The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements.
(a) Basis of consolidation:
(i) Subsidiaries. Subsidiaries are entities controlled by the Company. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.
(ii) Jointly controlled operations and jointly controlled assets. Many of the Company's oil and natural gas activities involve jointly controlled assets. The consolidated financial statements include the Company's share of these jointly controlled assets and the proportionate share of the relevant revenue and related costs.
(iii) Transactions eliminated on consolidation. Intercompany balances and transactions, and any unrealized income and expenses arising from intercompany transactions, are eliminated in preparing the consolidated financial statements.
(b) Financial instruments:
(i) Non-derivative financial instruments. Non-derivative financial instruments comprise cash and cash equivalents, accounts receivable and accruals, accounts payables and accruals, bank loans and convertible debentures. Non-derivative financial instruments are recognized initially at fair value, plus, for instruments not classified as "fair value through profit or loss", any directly attributable transaction costs. Subsequent to initial recognition, non-derivative financial instruments are measured as described below.
Cash and cash equivalents. Cash and cash equivalents comprise cash on hand, term deposits and other short-term highly liquid investments with original maturities of three months or less and are measured similar to other non-derivative financial instruments.
Other. Other non-derivative financial instruments, comprising accounts receivable and accruals, accounts payable and accruals, bank loans and convertible debentures, are measured at amortized cost using the effective interest method, less any impairment losses. The Company nets all transaction costs incurred in relation to the acquisition of a financial asset or liability, against the related financial asset or liability. Bank loans and convertible debentures are recorded net of issue costs and are presented net of deferred interest payments, with interest recognized in earnings on an effective interest basis.
(ii) Derivative financial instruments. The Company has entered into certain financial derivative contracts in order to manage the exposure to market risks from fluctuations in commodity prices. These instruments are not used for trading or speculative purposes. The Company has not designated its financial derivative contracts as effective accounting hedges, and thus has not applied hedge accounting, even though the Company considers all commodities contracts to be economic hedges. As a result, all financial derivative contracts are classified as "fair value through profit or loss" and are recorded on the statement of financial position at fair value. Transaction costs are recognized in profit or loss when incurred.
The Company accounts for forward physical delivery sales contracts, which are entered into and held for the purpose of delivery or receipt of non-financial items in accordance with expected sale or usage requirements as executory contracts. As such, these contracts are not considered to be derivative financial instruments and have not been recorded at fair value on the statement of financial position. Settlements on these physical sales contracts are recognized in oil and natural gas revenue.
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