Restatement of 2004 Results
Cairn Energy PLC
07 September 2005
CAIRN ENERGY PLC
2005 INTERIM REPORTING AND ADOPTION OF INTERNATIONAL FINANCIAL REPORTING
STANDARDS ('IFRS')
Cairn Energy PLC intends to publish its Interim Results under IFRS for the six
months to 30 June 2005 on Tuesday, 20 September 2005.
Cairn has adopted IFRS with effect from 1 January 2005. IFRS is the required
reporting basis for all European Union ('EU') listed companies from 2005. As
part of the IFRS transition and in line with best practice, Cairn is today
providing audited year ended 31 December 2004 restated results prepared under
IFRS. These restatements have been prepared on the basis of revised accounting
policies that have been agreed with Cairn's auditors. This restated financial
information is presented in this press release along with reconciliations from
UK Generally Accepted Accounting Principles ('UK GAAP') to IFRS and these
revised accounting policies.
Highlights
• Reported profit for 2004 up by 68% compared to UK GAAP profit
announced in March 2005
• No change to the Group's guidance on underlying performance for 2005
save for changes arising from adoption of IFRS
• No effect on the Group's trading cash flows or cash available for
investment
• No impact on economic value
• No effect on the Group's strategy or management of its business
The principal differences for Cairn between reporting on the basis of UK GAAP
and IFRS are as follows:
•Expensing pre-exploration expenditure previously held within exploration
and developing/producing assets
•Retranslation of certain assets held by subsidiaries with non-sterling
functional currencies on consolidation
•Recognising an expense for the fair value of employee share options
granted after 7 November 2002 and changes in the fair values for the Group's
Long Term Incentive Plan ('LTIP') awards granted after 7 November 2002
including reversing expenses recognised for awards granted prior to that
date
•Recognising deferred tax liabilities on prior year business acquisitions
•Disclosure and presentational adjustments for certain assets held by the
Group
Enquiries to:
Cairn Energy PLC
Kevin Hart, Finance Director Tel: 0131 475 3000
Kerry Crawford, Senior Group Finance Manager
Notes to Editors:
• Cairn focuses its activities on the geographic region of South Asia.
The Group holds material exploration and production positions in west India,
east India and Bangladesh along with new exploration rights in northern India
and Nepal.
• This focus on South Asia has already resulted in a significant number
of oil and gas discoveries. In particular, the company made a major oil
discovery (Mangala) in Rajasthan in the north west of India at the beginning of
2004.
• 'Cairn' where referred to in this release means Cairn Energy PLC and/
or its subsidiaries, as appropriate.
For further information on Cairn see www.cairn-energy.plc.uk
Cairn Energy PLC
Restatement of 2004 Results from UK GAAP to IFRS
Contents
Introduction...................................................................2
Independent Auditors' Report...................................................4
Independent Review Report......................................................6
Group IFRS Income Statement for the year ended 31 December 2004................8
Group IFRS Statement of Changes in Equity for the year ended 31 December 2004..9
Group IFRS Income Statement for the six months ended 30 June 2004 (unaudtied).10
Group IFRS Statement of Changes in Equity for the six months ended 30 June 2004
(Unaudited) ..................................................................11
Group IFRS Balance Sheet as at 31 December 2004...............................12
Group IFRS Balance Sheet as at 30 June 2004 (Unaudited).......................13
Group IFRS Balance Sheet as at 31 December 2003...............................14
Note 1 - Accounting Policies..................................................15
Reconciliation of Group Equity as at 31 December 2004.........................21
Reconciliation of Group Equity as at 30 June 2004 (unaudited).................22
Reconciliation of Group Equity as at 31 December 2003........................ 23
Reconciliation of Group Income Statement for the year ended 31 December 2004..24
Reconciliation of Group Income Statement for the six months ended 30 June 2004
(unaudited)...................................................................25
Note 2 - Reconciling items between UK GAAP and IFRS...........................26
Glossary of Terms.............................................................29
Introduction
Cairn has a mandatory requirement to implement IFRS for accounting periods
commencing 1 January 2005. This requires Cairn to report its 2005 Interim
Results under applicable International Accounting Standards and International
Financial Reporting Standards (hereafter referred to as 'IFRS'), including
comparative information.
As part of the transition to IFRS, Cairn has restated the Group Balance Sheets
as at 31 December 2003 (the 'transition date'), 31 December 2004 and 30 June
2004 and the Group Income Statements for the year ended 31 December 2004 and six
months ended 30 June 2004 to comply with IFRS. This restated financial
information is presented along with reconciliations from UK GAAP to IFRS
and revised accounting policies.
The information in this document has been prepared on the basis of IFRS expected
to be effective as at 31 December 2005. This assumes that all IFRS and
interpretations relevant to Cairn shall be endorsed by the European Commission
('EC'). Should the EC fail to endorse, there may be further changes required to
the information presented. All IFRS are still subject to change based on
further interpretative guidance from the IASB as well as changes in industry
interpretations on certain issues.
On the first time adoption of IFRS, the general principle for applying IFRS is
one of full retrospective application. IFRS 1 'First time adoption of
International Financial Reporting Standards' does, however, allow the first time
adopter certain exemptions from this principle. IFRS 1 contains both mandatory
and optional exemptions. From the optional exemptions, Cairn has elected:
•Not to restate financial information for business combinations which
occurred prior to 31 December 2003; and
•To deem cumulative translation differences arising on consolidation of
subsidiary undertakings to be zero at 31 December 2003.
In preparing these statements, Cairn has also chosen to adopt early IFRS 6
'Exploration for and Evaluation of Mineral Resources'.
The principal differences for Cairn between reporting on the basis of UK GAAP
and IFRS are as follows:
•Expensing pre-exploration expenditure previously held within Exploration
assets and Development/producing assets;
•Retranslation of certain assets held by subsidiaries with non-Sterling
functional currencies on consolidation;
•Recognising an expense for the fair value of employee share options
granted post 7 November 2002 and changes in the fair values for
LTIP awards granted post 7 November 2002 including
reversing expenses recognised for awards granted prior to this date;
•Recognising deferred tax liabilities on prior year business acquisitions;
and
•Disclosure and presentational adjustments for certain assets held by the
Group.
The Group has continued to apply its existing full cost accounting policy for
oil and gas assets to both exploration and appraisal activity and in the
development and production phase. However, as at the date these restatements are
authorised for issue, the Board are aware that, owing to a lack of clarity in
the authoritative literature, agreement has not been reached amongst the UK oil
industry and the accounting profession on the acceptability of applying full
cost policies under IFRS beyond the exploration and appraisal phase. As a
result, the matter has been referred to the Agenda Committee of the
International Financial Reporting Interpretations Committee ('IFRIC') to request
consideration of the matter by IFRIC. The timing and outcome of the Agenda
Committee discussions and any referral to IFRIC are currently uncertain.
Consequently, for the purposes of these restatements, the Company has continued
to apply their UK GAAP full cost accounting policies that were in effect
immediately prior to the Group's transition to IFRS, subject to changes in
accounting policy specifically required under IFRS 6.
The Board will reconsider the appropriateness of the full cost accounting policy
for the Group's annual report and accounts and take into account any guidance or
clarification received from either the Agenda Committee or IFRIC.
The UK GAAP financial information contained in this document does not constitute
statutory accounts as defined by section 240 of the Companies Act 1985. The
auditors have issued unqualified audit opinions on the Group's UK GAAP financial
statements for the years ended 31 December 2003 and 31 December 2004. Copies
of the UK GAAP financial statements for these years have been delivered to the
Registrar of Companies.
Independent Auditors' Report
INDEPENDENT AUDITORS' REPORT TO CAIRN ENERGY PLC ON THE PRELIMINARY IFRS
FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2004
We have audited the accompanying preliminary International Financial Reporting
Standards ('IFRS') financial statements of the Group for the year ended 31
December 2004 which comprise the opening IFRS Balance Sheet as at 31 December
2003, the Income Statement and the Statement of Changes in Equity for the year
ended 31 December 2004 and the Balance Sheet as at 31 December 2004, together
with the related accounting policies note set out on pages 15 to 20.
This report is made solely to the Company in accordance with our engagement
letter dated 7 July 2005. Our audit work has been undertaken so that we might
state to the Company those matters we are required to state to them in an
auditors' report and for no other purpose. To the fullest extent permitted by
law, we do not accept or assume responsibility or liability to anyone other than
the Company for our audit work, for this report, or for the opinions we have
formed.
Respective responsibilities of directors and auditors
These preliminary IFRS financial statements are the responsibility of the
Company's directors and have been prepared as part of the Company's conversion
to IFRS. They have been prepared in accordance with Note 1 which describes how
IFRS have been applied under IFRS 1, including the assumptions management has
made about the standards and interpretations expected to be effective, and the
policies expected to be adopted, when management prepares its first complete set
of IFRS financial statements as at 31 December 2005.
Our responsibility is to express an independent opinion on the preliminary IFRS
financial statements based on our audit. We read the other information
accompanying the preliminary IFRS financial statements and consider whether it
is consistent with the preliminary IFRS financial statements. This other
information comprises the introduction on pages 2 to 3, and the reconciliations
from UK GAAP to IFRS and accompanying explanations on pages 21 to 28. We
consider the implications for our report if we become aware of any apparent
misstatements or material inconsistencies with the preliminary opening balance
sheet. Our responsibilities do not extend to any other information.
Basis of audit opinion
We conducted our audit in accordance with United Kingdom Auditing Standards
issued by the Auditing Practices Board. Those Standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
preliminary IFRS financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the preliminary IFRS financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the preliminary
IFRS financial statements. We believe that our audit provides a reasonable
basis for our opinion.
Emphasis of matter
Without qualifying our opinion, we draw attention to the fact that Note 1
explains why there is a possibility that the preliminary IFRS financial
statements may require adjustment before constituting the final IFRS financial
statements. In particular, we highlight that the director's are aware that the
application of full cost accounting under IFRS has been referred to the IFRIC
Agenda Committee for consideration. Moreover, we draw attention to the fact
that, under IFRSs only a complete set of financial statements with comparative
financial information and explanatory notes can provide a fair presentation of
the Company's financial position, results of operations and cash flows in
accordance with IFRSs.
Opinion
In our opinion, the preliminary IFRS financial statements for the year ended
31December 2004 have been prepared, in all material respects, in accordance with
the basis set out in Note 1, which describes how IFRS have been applied under
IFRS 1, including the assumptions management has made about the standards and
interpretations expected to be effective, and the policies expected to be
adopted, when management prepares its first complete set of IFRS financial
statements as at 31 December 2005.
Ernst & Young LLP
London
7 September 2005
Independent Review Report
INDEPENDENT REVIEW REPORT TO CAIRN ENERGY PLC ON THE PRELIMINARY IFRS FINANCIAL
STATEMENTS FOR THE SIX MONTHS ENDED 30 JUNE 2004
Introduction
We have reviewed the preliminary International Financial Reporting Standards
('IFRS') consolidated financial information of Cairn Energy PLC for the six
months ended 30 June 2004 which comprises the IFRS Balance Sheet as at 30 June
2004 and the IFRS Income Statement and Statement of Changes in Equity for the
six months ended 30 June 2004.
This report is made solely to the company in accordance with guidance contained
in Bulletin 1999/4 'Review of interim financial information' issued by the
Auditing Practices Board. To the fullest extent permitted by the law, we do not
accept or assume responsibility to anyone other than the company for our work,
for this report, or for the conclusions we have formed.
Directors' responsibilities
The preliminary IFRS financial information is the responsibility of the
company's directors and has been prepared as part of the company's conversion to
IFRS. It has been prepared in accordance with the basis of preparations set out
in Note 1 which describes how IFRS has been applied under IFRS 1, including the
assumptions management has made about the standards and interpretations expected
to be effective, and the policies expected to be adopted, when management
prepares its first complete set of IFRS financial statements as at 31 December
2005.
Review work performed
We conducted our review in accordance with guidance contained in Bulletin 1999/4
'Review of interim financial information' issued by the Auditing Practices Board
for use in the United Kingdom. A review consists principally of making
enquiries of group management and applying analytical procedures to the
financial information and underlying financial data, and based thereon,
assessing whether the accounting policies and presentation have been
consistently applied, unless otherwise disclosed. A review excludes audit
procedures such as tests of controls and verification of assets, liabilities and
transactions. It is substantially less in scope than an audit performed in
accordance with United Kingdom Auditing Standards and therefore provides a lower
level of assurance than an audit. Accordingly we do not express an opinion on
the preliminary IFRS financial information.
Emphasis of matter
Without modifying our review conclusion, we draw attention to the fact that Note
1 explains why there is a possibility that the preliminary IFRS financial
information may require adjustment before constituting the final IFRS financial
statements. In particular, we highlight that the director's are aware that the
application of full cost accounting under IFRS has been referred to the IFRIC
Agenda Committee for consideration. Moreover, we draw attention to the fact
that, under IFRS only a complete set of financial statements with comparative
financial information and explanatory notes can provide a fair presentation of
the company's financial position, results of operations and cash flows in
accordance with IFRS.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the preliminary IFRS financial information as presented for
the six months ended 30 June 2004.
Ernst & Young LLP
7 September 2005
London
Group IFRS Income Statement
For the year ended 31 December 2004
UK GAAP IFRS IFRS
2004 adjustments 2004
£'000 £'000 £'000
-------- -------- --------
Revenue 95,449 - 95,449
Cost of sales
Production costs (27,689) (37) (27,726)
Depletion (31,608) 3,372 (28,236)
Decommissioning charge (1,183) - (1,183)
------------------------ ----- -------- -------- --------
Gross profit 34,969 3,335 38,304
------------------------ ----- -------- -------- --------
Administrative expenses (18,200) 3,661 (14,539)
------------------------ ----- -------- -------- --------
Operating profit 16,769 6,996 23,765
------------------------ ----- -------- -------- --------
Exceptional gain on sale of oil and 2,206 - 2,206
gas assets
Profit on ordinary activities before 18,975 6,996 25,971
interest
Interest income 1,811 - 1,811
Finance costs (4,889) (1,345) (6,234)
------------------------ ----- -------- -------- --------
Profit on ordinary activities before 15,897 5,651 21,548
taxation ----- -------- -------- --------
------------------------
Taxation on profit on ordinary (5,055) 1,689 (3,366)
activities ----- -------- -------- --------
------------------------
Profit for the year attributable to
equity holders
10,842 7,340 18,182
-------------------------------------- ----- -------- -------- --------
Earnings per ordinary share - basic 7.11p 11.92p
Earnings per ordinary share - 7.05p 11.83p
diluted ----- -------- -------- --------
------------------------
Further details of the IFRS adjustments can be found on pages 21 to 28.
Group IFRS Statement of Changes in Equity
For the year ended 31 December 2004
Group
2004
£'000
Opening equity 309,389
-------------------------------------- ---------
Currency translation differences (19,985)
-------------------------------------- ---------
Total expense recognised direct in equity (19,985)
-------------------------------------- ---------
Profit for the year 18,182
-------------------------------------- ---------
Total recognised income for the year 18,182
-------------------------------------- ---------
Total recognised income and expense for the year (1,803)
-------------------------------------- ---------
New shares issued for cash 101,889
New shares issued in respect of employee share options 4,559
Cost of shares purchased by ESOP trust (9,329)
Share based payments charges 1,291
-------------------------------------- ---------
Closing equity attributable to the Company's equity holders
405,996
-------------------------------------------------------------------- ---------
Group IFRS Income Statement
For the six months ended 30 June 2004 (Unaudited)
UK GAAP IFRS IFRS
June 2004 adjustment June 2004
£'000 £'000 £'000
------------------------ ----- -------- -------- --------
Revenue 61,055 - 61,055
Cost of sales
Production costs (13,866) - (13,866)
Depletion (14,048) 2,412 (11,636)
Decommissioning charge (654) - (654)
------------------------ ----- -------- -------- --------
Gross profit 32,487 2,412 34,899
------------------------ ----- -------- -------- --------
Administrative expenses (10,173) 2,508 (7,665)
------------------------ ----- -------- -------- --------
Operating profit 22,314 4,920 27,234
------------------------ ----- -------- -------- --------
Exceptional gain on sale of oil and 2,147 - 2,147
gas assets
Profit on ordinary activities before 24,461 4,920 29,381
interest
Interest income 182 2,295 2,477
Finance costs (1,699) 712 (987)
------------------------ ----- -------- -------- --------
Profit on ordinary activities before 22,944 7,927 30,871
taxation ----- -------- -------- --------
------------------------
Taxation on profit on ordinary (7,715) 449 (7,266)
activities ----- -------- -------- --------
------------------------
Profit for the period attributable to
equity holders
15,229 8,376 23,605
------------------------ ----- -------- -------- --------
Earnings per ordinary share - basic 10.23p 15.86p
Earnings per ordinary share - 10.16p 15.75p
diluted ----- -------- -------- --------
------------------------
Further details of the IFRS adjustments can be found on pages 21 to 28.
Group IFRS Statement of Changes in Equity
For the six months ended 30 June 2004 (Unaudited)
Group
2004
£'000
Opening equity 309,389
-------------------------------------- ---------
Currency translation differences (4,081)
-------------------------------------- ---------
Total expense recognised direct in equity (4,081)
-------------------------------------- ---------
Profit for the period 23,605
-------------------------------------- ---------
Total recognised income for the period 23,605
-------------------------------------- ---------
Total recognised income and expense for the period 19,524
-------------------------------------- ---------
New shares issued in respect of employee share options 4,349
Cost of shares purchased by ESOP trust (9,329)
Share based payments charges 552
-------------------------------------- ---------
Closing equity attributable to the Company's equity holders
324,485
-------------------------------------------------------------------- ---------
Group IFRS Balance Sheet as at 31 December 2004
UK GAAP IFRS IFRS
2004 adjustments 2004
£'000 £'000 £'000
Non-current assets
Intangible exploration assets 235,503 (2,577) 232,926
Tangible development/producing 232,415 (6,099) 226,316
assets
Property, plant and equipment 1,628 (172) 1,456
Intangible assets - 724 724
Investments 50 - 50
------------------------ --------- --------- ---------
469,596 (8,124) 461,472
-------------------------------- --------- --------- ---------
Current assets
Inventory - 1,125 1,125
Trade and other receivables 69,934 (1,652) 68,282
Bank deposits - 8,000 8,000
Cash and cash equivalents 72,042 (8,000) 64,042
------------------------ --------- --------- ---------
141,976 (527) 141,449
-------------------------------- --------- --------- ---------
Total assets 611,572 (8,651) 602,921
------------------------ --------- --------- ---------
Current liabilities
Trade and other payables 81,656 (2,826) 78,830
Income tax liabilities - 2,930 2,930
------------------------ --------- --------- ---------
81,656 104 81,760
-------------------------------- --------- --------- ---------
Non-current liabilities
Deferred tax liabilities 68,148 16,389 84,537
Provisions 30,628 - 30,628
------------------------ --------- --------- ---------
98,776 16,389 115,165
-------------------------------- --------- --------- ---------
Total liabilities 180,432 16,493 196,925
------------------------ --------- --------- ---------
Net assets 431,140 (25,144) 405,996
------------------------ --------- --------- ---------
Equity
Called-up share capital 15,901 - 15,901
Share premium 107,278 - 107,278
Shares held by the ESOP trust (14,031) - (14,031)
Foreign currency translation - (19,985) (19,985)
Other reserves 24,256 - 24,256
Capital reserves - non 26,281 - 26,281
distributable
Capital reserves - 109,635 - 109,635
distributable
Retained earnings 161,820 (5,159) 156,661
------------------------ --------- --------- ---------
Total equity attributable to the
Company's
equity holders 431,140 (25,144) 405,996
------------------------ --------- --------- ---------
Further details of the IFRS adjustments can be found on pages 21 to 28.
Group IFRS Balance Sheet as at 30 June 2004 (Unaudited)
UK GAAP IFRS IFRS
2004 adjustments 2004
£'000 £'000 £'000
Non-current assets
Intangible exploration assets 186,660 1,063 187,723
Tangible development/producing 238,092 (7,357) 230,735
assets
Property, plant and equipment 1,540 (227) 1,313
Intangible assets - 664 664
Investments 53 - 53
------------------------ --------- --------- ---------
426,345 (5,857) 420,488
-------------------------------- --------- --------- ---------
Current assets
Inventory - 1,517 1,517
Trade and other receivables 59,349 (1,968) 57,381
Cash and cash equivalents 16,438 - 16,438
------------------------ --------- --------- ---------
75,787 (451) 75,336
-------------------------------- --------- --------- ---------
Total assets 502,132 (6,308) 495,824
------------------------ --------- --------- ---------
Current liabilities
Trade and other payables 52,077 (8,595) 43,482
Income tax liabilities - 8,693 8,693
------------------------ --------- --------- ---------
52,077 98 52,175
-------------------------------- --------- --------- ---------
Non-current liabilities
Deferred tax liabilities 72,117 18,647 90,764
Bank loans 13,230 - 13,230
Provisions 15,170 - 15,170
------------------------ --------- --------- ---------
100,517 18,647 119,164
-------------------------------- --------- --------- ---------
Total liabilities 152,594 18,745 171,339
------------------------ --------- --------- ---------
Net assets 349,538 (25,053) 324,485
------------------------ --------- --------- ---------
Equity
Called-up share capital 15,142 - 15,142
Share premium 5,938 - 5,938
Shares held by the ESOP trust (14,031) - (14,031)
Foreign currency translation - (4,081) (4,081)
Other reserves 24,256 - 24,256
Capital reserves - non 26,281 - 26,281
distributable
Capital reserves - 109,635 - 109,635
distributable
Retained earnings 182,317 (20,972) 161,345
------------------------ --------- --------- ---------
Total equity attributable to the
Company's
equity holders 349,538 (25,053) 324,485
------------------------ --------- --------- ---------
Further details of the IFRS adjustments can be found on pages 21 to 28.
Group IFRS Balance Sheet as at 31 December 2003
UK GAAP IFRS IFRS
2003** adjustments 2003
£'000 £'000 £'000
Non-current assets
Intangible exploration assets 155,046 1,378 156,424
Tangible development/producing 236,749 (10,339) 226,410
assets
Property, plant and equipment 1,546 (122) 1,424
Intangible assets - 391 391
Investments 54 - 54
------------------------ --------- --------- ---------
393,395 (8,692) 384,703
----------------------------------- --------- --------- ---------
Current assets
Inventory - 2,271 2,271
Trade and other receivables 56,866 (2,553) 54,313
Cash and cash equivalents 17,766 - 17,766
------------------------ --------- --------- ---------
74,632 (282) 74,350
----------------------------------- --------- --------- ---------
Total assets 468,027 (8,974) 459,053
------------------------ --------- --------- ---------
Current liabilities
Trade and other payables 42,396 (5,634) 36,762
Income tax liabilities - 5,689 5,689
------------------------ --------- --------- ---------
42,396 55 42,451
----------------------------------- --------- --------- ---------
Non-current liabilities
Deferred tax liabilities 71,771 19,360 91,131
Provisions 16,082 - 16,082
------------------------ --------- --------- ---------
87,853 19,360 107,213
----------------------------------- --------- --------- ---------
Total liabilities 130,249 19,415 149,664
------------------------ --------- --------- ---------
Net assets 337,778 (28,389) 309,389
------------------------ --------- --------- ---------
Equity
Called-up share capital 15,010 - 15,010
Share premium 1,721 - 1,721
Shares held by the ESOP trust (4,702) - (4,702)
Foreign currency translation - - -
Other reserves 24,256 - 24,256
Capital reserves - non 26,281 - 26,281
distributable
Capital reserves - distributable 109,635 - 109,635
Retained earnings 165,577 (28,389) 137,188
------------------------ --------- --------- ---------
Total equity attributable to the
Company's
equity holders 337,778 (28,389) 309,389
------------------------ --------- --------- ---------
Further details of the IFRS adjustments can be found on pages 21 to 28.
** - restated UK GAAP as disclosed in 2004 annual accounts comparative figures
following change in accounting policy arising from the amendment to UITF 17
following implementation of UITF 38 effective for accounting periods ending on
or after 22 June 2004.
Note 1 - Accounting Policies
a) Accounting convention
Cairn prepares its accounts on a historical cost basis.
b) Accounting standards
Cairn prepares its accounts in accordance with applicable International
Financial Reporting Standards (IFRS).
This restatement of financial information for the years ended 31 December 2003
and 2004 has been prepared on the basis of all IFRS and interpretations issued
by the International Accounting Standards Board ('IASB') effective for the
Group's reporting year ended 31 December 2005, on the assumption that
they will be fully endorsed by the European Commission ('EC'). Should the EC
fail to endorse some of these standards and interpretations in full this could
result in the need to change the basis of accounting or presentation of certain
financial information in the 2005 Annual Report and Accounts.
The general principle in adopting IFRS is that all applicable accounting
standards should be applied fully retrospective. IFRS 1 'First time adoption of
International Financial Reporting Standards' allows certain exemptions which
companies are allowed to apply. Cairn has elected:
• Not to restate financial information for business combinations which
occurred prior to 31 December 2003; and
• To deem cumulative translation differences arising on consolidation of
subsidiary undertakings to be zero at 31 December 2003
These accounts are also prepared in accordance with IFRS 6 'Exploration for and
evaluation of mineral resources' following early adoption by Cairn of this
standard.
The Group has continued to apply its existing full cost accounting policy (see
f) below) to both exploration and appraisal activity and in the development and
production phase. However, as at the date these restatements are authorised for
issue, the Board are aware that, owing to a lack of clarity in the authoritative
literature, agreement has not been reached amongst the UK oil industry and the
accounting profession on the acceptability of applying full cost policies under
IFRS beyond the exploration and appraisal phase. As a result, the matter has
been referred to the Agenda Committee of the International Financial Reporting
Interpretations Committee ('IFRIC') to request consideration of the matter by
IFRIC. The timing and outcome of the Agenda Committee discussions and any
referral to IFRIC are currently uncertain. Consequently, for the purposes of
these restatements, the Company has continued to apply their UK GAAP full cost
accounting policies that were in effect immediately prior to the Group's
transition to IFRS, subject to changes in accounting policy specifically
required under IFRS 6.
The Board will reconsider the appropriateness of the full cost accounting policy
for the Group's annual report and accounts and take into account any guidance or
clarification received from either the Agenda Committee or IFRIC.
c) Basis of consolidation
The consolidated accounts include the results of Cairn Energy PLC and its
subsidiary undertakings to the Balance Sheet date. The consolidated income
statement and cash flow statement include the results and cash flows of
subsidiary undertakings up to the date of disposal.
Cairn allocates the purchase consideration of any acquisition to assets and
liabilities on the basis of fair values at the date of acquisition. Any excess
of the cost of acquisition over the fair values of the assets and liabilities is
recognised as goodwill. Any goodwill arising is recognised as an asset and
subject to annual review for impairment.
Business combinations arising prior to the Group's transition date to IFRS (31
December 2003) have not been revisited under the exemption provided by IFRS 1.
Deferred tax liabilities have however now been recognised on fair value
adjustments which arose from past business combinations in accordance with IAS
12.
d) Joint Ventures
Cairn participates in several Joint Ventures which involve the joint control of
assets used in the Group's oil and gas exploration and producing activities.
Cairn recognises its share of the assets and liabilities of Joint Ventures in
which the Group holds a participating interest, classified in the appropriate
balance sheet heading.
e) Revenue
Revenue represents Cairn's share of oil, gas and condensate production,
recognised on a direct entitlement basis and tariff income received for third
party use of operating facilities and pipelines in accordance with agreements.
Income received as operator from Joint Ventures is recognised on an accruals
basis in accordance with Joint Venture agreements and is included as a deduction
from administrative expenses.
Interest income is recognised on an accruals basis and is disclosed separately
on the face of the income statement.
f) Oil and gas exploration assets and development/producing assets
Cairn follows the full cost method of accounting for oil and gas assets. Under
this method, all expenditure incurred in connection with and directly
attributable to the acquisition, exploration, appraisal and development of oil
and gas assets is capitalised in two geographical cost pools: South Asia and
North Sea. Following the disposal of the Group's last remaining North Sea
interest during 2004 only one cost pool remains.
The capitalisation of expenditure under each phase of the project ends on
completion of that phase. Acquisition, exploration and appraisal expenditure is
capitalised as 'intangible exploration assets' within the balance sheet.
Exploration assets expenditure is transferred to 'tangible development/producing
assets' when the commercial reserves attributable to the underlying asset have
been established.
Further expenditure on fixed assets in the production phase is capitalised where
future economic benefit is enhanced.
Net proceeds from any disposal of oil and gas assets are credited against the
previously capitalised costs. In the case of disposal of an asset holding
subsidiary, net proceeds represents the net book value of the assets sold
together with the gain or loss arising on disposal of that subsidiary.
Depletion
Cairn depletes expenditure on oil and gas production and development on a unit
of production basis, based on proved and probable reserves on a cost pool basis.
Impairment
Exploration assets are reviewed regularly for indicators of impairment and costs
are written off where circumstances indicate that the carrying value might not
be recoverable. In such circumstances the exploration asset is allocated to its
corresponding development/producing cost pool, and tested for impairment. Any
such impairment arising is recognised in the profit or loss for the period.
Where there is no such development/producing cost pool, the exploration costs
are charged immediately to the Income Statement.
Impairment reviews on development/producing oil and gas assets are carried out
on each identified cost pool in accordance with IAS 36.
Each year the net book value of the cost pool is compared with the associated
discounted future cash flows. If the net book value is higher, then the
difference is written off to the Income Statement as impairment.
Where there has been a charge for impairment in an earlier year that charge will
be reversed in a later period where there has been a change in circumstances to
the extent that the discounted cash flows are higher than the net book value at
the time. In reversing impairment losses, the carrying amount of the asset will
be increased to the lower of its original carrying value or the carrying value
that would have been determined (net of depletion) had no impairment loss been
recognised in prior periods.
g) Property, plant and equipment
Tangible assets, other than development/producing assets, are measured at cost
and depreciated over their expected useful economic lives as follows:
Annual Rate (%) Depreciation Method
-------------- -------------------
Tenants' improvements 10 - 33 straight line
Vehicles, fixtures and equipment 25 - 50 straight line
h) Intangible assets
Intangible assets, other than exploration assets, have finite useful lives and
are measured at cost and amortised over their expected useful economic lives as
follows:
Annual Rate (%) Amortisation Method
------------ ------------
Computer software 25 - 50 straight line
i) Investments
Cairn recognises and measures unlisted investments where there is no quoted
market price available at cost. Investments in associates are carried at cost
less provisions recognised as a result of impairment.
j) Inventories
Inventories of oil and condensate held at the balance sheet date are valued at
net realisable value based on the estimated selling price at that date.
k) Financial instruments
Trade and other receivables
Trade receivables are recognised and carried at the original invoiced amount
less any allowances for doubtful debts. Other debtors are recognised and
measured at nominal value.
Bank deposits
Bank deposits with a maturity of over three months are held as a separate
category of current asset and presented on the face of the Balance Sheet.
Cash and cash equivalents
Cash and cash equivalents comprise cash at bank and short-term deposits with a
maturity of three months or less.
Trade payables and other creditors
Trade payables and other creditors are non-interest bearing and are measured at
cost.
Interest bearing bank loans
Interest bearing bank loans represent amounts drawn under the Group's revolving
credit facilities, classified according to the length of time remaining under
the respective facility. Interest payable is accrued in the Income Statement
for the period using the effective interest rate method.
Borrowing costs
Interest payable and exchange differences incurred on borrowings directly
attributable to development projects are capitalised within the development/
producing cost pool.
All other borrowing costs are recognised in the Income Statement in the period
in which they are incurred.
l) Equity
Equity instruments issued by Cairn are recorded at the proceeds received, net of
direct issue costs, allocated between share capital and share premium.
m) Taxation
The tax expense represents the sum of current tax and deferred tax expense.
The current tax is based on taxable profit for the year. Taxable profit differs
from net profit as reported in the income statement because it excludes items of
income or expense that are taxable or deductible in other years and it further
excludes items that are never taxable or deductible. The Group's liability for
current tax is calculated using tax rates that have been enacted or
substantively enacted by the balance sheet date.
Deferred tax is the tax expected to be payable or recoverable on differences
between the carrying amounts of assets and liabilities in the financial
statements and the corresponding tax bases used in the computation of taxable
profit, and is accounted for using the balance sheet liability method.
Deferred income tax liabilities are recognised for all taxable temporary
differences except in respect of taxable temporary differences associated with
investments in subsidiaries, associates and interests in joint ventures where
the timing of the reversal of the temporary difference can be controlled and it
is probable that the temporary difference will not reverse in the foreseeable
future.
Deferred income tax assets are recognised for all deductible temporary
differences, carry forward of unused tax assets and unused tax losses, to the
extent that it is probable that taxable profit will be available against which
the deductible temporary differences, carry forward of unused tax assets and
unused tax losses, can be utilised. In respect of taxable temporary differences
associated with investments in subsidiaries, associates and interests in joint
ventures, deferred tax assets are only recognised to the extent that it is
probable that the temporary differences will reverse in the foreseeable future
and taxable profit will be available against which the temporary difference can
be utilised.
The carrying amount of deferred income tax assets is reviewed at each balance
sheet date and reduced to the extent that it is no longer probable that
sufficient taxable profit will be available to allow all or part of the deferred
income tax asset to be utilised.
Deferred tax assets and liabilities are measured at the tax rates that are
expected to apply in the periods in which the asset is realised or the liability
is settled, based on tax rates and laws enacted or substantively enacted at the
balance sheet date.
n) Decommissioning
At the end of the producing life of a field, costs are incurred in removing and
decommissioning production facilities. Cairn recognises the full discounted
cost of decommissioning as an asset and liability when the obligation to rectify
environmental damage arises. The decommissioning asset is included within fixed
assets with the cost of the related installation. The liability is included
within provisions. Revisions to the estimated costs of decommissioning which
alter the level of the provisions required are also reflected in adjustments to
the decommissioning asset. The amortisation of the asset, calculated on a unit
of production basis based on proved and probable reserves, is shown as the
'decommissioning charge' in the income statement, and the unwinding of discount
on the provision is included within 'finance costs'.
o) Foreign currencies
In the accounts of individual Group companies, Cairn translates foreign currency
transactions into the functional currency at the rate of exchange prevailing at
the transaction date. Monetary assets and liabilities denominated in foreign
currency are translated into the functional currency at the rate of exchange
prevailing at the balance sheet date. Exchange differences arising are taken to
the income statement except for those incurred on borrowings specifically
allocable to development projects, which are capitalised as part of the cost of
the asset.
Cairn maintains the accounts of all subsidiary undertakings in their functional
currency, which for all material subsidiaries is US$. Cairn translates
subsidiary accounts into Sterling using the closing rate method, whereby assets
and liabilities are translated into Sterling at the rate of exchange prevailing
at the balance sheet date and income statement accounts are translated into
Sterling at average rates which approximate the exchange rates at the date of
the underlying transactions. Cairn takes exchange differences arising on the
translation of net assets and associated long term borrowings of subsidiary
undertakings and branches whose functional currency is non-Sterling directly to
reserves. On transition to IFRS Cairn has taken advantage of the exemption
offered under IFRS 1 and assumed zero brought forward translation differences on
subsidiary undertakings as at 1 January 2004.
Rates of exchange to £1 were as follows:
31 December Average 31 December
2004 2004 2003
----------- ----------- -----------
US$ 1.920 1.832 1.790
EUR 1.413 1.473 1.419
p) Pension schemes
Cairn operates defined contribution pension schemes in the UK and India. The
assets of the schemes are held separately from those of Cairn and its
subsidiaries. Cairn also operates an insured benefit scheme for certain
Indian employees as required under Indian legislation. In accordance with IAS
19 this is treated as a defined contribution scheme. The pension cost charge
represents contributions payable in the year in accordance with the rules of the
schemes.
q) Leasing commitments
Cairn charges rental payable under operating leases to the profit and loss
account on a straight line basis over the lease term.
r) Share schemes
The cost of awards to employees under Cairn's LTIP and share option plans are
recognised over the three year period to which the performance relates. The
amount recognised is based on the fair value of the shares as measured at the
date of the award. The shares are valued using a binomial model.
The costs of awards to employees in the form of cash but based on share
performance (phantom options) are recognised over the period to which the
performance relates. The amount recognised is based on the fair value of the
liability arising from the transaction.
Reconciliation of Group Equity as at 31 December 2004
Pre Foreign
UK exploration currency Intangible Total IFRS
GAAP write off DepletionImpairmentTranslation assets Taxation Other adjustments IFRS
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Notes on a b c d e f h
reconciling
items
Exploration 235,503 (152) - 4,179 (6,604) - - - (2,577) 232,926
assets
Development/ 232,415 (18,556) 13,056 (4,179) 3,580 - - - (6,099) 226,316
producing
assets
Property, 1,628 - - - - (172) - - (172) 1,456
plant and
equipment
Intangible - - - - 25 699 - - 724 724
assets
Investments 50 - - - - - - - - 50
------------- ------ ------- ------ ------- ------- ------ ------ ------ ------- ------
Total 469,596 (18,708) 13,056 - (2,999) 527 - - (8,124) 461,472
non-current ------ ------- ------ ------- ------- ------ ------ ------ ------- ------
assets
-------------
Inventory - - - - - - - 1,125 1,125 1,125
Trade and 69,934 - - - - (527) - (1,125) (1,652) 68,282
other
receivables
Bank - - - - - - - 8,000 8,000 8,000
deposits
Cash and cash 72,042 - - - - - - (8,000) (8,000) 64,042
equivalents ------ ------- ------ ------- ------- ------ ------ ------ ------- ------
-------------
Total current 141,976 - - - - (527) - - (527) 141,449
assets ------ ------- ------ ------- ------- ------ ------ ------ ------- ------
-------------
Total 611,572 (18,708) 13,056 - (2,999) - - - (8,651) 602,921
assets ------ ------- ------ ------- ------- ------ ------ ------ ------- ------
-------------
Trade and 81,656 - - - - - - (2,826) (2,826) 78,830
other
payables
Current tax - - - - - - - 2,930 2,930 2,930
liabilities ------ ------- ------ ------- ------- ------ ------ ------ ------- ------
-------------
Total current 81,656 - - - - - - 104 104 81,760
liabilities ------ ------- ------ ------- ------- ------ ------ ------ ------- ------
-------------
Deferred tax 68,148 - - - (1,282) - 17,671 - 16,389 84,537
liabilities
Provisions 30,628 - - - - - - - - 30,628
------------- ------ ------- ------ ------- ------- ------ ------ ------ ------- ------
Total non 98,776 - - - (1,282) - 17,671 - 16,389 115,165
current ------ ------- ------ ------- ------- ------ ------ ------ ------- ------
liabilities
-------------
Total 180,432 - - - (1,282) - 17,671 104 16,493 196,925
liabilities ------ ------- ------ ------- ------- ------ ------ ------ ------- ------
-------------
Net assets 431,140 (18,708) 13,056 - (1,717) - (17,671) (104) (25,144) 405,996
------------- ------ ------- ------ ------- ------- ------ ------ ------ ------- ------
Share capital 123,179 - - - - - - - - 123,179
and premium
Shares held (14,031) - - - - - - - - (14,031)
by the ESOP
trust
Foreign - - - - (19,985) - - - (19,985) (19,985)
currency
translation
Reserves 160,172 - - - - - - - - 160,172
Retained 161,820 (18,708) 13,056 - 18,268 - (17,671) (104) (5,159) 156,661
earnings ------ ------- ------ ------- ------- ------ ------ ------ ------- ------
-------------
Total 431,140 (18,708) 13,056 - (1,717) - (17,671) (104) (25,144) 405,996
equity ------ ------- ------ ------- ------- ------ ------ ------ ------- ------
-------------
Reconciliation of Group Equity as at 30 June 2004 (Unaudited)
Pre Foreign
UK exploration currency Intangible Total IFRS
GAAP write off DepletionImpairmenttranslation assets Taxation Other adjustments IFRS
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Notes on a b c d e f h
reconciling
items
Exploration 186,660 (152) - 4,179 (2,964) - - - 1,063 187,723
assets
Development/ 238,092 (18,519) 12,096 (4,179) 3,245 - - - (7,357) 230,735
producing
assets
Property, 1,540 - - - - (227) - - (227) 1,313
plant and
equipment
Intangible - - - - (14) 678 - - 664 664
assets
Investments 53 - - - - - - - - 53
------------- ------ ------- ------ ------- ------- ------ ------ ------ ------- ------
Total 426,345 (18,671) 12,096 - 267 451 - - (5,857) 420,488
non-current ------ ------- ------ ------- ------- ------ ------ ------ ------- ------
assets
-------------
Inventory - - - - - - - 1,517 1,517 1,517
Trade and 59,349 - - - - (451) - (1,517) (1,968) 57,381
other
receivables
Cash and cash 16,438 - - - - - - - - 16,438
equivalents ------ ------- ------ ------- ------- ------ ------ ------ ------- ------
-------------
Total current 75,787 - - - - (451) - - (451) 75,336
assets ------ ------- ------ ------- ------- ------ ------ ------ ------- ------
-------------
Total 502,132 (18,671) 12,096 - 267 - - - (6,308) 495,824
assets ------ ------- ------ ------- ------- ------ ------ ------ ------- ------
-------------
Trade and 52,077 - - - - - - (8,595) (8,595) 43,482
other
payables
Current tax - - - - - - - 8,693 8,693 8,693
liabilities ------ ------- ------ ------- ------- ------ ------ ------ ------- ------
-------------
Total current 52,077 - - - - - - 98 98 52,175
liabilities ------ ------- ------ ------- ------- ------ ------ ------ ------- ------
-------------
Deferred tax 72,117 - - - (264) - 18,911 - 18,647 90,764
liabilities
Bank loans 13,230 - - - - - - - - 13,230
Provisions 15,170 - - - - - - - - 15,170
------------- ------ ------- ------ ------- ------- ------ ------ ------ ------- ------
Total non 100,517 - - - (264) - 18,911 - 18,647 119,164
current ------ ------- ------ ------- ------- ------ ------ ------ ------- ------
liabilities
-------------
Total 152,594 - - - (264) - 18,911 98 18,745 171,339
liabilities ------ ------- ------ ------- ------- ------ ------ ------ ------- ------
-------------
Net assets 349,538 (18,671) 12,096 - 531 - (18,911) (98) (25,053) 324,485
------------- ------ ------- ------ ------- ------- ------ ------ ------ ------- ------
Share capital 21,080 - - - - - - - - 21,080
and premium
Shares held (14,031) - - - - - - - - (14,031)
by the ESOP
trust
Foreign - - - - (4,081) - - - (4,081) (4,081)
currency
translation
Reserves 160,172 - - - - - - - - 160,172
Retained 182,317 (18,671) 12,096 - 4,612 - (18,911) (98) (20,972) 161,345
earnings ------ ------- ------ ------- ------- ------ ------ ------ ------- ------
-------------
Total 349,538 (18,671) 12,096 - 531 - (18,911) (98) (25,053) 324,485
equity ------ ------- ------ ------- ------- ------ ------ ------ ------- ------
-------------
Reconciliation of Group Equity as at 31 December 2003
Pre Foreign
UK exploration currency Intangible Total IFRS
GAAP write off DepletionImpairmenttranslation assets Taxation Other adjustments IFRS
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Notes on a b c d e f h
reconciling
items
Exploration 155,046 (152) - 4,179 (2,649) - - - 1,378 156,424
assets
Development/ 236,749 (18,519) 9,684 (4,179) 2,675 - - - (10,339) 226,410
producing
assets
Property, 1,546 - - - (13) (109) - - (122) 1,424
plant and
equipment
Intangible - - - - - 391 - - 391 391
assets
Investments 54 - - - - - - - - 54
------------- ------ ------- ------ ------- ------- ------ ------ ------ ------- ------
Total 393,395 (18,671) 9,684 - 13 282 - - (8,692) 384,703
non-current ------ ------- ------ ------- ------- ------ ------ ------ ------- ------
assets
-------------
Inventory - - - - - - - 2,271 2,271 2,271
Trade and 56,866 - - - - (282) - (2,271) (2,553) 54,313
other
receivables
Cash and cash 17,766 - - - - - - - - 17,766
equivalents ------ ------- ------ ------- ------- ------ ------ ------ ------- ------
-------------
Total current 74,632 - - - - (282) - - (282) 74,350
assets ------ ------- ------ ------- ------- ------ ------ ------ ------- ------
-------------
Total 468,027 (18,671) 9,684 - 13 - - - (8,974) 459,053
assets ------ ------- ------ ------- ------- ------ ------ ------ ------- ------
-------------
Trade and 42,396 - - - - - - (5,634) (5,634) 36,762
other
payables
Current tax - - - - - - - 5,689 5,689 5,689
liabilities ------ ------- ------ ------- ------- ------ ------ ------ ------- ------
-------------
Total current 42,396 - - - - - - 55 55 42,451
liabilities ------ ------- ------ ------- ------- ------ ------ ------ ------- ------
-------------
Deferred tax 71,771 - - - - - 19,360 - 19,360 91,131
liabilities
Provisions 16,082 - - - - - - - - 16,082
------------- ------ ------- ------ ------- ------- ------ ------ ------ ------- ------
Total non 87,853 - - - - - 19,360 - 19,360 107,213
current ------ ------- ------ ------- ------- ------ ------ ------ ------- ------
liabilities
-------------
Total 130,249 - - - - - 19,360 55 19,415 149,664
liabilities ------ ------- ------ ------- ------- ------ ------ ------ ------- ------
-------------
Net assets 337,778 (18,671) 9,684 - 13 - (19,360) (55) (28,389) 309,389
------------- ------ ------- ------ ------- ------- ------ ------ ------ ------- ------
Share capital 16,731 - - - - - - - - 16,731
and premium
Shares held (4,702) - - - - - - - - (4,702)
by the ESOP
trust
Foreign - - - - - - - - - -
currency
translation
Reserves 160,172 - - - - - - - - 160,172
Retained 165,577 (18,671) 9,684 - 13 - (19,360) (55) (28,389) 137,188
earnings ------ ------- ------ ------- ------- ------ ------ ------ ------- ------
-------------
Total 337,778 (18,671) 9,684 - 13 - (19,360) (55) (28,389) 309,389
equity ------ ------- ------ ------- ------- ------ ------ ------ ------- ------
-------------
Reconciliation of Group Income Statement for the year ended 31 December 2004
Foreign Share
UK currency based Total IFRS
GAAPDepletiontranslationTaxation payments Other adjustments IFRS
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Notes on b d f g h
reconciling
items
Revenue 95,449 - - - - - - 95,449
Cost of sales
Production (27,689) - - - - (37) (37) (27,726)
costs
Depletion (31,608) 3,372 - - - - 3,372 (28,236)
Decommissioning (1,183) - - - - - - (1,183)
----------------- ------ -------- -------- ------- ------- ------- -------- -------
Gross profit 34,969 3,372 - - - (37) 3,335 38,304
Administration (18,200) - - - 3,710 (49) 3,661 (14,539)
expenses ------ -------- -------- ------- ------- ------- -------- -------
-----------------
Operating 16,769 3,372 - - 3,710 (86) 6,996 23,765
profit
Exceptional gain 2,206 - - - - - - 2,206
on sale ------ -------- -------- ------- ------- ------- -------- -------
-----------------
Profit on 18,975 3,372 - - 3,710 (86) 6,996 25,971
ordinary
activities before
interest
Interest income 1,811 - - - - - - 1,811
Finance costs (4,889) - (1,345) - - - (1,345) (6,234)
----------------- ------ -------- -------- ------- ------- ------- -------- -------
Profit on 15,897 3,372 (1,345) - 3,710 (86) 5,651 21,548
ordinary ------ -------- -------- ------- ------- ------- -------- -------
activities before
tax
-----------------
Taxation (5,055) - - 1,689 - - 1,689 (3,366)
----------------- ------ -------- -------- ------- ------- ------- -------- -------
Profit for the 10,842 3,372 (1,345) 1,689 3,710 (86) 7,340 18,182
period ------ -------- -------- ------- ------- ------- -------- -------
-----------------
Reconciliation of Group Income Statement for the six months ended 30 June 2004 (Unaudited)
Foreign Share
UK currency based Total IFRS
GAAPDepletiontranslationTaxation payments Other adjustments IFRS
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Notes on b d f g h
reconciling
items
Revenue 61,055 - - - - - - 61,055
Cost of sales
Production (13,866) - - - - - - (13,866)
costs
Depletion (14,048) 2,412 - - - - 2,412 (11,636)
Decommissioning (654) - - - - - - (654)
----------------- ------ -------- -------- ------- ------- ------- -------- -------
Gross profit 32,487 2,412 - - - - 2,412 34,899
Administration (10,173) - - - 2,551 (43) 2,508 (7,665)
expenses ------ -------- -------- ------- ------- ------- -------- -------
-----------------
Operating 22,314 2,412 - - 2,551 (43) 4,920 27,234
profit
Exceptional gain 2,147 - - - - - - 2,147
on sale ------ -------- -------- ------- ------- ------- -------- -------
-----------------
Profit on 24,461 2,412 - - 2,551 (43) 4,920 29,381
ordinary
activities before
interest
Interest income 182 - 2,295 - - - 2,295 2,477
Finance costs (1,699) - 712 - - - 712 (987)
----------------- ------ -------- -------- ------- ------- ------- -------- -------
Profit on 22,944 2,412 3,007 - 2,551 (43) 7,927 30,871
ordinary ------ -------- -------- ------- ------- ------- -------- -------
activities before
tax
-----------------
Taxation (7,715) - - 449 - - 449 (7,266)
----------------- ------ -------- -------- ------- ------- ------- -------- -------
Profit for the 15,229 2,412 3,007 449 2,551 (43) 8,376 23,605
period ------ -------- -------- ------- ------- ------- -------- -------
-----------------
Note 2 - Reconciling items between UK GAAP and IFRS
a) Pre-exploration write offs
Under IFRS 6, costs incurred prior to the legal rights to explore an area being
obtained may no longer be capitalised within exploration assets. Such costs
incurred by Cairn in prior years totalling £18.7 million, including general
exploration costs not related to a specific licence, have therefore been written
off through retained earnings as at 31 December 2003. During 2004 Cairn
incurred pre-exploration costs of £37,000 which have been expensed through the
income statement (see h) below).
b) Depletion
The adjustments to depletion reflect the adjusted costs carried in the
development/producing cost pool as a result of the pre-exploration write offs
(as per note a) above). Depletion is also now calculated in the Group's
functional currency of US$ rather than in Sterling as was previously the case
under UK GAAP.
c) Impairment of exploration assets
Previously under UK GAAP and the Statement of Recommended Practice ('SORP')
issued by the Oil Industry Accounting Committee ('OIAC'), where indicators of
impairment existed on an asset held within the exploration cost pool, an
impairment test was performed. Any resulting impairment of an exploration asset
led to a transfer of the impaired amount into the depletable development/
producing cost pool.
Under IFRS 6, where indicators of impairment exist on an exploration asset, an
impairment test is performed by assigning the asset to the associated
development/producing cost pool and testing this combined cost against future
discounted cash flows (including any associated with the exploration asset).
Any impairment arising would be recognised directly in the profit or loss for
the period.
As a consequence of this change, previous transfers between Cairn's exploration
and development/producing cost pools of £4.2 million, which arose from the
impairment of exploration assets, have been reversed. Impairment tests have
been performed using the IFRS approach with no impairment losses arising.
d) Foreign currency translation
IAS 21 requires that the functional currency for each subsidiary within the
Group be determined. Where the functional currency is different from the
Group's Sterling presentational currency, all assets and liabilities of those
subsidiaries should be converted to Sterling at closing rates on consolidation.
Given that the Group's income and expenses are mainly received and incurred in
US$, the majority of the Group's subsidiary undertakings have a US$ functional
currency. This includes UK based subsidiaries holding oil and gas exploration
and development/producing assets. These subsidiaries are now fully translated
from US$ to Sterling at the closing rate at the Balance Sheet date on
consolidation (rather than historic Sterling conversions).
In accordance with IAS 21, cumulative exchange differences are now recognised as
a separate component within equity. Cairn has taken advantage of the exemptions
offered under IFRS 1 and deemed cumulative translation differences to be zero at
31 December 2003.
e) Intangible assets
Cairn has reclassified computer software costs previously held as 'tangible
fixed assets' to 'intangible assets' in accordance with IAS 38. Further costs
relating to computer software (previously held within prepayments) have also
been re-allocated in accordance with IAS 38.
f) Taxation
Deferred tax liabilities arising from fair value adjustments made in prior
business combinations have been recognised on transition to IFRS. Such
liabilities were specifically excluded from recognition under UK GAAP. These
deferred tax liabilities are only likely to crystallise on disposal of the
assets concerned and will reduce as the carrying values of the underlying assets
are depleted on a unit of production basis.
g) Share Based Payments
In accordance with IFRS 2, Cairn has recognised a charge for share awards made
to employees under its LTIP and share option plans since 7 November 2002. This
charge is based on the fair value of these awards. The fair value has been
calculated using a binomial valuation model and is charged to the income
statement over the relevant vesting period, adjusted to reflect actual and
expected levels of vesting. In accordance with IFRS, only awards made after 7
November 2002 should be charged through the Income statement, therefore LTIP
charges relating to awards made prior to this date have been reversed. Share
options awarded prior to this date were not previously charged to the income
statement.
The reconciling credit of £3.7 million between the UK GAAP and the IFRS Income
Statement for the year ended 31 December 2004 (£2.6 million for the six months
ended 30 June 2004) is a consequence of the differing fair value methodologies
of the binomial valuation model used to fair value LTIP awards under IFRS 2 from
that previously used to fair value such awards under UK GAAP, the charge
relating to share options awarded post 7 November 2002 and the credit for LTIP
charges relating to awards prior to this date.
h) Other adjustments
1) Cairn have introduced an accrual of £55,000 at 31 December 2003,
increasing to £104,000 at 31 December 2004 relating to employees entitlements to
annual leave, as required by IAS 19.
2) Pre-exploration costs of £37,000 have been expensed during 2004 (see
note a) above)
3) The following reclassifications have been made in accordance with IAS 1,
which requires separate disclosure of certain assets and liabilities on the face
of the Balance Sheet:
• Oil and condensate inventory of £2.3 million at 31 December 2003, £1.5
million at 30 June 2004 and £1.1 million at 31 December 2004 has been
reclassified from 'trade and other receivables'
• Current taxation liabilities of £5.7 million at 31 December 2003, £8.7
million at 30 June 2004 and £2.9 million at 31 December 2004 have been
reclassified from 'trade and other payables'
4) In accordance with the Group's revised accounting policy, cash and cash
equivalents include only short-term deposits with a maturity of less than three
months. As a consequence, £8.0 million of long term deposits at 31 December
2004 have been reclassified to 'bank deposits'.
i) Cash Flow Statements
The IFRS Cash Flow Statement, prepared under IAS 7, presents cash flows in three
categories; cash flows from operating activities, cash flows from investing
activities and cash flows from financing activities. This is fewer than the
previous seven categories under UK GAAP. Other than the reclassification of
cash flow items into the new disclosure categories, there are no significant
differences between the Group's Cash Flow Statement under UK GAAP and IFRS.
Consequently, the revised Cash Flow Statement has not been presented in this
document.
Glossary of Terms
The following are the main terms and abbreviations used in this document:-
Corporate
Board the Board of Directors of Cairn Energy PLC
Cairn the Company and/or its subsidiaries as appropriate
Company Cairn Energy PLC (as the context requires)
Group the Company and/or its subsidiaries as appropriate
Accounting
ESOP Trust Employee Share Ownership Plan Trust
IAS 1 International Accounting Standard 1 'Presentation of Financial
Statements'
IAS 7 International Accounting Standard 7 'Cash Flow Statements'
IAS 12 International Accounting Standard 12 'Income Taxes'
IAS 19 International Accounting Standard 19 'Employee Benefits'
IAS 21 International Accounting Standard 21 'The Effects of Changes in
Foreign Exchange Rates'
IAS 36 International Accounting Standard 36 'Impairment of Assets'
IAS 38 International Accounting Standard 38 'Intangible Assets'
IASB the International Accounting Standards Board
IFRIC the International Financial Reporting Interpretations Committee
IFRS International Financial Reporting Standards and International
Accounting Standards
IFRS 1 International Financial Reporting Standard 1 'First-time
Adoption of International Financial Reporting Standards'
IFRS 2 International Financial Reporting Standard 2 'Share Based Payments'
IFRS 6 International Financial Reporting Standard 6 'Exploration for
and Evaluation of Mineral Resources'
LTIP Long Term Incentive Plan
UITF 17 Urgent Issues Task Force Abstract number 17 'Employee Share Schemes'
UITF 38 Urgent Issues Task Force Abstract number 38 'Accounting for ESOP Trusts'
UK GAAP Generally Accepted Accounting Principles in the United Kingdom
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