nor of the Parent Company s Memorandum of incorporation and Articles of Association, as amended, have occurred during the year ended 31 December 2014 that might have had a material effect on the business of the Parent Company or on its consolidated financial position. WALEED A. AL OSAIMI LICENCE NO. 68 A EY (AL AIBAN, AL OSAIMI & PARTNERS) 18 March 2015 Kuwait 33 rd Annual Report 2014 35
CONSOLIDATED STATEMENT OF FINANCIAL POSITION Notes 2014 KD 000 s 2013 KD 000 s ASSETS Current assets Cash and cash equivalents 6 37,938 40,719 Funds held by Ultimate Parent Company 7 38,357 160,769 Trade and other receivables 8 167,534 184,579 Inventories 9 49,108 46,196 292,937 432,263 Non-current assets Property, plant and equipment 10 1,748,726 958,596 Intangible assets 11 494,850 95,902 Investment in associate 8,455 7,777 Deferred tax assets 21 148,252 147,785 Goodwill 12 125 27,107 2,400,408 1,237,167 TOTAL ASSETS 2,693,345 1,669,430 LIABILITIES AND EQUITY Current liabilities Trade and other payables 13 132,676 118,823 Tax liabilities 33,952 103,816 Due to Ultimate Parent Company and affiliates 7 46,101 17,856 Dividends payable 27 288,990 239,955 Current portion of long-term borrowing 22 41,829-543,548 480,450 Non-current liabilities Decommissioning provision 14 227,092 136,261 Employees' end of service benefits 15 7,518 6,821 Deferred tax liabilities 21 83,412 164,570 Deferred consideration payable for an acquisition 4 183,011 21,972 Long-term borrowing 22 543,771 211,538 1,044,804 541,162 Total Liabilities 1,588,352 1,021,612 Equity Share capital 16 1,092,426 538,893 Statutory reserve 16 61,971 60,858 Voluntary reserve 16 61,971 60,858 Foreign currency translation reserve (120,277) (51,405) Retained earnings 8,902 38,614 Total equity 1,104,993 647,818 TOTAL LIABILITIES AND EQUITY 2,693,345 1,669,430 Sanad H. Al-Sanad Mohammad Saqer Al-Ghanim Chairman Vice President - Finance & Administration The attached notes 1 to 32 form part of these consolidated financial statements. 36 Kuwait Foreign Petroleum Exploration Co. K.S.C. (Closed) and Subsidiaries
CONSOLIDATED INCOME STATEMENT For the year ended 31 December 2014 Notes 2014 KD 000 s 2013 KD 000 s Continuing operations: Revenue 17 424,066 405,871 Cost of operations 18 (278,589) (222,427) GROSS PROFIT 145,477 183,444 Exploration expenditure written off 11 (69,140) (27,460) Net impairment losses 19 (66,768) (29,829) General and administrative expenses 23 (13,566) (15,801) Reversal (provision) for slow moving inventory items 9 990 (387) (148,484) (73,477) (LOSS) PROFIT FROM CONTINUING OPERATIONS BEFORE FINANCE INCOME, FINANCE COSTS, TAXATION AND DIRECTORS FEES (3,007) 109,967 Interest income 1,380 1,070 Share of loss of an associate (858) - Unwinding of discount (7,589) (4,494) Other expenses (300) (81) Foreign exchange gain (loss) 7,327 (204) Finance costs (659) (1,432) (LOSS) PROFIT FROM CONTINUING OPERATIONS BEFORE TAXATION AND DIRECTORS' FEES (3,706) 104,826 Discontinued operations Loss from discontinued operations 5 - (20,976) (LOSS) PROFIT BEFORE TAXATION AND DIRECTORS' FEES (3,706) 83,850 Income tax 20 14,888 (35,534) PROFIT BEFORE DIRECTORS' FEES 11,182 48,316 Directors' fees (54) (54) PROFIT FOR THE YEAR 11,128 48,262 The attached notes 1 to 32 form part of these consolidated financial statements. 33 rd Annual Report 2014 37
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 December 2014 2014 KD 000 s 2013 KD 000 s Profit for the year 11,128 48,262 OTHER COMPREHENSIVE INCOME (LOSS) Other comprehensive income (loss) to be classified to profit or loss in subsequent periods: Foreign currency translation adjustment (68,872) (57,123) Other comprehensive loss (68,872) (57,123) TOTAL COMPREHENSIVE LOSS FOR THE YEAR (57,744) (8,861) The attached notes 1 to 32 form part of these consolidated financial statements. 38 Kuwait Foreign Petroleum Exploration Co. K.S.C. (Closed) and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2014 Share capital KD 000 s Statutory reserve KD 000 s Voluntary reserve KD 000 s Foreign currency translation reserve KD 000 s Retained earnings KD 000 s Total KD 000 s At 1 January 2014 538,893 60,858 60,858 (51,405) 38,614 647,818 Profit for the year - - - - 11,128 11,128 Other comprehensive loss - - - (68,872) - (68,872) Total comprehensive (loss) income - - - (68,872) 11,128 (57,744) )Increase in share capital (note 16 553,533 - - - - 553,533 )Dividends (note 27 - - - - (38,614) (38,614) )Transfer to reserves (note 16-1,113 1,113 - (2,226) - 1,092,426 61,971 61,971 (120,277) 8,902 1,104,993 At 1 January 2013 200,000 56,034 56,034 5,718 44,331 362,117 Profit for the year - - - - 48,262 48,262 Other comprehensive loss - - - (57,123) - (57,123) Total comprehensive (loss) income - - - (57,123) 48,262 (8,861) )Increase in share capital (note 16 338,893 - - - - 338,893 )Dividends (note 27 - - - - (44,331) (44,331) )Transfer to reserves (note 16-4,824 4,824 - (9,648) - At 31 December 2013 538,893 60,858 60,858 (51,405) 38,614 647,818 The attached notes 1 to 32 form part of these consolidated financial statements. 33 rd Annual Report 2014 39
CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 31 December 2014 OPERATING ACTIVITIES Profit before taxation and directors' fees from continuing operations Profit (loss) before taxation and directors' fees from discontinued operations 40 Kuwait Foreign Petroleum Exploration Co. K.S.C. (Closed) and Subsidiaries Notes 2014 KD 000 s 2013 KD 000 s (3,706) 104,826 5-173 Profit before taxation and directors' fees (3,706) 104,999 Adjustments to reconcile profit before taxation and directors' fees to net cash flows: Depreciation, depletion and amortization 10 154,802 124,863 Exploration costs written off 11 69,140 27,460 Net impairment losses 19 60,457 27,503 Provision for slow moving inventory items 9 (990) 387 Interest income (1,380) (1,070) Unwinding of discount 7,589 4,494 Goodwill impairment 6,311 2,326 Finance costs 659 1,432 Share of loss from associates 858 - Reversal of allowance for doubtful debts 8 302 (193) Provision for employees end of service benefits 15 1,615 2,892 295,657 295,093 Working capital adjustments: Trade and other receivables (39,524) (35,917) Inventories (1,965) (13,574) Trade and other payables 11,041 30,719 265,209 276,321 Income tax paid (53,232) (47,440) Employee s end of service benefits paid 15 (918) (1,279) Directors fees paid (54) (54) Net cash flows from operating activities 211,005 227,548 INVESTING ACTIVITIES Receipt of funds held by Ultimate Parent Company 122,412 (143,894) Expenditure on property, plant and equipment 10 (897,992) (416,305) Interest income received 1,380 1,070 Decrease in restricted deposits with bank 6 11 (34,768) Expenditure on exploration and evaluation assets 11 (345,450) (62,370) Payment of decommissioning liability 14 (3,567) - Net cash flow from disposal of the discontinued operation 5-66,177 Acquisition of subsidiaries, net of cash acquired 4 - (70,282) Net cash flows used in investing activities (1,123,206) (660,372) FINANCING ACTIVITIES Net proceeds from issue of share capital 16 553,533 338,893 Repayment of long-term borrowing - (12,857) Proceeds from loans and borrowings 374,063 211,538 Finance costs paid (659) (1,432) Due to Ultimate Parent Company and affiliates 28,245 (168,968) Net cash flows from financing activities 955,182 367,174 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 42,981 (65,650) Net foreign exchange difference (45,751) 78,442 Cash and cash equivalents at 1 January 40,708 27,916 CASH AND CASH EQUIVALENTS AT 31 DECEMBER 6 37,938 40,708 The attached notes 1 to 32 form part of these consolidated financial statements.
1- CORPORATE INFORMATION Kuwait Foreign Petroleum Exploration Company K.S.C. (Closed) (the Parent Company ) was registered in Kuwait in 1981 as a wholly owned subsidiary of Kuwait Petroleum Corporation (KPC) (the Ultimate Parent Company ) and its registered address is P.O. Box 5291, Safat 13053, State of Kuwait. The principal activities of the Parent Company and its subsidiaries (collectively the Group ) are the exploration and development of oil and gas outside the State of Kuwait. These consolidated financial statements were authorized for issue by the Chairman and Vice President for Finance and Administration on behalf of the Board of Directors on 18 March 2015. The General Assembly has the power to amend these consolidated financial statements after issuance. 2- SIGNIFICANT ACCOUNTING POLICIES Basis of preparation The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) issued by the International Accounting Standards Board ( IASB ) and the interpretations issued by the International Financial Reporting Interpretations Committee ( IFRIC ) under the historical cost basis of measurement. As at 31 December 2014, the Group's current liabilities exceed its current assets by KD 250,611 thousand (31 December 2013: KD 48,187 thousand). These consolidated financial statements have been prepared on a going concern basis as the Ultimate Parent Company has committed to provide financial support. These consolidated financial statements are presented in Kuwaiti Dinars ( KD ), which is the Parent Company's presentation currency, rounded off to the nearest thousands, except when otherwise indicated. Changes in accounting policies and disclosures The accounting policies used in the preparation of these consolidated financial statements are consistent with those used in the previous year except for the adoption of the following amendments, new standards and interpretations effective as of 1 January 2014. Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) These amendments provide an exception to the consolidation requirement for entities that meet the definition of an investment entity under IFRS 10 Consolidated Financial Statements and must be applied retrospectively, subject to certain transition relief. The exception to consolidation requires investment entities to account for subsidiaries at fair value through profit or loss. These amendments have no impact on the Group, since none of the entities in the Group qualifies to be an investment entity under IFRS 10. Offsetting Financial Assets and Financial Liabilities - Amendments to IAS 32 These amendments clarify the meaning of currently has a legally enforceable right to set-off and the criteria for non-simultaneous settlement mechanisms of clearing houses to qualify for offsetting and is applied retrospectively. These amendments have no impact on the Group, since none of the entities in the Group has any offsetting arrangements. Novation of Derivatives and Continuation of Hedge Accounting Amendments to IAS 39 These amendments provide relief from discontinuing hedge accounting when novation of a derivative designated as a hedging instrument meets certain criteria and retrospective application is required. These amendments have no impact on the Group, as the Group does not enter into derivative contracts. IFRIC 21 Levies IFRIC 21 clarifies that an entity recognises a liability for a levy when the activity that triggers payment, as identified by the relevant legislation, occurs. For a levy that is triggered upon reaching a minimum threshold, the interpretation clarifies that no liability should be anticipated before the specified minimum threshold is reached. Retrospective application is required for IFRIC 21. This interpretation has no impact on the Group. 33 rd Annual Report 2014 41
Annual Improvements 2010-2012 Cycle In the 2010-2012 annual improvements cycle, the IASB issued seven amendments to six standards, which included an amendment to IFRS 13 Fair Value Measurement. The amendment to IFRS 13 is effective immediately and, thus, for periods beginning at 1 January 2014, and it clarifies in the Basis for Conclusions that short-term receivables and payables with no stated interest rates can be measured at invoice amounts when the effect of discounting is immaterial. This amendment to IFRS 13 has no impact on the Group. Annual Improvements 2011-2013 Cycle In the 2011-2013 annual improvements cycle, the IASB issued four amendments to four standards, which included an amendment to IFRS 1 First-time Adoption of International Financial Reporting Standards. The amendment to IFRS 1 is effective immediately and, thus, for periods beginning at 1 January 2014, and clarifies in the Basis for Conclusions that an entity may choose to apply either a current standard or a new standard that is not yet mandatory, but permits early application, provided either standard is applied consistently throughout the periods presented in the entity s first IFRS financial statements. This amendment to IFRS 1 has no impact on the Group, since the Group is an existing IFRS preparer. Standards issued but not yet effective A number of new standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Group s financial statements are listed below. None of these are expected to have a significant impact on the consolidated financial statement of the group except the following: IFRS 15: Revenue from Contracts with customers IFRS 15 was issued by IASB on 28 May 2014 is effective for annual periods beginning on or after 1 January 2017. IFRS 15 supersedes IAS 11 Construction contracts and IAS 18 Revenue along with related IFRIC 13, IFRS 15, IFRIC 18 and SIC 31 from the effective date. This new standard would remove inconsistencies and weaknesses in previous revenue requirements, provide a more robust framework for addressing revenue issues and improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. The Group is in the process of evaluating the effect of IFRS 15 on the Group and do not expect any significant impact on adoption of this standard. Annual improvements 2011-2013 Cycle These improvements are effective from 1 July 2014. They include: IFRS 3 Business Combinations The amendment is applied prospectively and clarifies for the scope exceptions within IFRS 3 that: Joint arrangements, not just joint ventures, are outside the scope of IFRS 3 This scope exception applies only to the accounting in the financial statements of the joint arrangement itself Amendments to IFRS 11 Joint Arrangements: Accounting for Acquisitions of Interests The amendments to IFRS 11 require that a joint operator accounting for the acquisition of an interest in a joint operation, in which the activity of the joint operation constitutes a business must apply the relevant IFRS 3 principles for business combinations accounting. The amendments also clarify that a previously held interest in a joint operation is not remeasured on the acquisition of an additional interest in the same joint operation while joint control is retained. In addition, a scope exclusion has been added to IFRS 11 to specify that the amendments do not apply when the parties sharing joint control, including the reporting entity, are under common control of the same ultimate controlling party. The amendments apply to both the acquisition of the initial interest in a joint operation and the acquisition of any additional interests in the same joint operation and are prospectively effective for annual periods beginning on or after 1 January 2016, with early adoption permitted. These amendments are not expected to have any impact to the Group. The application of these standards will be made in the consolidated financial statements when these standards become effective. The Parent Company s management is yet to assess the impact of the application of these standards on the consolidated financial statements of the Group. 42 Kuwait Foreign Petroleum Exploration Co. K.S.C. (Closed) and Subsidiaries
Basis of consolidation The consolidated financial statements comprise the financial statements of the Group as at 31 December 2014. 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 all of the following: Power over the investee (i.e., existing rights that give it the current ability to direct the relevant activities of the investee) Exposure, or rights, to variable returns from its involvement with the investee The ability to use its power over the investee to affect its returns The Group reassesses 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 statement of income and comprehensive income 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 (NCI), even if this results in the NCI having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group s accounting policies. All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. 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: Derecognizes the assets (including goodwill) and liabilities of the subsidiary Derecognizes the carrying amount of any NCI Derecognizes the cumulative translation differences recorded in equity Recognizes the fair value of the consideration received Recognizes the fair value of any investment retained Recognizes any surplus or deficit in the statement of profit or loss and other comprehensive income Reclassifies the parent s share of components previously recognized 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 goodwill Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non controlling interest in the acquiree. For each business combination, the acquirer measures the non controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree s identifiable net assets. Acquisition related costs incurred are expensed and included in general and 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. If the business combination is achieved in stages, the acquisition date fair value of the acquirer s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date through consolidated income statement. Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or liability will be recognised in accordance with IAS 39 either in consolidated income statement or as a change to other comprehensive income. If the contingent consideration is classified as equity, 33 rd Annual Report 2014 43
it should not be re-measured until it is finally settled within equity. In instances where the contingent consideration does not fall within the scope of IAS 39, it is measured in accordance with the appropriate IFRS. Goodwill is initially measured at cost being the excess of the aggregate of the consideration transferred and the amount recognised for non controlling interest over the net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognised in the consolidated income statement. 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 forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained. Interest in joint arrangements IFRS defines a joint arrangement as an arrangement over which two or more parties have joint control. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities (being those that significantly affect the returns of the arrangement) require unanimous consent of the parties sharing control. Joint Operations A joint operation is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets and obligations for the liabilities, relating to the arrangement. In relation to its interests in joint operations, the Group recognizes its: Assets, including its share of any assets held jointly Liabilities, including its share of any liabilities incurred jointly Revenue from the sale of its share of the output arising from the joint operation Share of the revenue from the sale of the output by the joint operation Expenses, including its share of any expenses incurred jointly A party that participates in, but does not have joint control of, a joint operation shall account for its interest in the arrangement as if it were a joint operation, if that party has rights to the assets, and obligations for the liabilities, relating to the joint operation. Joint ventures 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 arrangement. The Group does not have investment in joint ventures. If a party that participates in, but does not have joint control of, a joint operation and does not have rights to the assets, and obligations for the liabilities, relating to that joint operation, it shall account for its interest in the joint operation in accordance with the IFRSs applicable to that interest. When a contractual arrangement does not meet the definition of a joint arrangement, an entity accounts for its interest in the contractual arrangement in accordance with the relevant IFRS. Interest in contractual arrangements A contractual arrangement is an arrangement whereby the Group has rights to the assets and obligations for the liabilities in proportion to its participating interest based on the contractual terms without having control, joint control, or significant influence over the arrangement. The Group recognizes its interest in the assets, liabilities, revenue and expenses of the contractual arrangement in accordance with the applicable accounting policies. 44 Kuwait Foreign Petroleum Exploration Co. K.S.C. (Closed) and Subsidiaries
Investment in associate An associate is an entity over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies. The considerations made in determining significant influence or joint control are similar to those necessary to determine control over subsidiaries. The Group s investment in its associate is accounted for using the equity method. Under the equity method, the investment in an associate 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 associate since the acquisition date. Goodwill relating to the associate is included in the carrying amount of the investment and is neither amortised nor individually tested for impairment. The consolidated income statement reflects the Group s share of the results of operations of the associate. Any change in OCI of the investee is presented as part of the Group s OCI. In addition, when there has been a change recognised directly in the equity of the associate, the Group recognises its share of any changes, when applicable, in the consolidated statement of changes in equity. Unrealised gains and losses resulting from transactions between the Group and the associate are eliminated to the extent of the interest in the associate. The aggregate of the Group s share of profit or loss of an associate is shown on the face of the consolidated income statement outside operating profit and represents profit or loss after tax and non-controlling interests in the subsidiaries of the associate. The financial statements of the associate is 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 its associate. At each reporting date, the Group determines whether there is objective evidence that the investment in the associate is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value, then recognises the loss as impairment of investments in the consolidated income statement. Upon loss of significant influence over the associate, the Group measures and recognises any retained investment at its fair value. Any difference between the carrying amount of the associate upon loss of significant influence or joint control and the fair value of the retained investment and proceeds from disposal is recognised as profit or loss. Financial assets Initial recognition and measurement Financial assets within the scope of IAS 39 are classified as financial assets at fair value through profit or loss, financial assets available for sale, financial assets held to maturity, loans and receivables, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Group determines the classification of its financial assets at initial recognition. All financial assets are recognised initially at fair value plus transaction costs, except in the case of financial assets recorded at fair value through profit or loss. All regular way purchases and sales of financial assets are recognised on the settlement date, i.e. the date the asset is received from or delivered to the counterparty. Changes in fair value between the trade date and settlement date are recognised in the consolidated income statement or in consolidated statement of comprehensive income through cumulative changes in fair values in accordance with the policy applicable to the related instrument. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulations or conventions in the market place. 33 rd Annual Report 2014 45
The Group s financial assets include cash and bank balances, funds held by Ultimate Parent Company, trade and other receivables. Subsequent measurement The subsequent measurement of financial assets depends on their classification as follows: Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, such financial assets are subsequently measured at amortised cost using the effective interest rate, less impairment. 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 effective interest rate. The effective interest rate amortisation is included in the consolidated income statement. The losses arising from impairment are recognised in the consolidated income statement. The Group classifies its loans and receivables as trade and other receivables. 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 derecognised when: The rights to receive cash flows from the asset have expired 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 (b) 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, and has neither transferred nor retained substantially all of the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group s continuing involvement in the asset. 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. When continuing involvement takes the form of a written and/or purchased option (including a cash settled option or similar provision) on the transferred asset, the extent of the Group s continuing involvement is the amount of the transferred asset that the Group may repurchase, except that in the case of a written put option (including a cash settled option or similar provision) on an asset measured at fair value, the extent of the Group s continuing involvement is limited to the lower of the fair value of the transferred asset and the option exercise price. Impairment of financial assets The Group assesses at each reporting date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred loss event ) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the borrowers or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. 46 Kuwait Foreign Petroleum Exploration Co. K.S.C. (Closed) and Subsidiaries
Financial liabilities Initial recognition and measurement Financial liabilities within the scope of IAS 39 are classified as financial liabilities at fair value through profit or loss, loans and borrowings, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Group determines the classification of its financial liabilities at initial recognition. All financial liabilities are recognised initially at fair value and in the case of loans and borrowings, plus directly attributable transaction costs. The Group classifies its financial liabilities other than at fair value through profit or loss as trade and other payables, due to Ultimate Parent Company and affiliates, dividends payable, and long-term borrowing. Subsequent measurement The measurement of financial liabilities depends on their classification as follows: Financial liabilities other than at fair value through profit or loss After initial recognition, interest bearing loans and borrowings are subsequently measured at amortised cost using the effective interest rate. Gains and losses are recognised in the consolidated income statement when the liabilities are derecognised as well as through the effective interest rate 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 effective interest rate. The effective interest rate amortisation is included in interest expense in the consolidated income statement. 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 a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in the consolidated income statement. Cash and cash equivalents For the purpose of the consolidated cash flow statement, cash and cash equivalents includes cash and bank balances, deposits and other short-term, highly liquid investments that are readily convertible to known amounts of cash with original maturities up to three months from the date of acquisition and that are subject to an insignificant risk of change in value. Inventories Crude oil is valued at net realizable value. Any changes arising on the revaluation of inventories are recognised in the consolidated income statement. Other inventories comprising mainly of spare parts, materials and supplies are valued at cost, determined principally on a weighted average cost basis, less allowance for any obsolete or slow moving items. Purchase cost includes the purchase price, import duties, transportation, handling and other direct costs. Oil and natural gas exploration, evaluation and development expenditure Oil and natural gas exploration, evaluation and development expenditure is accounted for using successful efforts method of accounting. Pre-licence costs Pre-licence costs are expensed in the period in which they are incurred. Licence and property acquisition costs Exploration licence and leasehold property acquisition costs are capitalised within intangible assets and are reviewed at each reporting date to confirm that there is no indication that the carrying amount exceeds the recoverable amount. This review includes confirming that exploration drilling is still under way or firmly planned, or that it has been determined, or work is under way to determine, that the discovery is economically viable based on a range of technical and commercial considerations and sufficient progress is being made on establishing development plans and timing. 33 rd Annual Report 2014 47
If no future activity is planned, the carrying value of the licence and property acquisition costs is written off through consolidated income statement. Upon recognition of proved reserves and internal approval for development, the relevant expenditure is transferred to oil and gas properties. Exploration and evaluation costs Exploration and evaluation activity involves the search for mineral resources, the determination of technical feasibility and assessment of commercial viability of an identified resource. Once the legal right to explore has been acquired, costs directly associated with an exploration well are capitalised as exploration and evaluation intangible assets until the drilling of the well is complete and the results have been evaluated. If no potentially commercial hydrocarbons are discovered, the exploration asset is written off as a dry hole. If extractable hydrocarbons are found and, subject to further appraisal activity (e.g., the drilling of additional wells), are likely to be capable of being commercially developed, the costs continue to be carried as an intangible asset while sufficient/continued progress is made in assessing the commerciality of the hydrocarbons. Costs directly associated with appraisal activity undertaken to determine the size, characteristics and commercial potential of a reservoir following the initial discovery of hydrocarbons, including the costs of appraisal wells where hydrocarbons were not found, are initially capitalised as an exploration and evaluation intangible asset. All such capitalised costs are subject to technical, commercial and management review as well as review for indicators of impairment at least once a year. This is to confirm the continued intent to develop or otherwise extract value from the discovery. When this is no longer the case, the costs are written off to consolidated income statement. When proved reserves of oil and natural gas are identified and development is sanctioned by management, the relevant capitalised expenditure is first assessed for impairment and (if required) any impairment loss is recognised, then the remaining balance is transferred to oil and gas properties. No amortisation is charged during the exploration and evaluation phase. Development costs Expenditure on the construction, installation or completion of infrastructure facilities such as platforms, seismic geological and geophysical studies, finance charges, mineral interests in properties, pipelines and the drilling of development wells, including unsuccessful development or delineation wells, is capitalised within oil and gas properties. Oil and gas properties and other fixed assets Initial recognition Oil and gas properties and other fixed assets are stated at cost, less accumulated depreciation and accumulated impairment losses. The initial cost of an asset comprises its purchase price or construction cost, any costs directly attributable to bringing the asset into operation, the initial estimate of the decommissioning obligation, and for qualifying assets (where applicable), borrowing costs. The purchase price or construction cost is the aggregate amount paid and the fair value of any other consideration given to acquire the asset. When a development project moves into the production stage, the capitalisation of certain construction/ development costs ceases and costs are either regarded as part of the cost of inventory or expensed, except for costs which qualify for capitalisation relating to oil and gas property asset additions, improvements or new developments. Decommissioning costs and provisions The decommissioning provision is calculated based on the net present value of the Group's share of the estimated future cost of decommissioning and site restoration required for facilities in place. This is calculated using the latest estimates provided by the Group's technical staff, which is based upon estimates provided by the field operators. An associated decommissioning asset is recognized, which is amortised for each field on a unit-of-production basis in accordance with the Group's policy for depreciation, depletion and amortisation of oil and gas properties. Period charges for changes in the net present value of the decommissioning provision arising from the unwinding of the discount are included in finance costs. 48 Kuwait Foreign Petroleum Exploration Co. K.S.C. (Closed) and Subsidiaries
The Group recognises a decommissioning provision when it has a present legal or constructive obligation as a result of past events, and it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount of obligation can be made. The obligation generally arises when the asset is installed or the ground/environment is disturbed at the field location. When the liability is initially recognised, the present value of the estimated costs is capitalised by increasing the carrying amount of the related oil and gas assets to the extent that it was incurred by the development/construction of the field. Any decommissioning obligations that arise through the production of inventory are expensed as incurred. Changes in the estimated timing of decommissioning or decommissioning cost estimates are dealt with prospectively by recording an adjustment to the provision, and a corresponding adjustment to oil and gas properties. Any reduction in the decommissioning liability and, therefore, any deduction from the asset to which it relates, may not exceed the carrying amount of that asset. If it does, any excess over the carrying value is taken immediately to consolidated income statement. If the change in estimate results in an increase in the decommissioning liability and, therefore, an addition to the carrying value of the asset, the Group considers whether this is an indication of impairment of the asset as a whole, and if so, tests for impairment in accordance with IAS 36. If, for mature fields, the revised oil and gas assets, net of decommissioning provisions exceed the recoverable value, that portion of the increase is charged directly to consolidated income statement. Over time, the discounted liability is increased for the change in present value based on the discount rate that reflects current market assessments and the risks specific to the liability. The periodic unwinding of the discount is recognised in consolidated income statement. Depreciation, depletion and amortization Oil and gas properties are depreciated, depleted and amortised on a unit-of-production basis over the commercial proven and probable reserves ( 2P reserves ) of the field concerned. The unit-of-production rate calculation for the depreciation, depletion and amortisation of field development costs takes into account expenditures incurred to date, together with sanctioned future development expenditure. Oil and gas reserves are calculated using the latest estimates provided by the Group's technical staff, which are based on estimates provided by the field operator. An item of oil and gas properties and other fixed assets initially recognised is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in income statement when the asset is derecognised. The asset s residual values, useful lives and methods of depreciation, depletion and amortisation are reviewed at each reporting period, and adjusted prospectively if appropriate. Other fixed assets are generally depreciated on a straight-line basis over their estimated useful lives which is generally 5 years, except for building which is 25 years. Major maintenance, inspection and repairs Expenditure on major maintenance refits, inspections or repairs comprises the cost of replacement assets or parts of assets, inspection costs and overhaul costs. Where an asset or part of an asset, that was separately depreciated and is now written off, is replaced and it is probable that future economic benefits associated with the item will flow to the Group, the expenditure is capitalised. Where part of the asset replaced was not separately considered as a component and therefore not depreciated separately, the replacement value is used to estimate the carrying amount of the replaced asset(s) which is immediately written off. Inspection costs associated with major maintenance programmes are capitalised and amortised over the period to the next inspection. All other day-to-day repairs and maintenance costs are expensed as incurred. 33 rd Annual Report 2014 49