HispanicBusiness

Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded derivative are not closely related. Changes in the fair value of separable embedded derivatives are recognized immediately in profit or loss.

(iii) Share capital. Common shares are classified as equity. Incremental costs directly attributable to the issue of common shares and stock options are recognized as a deduction from equity, net of any tax effects.

(c) Property, plant and equipment:

Development and production costs. Items of property, plant and equipment, which include oil and gas development and production assets, are measured at cost less accumulated depletion and depreciation and accumulated impairment losses. All costs directly associated with the development of oil and natural gas reserves are recognized as oil and natural gas interests if they extend or enhance the recoverable reserves of the underlying assets. Such costs include property acquisitions, drilling and completion costs, gathering and processing infrastructure, capitalized decommissioning obligations, directly attributable internal costs and major overhaul and turnaround activities that maintain property, plant and equipment. Repairs and maintenance and operational costs that do not extend or enhance the recoverable reserves are charged to profit or loss when incurred.

Oil and natural gas assets are grouped into cash generating units ("CGUs") for impairment testing. The Company had previously grouped its development and production assets into the following CGUs: Horizontal Oil, Deep Gas, Shallow Gas and Non-Core. In 2012, a significant portion of the assets in the Deep Gas and Non-core CGUs were sold and the remaining assets were regrouped into the following CGUs: Gas and Horizontal Cardium. The Horizontal Cardium CGU retained the same group of assets, but was renamed to better reflect the nature of those assets. The remaining assets in the Deep Gas and Non-core CGUs more closely resemble the operational, management and monitoring, product composition, and cash inflows of the assets within the Shallow Gas CGU. Accordingly, these remaining Deep Gas and Non-core assets have been grouped with the Shallow Gas assets to form the new Gas CGU.

When significant parts of an item of property, plant and equipment, including oil and natural gas interests, have different useful lives, they are accounted for as separate items (components).

Gains and losses on the sale of property, plant and equipment, including oil and natural gas interests, are determined by comparing the proceeds received to the carrying amount of property, plant and equipment and are recognized as a separate line item in other income. See note 14.

(d) Depletion and depreciation. The net carrying value of development or production assets is depleted using the unit of production method by reference to the ratio of production in the quarter to the related proved plus probable reserves, taking into account estimated future development and decommissioning costs necessary to bring those reserves into production. For other assets, depreciation is recognized in profit or loss over the estimated useful lives of each part of an item of property, plant and equipment using the declining balance method at rates between 20% and 30% per annum. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Company will obtain ownership by the end of the lease term.