A significant portion of the Group's consolidated net assets of
US$99.0million (31 December 2012: US$106.3 million) comprises
undeveloped mineral deposits requiring significant additional
investment. The Group is dependent upon external debt to fully
develop the deposits and realise the value attributed to such
assets.
The Group had net current assets of US$0.7million as of 30 June
2013 (31 December 2012: net current liabilities of US$1.1 million).
The most significant creditor as of 30 June 2013 was US$5.5 million
loan from Petraco (31 December 2012: US$3.0 million) (Note 9).
Management have prepared monthly cash flow projections for
periods throughout 2013and 2014. Judgements which are significant
to management's conclusion that no material uncertainty exists for
going concern this year include future oil prices and planned
production which were required for the preparation of the cash flow
projections and model. Positive overall cash flows are dependent on
future oil prices (a price of US$110per barrel has been used for
2013 and for 2014). Despite the above matters, the Group still has
funding and liquidity constraints, though these are less severe
than in the prior year. Despite the uncertainties and based on cash
flow projections performed, management considers that the
application of the going concern assumption for the preparation of
these consolidated financial statements is appropriate.
4 Critical Accounting Estimates and Judgments in Applying Accounting Policies
The Group makes estimates and assumptions that affect the
amounts recognised in the consolidated financial statements and the
carrying amounts of assets and liabilities within the next
financial year. Estimates and judgments are continually evaluated
and are based on management's experience and other factors,
including expectations of future events that are believed to be
reasonable under the circumstances. Management also makes certain
judgments, apart from those involving estimations, in the process
of applying the accounting policies. Judgments that have the most
significant effect on the amounts recognised in the consolidated
financial statements and estimates that can cause a significant
adjustment to the carrying amount of assets and liabilities within
the next financial year include:
Tax legislation
Russian tax and customs legislation is subject to varying
interpretations, and changes, which can occur frequently.
Management's interpretation of such legislation as applied to the
transactions and activity of the Group may be challenged by the
relevant authorities.
Initial recognition of related party transactions
In the normal course of business the Company enters into
transactions involving various financial instruments with its
related parties. IAS 39, Financial Instruments: recognition and
measurement, requires initial recognition of financial instruments
based on their fair values. Judgment was applied in determining if
transactions are priced at market or non market interest rates,
where there is no active market for such transactions. This
judgment was based on the pricing for similar types of transactions
with unrelated parties and effective interest rate analyses.
Estimation of oil and gas reserves
Engineering estimates of hydrocarbon reserves are inherently
uncertain and are subject to future revisions. Accounting measures
such as depreciation, depletion and amortisation charges,
impairment assessments and asset retirement obligations that are
based on the estimates of proved reserves are subject to change
based on future changes to estimates of oil and gas reserves.
Proved reserves are defined as the estimated quantities of
hydrocarbons which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known
reservoirs under existing economic conditions. Proved reserves are
estimated by reference to available reservoir and well information,
including production and pressure trends for producing reservoirs.
Furthermore, estimates of proved reserves only include volumes for
which access to market is assured with reasonable certainty. All
proved reserves estimates are subject to revision, either upward or
downward, based on new information, such as from development
drilling and production activities or from changes in economic
factors, including product prices, contract terms or development
plans. In some cases, substantial new investment in additional
wells and related support facilities and equipment will be required
to recover such proved reserves. Due to the inherent uncertainties
and the limited nature of reservoir data, estimates of underground
reserves are subject to change over time as additional information
becomes available.
The Group last obtained an independent reserve engineers report
as at 31 December 2007. Management believes that these reserves
have not changed, other than through production, as the amount of
subsequent additional drilling has been minimal.
In general, estimates of reserves for undeveloped or partially
developed fields are subject to greater uncertainty over their
future life than estimates of reserves for fields that are
substantially developed and depleted. As those fields are further
developed, new information may lead to further revisions in reserve
estimates. Reserves have a direct impact on certain amounts
reported in the consolidated financial statements, most notably
depreciation, depletion and amortisation as well as impairment
expenses. Depreciation rates on production assets using the
units-of-production method for each field are based on proved
developed reserves for development costs, and total proved reserves
for costs associated with the acquisition of proved properties.
Assuming all variables are held constant, an increase in proved
developed reserves for each field decreases depreciation, depletion
and amortisation expenses. Conversely, a decrease in the estimated
proved developed reserves increases depreciation, depletion and
amortisation expenses. Moreover, estimated proved reserves are used
to calculate future cash flows from oil and gas properties, which
serve as an indicator in determining whether or not property
impairment is present. The possibility exists for changes or
revisions in estimated reserves to have a significant effect on
depreciation, depletion and amortisation charges and, therefore,
reported net profit/(loss) for the year.
Deferred income tax asset recognition
The recognised deferred tax asset represents income taxes
recoverable through future deductions from taxable profits and is
recorded in the statement of financial position. Deferred income
tax assets are recorded to the extent that realisation of the
related tax benefit is probable. The future taxable profits and the
amount of tax benefits that are probable in the future are based on
the medium term business plan prepared by management and
extrapolated results thereafter. The business plan is based on
management expectations that are believed to be reasonable under
the circumstances. Key assumptions in the business plan are an
average oil price of US$110for 2013 and US$90 in real terms for
future sales.
Impairment provision for receivables
The impairment provision for receivables (including loans
issued) is based on management's assessment of the probability of
collection of individual receivables. Significant financial
difficulties of the debtor/lender, probability that the
debtor/lender will enter bankruptcy or financial reorganisation,
and default or delinquency in payments are considered indicators
that the receivable is potentially impaired. Actual results could
differ from these estimates if there is deterioration in a
debtor's/lender's creditworthiness or actual defaults are higher
than the estimates.
When there is no expectation of recovering additional cash for
an amount receivable, the expected amount receivable is written off
against the associated provision.
Future cash flows of receivables that are evaluated for
impairment are estimated on the basis of the contractual cash flows
of the assets and the experience of management in respect of the
extent to which amounts will become overdue as a result of past
loss events and the success of recovery of overdue amounts. Past
experience is adjusted on the basis of current observable data to
reflect the effects of current conditions that did not affect past
periods and to remove the effects of past conditions that do not
exist currently.
Asset retirement obligations
Management makes provision for the future costs of
decommissioning hydrocarbon production facilities, pipelines and
related support equipment based on the best estimates of future
cost and economic lives of those assets. Estimating future asset
retirement obligations is complex and requires management to make
estimates and judgments with respect to removal obligations that
will occur many years in the future. Changes in the measurement of
existing obligations can result from changes in estimated timing,
future costs or discount rates used in valuation.
Useful lives of non-oil and gas properties
Items of non-oil and gas properties are stated at cost less
accumulated depreciation. The estimation of the useful life of an
asset is a matter of management judgment based upon experience with
similar assets. In determining the useful life of an asset,
management considers the expected usage, estimated technical
obsolescence, physical wear and tear and the physical environment
in which the asset is operated. Changes in any of these conditions
or estimates may result in adjustments to future depreciation
rates. Useful lives applied to oil and gas properties may exceed
the license term where management considers that licenses will be
renewed. Assumptions related to renewal of licenses can involve
significant judgment of management.
Impairment
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