tullow oil plc –transition to ifrs - investisfiles.investis.com/tullowoil/pdfs/ifrs2004l.pdf ·...
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Tullow Oil plc –Transition to IFRSBuilding a balanced portfolio of Exploration and Production Assets
24 August 2005
The IFRS Process
Summary Impact of IFRS on 2004 Results
IFRS Standards Relevant to Tullow’s 2004 Results
Reconciliation of 2004 Results – UK GAAP to IFRS
IAS 39 – Financial Instruments
Summary and Conclusions
Agenda
1
EU requires all EU listed companies to prepare consolidated accounts under IFRS for 2005 year end
The basic components of the financial statements (balance sheet, P&L, cashflow, notes etc) will remain
Presentation and terminology will change slightly for most companies to comply with IFRS – changes will be kept to a minimum
Accounting for certain transactions and activities will differ under IFRS, impacting on reported earnings and the balance sheet, with a tendency to increased earnings volatility
Cashflows and economics of the business are generally unaffected by IFRS
The IFRS Process
3
IFRS Timeline and Information Flow
2004 2005For 31 December year end
UK GAAP and IFRSComparatives
IFRS Reportingonly
IFRS‘Transition
Date’
IASBfinalisedIFRS’s for
2005 adoption
2004 resultswere the last
to be publishedunder UK GAAP
2005 interimresults
publishedunder IFRS
2005 fullyear resultspublished
under IFRS
Publish reconciliations of 2004 full year and half yearUK GAAP results and balance sheets to IFRS
(may still giveUK GAAP info)
4
IFRS 2 Share Based Payments
IAS 12 Income Taxes
IAS 16 Property, Plant and Equipment
IAS 17 Leases
IAS 39 Financial Instruments
Other Standards (IFRS 6)
IFRS – Standards Relevant to Tullow
6
IFRS Summary
Cashflows and commercial substance of transactions not impacted
Marginal impact on 2004, largely due to PRT and Gawain depreciation– 5% decrease in 2004 EPS– 1% decrease in 2004 net assets
Key impacts for 2005 onwards are IAS 39 and PRT
First disclosure of IAS 39 will be in 2005 interim results
Interim Reporting will give both UK GAAP and IFRS Comparatives
Guidance for H2 will be available under IFRS
7
Summary Impact of IFRS on 2004 Results
Negative Gawain depreciation offset by PRT charge reduction
-1%375.5379.1Net assets
-5%5.886.18EPS (p)
No change0%1.751.75Dividend per share (p)
No change0%154.3154.3Operating Cashflow
Negative Gawain depreciation offset by PRT charge reduction
-5%31.332.9Profit after tax
Additional depreciation-16%56.867.5Operating Profit
IAS 17 Espoir lease, IAS 12 Energy Africa tax gross up IAS 16 component depreciation: Gawain
+19%80.467.6Depletion and Amortisation
IAS 17 Espoir Lease-4%60.863.5Operating Costs
No change0%225.3225.3Revenue
Comment on principal changes% Change
IFRS£m
UK GAAP£m
8
UK GAAP TreatmentNo accounting impact of share option awards
IFRS Scope Mandatory compliance from 1 Jan 05IFRS 2 is retrospective and applicable to awards since 7 Nov 02
ProcessFair value is established at the date of grant based on actuarial model which takes account of volatility, staff turnover, early exercise and dividend yieldRecord accounting charge over anticipated vesting period Deferred Tax credit reduces P&L impact
Relevance To TullowShare Option Schemes, Employee Share Plans and PSP’s are within scope – the latter likely to be most material in future periods
ImpactEquity based incentives reflected in the P&L upon awardRelatively minor impact on 2004 (£330k) - likely to increase in future periods
IFRS 2 – Share Based Payments
10
UK GAAP TreatmentNo deferred tax gross up required on acquisitionsFair value exercise required Generally no goodwill in oil and gas sector
IFRS Scope Effective for business combinations after 1 Jan 2004 (IFRS 1 exemption)Business combination – the bringing together of separate entities or businesses into one reporting entity IAS 12 does not cover asset transactions
ProcessDeferred tax gross up only includes assets which are subject to CTLocal country corporation tax ratesIntangible assets included in calculation
IAS 12 – Income TaxesDeferred tax on Business Combinations (1)
11
Relevance to TullowThe Energy Africa Acquisition is a business combination under IAS 12Schooner/Ketch acquisition is not a business combination
ImpactDeferred Tax Gross-Up applied to EA assets at date of Acquisition - £49.2 millionAdditional “value” depreciated on normal basis over asset lives – 5.6 % higher notional “DDA/Barrel” in 2004Equal and opposite deferred tax “reversal” reduces tax charge in each accounting periodNet P & L impact marginal - £17k in 2004No cash impact on income taxes
IAS 12 – Income TaxesDeferred tax on Business Combinations (2)
12
UK GAAP TreatmentNo definitive guidanceTreated as a tax with Petroleum Revenue Tax (PRT) calculated on a Unit of Production basis (UOP)
IFRS ScopeTullow elects to treat PRT as a tax under IAS 12 – ‘income taxes include all domestic taxes which are based on taxable profits’Industry debate continues – tax vs cost
ProcessDeferred PRT now calculated on a temporary difference basis
Relevance to TullowPRT paying fields are Murdoch, Murdoch K and Orwell; Alba sold May ‘05
Impact2004 PRT charge, net of deferred tax, decreased by £3.3 millionUnder IFRS, lower PRT charge in early years. No change on life of field PRT charge
IAS 12 – Income TaxesPetroleum Revenue Tax
13
UK GAAP TreatmentDepreciation calculated on a “field-by-field” basis under ‘successful efforts’ accounting policy“Field” can include a group of independent assets e.g. CMS/Thames
IFRS Scope Effective date 1 Jan 05Depreciation - depreciable amount should be allocated on a systematic basis over the assets useful life (IAS 16.50)
– Introduces the notion of “component depreciation” with implications for asset grouping based on common reservoir/infrastructure
– Grouping – allowable but must have same useful life and method of depreciation– Include future reserves and costs in UOP calculation
ProcessRevisit reserves and useful lives of key infrastructural complexes grouped under UK GAAP –CMS, Thames, Equatorial GuineaDetermine whether component approach causes material adjustment
IAS 16 – Property, Plant and Equipment (1)
14
Relevance to TullowThe Gawain asset within Thames area suffered material reserve downgrades in 2003/04It will now cease production in advance of the remainder of the Thames Complex, but is grouped with Thames under UK GAAPIFRS requires Gawain to be depreciated based on its own reserves and useful life only
Impact2004 Gawain depreciation charge, net of deferred tax, increases by £4.6 millionNo impact on CMS or Equatorial Guinea Assets – grouping continues.Gabon, Côte d’Ivoire, Congo, Pakistan depreciated on strict “field by field” basis – no impactFull prospective IFRS guidance will be give with interim results (including updated reserves)
IAS 16 – Property, Plant and Equipment (2)
15
UK GAAP TreatmentA finance lease is a lease that transfers substantially all the risks and rewards of ownership of an asset to the lessee PV of minimum lease payments > 90% of fair value of leased asset
IFRS ScopeEffective date 1 Jan 05Accounting change from UK GAAP – more likely long term leases will become classified as “Finance Leases”
ProcessAll lease terms reviewedCertain criteria have to be met as follows:
– Lease transfers ownership of the asset to the lessee by the end of the lease term– The lessee has an option to purchase the asset at a price lower than the fair value– The lease term is for the major part of the economic life of the asset– At the inception of the lease, the PV of the minimum lease payments amounts to at least
substantially all of the FV of the leased asset– The leased assets are of a specialised nature
IAS 17 – Leases (1)
16
Relevance to TullowSince 2001, Espoir field partners have joint lease covering Field FPSO and running to 2011Under UK GAAP, the lease payments have been an operating costUnder IFRS, this will now be classified as a Finance Lease No other arrangements impacted – Ceiba FPSO owned by partners
ImpactThe Capital value of the Lease Payments is recorded as a Fixed Asset and a Long Term Liability (Debt)The Fixed Asset is depreciated over field life in the normal wayUnit Operating costs are reduced and depreciation costs are increased under IFRSMinimal impact on Net AssetsSummary 2004 impact
IAS 17 – Leases (2)
(489)NilInterest
(2,221)NilDepreciation
Nil(2,722)Operating Cost
IFRS (£’000)UK GAAP (£’000)
17
UK GAAP Treatment‘Successful efforts’ accounting policy
IFRS ScopeEffective date 1 Jan 06 (earlier application encouraged)Applies only to exploration and evaluation (‘appraisal’) expendituresIf early adoption not required to restate comparatives
ImpactAs Tullow followed a ‘successful efforts’ accounting policy under UK GAAP – No changes requiredRecognition – no impact, still measured at cost (pre licence expenditures andexpenditures incurred after commercial viability is demonstrable specifically excluded)Presentation – Allocate E & A costs to Intangible and Tangible based on underlying nature of expense
IFRS 6Exploration for and Evaluation of Mineral Resources
18
2004 Operating Profit reconciliation
IAS 12 – additional depreciation due to Energy Africa tax gross upIAS 16 – additional depreciation due to component treatment on Gawain
20
67,499 (556) (2,989)(7,669)
501 56,786
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
UK GAAP IFRS 2 IAS 12 IAS 16 IAS 17 IFRS
£'00
0
2004 Profit after Tax reconciliation
Modest impact on 2004 EarningsNegative Gawain depreciation offset by positive PRT movement
21
24,34012
(4,601)3,292(317)25,934
0
5,000
10,000
15,000
20,000
25,000
30,000
UK GAAP IFRS 2 IAS 12 IAS 16 IAS 17 IFRS
£'00
0
2004 Net Assets reconciliation
Minimal impact on 2004 Net AssetsNegative Gawain depreciation offset by positive PRT movement
22
379,084 260 4,594 (8,283) (189) 375,466
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
UK GAAP IFRS 2 IAS 12 IAS 16 IAS 17 IFRS
£'00
0
Summary Impact of IFRS on 2004 Results
Negative Gawain depreciation offset by PRT charge reduction
-1%375.5379.1Net assets
-5%5.886.18EPS (p)
No change0%1.751.75Dividend per share (p)
No change0%154.3154.3Operating Cashflow
Negative Gawain depreciation offset by PRT charge reduction
-5%31.332.9Profit after tax
Additional depreciation-16%56.867.5Operating Profit
IAS 17 Espoir lease, IAS 12 Energy Africa tax gross up IAS 16 component depreciation: Gawain
+19%80.467.6Depletion and Amortisation
IAS 17 Espoir Lease-4%60.863.5Operating Costs
No change0%225.3225.3Revenue
Comment on principal changes% Change
IFRS£m
UK GAAP£m
23
UK GAAP TreatmentUnder UK GAAP hedges are often not recognised until the hedged transaction occurs – few rules
ScopeIAS compliance required from 1 Jan 05, no prior year comparatives will be required (IFRS 1 exemption)Under IFRS all derivatives, even hedges, are recorded on the balance sheet at market value (Mark to Market ‘MTM’)The IAS 39 definition of a derivative captures
– Commodity derivatives (swaps, options etc)– Long Term Gas Contracts– Interest rate derivatives– FX derivatives
IAS 39 – Financial Instruments (1)
IAS 39 is the most significant change for Tullow in migration from UK GAAP to IFRS
25
ProcessIAS 39 is a very complex standard that requires significant analysis and planning at contract inceptionAll contracts reviewed and hedge effectiveness tests undertaken
Relevance to TullowTullow has hedged both oil and gas since 2001Rising Commodity Prices mean the majority of contracts are substantially “out of the money”Tullow has 3 main categories of financial instruments
– EA Barclays hedges: Call $29/bbl, Put $24.5/bbl, 4000 bopd to 2009– LT Gas contracts – Thames, Powergen, Schooner/Ketch– Others: swaps, collars etc.
IAS 39 – Financial Instruments (2)
26
ImpactNo cash impact, other than normal flows associated with hedge settlementPositive or negative MTM impacts depending on underlying commodity price movementsEA Barclays hedge – Negative MTM 1/1/05 £21.0 million, 30/6/05 £81.5 million
– Tullow to designate as hedge– Some ineffectiveness likely to lead to charge to income statement– Fair value on acquisition impacts accounting
LT Gas contracts - Thames, Powergen– Tullow to apply own use exemption – no adjustments
Schooner/Ketch contracts – Tullow are proposing that own use exemption will apply– However still uncertainty due to volumetric flexibility inherent in contract– Possible charge to income statement
Physical Gas Forward Sales – Directly correlated to physical flows thus no impact
Other derivatives – Negative MTM 1/1/05 £10.5 million, 30/6/05 £59.8 million– Tullow to apply hedge accounting– Any ineffectiveness likely to lead to charge to income statement
IAS 39 – Financial Instruments (3)
27
IFRS Summary and Conclusions
Cashflows and commercial substance of transactions not impacted
Marginal impact on 2004, largely due to PRT and Gawain depreciation– 5% decrease in 2004 EPS– 1% decrease in 2004 net assets
Key impacts for 2005 onwards are IAS 39 and PRT
First disclosure of IAS 39 will be in 2005 interim results
Interim Reporting will give both UK GAAP and IFRS Comparatives
Guidance for H2 will be available under IFRS
29