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RNS Number : 9968R
SEPLAT Petroleum Development Co PLC
06 March 2019
 

         

Seplat Petroleum Development Company Plc

 

Full Year Results

 

For the year ended 31 December 2018
(Expressed in Naira and US Dollars)

 

Please see a print friendly version by clicking on the link below; 

http://www.rns-pdf.londonstockexchange.com/rns/9958R_1-2019-3-6.pdf

 

41.2  IFRS 9 Financial instruments - Impact of adoption

The new financial instruments standard, IFRS 9 replaces the provisions of IAS 39. The new standard presents a new model for classification and measurement of assets and liabilities, a new impairment model which replaces the incurred credit loss approach with an expected credit loss approach, and new hedging requirements.

The adoption of IFRS 9 Financial Instruments from 1 January 2018 resulted in changes in accounting policies and adjustments to the amounts recognised in the financial statements. The new accounting policies are set out in the notes below. In accordance with the transitional provisions in IFRS 9, comparative figures have not been restated but the impact of adoption has been adjusted through opening retained earnings for the current reporting period.

41.2.1 Classification and measurement

a)  Financial assets

On 1 January 2018 (the date of initial application of IFRS 9), the Group's management assessed the classification of its financial assets which is driven by the cash flow characteristics of the instrument and the business model in which the asset is held.

The Group's financial assets include cash and bank balances and trade and other receivables. The Group's business model is to hold these financial assets to collect contractual cash flows and to earn contractual interest. For cash and bank balances, interest is based on prevailing market rates of the respective bank accounts in which the cash and bank balances are domiciled. Interest on trade and other receivables is earned on defaulted payments in accordance with the Joint operating agreement (JOA). The contractual cash flows arising from these assets represent solely payments of principal and interest (SPPI).

Cash and bank balances and trade and other receivables that were previously classified as loans and receivables (L and R) are now classified as financial assets at amortised cost.

Since there was no change in the measurement basis except for nomenclature change, opening retained earnings was not impacted (no difference between the previous carrying amount and the revised carrying amount of these assets at 1 January 2018).

b)  Financial liabilities

The adoption of IFRS 9 eliminates the policy choice on the treatment of gain or loss from the refinancing of a borrowing. Day one gain or loss can no longer be deferred over the remaining life of the borrowing but must now be recognised at once. No retrospective adjustments have been made in relation to this change as at 1 January 2018.

On the date of initial application, 1 January 2018, the financial instruments of the Group were classified as follows:

 

           Classification & Measurement category

                 Carrying amount

 

Original

New

Original

New

 

IAS 39

IFRS 9

million

million

Current financial assets

 

 

 

 

Trade and other receivables:

 

 

 

Trade receivables

L and R

Amortised cost

33,236

33,236

NPDC receivables

L and R

Amortised cost

34,453

34,453

NAPIMS receivables

L and R

Amortised cost

3,824

3,824

Other receivables*

L and R

Amortised cost

7

7

Cash and bank balances

L and R

Amortised cost

133,699

133,699

Non-current financial liabilities

 

 

 

Interest bearing loans and borrowings

Amortised cost

Amortised cost

93,170

93,170

Current financial liabilities

 

 

 

Interest bearing loans and borrowings

Amortised cost

Amortised cost

81,159

81,159

Trade and other payables**

Amortised cost

Amortised cost

38,876

38,876

 

 

           Classification & Measurement category

                 Carrying amount

 

Original

New

Original

New

 

IAS 39

IFRS 9

$'000

$'000

Current financial assets

 

 

 

 

Trade and other receivables:

 

 

 

Trade receivables

L and R

Amortised cost

108,685

108,685

NPDC receivables

L and R

Amortised cost

112,664

112,664

NAPIMS receivables

L and R

Amortised cost

12,506

12,506

Other receivables*

L and R

Amortised cost

23

23

Cash and bank balances

L and R

Amortised cost

437,212

437,212

Non-current financial liabilities

 

 

 

Interest bearing loans and borrowings

Amortised cost

Amortised cost

304,677

304,677

Current financial liabilities

 

 

 

Interest bearing loans and borrowings

Amortised cost

Amortised cost

265,400

265,400

Trade and other payables**

Amortised cost

Amortised cost

127,128

127,128

*Other receivables exclude NGMC VAT receivables, cash advance and advance payments.

** Trade and other payables exclude provisions (including provisions for bonus and royalties), VAT, Withholding tax, deferred revenue and royalties.

The new carrying amounts in the table above have been determined based on the measurement criteria specified in IFRS 9. However, the impact of IFRS 9 expected credit loss impairment and IFRS 15 reclassifications has also not been considered here. See the subsequent pages for the impacts.

41.2.2  Impairment of financial assets

The Group has five types of financial assets that are subject to IFRS 9's new expected credit loss model. Contract assets are also subject to the new expected credit loss model, even though they are not financial assets, as they have substantially the same credit risk characteristics as trade receivables. Under IFRS 9, the Group is required to revise its previous impairment methodology under IAS 39 for each of these classes of assets. The impact of the change in impairment methodology on the Group's retained earnings is disclosed in the table below.

   Nigerian Petroleum Development Company (NPDC) receivables

   National Petroleum Investment Management Services (NAPIMS)

   Trade receivables

   Contract assets

   Other receivables and;

   Cash and bank balances

 

The total impact on the Group's retained earnings as at 1 January 2018 is as follows:

 

Notes

'million

$'000

Closing retained earnings as at 31 December 2017- IAS 39

 

166,149

944,108

Increase in provision for Nigerian Petroleum Development Company (NPDC) receivables

(a)

(1,698)

(5,553)

Increase in provision for National Petroleum Investment Management Services (NAPIMS) receivables

(b)

 (64)

 (213)

Increase in provision for Nigerian Gas Marketing Company (NGMC) receivables

(c)

(468)

(1,535)

Increase in provision for Pillar Limited receivables

(c)

(31)

(101)

Increase in provision for fixed deposits

(e)

(103)

(335)

Exchange difference

 

(4)

-

Total transition adjustments

 

(2,368)

(7,737)

Deferred tax impact on transition adjustments

 

2,013

6,577

Opening retained earnings as at 1 January 2018 on adoption of IFRS 9

 

165,794

942,948

 

The parameters used to determine impairment for NPDC receivables, NAPIMS receivables, other receivables and fixed deposits are shown below. For all receivables presented in the table, the respective 12-month Probability of Default (PD) equate the Lifetime PD for stage 2 as the maximum contractual period over which the Group is exposed to credit risk arising from the receivables is less than 12 months.

 

 

Nigerian Petroleum Development Company (NPDC) receivables

 

 

National Petroleum Investment Management Services (NAPIMS) receivables

 

Other receivables

 

Fixed deposits

Probability of Default (PD)

 

The 12 month PD and lifetime PD for stage 1 and stage 2 is 3.9%.

The PD for stage 3 is 99%.

 

 

The 12 month PD and lifetime PD for stage 1 and stage 2 is 3.9%.

The PD for stage 3 is 99%.

 

The 12 month PD and lifetime PD for stage 1 and stage 2 is 0.05%.

The PD for stage 3 is 99%.

 

The 12 month PD and lifetime PD for stage 1 and stage 2 is 0.09%.

The PD for stage 3 is 99%.

Loss Given Default (LGD)

 

The 12-month LGD and lifetime LGD were determined using average recovery rate for Moody's senior unsecured corporate bonds for emerging economies.

 

 

The 12-month LGD and lifetime LGD were determined using average recovery rate for Moody's senior unsecured corporate bonds for emerging economies.

 

The 12-month LGD and lifetime LGD were determined using average recovery rate for Moody's senior unsecured corporate bonds for emerging economies.

 

The 12-month LGD and lifetime LGD were determined using the average recovery rate for Moody's senior unsecured corporate bonds for emerging economies.

Exposure at default (EAD)

 

The EAD is the maximum exposure of the receivable to credit risk.

 

 

The EAD is the maximum exposure of the receivable to credit risk.

 

The EAD is the maximum exposure of the receivable to credit risk.

 

The EAD is the maximum exposure of the fixed deposits to credit risk.

Macroeconomic indicators

 

The historical gross domestic product (GDP) growth rate in Nigeria and crude oil price were used.

 

 

The historical gross domestic product (GDP) growth rate in Nigeria and crude oil price were used

 

The historical gross domestic product (GDP) growth rate in Nigeria and crude oil price were used.

 

The historical gross domestic product (GDP) growth rate in Nigeria and crude oil price were used.

Probability weightings

 

75%, 8% and 17% of historical GDP growth rate observations fall within acceptable bounds, periods of boom and periods of downturn respectively.

 

 

75%, 8% and 17% of historical GDP growth rate observations fall within acceptable bounds, periods of boom and periods of downturn respectively.

 

89%, 2% and 9% of historical GDP growth rate observations fall within acceptable bounds, periods of boom and periods of downturn respectively.

 

78%, 12% and 10% of historical GDP growth rate observations fall within acceptable bounds, periods of boom and periods of downturn respectively.

 

The Group considers both quantitative and qualitative indicators in classifying its receivables into the relevant stages for impairment calculation as shown below:

 

Stage 1: This stage includes financial assets that are less than 30 days past due (Performing).

Stage 2: This stage includes financial assets that have been assessed to have experienced a significant increase in credit risk using the days past due criteria (i.e. the outstanding receivables amounts are more than 30 days past due but less than 90 days past due) and other qualitative indicators such as the increase in political risk concerns or other micro-economic factors and the risk of legal action, sanction or other regulatory penalties that may impair future financial performance.

Stage 3: This stage includes financial assets that have been assessed as being in default (i.e. receivables that are more than 90 days past due) or that have a clear indication that the imposition of financial or legal penalties and/or sanctions will make the full recovery of indebtedness highly improbable.

 

a)    Nigerian Petroleum Development Company (NPDC) receivables

NPDC receivables represent the outstanding cash calls due to Seplat from its Joint Arrangement partner, Nigerian Petroleum Development Company. The Group applies the IFRS 9 general model for measuring expected credit losses (ECL). This requires a three-stage approach in recognising the expected loss allowance for NPDC receivables.

The ECL recognised for the period is a probability-weighted estimate of credit losses discounted at the effective interest rate of the financial asset. Credit losses are measured as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the Group in accordance with the contract and the cash flows that the Group expects to receive).

The ECL was calculated based on actual credit loss experience from 2014, which is the date the Group initially became a party to the contract. The following analysis provides further detail about the calculation of ECLs related to these assets. The Group considers the model and the assumptions used in calculating these ECLs as key sources of estimation uncertainty. See notes 11, 23 and 34 for further details.

                                                                                                                                                                                          1 January 2018

 

Stage 1

Stage 2

Stage 3

Total

 

12-month ECL

Lifetime ECL

Lifetime ECL

 

 

'million

'million

'million

'million

Gross EAD*

-

11,369

23,084

34,453

Loss allowance as at 1 January 2018

-

(32)

(1,666)

(1,698)

Net EAD

-

11,337

21,418

32,755

 

                                                                                                                                                                                          31 December 2018

 

Stage 1

Stage 2

Stage 3

Total

 

12-month ECL

Lifetime ECL

Lifetime ECL

 

 

'million

'million

'million

'million

Gross EAD*

 -

 -

 14,871

 14,871

Loss allowance as at 31 December 2018

 -

 -

 (2,475)

 (2,475)

Net EAD

 -  

 -  

 12,396

 12,396

* Exposure at default

 

                                                                                                                                                                                          1 January 2018

 

Stage 1

Stage 2

Stage 3

Total

 

12-month ECL

Lifetime ECL

Lifetime ECL

 

 

$'000

$'000

$'000

$'000

Gross EAD*

-

37,179

75,485

112,664

Loss allowance as at 1 January 2018

-

(105)

(5,448)

(5,553)

Net EAD

-

37,074

70,037

107,111

 

                                                                                                                                                                                          31 December 2018

 

Stage 1

Stage 2

Stage 3

Total

 

12-month ECL

Lifetime ECL

Lifetime ECL

 

 

$'000

$'000

$'000

$'000

Gross EAD*

 -

 -

 48,439

 48,439

Loss allowance as at 31 December 2018

 -

 -

 (8,086)

 (8,086)

Net EAD

 -  

 -  

 40,353

 40,353

* Exposure at default

 

The reconciliation of loss allowances for Nigerian Petroleum Development Company receivables as at 31 December 2017 and 31 December 2018 is as follows:

 

'million

$'000

Loss allowance as at 31 December 2017 - calculated under IAS 39

-

-

Amounts adjusted through opening retained earnings

1,698

5,553

Loss allowance as at 1 January 2018 - calculated under IFRS 9

1,698

5,553

Unwinding of discount

19

62

Increase in provision for impairment loss on NPDC receivables

756

 2,471

Exchange difference

2

-

Loss allowance as at 31 December 2018 - Under IFRS 9

2,475

 8,086

 

b)    National Petroleum Investment Management services (NAPIMS) receivables

NAPIMS receivables represent the outstanding cash calls due to Seplat from its Joint Operating Arrangement (JOA) partner, National Petroleum Investment Management Services. The Group applies the IFRS 9 general model for measuring expected credit losses (ECL) which uses a three-stage approach in recognising the expected loss allowance for NAPIMS receivables.

The ECL was calculated based on actual credit loss experience from 2016, which is the date the Group initially became a party to the contract. The following analysis provides further detail about the calculation of ECLs related to these assets. The Group considers the model and the assumptions used in calculating these ECLs as key sources of estimation uncertainty. The explanation of inputs, assumptions and estimation techniques used are consistent with those for NPDC receivables.

On initial application of IFRS 9, an impairment loss of 80 million, ($263,000) was recognised for NAPIMS receivables. This loss allowance was calculated on a total exposure of 3.8 billion, ($12.5 million). During the reporting period, the outstanding receivable was settled. This resulted in a reversal of the previously recognised impairment loss. See notes 11, 23 and 34 for further details.

                                                                                                                                                                                          1 January 2018

 

Stage 1

Stage 2

Stage 3

Total

 

12-month ECL

Lifetime ECL

Lifetime ECL

 

 

'million

'million

'million

'million

Gross EAD*

1,306

-

2,518

3,824

Loss allowance as at 1 January 2018

(2)

-

(62)

(64)

Net EAD

1,304

-

2,456

3,760

                                                                                                                                                                                          1 January 2018

 

Stage 1

Stage 2

Stage 3

Total

 

12-month ECL

Lifetime ECL

Lifetime ECL

 

 

$'000

$'000

$'000

$'000

Gross EAD*

4,274

-

8,232

12,506

Loss allowance as at 1 January 2018

(5)

-

(208)

(213)

Net EAD

4,269

-

8,024

12,293

                                                                                                                                                                         

The reconciliation of gross carrying amount for National Petroleum Investment Management Services receivables is as follows:

 

 

'million

$'000

Gross carrying amount as at 1 January

3,824

12,506

Receipts for the year

(3,824)

(12,506)

Exchange differences

-

-

Gross carrying amount as at 31 December

 -

 -

 

The reconciliation of loss allowances for National Petroleum Investment Management Services receivables as at 31 December 2017 and 31 December 2018 is as follows:

 

 

'million

$'000

Loss allowance as at 31 December 2017 - calculated under IAS 39

-

-

Amounts restated through opening retained earnings

64

213

Loss allowance as at 1 January 2018 - calculated under IFRS 9

64

213

Unwinding of discount

1

2

Reversal of impairment loss on NAPIMS receivables

 (65)

 (215)

Exchange difference

-

-

Loss allowance as at 31 December 2018 - Under IFRS 9

 -  

 -  

 

c)     Trade receivables and contract assets

The Group applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables and contract assets.

To measure the expected credit losses, trade receivables and contract assets have been grouped based on shared credit risk characteristics and the days past due criterion. Contract assets relate to unbilled amounts for the delivery of gas supplies in which NGMC has taken delivery of but has not been invoiced as at the end of the reporting period. These assets have substantially the same risk characteristics as the trade receivables for the same types of contracts. The Group has therefore concluded that the expected loss rates for trade receivables are a reasonable approximation of the loss rates for the contract assets.

Trade receivables and contract assets include amounts receivable from Nigerian Gas Marketing Company (NGMC), Mercuria Energy Group and Pillar Limited. See notes 11 and 23 for further details.

i.              Nigerian Gas Marketing Company (NGMC) receivables

NGMC receivables represents the amount receivable from NGMC for gas sales. The expected credit loss rate for this receivable is determined using a provision matrix. The provision matrix used is based on the Group's historical default rates observed over the expected life of the receivable and is adjusted for forward-looking estimates. An expected loss rate was calculated as the percentage of the receivable that is deemed uncollectible during a particular period. The expected loss rates as at 1 January 2018 and 31 December 2018 are as follows:

                                                                                                                                                                                          1 January 2018

 

Current

1-30

days past due

31-60

days past due

61-90

days past due

91 and 120 days past due

More than 120

days past due

 

'million

'million

'million

'million

'million

'million

Gross carrying amount

-

-

3,328

5,168

6,103

3,404

Expected loss rate

-

-

1.43%

1.56%

1.60%

7.13%

Lifetime ECL

-

-

(47)

(81)

(98)

(242)

Total

-

-

3,281

5,087

6,005

3,162

                                                                                                                                                                                          31 December 2018

 

Current

1-30

days past due

31-60

days past due

61-90

days past due

91 and 120 days past due

More than 120

days past due

 

'million

'million

'million

'million

'million

'million

Gross carrying amount

4,639

-

2,392

4,035

-

3,080

Expected loss rate

0.53%

-

0.53%

0.53%

-

2.04%

Lifetime ECL

(25)

-

(13)

(21)

-

(63)

Total

4,614

-

2,379

4,014

-

3,017

                                                                                                                                                                                              1 January 2018

 

Current

1-30

days past due

31-60

days past due

61-90

days past due

91 and 120 days past due

More than 120

days past due

 

$'000

$'000

$'000

$'000

$'000

$'000

Gross carrying amount

-

-

10,877

16,888

19,944

11,128

Expected loss rate

-

-

1.43%

1.56%

1.60%

7.13%

Lifetime ECL

-

-

(155)

(265)

(320)

(794)

Total

-

-

10,722

16,623

19,624

10,334

                                                                                                                                                                                              31 December 2018

 

Current

1-30

days past due

31-60

days past due

61-90

days past due

91 and 120 days past due

More than 120

days past due

 

$'000

$'000

$'000

$'000

$'000

$'000

Gross carrying amount

15,111

-

7,792

13,142

-

10,033

Expected loss rate

0.53%

-

0.53%

0.53%

-

2.04%

Lifetime ECL

(80)

-

(41)

(70)

-

(205)

Total

15,031

-

7,751

13,072

-

9,828

 

The reconciliation of gross carrying amount for NGMC is as follows:

 

 

'million

$'000

Gross carrying amount as at 1 January

18,003

58,837

Receipts for the year

(3,903)

(12,750)

Exchange differences

46

-

Gross carrying amount as at 31 December

 14,146

46,077

 

The reconciliation of loss allowances for Nigerian Gas Marketing Company receivables as 31 December 2018 is as follows:

 

 

'million

$'000

Loss allowance as at 31 December 2017 - calculated under IAS 39

-

-

Amounts restated through opening retained earnings

468

1,535

Loss allowance as at 1 January 2018 - calculated under IFRS 9

468

1,535

Reversal of impairment loss on NGMC receivables

(347)

(1,139)

Exchange difference

1

-

Loss allowance as at 31 December 2018 - Under IFRS 9

122

396

 

ii.            Pillar Limited receivables

These amounts represent cash calls receivables from Pillar Limited. The expected cash calls was assessed to be repayable within the next 12 months after adjusting for possible cash shortfalls and macroeconomic indicators. Based on this, possible loss rates were determined for each aging bucket.

                                                                                                                                                                                          1 January 2018

 

Current

1-30

days past due

31-60

days past due

61-90

days past due

91 and 120 days past due

More than 120

days past due

 

'million

'million

'million

'million

'million

'million

Gross carrying amount

1,273

-

-

-

-

-

Expected loss rate

2.46%

-

-

-

-

-

Lifetime ECL

(31)

-

-

-

-

-

Total

1,242

-

-

-

-

-

                                                                                                                                                                                          31 December 2018

 

Current

1-30

days past due

31-60

days past due

61-90

days past due

91 and 120 days past due

More than 120

days past due

 

'million

'million

'million

'million

'million

'million

Gross carrying amount

164

-

-

-

-

-

Expected loss rate

2.26%

-

-

-

-

-

Lifetime ECL

(4)

-

-

-

-

-

Total

160

-

-

-

-

-

                                                                                                                                                                                          1 January 2018

 

Current

1-30

days past due

31-60

days past due

61-90

days past due

91 and 120 days past due

More than 120

days past due

 

$'000

$'000

$'000

$'000

$'000

$'000

Gross carrying amount

4,160

-

-

-

-

-

Expected loss rate

2.46%

-

-

-

-

-

Lifetime ECL

(101)

-

-

-

-

-

Total

4,059

-

-

-

-

-

                                                                                                                                                         

                                                                                                                                                              31 December 2018

 

Current

1-30

days past due

31-60

days past due

61-90

days past due

91 and 120 days past due

More than 120

days past due

 

$'000

$'000

$'000

$'000

$'000

$'000

Gross carrying amount

535

-

-

-

-

-

Expected loss rate

2.26%

-

-

-

-

-

Lifetime ECL

(12)

-

-

-

-

-

Total

523

-

-

-

-

-

 

The reconciliation of gross carrying amount for Pillars Limited receivables is as follows:

 

 

'million

$'000

Gross carrying amount as at 1 January

1,273

4,160

Receipts for the year

(1,110)

(3,625)

Exchange differences

1

-

Gross carrying amount as at 31 December

 164

535

 

The reconciliation of loss allowances for Pillars Limited receivables as 31 December 2018 is as follows:

 

 

'million

$'000

Loss allowance as at 31 December 2017 - calculated under IAS 39

-

-

Amounts restated through opening retained earnings

31

101

Loss allowance as at 1 January 2018 - calculated under IFRS 9

31

101

Reversal of impairment loss on Pillars Limited receivables

(27)

(89)

Exchange difference

-

-

Loss allowance as at 31 December 2018 - Under IFRS 9

4

12

 

iii.           Mercuria Energy Group

Mercuria Energy Group receivables represents the amount receivable from oil sales. The expected credit loss rate was determined using provision matrix. The loss rate was calculated to be 0.05% for both 1 January 2018 and 31 December 2018 reporting periods. The impairment calculated was therefore assessed to be insignificant. These assets are classified as less than 30 days past due.

iv.            Contract assets

The Contract assets comprises majorly of unbilled gas invoices from the Group's sale of gas to NGMC. In determining the expected credit losses using a provision matrix, contract assets were grouped in the current 'aging' bucket i.e. less than 30 days. This is based on the premise that the period between the delivery of gas and the date an invoice is raised is usually 30 days.

The estimated loss was calculated using the applicable loss rate of current NGMC receivables of 0.53% as the Group's exposure to credit risk on contract asset is similar to that of NGMC receivables. The loss was calculated for both 1 January 2018 and 31 December 2018 reporting periods. The impairment calculated was assessed as insignificant. See note 24.1 for reconciliation of gross carrying amounts.

d)    Other receivables

The Group applies the IFRS 9 general approach to measuring expected credit losses (ECL) which uses a three-stage approach in recognising the expected loss allowance for all financial assets that are classified within other receivables.

i)       Other receivables

These receivables represent the outstanding payments due to Seplat from an investment no longer being pursued. This amount was previously presented as advances on investment but is now included in other receivables. See notes 11 and 23 for further details.

 

                                                                                                                                                                                          31 December 2018

 

Stage 1

Stage 2

Stage 3

Total

 

12-month ECL

Lifetime ECL

Lifetime ECL

 

 

'million

'million

'million

'million

Gross EAD*

 -

 10,770

3,070

 13,840

Loss allowance as at 31 December 2018

 -

 (1,186)

 (3,029)

 (4,215)

Net EAD

 -  

 9,584

41  

 9,625

 

                                                                                                                                                                                          31 December 2018

 

Stage 1

Stage 2

Stage 3

Total

 

12-month ECL

Lifetime ECL

Lifetime ECL

 

 

$'000

$'000

$'000

$'000

Gross EAD*

 -

 35,121

10,000

 45,121

Loss allowance as at 31 December 2018

 -

 (3,875)

(9,895)

 (13,770)

Net EAD

 -  

 31,246

105  

 31,351

 

The reconciliation of gross carrying amount for other receivables is as follows:

 

 

'million

$'000

Gross carrying amount as at 1 January

-

-

Additions during the year

13,840

45,121

Gross carrying amount as at 31 December

  13,840

45,121

 

The reconciliation of loss allowances for these receivables as 31 December 2018 is as follows:

 

 

'million

$'000

Loss allowance as at 1 January 2018 - calculated under IFRS 9

-

-

Increase in provision for impairment loss on other receivables

 4,215

 13,770

Loss allowance as at 31 December 2018 - Under IFRS 9

 4,215

 13,770

 

ii)            Staff receivables

These receivables relate to staff receivables. For impairment assessment, the Group uses the only borrower specific information available (days past due information and employment status) to assess whether credit risk has increased significantly since initial recognition. These assets are classified as less than 30 days past due (stage 1).

Impairment allowance on receivable amounts was assessed to be insignificant. This was on the basis that there has been no history of default on these asset as repayments are deducted directly from the staff's monthly salary. In addition, the outstanding balance as at 31 December 2018 and 31 December 2017 was deemed to be insignificant (218 million, 2017: 7.1 million) ($0.7 million, 2017: $23,288). The impairment loss was nil under the incurred loss model of IAS 39.

e)    Cash and bank balances

i)             Fixed deposits

The Group applies the IFRS 9 general model for measuring expected credit losses (ECL) which uses a three-stage approach in recognising the expected loss allowance for cash and bank balances. The ECL was calculated as the probability weighted estimate of the credit losses expected to occur over the contractual period of the facility after considering macroeconomic indicators. See notes 11 and 26 for further details.

 

                                                                                                                                                                                          1 January 2018

 

Stage 1

Stage 2

Stage 3

Total

 

12-month ECL

Lifetime ECL

Lifetime ECL

 

 

'million

'million

'million

'million

Gross EAD*

30,191

-

-

30,191

Loss allowance as at 31 December 2018

(103)

-

-

(103)

Net EAD

30,088

-

-

30,088

 

                                                                                                                                                                                          31 December 2018

 

Stage 1

Stage 2

Stage 3

Total

 

12-month ECL

Lifetime ECL

Lifetime ECL

 

 

'million

'million

'million

'million

Gross EAD*

33,272

-

-

33,272

Loss allowance as at 1 January 2018

(36)

-

-

(36)

Net EAD

33,236

-

-

33,236

                                                                                                                                                                                         

* Exposure at default

 

                                                                                                                                                                                                   1 January 2018

 

Stage 1

Stage 2

Stage 3

Total

 

12-month ECL

Lifetime ECL

Lifetime ECL

 

 

$'000

$'000

$'000

$'000

Gross EAD*

98,343

-

-

98,343

Loss allowance as at 31 December 2018

(335)

-

-

(335)

Net EAD

98,008

-

-

98,008

 

                                                                                                                                                                                          31 December 2018

 

Stage 1

Stage 2

Stage 3

Total

 

12-month ECL

Lifetime ECL

Lifetime ECL

 

 

$'000

$'000

$'000

$'000

Gross EAD*

108,732

-

-

108,732

Loss allowance as at 1 January 2018

(118)

-

-

(118)

Net EAD

108,614

-

-

108,614

                                                                                                                                                         

* Exposure at default

The reconciliation of gross carrying amount for fixed deposits is as follows:

 

'million

$'000

Gross carrying amount as at 1 January

30,191

98,343

Additions during the year

3,180

10,389

Exchange differences

135

-

Gross carrying amount as at 31 December

 33,506

108,732

 

The reconciliation of loss allowances for fixed deposits as at 31 December 2017 and 31 December 2018 is as follows:

 

 

'million

$'000

Loss allowance as at 31 December 2017 - calculated under IAS 39

-

-

Amounts adjusted through opening retained earnings

103

335

Loss allowance as at 1 January 2018 - calculated under IFRS 9

103

335

Reversal of impairment loss on fixed deposits

(67)

(217)

Exchange difference

-

-

Loss allowance as at 31 December 2018 - Under IFRS 9

36

118

The impact of unwinding of discount on impairments of fixed deposits is rounded up to zero.

 

ii.            Other cash and bank balances

The Group also assessed the other cash and bank balances to determine their expected credit losses. Based on this assessment, they identified the expected losses as at 1 January 2018 and 31 December 2018 to be insignificant. The assets are assessed to be in stage 1.

iii.           Credit quality of cash and bank balances

The credit quality of the Group's other cash and bank balances is assessed on the basis of external credit ratings (Fitch national long term rating) as shown below:

 

2018

2017

2018

2017

 

million

million

$'000

$'000

Non-rated

 4

62,937

 12

205,811

B-

 -  

24,978

 -  

81,681

B

 -  

16,589

 -  

54,247

B+

 -  

4,308

 -  

14,090

BB+

 -

-

 -

-

BBB+

 36

-

 117

-

BBB

 619

-

 2,015

-

A+

94,128  

24,331

306,608  

79,564

AA

 47,920

-

 156,090

-

AA-

 28,688

556

 93,451

1,819

AAA

8,150

-

26,548

-

 

 179,545

133,699

  584,841

437,212

Allowance for impairment recognised during the year

(36)

-

(118)

-

Net cash and cash bank balances

179,509

133,699

584,723

437,212

 

f)     Deferred tax impact on transition adjustment.

The deferred tax assets recognised were as a result of the expected credit losses recognised on initial adoption of IFRS 9.

g)     Reconciliation of impairment loss on financial assets

Movements in the provision for impairment of financial assets that are assessed are as follows:

 

 

2018

2017

2018

2017

 

million

million

$'000

$'000

At 1 January

-

3,129

-

10,260

Impact on initial application of IFRS 9

2,369

-

7,737

-

Adjusted balance at 1 January 2018

2,369

 

7,737

 

Allowance for impairment recognised during the year

4,990

-

16,303

-

Reversal of previously recognised impairment losses

(505)

(3,138)

(1,660)

(10,260)

Exchange rate differences

(2)

9

-

-

At 31 December

6,852

-

22,380

-

 

41.2.3. Hedge accounting

The Group entered agreements to sell put options for crude oil in Brent at a strike price of 12,280 ($40) per barrel to Ned Bank Limited for 600,000 barrels within a period of 6 months from 1 January 2018 to 30 June 2018.

It also entered into agreements to sell put options for crude oil in Brent at a strike price of 15,350 ($50) per barrel to Natixis for 500,000 barrels within a period of 6 months from 1 July 2018 to 31 December 2018.

The purpose of these is to hedge its cash flows against oil price risk. The contracts provide for a no loss position for Seplat, in that Seplat makes a gain if the price of oil falls below the strike price; and if the price of oil is above the strike price, there is no loss i.e. no payment is made by Seplat except for the mutually agreed monthly premium which is paid in arrears and is settled net of any gain on settlement date.

As at the reporting periods ended 31 December 2017 and 31 December 2018, the Group had derivative assets and no derivative liabilities. The derivative assets are measured and recognised at fair value. The Group has not formally designated any of these instruments for hedge accounting.

41.3 IFRS 15 Revenue from Contracts with Customers - Impact of adoption

The Group has adopted IFRS 15 Revenue from Contracts with Customers from 1 January 2018 which resulted in changes in accounting policies and adjustments to the amounts recognised in the financial statements. In accordance with the transition provisions in IFRS 15, the Group has adopted the new rules using the modified retrospective approach and has not restated comparatives for the 2017 financial year. There was no impact on the Group's retained earnings at the date of initial application (i.e. 1 January 2018). The reclassification adjustments resulting from the adoption of IFRS 15 is shown in note 41.3 and detailed below:

41.3.1 Impact on statement of financial position

 

a)    Trade and other receivables

The Group introduced the presentation of contract assets in the balance sheet to reflect the guidance of IFRS 15. Contract assets of 4.3 billion, 1 January 2018: 4.2 billion ($14.1 million, 1 January 2018: $13.8 million) recognised in relation to unbilled amounts from Nigerian Gas Marketing Company (NGMC) were previously presented as part of trade and other receivables. See notes 23 and 24 for further details.

41.3.1.1 Impact on statement of profit or loss and other comprehensive income

 

a)    Reclassification of underlifts to other income

In some instances, Joint Operating arrangement (JOA) partners lift the share of production of other partners. Under IAS 18, over lifts and underlifts were recognised net in revenue using entitlement accounting. They are settled at a later period through future liftings and not in cash (non-monetary settlements). This is referred to as the entitlement method. IFRS 15 excludes transactions arising from arrangements where the parties are participating in an activity together and share the risks and benefits of that activity as the counterparty is not a customer. To reflect the change in policy, the Group has reclassified underlifts to other income. Revenue has therefore been recognised net of underlifts of 4.2 billion ($13.7 million) for the reporting period. Under IAS 18, revenue recognized without reclassifying underlifts to other income would have been 232.6 billion ($759.8 million). See note 9 for other details.

b)     Reclassification of demurrage from costs of sales

Seplat pays demurrage to Mercuria for delays caused by incomplete cargoes delivered at the port. These are referred to as price adjustments and Seplat is billed subsequently by Mercuria. Under IFRS 15, these are considerations payable to customers and should be recognised net of revenue. Revenue has therefore been recognised net of demurrage costs of 64.6 million ($211,160) for the reporting period. This had no tax impact. In the current period, there was a refund of demurrage which has been added to revenue. In prior reporting periods, demurrage costs were included as part of operations and maintenance costs. Under IAS 18, revenue recognized without reclassifying demurrage costs to revenue would have been 228.3 billion ($745.9 million). See note 8 for further details.

 

 

Statement of value added
For the year ended 31 December 2018

 

 

2018

 

2017

 

2018

 

2017

 

 

million

%

million

%

$'000

%

$'000

%

Revenue

228,391

 

 138,281

 

 

746,140

 

452,179

 

Other income

4,618

 

209

 

 15,085

 

 

 

Finance income

3,032

 

 1,326

 

 9,905

 

4,335

 

Cost of goods and other services:

 

 

 

 

 

 

 

 

Local

 (54,041)

 

 (41,757)

 

 (176,546)

 

 (136,543)

 

Foreign

 (36,028)

 

 (27,838)

 

 (117,697)

 

 (91,028)

 

Valued added

 145,972

 

 70,012

100%

 476,887

 

 228,943

100%

 

Applied as follows:

 

2018

 

2017

 

2018

 

2017

 

 

million

%

million

%

$'000

%

$'000

%

To employees:

- as salaries and labour related expenses

 

 

10,604

7

7,925

11

 

 

34,648

 

 

7

25,917

11

To external providers of capital:

- as interest

 17,292

12

22,248

32

 

56,492

 

12

72,752

32

To Government:

- as Group taxes

 

7,693

5

687

1

 

25,134

 

5

2,248

1

Retained for the Group's future:

- For asset replacement, depreciation, depletion & amortisation

 

 

 

37,461

26

 26,385

38

 

 

 

122,383

 

 

 

26

86,277

38

Deferred tax (charges)/credit

 28,055

19

 (68,344)

(98)

 91,654

19

 (223,481)

(98)

Profit for the year

 44,867

31

 81,111

116

 146,576

31

 265,230

116

Valued added

 145,972

100%

 70,012

100%

 476,887

100%

 228,943

100%

 

The value added represents the additional wealth which the Group has been able to create by its own and its employees' efforts. This statement shows the allocation of that wealth to employees, providers of finance, shareholders, government and that retained for the creation of future wealth.

 

Five year financial summary

As at 31 December 2018

 

 

2018

2017

2016

2015

2014

million

million

million

million

million

Revenue

 228,391

 138,281

 63,384

 112,972

 124,377

Profit/(loss) before taxation

 80,615

  13,454

 (47,419)

 17,243

 40,481

Income tax (expense)/credit

 (35,748)

 67,657

 2,035

 (4,252)

 -  

Profit/(loss) for the year

 44,867

  81,111

 (45,384)

 12,991

 40,481

 

 

2018

2017

2016

2015

2014

million

million

million

million

million

Capital employed:

 

 

 

 

 

Issued share capital

 286

 283

 283

 282

 277

Share premium

 82,080

 82,080

 82,080

 82,080

 82,080

Share based payment reserve

 7,298

 4,332

 2,597

 1,729

 -  

Capital contribution

 5,932

 5,932

 5,932

 5,932

 5,932

Retained earnings

 192,723

 166,149

 85,052

 134,919

 135,727

Foreign translation reserve

 203,153

 200,870

 200,429

 56,182

 35,642

Non-controlling interest

 -  

 -  

 -  

 (148)

 -  

Total equity

491,472

 459,646

 376,373

 280,976

 259,658

Represented by:

 

 

 

 

 

Non-current assets

512,219

 539,672

 462,402

 295,735

 182,162

Current assets

 263,437

 259,881

 202,274

 249,462

 261,864

Non-current liabilities

 (184,808)

 (131,925)

 (141,473)

 (131,786)

 (48,247)

Current liabilities

 (99,376)

 (207,982)

 (146,830)

 (132,435)

 (136,121)

Net assets

 491,472

 459,646

 376,373

 280,976

 259,658

 

 

Five year financial summary

As at 31 December 2018

 

2018

2017

2016

2015

2014

 

$'000

$'000

$'000

$'000

$'000

 

Revenue

  746,140

 452,179

 254,217

 570,477

 775,019

 

Profit/(loss) before taxation

  263,364

 43,997

 (172,766)

 87,079

 252,253

 

Income tax (expense)/credit

 (116,788)

 221,233

 6,672

 (21,472)

 -  

 

Profit/(loss) for the year

 146,576

 265,230

 (166,094)

 65,607

 252,253

 

 

2018

2017

2016

2015

2014

$'000

$'000

$'000

$'000

$'000

Capital employed:

 

 

 

 

 

Issued share capital

 1,834

 1,826

 1,826

1,821

1,798

Share premium

 497,457

 497,457

 497,457

497,457

497,457

Share based payment reserve

 27,499

 17,809

 12,135

 8,734

 -  

Capital contribution

 40,000

 40,000

 40,000

40,000

40,000

Retained earnings

 1,030,954

 944,108

 678,922

865,483

869,861

Foreign currency translation reserve

 3,141

 1,897

 3,675

325

26

Non-controlling interest

 -  

 -  

 -  

 (745)

 -  

Total equity

1,600,885

 1,503,097

 1,234,015

 1,413,075

 1,409,142

Represented by:

 

 

 

 

 

Non-current assets

1,668,466

 1,764,789

 1,516,073

 1,487,307

 988,576

Current assets

 858,099

 849,841

 663,200

 1,254,583

 1,421,114

Non-current liabilities

 (601,976)

 (431,407)

 (463,847)

 (662,774)

 (261,834)

Current liabilities

  (323,704)

 (680,126)

 (481,411)

 (666,041)

 (738,714)

Net assets

  1,600,885

1,503,097

  1,234,015

 1,413,075

 1,409,142

                       

 

 

Supplementary financial information (unaudited)

For the year ended 31 December 2018

42 Estimated quantities of proved plus probable reserves

 

Oil & NGLs

MMbbls

Natural Gas

Bscf

Oil Equivalent

MMboe

At 1 January 2018

226.2

1,455.8

477.2

Revisions

10.7

70.2

22.8

Discoveries and extensions

-

-

-

Acquisitions

-

-

-

Production

(10.3)

(53.0)

(19.4)

At 1 January 2019

226.6

1,473.0

480.6

 

Reserves are those quantities of crude oil, natural gas and natural gas liquid that, upon analysis of geological and engineering data, appear with reasonable certainty to be recoverable in the future from known reservoirs under existing economic and operating conditions.

As additional information becomes available or conditions change, estimates are revised.

43.  Capitalised costs related to oil producing activities

 

2018

2017

2018

2017

 

million

million

$'000

$'000

Capitalised costs:

 

 

 

 

Unproved properties

-

-

-

-

Proved properties

551,540

 508,314

1,796,547

 1,662,243

Total capitalised costs

551,540

 508,314

1,796,547

 1,662,243

Accumulated depreciation

(152,065)

(114,937)

(495,327)

(375,856)

Net capitalised costs

399,475

393,377

1,301,220

1,286,387

Capitalised costs include the cost of equipment and facilities for oil producing activities. Unproved properties include capitalised costs for oil leaseholds under exploration, and uncompleted exploratory well costs, including exploratory wells under evaluation. Proved properties include capitalised costs for oil leaseholds holding proved reserves, development wells and related equipment and facilities (including uncompleted development well costs) and support equipment.

44.Concessions

The expiry dates of concessions granted to the Group are:

 

Expiry  date

Seplat

OML 4, 38 & 41

 

October 2038

Newton

OPL 283

 

October 2028

Seplat East Swamp

OML 53

 

June 2027

Seplat Swamp

OML 55

 

June 2027

 

On 15 November 2018 Seplat announced the President and Honourable Minister of Petroleum Resources had given consent for the renewal of OMLs 4, 38 and 41 to a new expiry date of 21 October 2038.  Seplat holds a 45% working interest in OMLs 4, 38 and 41.  In connection with the license renewal Seplat has paid in full a Renewal Bonus of 7.8 billion, 2017: nil ($25.9 million, 2017: nil), thus ensuring all conditions for license renewal have been met.  The Company is working with the Department of Petroleum Resources to obtain the updated title deeds in connection with the renewal.

45.  Results of operations for oil producing activities

 

2018

2017

2018

2017

 

million

million

$'000

$'000

Revenue

 180,751

 100,369

 590,503

 328,206

Other income - net

4,618

209

15,085

682

Production and administrative expenses

(105,111)

(86,792)

(343,396)

(283,800)

Depreciation & amortisation

(36,073)

 (22,691)

(117,842)

 (74,198)

Profit/(loss) before taxation

 44,185

 (8,905)

 144,350

 (29,110)

Taxation

 (35,748)

 67,657

 (116,788)

 221,233

Profit/(loss) after taxation

 8,437

 58,752

 27,562

 192,123

 

46.  Reclassification

Certain comparative figures have been reclassified in line with the current year's presentation.

47.  Exchange rates used in translating the accounts to Naira

The table below shows the exchange rates used in translating the accounts into Naira

 

Basis

31 December 2018

31 December 2017

 

 

N/$

N/$

Fixed assets - opening balances

Historical rate

Historical

Historical

Fixed assets - additions

Average rate

306.10

305.80

Fixed assets - closing balances

Closing rate

307.00

305.81

Current assets

Closing rate

307.00

305.81

Current liabilities

Closing rate

307.00

305.81

Equity

Historical rate

Historical

Historical

Income and Expenses:

Overall Average rate

306.10

305.81

 

 

Separate financial statements

Statement of profit or loss and other comprehensive income

For the year ended 31 December 2018

 

 

31 Dec 2018

31 Dec 2017

31 Dec 2018

31 Dec 2017

 

Notes

million

million

$'000

$'000

 

 

 

 

 

 

Revenue

7

 217,174

 127,655

 709,493

 417,428

Cost of sales

8

 (103,086)

 (67,666)

 (336,777)

 (221,258)

Gross profit

 

 114,088

 59,989

 372,716

 196,170

Other income - net

9

 1,757

 334

 5,739

1,092

General and administrative expenses

10

 (19,752)

 (18,459)

 (64,520)

 (60,355)

(Impairment)/reversal of losses on financial assets - net

11

 (69)

 3,138

 (227)

 10,260

Fair value gain/(loss) - net

12

 1,319

 (5,931)

 4,308

 (19,393)

Operating profit

 

 97,343

 39,071

 318,016

 127,774

Finance income

13

 2,874

 11,924

 9,388

 38,992

Finance cost

13

 (14,788)

 (22,236)

 (48,311)

 (72,710)

Profit before taxation

 

 85,429

 28,759

 279,093

 94,056

Income tax (expense)/credit

14

 (35,748)

 67,657

 (116,788)

 221,233

Profit for the year

 

 49,681

 96,416

 162,305

 315,289

Other comprehensive income:

 

 

 

 

 

Items that may be reclassified to profit or loss:

 

 

 

 

 

Foreign currency translation difference

 

 2,026

 1,027

 -  

 -  

Items that will not be reclassified to profit or loss:

 

 

 

 

 

Remeasurement of post-employment benefit obligations

31

 178

 (90)

 579

 (294)

Deferred tax (expense)/credit on remeasurement (gains)/losses

14

 (80)

 76

 (261)

250

 

 

 98

 (14)

 318

(44)

Other comprehensive income/(loss) for the year (net of tax)

 

 2,124

 1,013

 318

 (44)

 

 

 

 

 

 

Total comprehensive income for the year (net of tax)

 

 51,805

 97,429

 162,623

 315,245

 

 

 

 

 

 

Basic earnings per share /($)

33

 87.52

 171.12

 0.29

 0.56

Diluted earnings per share /($)

33

 85.66

 168.66

 0.28

 0.55

*There is no revenue other than revenue from contracts with customers in 2018.

Notes 1 to 39 further on are an integral part of these financial statements.

 

 

Separate financial statements

Statement of financial position

As at 31 December 2018

 

 

 

31 Dec 2018

31 Dec 2017

31 Dec 2018

31 Dec 2017

 

Notes

million

million

$'000

$'000

ASSETS

 

 

 

 

 

Non-current assets

 

 

 

 

 

Oil & gas properties

17

 275,085

 278,841

 896,040

 911,839

Other property, plant and equipment

17

 1,285

 1,537

 4,183

 5,025

Tax paid in advance

18

 9,708

 9,670

 31,623

31,623

Prepayments

19

 7,871

 287

 25,635

939

Deferred tax

15

 44,284

 68,417

 144,246

 223,731

Investment in subsidiaries

20

 345

 345

 1,129

 1,129

Total non-current assets

 

 338,578

 359,097

1,102,856

 1,174,286

 

 

 

 

 

 

Current assets

 

 

 

 

 

Inventories

21

 30,400

 29,576

 99,022

 96,719

Trade and other receivables

22

 318,997

 327,528

 1,039,074

 1,071,044

Prepayments

19

 3,456

 513

 11,258

 1,674

Contract assets

23

 4,327

 -  

 14,096

-

Derivative financial instruments

24

 2,693

 -  

 8,772

-

Cash and bank balances

25

 153,535

 117,220

 500,116

 383,321

Total current assets

 

 513,408

 474,837

 1,672,338

 1,552,758

Total assets

 

 851,986

 833,934

2,775,194

 2,727,044

 

 

 

 

 

 

EQUITY AND LIABILITIES

 

 

 

 

 

Equity

 

 

 

 

 

Issued share capital

26

 286

 283

 1,834

 1,826

Share premium

26

 82,080

 82,080

 497,457

 497,457

Share based payment reserve

26

 7,298

 4,332

 27,499

 17,809

Capital contribution

27

 5,932

 5,932

 40,000

 40,000

Retained earnings

 

234,148

 203,072

1,147,526

 1,045,985

Foreign currency translation reserve

28

 196,542

 194,526

 -  

 -  

Total shareholders' equity

 

 526,296

 490,225

 1,714,316

 1,603,077

 

 

 

 

 

 

Non-current liabilities

 

 

 

 

 

Interest bearing loans and borrowings

29

 133,799

 93,170

 435,827

 304,677

Provision for decommissioning obligation

30

 37,658

 30,716

 122,666

 100,447

Defined benefit plan

31

 1,819

 1,994

 5,923

6,518

Total non-current liabilities

 

 173,276

 125,880

 564,416

 411,642

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

Interest bearing loans and borrowings

29

 3,031

 81,159

 9,872

 265,400

Trade and other payables

32

 140,398

 135,406

 457,323

 442,792

Current tax liabilities

14

 8,985

 1,264

 29,267

 4,133

Total current liabilities

 

 152,414

 217,829

 496,462

 712,325

Total liabilities

 

 325,690

 343,709

 1,060,878

 1,123,967

Total shareholders' equity and liabilities

 

 851,986

 833,934

 2,775,194

 2,727,044

 

Notes 1 to 39 further on are an integral part of these financial statements.

 

 

The financial statements of Seplat Development Company Plc for the year ended 31 December 2018 were authorised for issue in accordance with a resolution of the Directors on 6 March 2019 and were signed on its behalf by:

 

A. B. C. Orjiako

A. O. Avuru

R.T. Brown 

FRC/2013/IODN/00000003161

FRC/2013/IODN/00000003100

FRC/2014/ANAN/00000017939

Chairman

Chief Executive Officer

Chief Financial Officer

6 March 2019

6 March 2019

6 March 2019

 

 

Separate financial statements

Statement of changes in equity

For the year ended 31 December 2018

 

Issued
share
capital

Share
premium

Share
based

payment

reserve

Capital
contribution

Retained

earnings

Foreign currency translation reserve

Total

equity

 

million

million

million

million

million

million

million

At 1 January 2017

283

 82,080

 2,597

 5,932

 106,670

 193,499

 391,061

Profit for the year

-

 -  

 -  

 -  

 96,416

 -  

 96,416

Other comprehensive (loss)/income

-

 -  

 -  

 -  

 (14)

 1,027

 1,013

Total comprehensive income for the year

-

 -  

 -  

 -  

 96,402

 1,027

 97,429

Transactions with owners in their capacity as owners:

 

 

 

 

 

 

 

Share based payments (Note 26)

-

 -  

 1,735

 -  

 

 -  

 1,735

Total

-

 -  

 1,735

 -  

 

 -  

 1,735

At 31 December 2017 as originally presented

283

 82,080

 4,332

 5,932

 203,072

 194,526

490,255

Impact of change in accounting

policy:

 

 

 

 

 

 

 

Adjustment on initial application of IFRS 9 - net of tax (Note 39.1)

 -  

 -  

 -  

 -  

  (667)

-

  (667)

At 1 January 2018 - Restated

283

 82,080

 4,332

 5,932

  202,405

 194,526

  489,558

Profit for the year

 -  

 -  

 -  

 -  

  49,681

 -  

  49,681

Other comprehensive income

 -  

 -  

 -  

 -  

 98

 2,026

 2,124

Total comprehensive income for the year

-

-

-

-

 49,779

 2,026

 51,805

Transactions with owners in their capacity as owners:

 

 

 

 

 

 

 

Dividends paid

 -  

 -  

 -  

 -  

(18,036)

 -  

 (18,036)

Share based payments (Note 26)

 -  

 -  

  2,969

 -  

 -  

 -  

2,969

Vested shares (Note 26)

3  

 -  

 (3)

 -  

 -  

 -  

 -  

Total

3

-

2,966

-

(18,036)

 -  

(15,067)

At 31 December 2018

286

82,080

7,298

5,932

234,148

 196,552

 526,296

Notes 1 to 39 further on are an integral part of these financial statements.

 

 

Issued
share
capital

Share
premium

Share
based

payment

reserve

Capital
contribution

Retained

earnings

Total

equity

 

$'000

$'000

$'000

$'000

$'000

$'000

At 1 January 2017

 1,826

497,457

12,135

40,000

730,740

1,282,158

Profit for the year

 -  

 -  

 -  

 -  

 315,289

 315,289

Other comprehensive loss

 -  

 -  

 -  

 -  

 (44)

 (44)

Total comprehensive income for the year

 -  

 -  

 -  

 -  

 315,245

 315,245

Transactions with owners in their capacity as owners:

 

 

 

 

 

 

Share based payments (Note 26)

 -  

 -  

5,674  

 -  

-

5,674  

Total

 -  

-

 5,674

 -  

 -

5,674  

At 31 December 2017 as originally presented

 1,826

 497,457

 17,809

 40,000

 1,045,985

 1,603,077

Impact of change in accounting

policy:

 

 

 

 

 

 

Adjustment on initial application of IFRS 9 - net of tax (Note 39.1)

 -  

 -  

 -  

 -  

  (2,194)

  (2,194)

At 1 January 2018 - Restated

 1,826

 497,457

 17,809

 40,000

 1,043,791

 1,600,883

Profit for the year

 -

 -

 -

 -

 162,305

 162,305

Other comprehensive income

 -

 -

 -

 -

 318

 318

Total comprehensive income for the year

 -

 -

 -

 -

 162,623

 162,623

Transactions with owners in their capacity as owners:

 

 

 

 

 

 

Dividends paid

 -

 -

 -

 -

 (58,888)

 (58,888)

Share based payments (Note 26)

 -

 -

  9,698

 -

 -

9,698

Vested shares (Note 26)

 8

 -

 (8)

 -

 -

 -  

Total

 8

 -  

9,690

 -  

 (58,888)

(49,190)

At 31 December 2018

 1,834

 497,457

  27,499

 40,000

  1,147,526

  1,714,316

Notes 1 to 39 further on are an integral part of these financial statements.

 

 

Separate statement of cash flows

For the year ended 31 December 2018

 

 

31 Dec 2018

31 Dec 2017

31 Dec 2018

31 Dec 2017

 

Notes

million

million

$'000

$'000

Cash flows from operating activities

 

 

 

 

 

Cash generated from operations

16

  151,582

 118,577

  495,074

 387,760

Defined benefit paid

 

 (63)

(163)     

 (206)

(532)  

Net cash inflows from operating activities

 

  151,519

 118,414

  494,868

 387,228

Cash flows from investing activities

 

 

 

 

 

Investment in oil and gas properties

17

 (20,128)

 (4,818)

 (65,757)

 (15,756)

Investment in other property, plant and equipment

17

 (698)

 (441)

 (2,281)

 (1,442)

Investment in subsidiary

20

 -  

 (20)

 -  

 (65)

Proceeds from disposal of other property plant and equipment

17

 73

 50

 239

 162

Payments for plan assets

31b

 (502)

 -  

 (1,635)

 

Interest received

13

 2,874

 11,924

 9,388

 38,992

Net cash (outflows/inflows) from investing activities

 

(18,389)

 6,695

 (60,046)

 21,891

Cash flows from financing activities

 

 

 

 

 

Repayments of loans

29

 (207,532)

 (29,970)

 (678,000)

 (98,000)

Proceeds from loans

29

 163,775

 -  

 535,045

 -

Dividends paid

34

 (18,036)

 -  

 (58,888)

 -  

Principal repayments on crude oil advance

32a

 (23,193)

 -  

 (75,769)

 -

Interest repayments on crude oil advance

32a

 (530)

 (1,770)

 (1,730)

(5,789)

Payments for other financing charges

29

 (1,802)

 -  

 (5,885)

-

Interest paid on bank financing

29

 (10,890)

 (21,213)

 (35,471)

 (69,366)

Net cash outflows from financing activities

 

 (98,208)

 (52,953)

 (320,698)

 (173,155)

Net increase in cash and cash equivalents

 

 35,980

 72,156

 117,541

 235,964

Cash and cash equivalents at beginning of the year

 

 117,220

 44,950

 383,321

 147,377

Effects of exchange rate changes on cash and cash equivalents

 

344

 114

  (747)

 (20)

Cash and cash equivalents at end of the year

25

 152,486

 117,220

 496,698

 383,321

                   

Notes 1 to 39 further on are an integral part of these financial statements.  

 

Notes to the separate financial statements

1.    Corporate information and business

Seplat Petroleum Development Company Plc ('Seplat' or the 'Company') was incorporated on 17 June 2009 as a private limited liability company and re-registered as a public company on 3 October 2014, under the Companies and Allied Matters Act, CAP C20, Laws of the Federation of Nigeria 2004. The Company commenced operations on 1 August 2010. The Company is principally engaged in oil and gas exploration.

The Company's registered address is: 25a Lugard Avenue, Ikoyi, Lagos, Nigeria.

The Company acquired, pursuant to an agreement for assignment dated 31 January 2010 between the Company, SPDC, TOTAL and AGIP, a 45% participating interest in the following producing assets:

OML 4, OML 38 and OML 41 located in Nigeria. The total purchase price for these assets was 50.4 billion ($340 million) paid at the completion of the acquisition on 31 July 2010 and a contingent payment of 4.8 billion ($33 million) payable 30 days after the second anniversary, 31 July 2012, if the average price per barrel of Brent Crude oil over the period from acquisition up to 31 July 2012 exceeds 11,850 ($80) per barrel. 53.1 billion ($358.6 million) was allocated to the producing assets including 2.8 billion ($18.6 million) as the fair value of the contingent consideration as calculated on acquisition date. The contingent consideration of 5.1 billion ($33 million) was paid on 22 October 2012.

2.    Significant changes in the current accounting period

The following significant changes occurred during the reporting year ended 31 December 2018:

The offering of 9.25% senior notes with an aggregate principal amount of 107 billion ($350 million) due in April 2023. The notes were issued by the Company in March 2018 and guaranteed by some of its subsidiaries. The proceeds of the notes are being used to refinance existing indebtedness and for general corporate purposes.

In March 2018, the Company obtained a 92 billion ($300 million) revolving facility to refinance an existing 92 billion ($300 million) revolving credit facility due in December 2018. The facility has a tenor of 4 years (due in June 2022) with an initial interest rate of the 6% +Libor. Interest is payable semi-annually and principal repayable annually. 61 billion ($200 million) was drawn down in March 2018. The proceeds from the notes are being used to repay existing indebtedness. In October 2018, the Company made a principal repayment of 30.7 billion ($100 million) out of its existing cash surplus.

25,000,000 additional shares were issued in furtherance of the Company's Long Term Incentive Plan, in February 2018. The additional issued shares, less 5,052,464 shares which vested in April 2018, are held by Stanbic IBTC Trustees Limited as Custodian. The Company's share capital as at the reporting date consists of 568,497,025 ordinary shares (excluding the additional shares held in trust) of 0.50k each, all with voting rights.

 

3.    Summary of significant accounting policies

3.1.         Introduction to summary of significant accounting policies

 

This note provides a list of the significant accounting policies adopted in the preparation of these financial statements. These accounting policies have been applied to all the years presented, unless otherwise stated.

3.2.         Basis of preparation          

h)    Compliance with IFRS

The financial statements for the year ended 31 December 2018 have been prepared in accordance with International Financial Reporting Standards ("IFRS") and interpretations issued by the IFRS Interpretations Committee (IFRS IC). The financial statements comply with IFRS as issued by the International Accounting Standards Board (IASB). Additional information required by National regulations is included where appropriate.

The financial statements comprise the statement of profit or loss and other comprehensive income, the statement of financial position, the statement of changes in equity, the statement of cash flows and the notes to the financial statements.

ii)            Historical cost convention

The financial information has been prepared under the going concern assumption and historical cost convention, except for derivate financial instruments measured at fair value through profit or loss on initial recognition. The financial statements are presented in Nigerian Naira and United States Dollars, and all values are rounded to the nearest million ('million) and thousand ($'000) respectively, except when otherwise indicated.

iii)           Going concern

Nothing has come to the attention of the directors to indicate that the Company will not remain a going concern for at least twelve months from the date of this statement.

iv)            New and amended standards adopted by the Company

The Company has applied the following standards and amendments for the first time in the annual reporting period commencing 1 January 2018.

·      IFRS 9 Financial instruments, and

·      IFRS 15 Revenue from contracts with customers

·      Amendments to IFRS 15 Revenue from contracts with customers

The impact of the adoption of these standards and the new accounting policies are disclosed in note 39. Other new accounting standards effective for reporting periods beginning on or after 1 January 2018 did not have any impact on the Company's accounting policies and did not require retrospective adjustments to the financial statements.

v)             New standards, amendments and interpretations not yet adopted 

Certain new accounting standards and interpretations have been published that are not mandatory for 31 December 2018 reporting periods and have not been early adopted by the Company. The Company's assessment of the impact of these new standards and interpretations is set out below.

 

a.      IFRS 16 Leases

 

Title of standard

IFRS 16 Leases

Nature of change

IFRS 16 was issued in January 2016. It will result in almost all leases being recognised on the statement of financial position, as the distinction between operating and finance leases is removed. Under the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals are recognised. The only exceptions are short-term and low-value leases. The accounting for lessors will not significantly change.

Impact

Operating leases: The standard will affect primarily the accounting for the Company's operating leases which include leases of drilling rigs, buildings and land. As at the reporting date, the Company had non-cancellable operating lease commitments (8 billion, $26 million).

Short term leases & low value leases: The Company's one-year contracts with no planned extension commitments mostly applicable to leased staff flats will be covered by the exception for short-term leases. Of these non-cancellable lease commitments, approximately 190.8 million ($0.6 million) relate to short-term leases. None of the Company's other leases will be covered by the exception for low value leases. Short term leases will be recognised on a straight line basis as an expense in profit or loss.

Service contracts: Some commitments such as contracts for the provision of drilling, cleaning and community services were identified as service contracts as they did not contain an identifiable asset which the Company had a right to control. It therefore did not qualify as leases under IFRS 16.

Right of use assets and lease liabilities: As at January 1 2019, the Company expects to recognise right-of-use assets and lease liabilities of approximately 6.8 billion, $22.2 million and 5.6 billion, $18.4 million respectively. The overall net current assets will be lower by approximately 141.4 million, $0.5 million due to the presentation of a portion of the liability as current liability. Cash flows from principal repayments would be recognised in financing activities while cash flows from interest repayments and short term lease payments would be recognised in operating activities.

The Company does not have arrangements where they are lessors.

Date of adoption

The standard for leases is mandatory for financial years commencing on or after 1 January 2019. The Company does not intend to adopt the standard before its effective date.

The Company intends to apply the modified retrospective approach and will not restate comparative amounts for the year prior to first adoption.

 

b.      Amendments to IAS 19 Employee benefits

These amendments were issued in February 2018. The amendments issued require an entity to use updated assumptions to determine current service cost and net interest for the remainder of the period after a plan amendment, curtailment or settlement. They also require an entity to recognise in profit or loss as part of past service cost or as a gain or loss on settlement, any reduction in a surplus, even if that surplus was not previously recognised because of the impact of the asset ceiling.

These amendments are mandatory for annual periods beginning on or after 1 January 2019. The Company does not intend to adopt the amendments before its effective date and does not expect it to have a material impact on its current or future reporting periods.

c.       IFRIC 23 Uncertainty over income tax treatment           

These amendments were issued in June 2017. IAS 12 Income taxes specifies requirements for current and deferred tax assets and liabilities. An entity applies the requirements in IAS 12 based on applicable tax laws. It may be unclear how tax law applies to a particular transaction or circumstance. The acceptability of a particular tax treatment under tax law may not be known until the relevant taxation authority or a court takes a decision in the future. Consequently, a dispute or examination of a particular tax treatment by the tax authority may affect an entity's accounting for a current or deferred tax asset or liability.

This Interpretation clarifies how to apply the recognition and measurement requirements in IAS 12 when there is uncertainty over income tax treatments. In such a circumstance, an entity shall recognise and measure its current or deferred tax asset or liability applying the requirements in IAS 12 based on taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates determined applying this Interpretation.

These amendments are mandatory for annual periods beginning on or after 1 January 2019. The Company does not intend to adopt the amendments before its effective date and does not expect it to have a material impact on its current or future reporting periods.

d.      Conceptual framework for financial reporting - Revised

These amendments were issued in March 2018. Included in the revised conceptual framework are revised definitions of an asset and a liability as well as new guidance on measurement and derecognition, presentation and disclosure. The amendments focused on areas not yet covered and areas that had shortcomings.

These amendments are mandatory for annual periods beginning on or after 1 January 2020. The Company does not intend to adopt the amendments before its effective date and does not expect it to have a material impact on its current or future reporting periods.

e.      Amendments to IAS 23 Borrowing costs

These amendments were issued in December 2017. The amendments clarify that if any specific borrowing remains outstanding after the related asset is ready for its intended use or sale, that borrowing becomes part of the funds that an entity borrows generally when calculating the capitalisation rate on general borrowings.

These amendments are mandatory for annual periods beginning on or after 1 January 2019. The Company does not intend to adopt the amendments before its effective date and does not expect it to have a material impact on its current or future reporting periods.

f.        Amendments to IAS 12 Income taxes

These amendments were issued in December 2017. These amendments clarify that all income tax consequences of dividends (including payments on financial instruments classified as equity) are recognised consistently with the transactions that generated the distributable profits. In effect, the income tax consequences of dividends are linked more directly to past transactions or events that generated distributable profits than to distributions to owners. Therefore, an entity shall recognise the income tax consequences of dividends in profit or loss, other comprehensive income or equity according to where the entity originally recognised those past transactions or events.

These amendments are mandatory for annual periods beginning on or after 1 January 2019. The Company does not intend to adopt the amendments before its effective date and does not expect it to have a material impact on its current or future reporting periods.

g.       Amendments to IFRS 11 Joint arrangements

These amendments were issued in December 2017. These amendments clarify how a company accounts for increasing its interest in a joint operation that meets the definition of a business. If a party maintains (or obtains) joint control, then the previously held interest is not remeasured. If a party obtains control, then the transaction is a business combination achieved in stages and the acquiring party remeasures the previously held interest at fair value. In addition to clarifying when a previously held interest in a joint operation is remeasured, the amendments also provide further guidance on what constitutes the previously held interest. This is the entire previously held interest in the joint operation.

These amendments are mandatory for annual periods beginning on or after 1 January 2019. The Company does not intend to adopt the amendments before its effective date and does not expect it to have a material impact on its current or future reporting periods.

3.3.         Functional and presentation currency

Items included in the financial statements are measured using the currency of the primary economic environment in which the company operates ('the functional currency'), which is the US dollar. The financial statements are presented in Nigerian Naira and the US Dollars.

The Company has chosen to show both presentation currencies and this is allowable by the regulator.

i)     Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies at year end are generally recognised in profit or loss.

Foreign exchange gains and losses that relate to borrowings are presented in the statement of profit or loss, within finance costs. All other foreign exchange gains and losses are presented in the statement of profit or loss on a net basis within other income or other expenses.

Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Translation differences on assets and liabilities carried at fair value are reported as part of the fair value gain or loss or other comprehensive income depending on where fair value gain or loss is reported.

3.4 Oil and gas accounting          

i) Pre-license costs

Pre-license costs are expensed in the period in which they are incurred.

ii)            Exploration license cost

Exploration license costs are capitalised within oil and gas properties. License costs paid in connection with a right to explore in an existing exploration area are capitalised and amortised on a straight-line basis over the life of the permit.

License costs are reviewed at each reporting date to confirm that there is no indication that the carrying amount exceeds the recoverable amount. This review includes confirming that exploration drilling is still under way or firmly planned, or that it has been determined, or work is under way to determine that the discovery is economically viable based on a range of technical and commercial considerations and sufficient progress is being made to establish development plans and timing. If no future activity is planned or the license has been relinquished or has expired, the carrying value of the license is written off through profit or loss.

iii)           Acquisition of producing assets

Upon acquisition of producing assets which do not constitute a business combination, the Company identifies and recognises the individual identifiable assets acquired (including those assets that meet the definition of, and recognition criteria for, intangible assets in IAS 38 Intangible Assets) and liabilities assumed. The purchase price paid for the group of assets is allocated to the individual identifiable assets and liabilities on the basis of their relative fair values at the date of purchase.

iv)            Exploration and evaluation expenditures

Geological and geophysical exploration costs are charged to profit or loss as incurred.

Exploration and evaluation expenditures incurred by the entity are accumulated separately for each area of interest. Such expenditures comprise net direct costs and an appropriate portion of related overhead expenditure, but do not include general overheads or administrative expenditure that is not directly related to a particular area of interest. Each area of interest is limited to a size related to a known or probable hydrocarbon resource capable of supporting an oil operation.

Costs directly associated with an exploration well, exploratory stratigraphic test well and delineation wells are temporarily suspended (capitalised) until the drilling of the well is complete and the results have been evaluated. These costs include employee remuneration, materials and fuel used, rig costs, delay rentals and payments made to contractors. If hydrocarbons ('proved reserves') are not found, the exploration expenditure is written off as a dry hole and charged to profit or loss. If hydrocarbons are found, the costs continue to be capitalised.

Suspended exploration and evaluation expenditure in relation to each area of interest is carried forward as an asset provided that one of the following conditions is met:

the costs are expected to be recouped through successful development and exploitation of the area of interest or alternatively, by its sale;

exploration and/or evaluation activities in the area of interest have not, at the reporting date, reached a stage which permits a reasonable assessment of the existence or otherwise of economically recoverable reserves; and

active and significant operations in, or in relation to, the area of interest are continuing.

 

Exploration and/or evaluation expenditures which fail to meet at least one of the conditions outlined above are written off. In the event that an area is subsequently abandoned or exploration activities do not lead to the discovery of proved or probable reserves, or if the Directors consider the expenditure to be of no value, any accumulated costs carried forward relating to the specified areas of interest are written off in the year in which the decision is made. While an area of interest is in the development phase, amortisation of development costs is not charged pending the commencement of production. Exploration and evaluation costs are transferred from the exploration and/or evaluation phase to the development phase upon commitment to a commercial development.

v)             Development expenditures

Development expenditure incurred by the entity is accumulated separately for each area of interest in which economically recoverable reserves have been identified to the satisfaction of the Directors. Such expenditure comprises net direct costs and, in the same manner as for exploration and evaluation expenditure, an appropriate portion of related overhead expenditure directly related to the development property. All expenditure incurred prior to the commencement of commercial levels of production from each development property is carried forward to the extent to which recoupment is expected to be derived from the sale of production from the relevant development property.

3.5 Revenue recognition

3.5.1 Revenue recognition (policy from 1 January 2018)

The Company has adopted IFRS 15 as issued in May 2014 which has resulted in changes in accounting policy of the Company. IFRS 15 replaces IAS 18 which covers revenue arising from the sale of goods and the rendering of services, IAS 11 which covers construction contracts, and related interpretations. In accordance with the transitional provisions in IFRS 15, comparative figures have not been restated as the Company has applied the modified retrospective approach in adopting this standard.

IFRS 15 introduces a five-step model for recognising revenue to depict transfer of goods or services. The model distinguishes between promises to a customer that are satisfied at a point in time and those that are satisfied over time.

It is the Company's policy to recognise revenue from a contract when it has been approved by both parties, rights have been clearly identified, payment terms have been defined, the contract has commercial substance, and collectability has been ascertained as probable. Collectability of customer's payments is ascertained based on the customer's historical records, guarantees provided, the customer's industry and advance payments made if any.

Revenue is recognised when control of goods sold has been transferred. Control of an asset refers to the ability to direct the use of and obtain substantially all of the remaining benefits (potential cash inflows or savings in cash outflows) associated with the asset. Seplat has two promises to its customers which is the sale of crude oil and gas. For crude oil, this occurs when the crude products are lifted by the customer (buyer) Free on Board at the Company's loading facility. Revenue from the sale of oil is recognised at a point in time when performance obligation is satisfied. For gas, revenue is recognised when the product passes through the custody transfer point to the customer. Revenue from the sale of gas is recognised over time using the practical expedient of the right to invoice.

The surplus or deficit of the product sold during the period over the Company's share of production in line with entitlement method is termed as an overlift or underlift. With regard to underlifts, if the over-lifter does not meet the definition of a customer or the settlement of the transaction is non-monetary, a receivable and other income is recognised. Conversely, when an overlift occurs, cost of sale is debited and a corresponding liability is accrued. Overlifts and underlifts are initially measured at the market price of oil at the date of lifting, consistent with the measurement of the sale and purchase. Subsequently, they are remeasured at the current market value. The change arising from this remeasurement is included in the profit or loss as other income/expenses-net.

Definition of a customer

A customer is a party that has contracted with the Company to obtain crude oil or gas products in exchange for a consideration, rather than to share in the risks and benefits that result from sale. The Company has entered into collaborative arrangements with its Joint arrangement partners to share in the production of oil. Collaborative arrangements with its Joint arrangement partners to share in the production of oil are accounted for differently from arrangements with customers as collaborators share in the risks and benefits of the transaction, and therefore, do not meet the definition of customers. Revenue arising from these arrangements are recognised separately in other income.

Contract enforceability and termination clauses

It is the Company's policy to assess that the defined criteria for establishing contracts that entail enforceable rights and obligations are met. The criteria provides that the contract has been approved by both parties, rights have been clearly identified, payment terms have been defined, the contract has commercial substance, and collectability has-been ascertained as probable. Revenue is not recognised for contracts that do not create enforceable rights and obligations to parties in a contract. The Company also does not recognise revenue for contracts that do not meet the revenue recognition criteria. In such cases where consideration is received it recognises a contract liability and only recognises revenue when the contract is terminated. For crude oil and gas sales, contract is enforceable at the inception of the contract.

The Company may also have the unilateral rights to terminate an unperformed contract without compensating the other party. This could occur where the Company has not yet transferred any promised goods or services to the customer and the Company has not yet received, and is not yet entitled to receive, any consideration in exchange for promised goods or services.

Identification of performance obligation

At inception, the Company assesses the goods or services promised in the contract with a customer to identify as a performance obligation, each promise to transfer to the customer either a distinct good or series of distinct goods. The number of identified performance obligations in a contract will depend on the number of promises made to the customer. The delivery of barrels of crude oil or units of gas are usually the only performance obligation included in oil and gas contract with no additional contractual promises. Additional performance obligations may arise from future contracts with the Company and its customers.

The identification of performance obligations is a crucial part in determining the amount of consideration recognised as revenue. This is due to the fact that revenue is only recognised at the point where the performance obligation is fulfilled. Management has therefore developed adequate measures to ensure that all contractual promises are appropriately considered and accounted for accordingly.

Transaction price

Transaction price is the amount allocated to the performance obligations identified in the contract. It represents the amount of revenue recognised as those performance obligations are satisfied. Complexities may arise where a contract includes variable consideration, significant financing component or consideration payable to a customer.

Variable consideration not within the Company's control is estimated at the point of revenue recognition and reassessed periodically. The estimated amount is included in the transaction price to the extent that it is highly probable that a significant reversal of the amount of cumulative revenue recognised will not occur when the uncertainty associated with the variable consideration is subsequently resolved. As a practical expedient, where the Company has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the Company's performance completed to date, the Company may recognise revenue in the amount to which it has a right to invoice.

Sales contracts for crude oil and gas often incorporates provisional pricing - at the date of delivery of the oil or gas, a provisional price is recognised as revenue. The amount of revenue to be recognised is estimated based on the market price of the commodity being sold at the delivery date. The final price is based on agreements between the Company and counterparty with any adjustments recognised within revenue. The existence of provisionally priced arrangements may result in variable consideration. The Company applies judgement to determine if there is an amount that is variable consideration and, if so, whether it is subject to a significant reversal. Such a reversal would occur if there were a significant downward adjustment of the cumulative amount of revenue recognised for that performance obligation.

Although variable considerations are subject to a constraint, revenue recognised as the performance obligation is satisfied is not subject to a significant reversal in future periods.

For crude oil contracts, revenue recognition is delayed until the invoice date. As a result, crude contracts are not categorised as provisionally pricing contracts. However for gas contracts, revenue is recognised on the date of delivery at a provisional price. At the invoice date, revenue is marked to market with any adjustments being recognised in revenue. A lag period exists between the delivery of the gas and the date gas volumes are agreed. As a result of the differences in gas volumes that may give rise to variable quantities, the Company recognizes the corresponding transaction as contract assets until the point at which the variable consideration becomes unconditional, and is then considered a financial asset within the scope of IFRS 9.

Significant financing component (SFC) assessment is carried out (using a discount rate that reflects the amount charged in a separate financing transaction with the customer and also considering the Company's incremental borrowing rate) on contracts that have a repayment period of more than 12 months.

As a practical expedient, the Company does not adjust the promised amount of consideration for the effects of a significant financing component if it expects, at contract inception, that the period between when it transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.

Instances when SFC assessment may be carried out include where the Company receives advance payment for agreed volumes of crude oil or receives take or pay deficiency payment on gas sales. Take or pay gas sales contract ideally provides that the customer must sometimes pay for gas even when not delivered to the customer. The customer, in future contract years, takes delivery of the product without further payment. The portion of advance payments that represents significant financing component will be recognised as interest expense.

Consideration payable to a customer is accounted for as a reduction of the transaction price and, therefore, of revenue unless the payment to the customer is in exchange for a distinct good or service that the customer transfers to the Company. Examples include barging costs incurred, demurrage and freight costs. These do not represent a distinct service transferred and is therefore recognised as a direct deduction from revenue.

Breakage

The Company enters into take or pay contracts for sale of gas where the buyer may not ultimately exercise all of their rights to the gas. The take or pay quantity not taken is paid for by buyer called take or pay deficiency payment. The Company assesses if there is a reasonable assurance that it will be entitled to a breakage amount. Where it establishes that a reasonable assurance exists, it recognises the expected breakage amount as revenue in proportion to the pattern of rights exercised by the customer. However, where the Company is not reasonably assured of a breakage amount, it would only recognise the expected breakage amount as revenue when the likelihood of the customer exercising its remaining rights becomes remote.

Contract modification and contract combination

Contract modifications relate to a change in the price and/or scope of an approved contract. Where there is a contract modification, the Company assesses if the modification will create a new contract or change the existing enforceable rights and obligations of the parties to the original contract.

Contract modifications are treated as new contracts when the performance obligations are separately identifiable and transaction price reflects the standalone selling price of the crude oil or the gas to be sold. Revenue is adjusted prospectively when the crude oil or gas transferred is separately identifiable and the price does not reflect the standalone selling price.

The Company enters into new contracts with its customers only on the expiry of the old contract. In the new contracts, prices and scope may be based on terms in the old contract. In gas contracts, prices change over the course of time. Even though gas prices change over time, the changes are based on agreed terms in the initial contract i.e. price change due to consumer price index. The change in price is therefore not a contract modifications. Any other change expected to arise from the modification of a contract is implemented in the new contracts.

The Company combines contracts entered into at near the same time (less than 12 months) as one contract if they are entered into with the same or related party customer, the performance obligations are the same for the contracts and the price of one contract depends on the other contract.

Portfolio expedients

As a practical expedient, the Company may apply the requirements of IFRS 15 to a portfolio of contracts (or performance obligations) with similar characteristics if it expects that the effect on the financial statements would not be materially different from applying IFRS to individual contracts within that portfolio.

Contract assets and liabilities

The Company recognises contract assets for unbilled amounts from crude oil and gas sales. Contract liability is recognised for consideration received for which performance obligation has not been met.

Disaggregation of revenue from contract with customers

The Company derives revenue from two types of products, oil and gas. The Company has determined that the disaggregation of revenue based on the criteria of type of products meets the disaggregation of revenue disclosure requirement of IFRS 15. It depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. See further details in note 6.

3.5.2 Revenue recognition (policy prior to 1 January 2018)

Revenue arises from the sale of crude oil and gas. Revenue comprises the realised value of crude oil lifted by customers. Revenue is recognised when crude products are lifted by a third party (buyer) Free on Board ('FOB') at the Company's designated loading facility or lifting terminals. At the point of lifting, all risks and rewards are transferred to the buyer. Gas revenue is recognised when gas passes through the custody transfer point.

Overlift and underlift

The excess of the product sold during the period over the Company's ownership share of production is termed as an overlift and is accrued for as a liability and not as revenue. Conversely, an underlift is recognised as an asset and the corresponding revenue is also reported.

Overlifts and underlifts are initially measured at the market price of oil at the date of lifting, consistent with the measurement of the sale and purchase.

Subsequently, they are remeasured at the current market value. The change arising from this remeasurement is included in the profit or loss as revenue or cost of sales.

3.6 Property, plant and equipment

Oil and gas properties and other plant and equipment are stated at cost, less accumulated depreciation and accumulated impairment losses.

The initial cost of an asset comprises its purchase price or construction cost, any costs directly attributable to bringing the asset into operation, the initial estimate of any decommissioning obligation and, for qualifying assets, borrowing costs. The purchase price or construction cost is the aggregate amount paid and the fair value of any other consideration given to acquire the asset. Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment.

Expenditure on major maintenance refits or repairs comprises the cost of replacement assets or parts of assets, inspection costs and overhaul costs. Where an asset or part of an asset that was separately depreciated and is now written off is replaced and it is probable that future economic benefits associated with the item will flow to the entity, the expenditure is capitalised. Inspection costs associated with major maintenance programmes are capitalised and amortised over the period to the next inspection. Overhaul costs for major maintenance programmes are capitalised as incurred as long as these costs increase the efficiency of the unit or extend the useful life of the asset. All other maintenance costs are expensed as incurred.

Depreciation

Production and field facilities are depreciated on a unit-of-production basis over the estimated proved developed reserves. Assets under construction are not depreciated. Other property, plant and equipment are depreciated on a straight-line basis over their estimated useful lives. Depreciation commences when an asset is available for use. The depreciation rate for each class is as follows:

Plant and machinery

20%

Motor vehicles

25%

Office furniture and IT equipment

33.33%

Leasehold improvements

Over the unexpired portion of the lease

 

The expected useful lives and residual values of property, plant and equipment are reviewed on an annual basis and, if necessary, changes in useful lives are accounted for prospectively.

Gains or losses on disposal of property, plant and equipment are determined as the difference between disposal proceeds and carrying amount of the disposed assets. These gains or losses are included in profit or loss.

3.7.         Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale.

Borrowing costs consist of interest and other costs incurred in connection with the borrowing of funds. These costs may arise from; specific borrowings used for the purpose of financing the construction of a qualifying asset, and those that arise from general borrowings that would have been avoided if the expenditure on the qualifying asset had not been made. The general borrowing costs attributable to an asset's construction is calculated by reference to the weighted average cost of general borrowings that are outstanding during the period.

Investment income earned on the temporary investment of specific borrowings pending their expenditure on the qualifying assets is deducted from the borrowing costs eligible for capitalisation. All other borrowing costs are recognised in profit or loss in the period in which they are incurred.

3.8.         Finance income and costs

Finance income

Finance income is recognised in the statement of profit or loss as it accrues using the effective interest rate (EIR), which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the amortised cost of the financial instrument. The determination of finance income takes into account all contractual terms of the financial instrument as well as any fees or incremental costs that are directly attributable to the instrument and are an integral part of the effective interest rate (EIR), but not future credit losses.

Finance cost

Finance costs includes borrowing costs, interest expense calculated using the effective interest rate method, finance charges in respect of lease liabilities, the unwinding of the effect of discounting provisions, and the amortisation of discounts and premiums on debt instruments that are liabilities.

3.9.         Impairment of non-financial assets

Goodwill and intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment, or more frequently. Other non -financial assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Individual assets are grouped for impairment assessment purposes at the lowest level at which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. This should be at a level not higher than an operating segment.

If any such indication of impairment exists or when annual impairment testing for an asset group is required, the entity makes an estimate of its recoverable amount. Such indicators include changes in the Company's business plans, changes in commodity prices, evidence of physical damage and, for oil and gas properties, significant downward revisions of estimated recoverable volumes or increases in estimated future development expenditure.

The recoverable amount is the higher of an asset's fair value less costs of disposal ('FVLCD') and value in use ('VIU'). The recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or group of assets, in which case, the asset is tested as part of a larger cash generating unit to which it belongs. Where the carrying amount of an asset group exceeds its recoverable amount, the asset group is considered impaired and is written down to its recoverable amount.

Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at the end of each reporting period.

In calculating VIU, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset/CGU. In determining FVLCD, recent market transactions are taken into account. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded companies or other available fair value indicators.

Impairment - exploration and evaluation assets

Exploration and evaluation assets are tested for impairment once commercial reserves are found before they are transferred to oil and gas assets, or whenever facts and circumstances indicate impairment. An impairment loss is recognised for the amount by which the exploration and evaluation assets' carrying amount exceeds their recoverable amount. The recoverable amount is the higher of the exploration and evaluation assets' fair value less costs to sell and their value in use.

Impairment - proved oil and gas production properties

Proven oil and gas properties are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs of disposal and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows.

3.10.      Cash and bank balances

Cash and bank balances in the statement of cash flows comprise cash at banks and at hand and short-term deposits with an original maturity of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. Please see note 3.13.1(b) for accounting policies on impairment of cash and bank balances.

3.11.      Inventories

Inventories represent the value of tubulars, casings and wellheads. These are stated at the lower of cost and net realisable value. Cost is determined using the invoice value and all other directly attributable costs to bringing the inventory to the point of use determined on a first in first out basis. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated cost necessary to make the sale.

3.12.      Segment reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker.

The Board of directors has appointed a steering committee which assesses the financial performance and position of the Company, and makes strategic decisions. The steering committee, which has been identified as the chief operating decision maker, consists of the chief financial officer, the general manager (Finance), the general manager (Gas) and the financial reporting manager. See further details in note 6.

3.13.      Financial instruments

3.13.1.   Financial instruments (policy from 1 January 2018)

 

The Company's accounting policies were changed to comply with IFRS 9. IFRS 9 replaces the provisions of IAS 39 that relate to the recognition, classification and measurement of financial assets and financial liabilities; derecognition of financial instruments; impairment of financial assets and hedge accounting. IFRS 9 also significantly amends other standards dealing with financial instruments such as IFRS 7 Financial Instruments: Disclosures.

j)      Classification and measurement

Financial assets

It is the Company's policy to initially recognise financial assets at fair value plus transaction costs, except in the case of financial assets recorded at fair value through profit or loss which are expensed in profit or loss.

Classification and subsequent measurement is dependent on the Company's business model for managing the asset and the cashflow characteristics of the asset. On this basis, the Company may classify its financial instruments at amortised cost, fair value through profit or loss and at fair value through other comprehensive income.

All the Company's financial assets as at 31 December 2018 satisfy the conditions for classification at amortised cost under IFRS 9 except derivative financial instruments which is measured at fair value through profit or loss.

 

The Company's financial assets include trade receivables, NPDC receivables, intercompany receivables, other receivables, derivative financial instruments and cash and bank balances. They are included in current assets, except for maturities greater than 12 months after the reporting date. Interest income from these assets is included in finance income using the effective interest rate method. Any gain or loss arising on derecognition is recognised directly in profit or loss and presented in finance income/cost.

Financial liabilities

Financial liabilities of the Company are classified and measured at fair value on initial recognition and subsequently at amortised cost net of directly attributable transaction costs, except for derivatives which are classified and subsequently recognised at fair value through profit or loss.

Fair value gains or losses for financial liabilities designated at fair value through profit or loss are accounted for in profit or loss except for the amount of change that is attributable to changes in the Company's own credit risk which is presented in other comprehensive income. The remaining amount of change in the fair value of the liability is presented in profit or loss. The Company's financial liabilities include trade and other payables and interest bearing loans and borrowings.

k)     Impairment of financial assets

Recognition of impairment provisions under IFRS 9 is based on the expected credit loss (ECL) model. The ECL model is applicable to financial assets classified at amortised cost and contract assets under IFRS 15: Revenue from Contracts with Customers. The measurement of ECL reflects an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes, time value of money and reasonable and supportable information that is available without undue cost or effort at the reporting date, about past events, current conditions and forecasts of future economic conditions.

The simplified approach is applied for trade receivables and contract assets while the general approach is applied to NPDC receivables, cash and bank balances, and other receivables.

The simplified approach requires expected lifetime losses to be recognised from initial recognition of the receivables. This involves determining the expected loss rates using a provision matrix that is based on the Company's historical default rates observed over the expected life of the receivable and adjusted forward-looking estimates. This is then applied to the gross carrying amount of the receivable to arrive at the loss allowance for the period.

The three-stage approach assesses impairment based on changes in credit risk since initial recognition using the past due criterion and other qualitative indicators such as increase in political concerns or other macroeconomic factors and the risk of legal action, sanction or other regulatory penalties that may impair future financial performance. Financial assets classified as stage 1 have their ECL measured as a proportion of their lifetime ECL that results from possible default events that can occur within one year, while assets in stage 2 or 3 have their ECL measured on a lifetime basis.

Under the three-stage approach, the ECL is determined by projecting the probability of default (PD), loss given default (LGD) and exposure at default (EAD) for each ageing bucket and for each individual exposure. The PD is based on default rates determined by external rating agencies for the counterparties. The LGD is determined based on management's estimate of expected cash recoveries after considering the historical pattern of the receivable, assesses the portion of the outstanding receivable that is deemed to be irrecoverable at the reporting period. The EAD is the total amount of outstanding receivable at the reporting period. These three components are multiplied together and adjusted for forward looking information, such as the gross domestic product (GDP) in Nigeria and crude oil prices, to arrive at an ECL which is then discounted back to the reporting date and summed. The discount rate used in the ECL calculation is the original effective interest rate or an approximation thereof.

Loss allowances for financial assets measured at amortised cost are deducted from the gross carrying amount of the related financial assets and the amount of the loss is recognised in profit or loss.

l)     Significant increase in credit risk and default definition

The Company assesses the credit risk of its financial assets based on the information obtained during periodic review of publicly available information, industry trends and payment records. Based on the analysis of the information provided, the Company identifies the assets that require close monitoring.

 

Furthermore, financial assets that have been identified to be more than 30 days past due on contractual payments are assessed to have experienced significant increase in credit risk. These assets are grouped as part of Stage 2 financial assets where the three-stage approach is applied.

 

In line with the Company's credit risk management practices, a financial asset is defined to be in default when contractual payments have not been received at least 90 days after the contractual payment period. Subsequent to default, the Company carries out active recovery strategies to recover all outstanding payments due on receivables. Where the Company determines that there are no realistic prospects of recovery, the financial asset and any related loss allowance is written off either partially or in full.

m)   Derecognition

Financial assets

The Company derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire or when it transfers the financial asset and the transfer qualifies for derecognition. Gains or losses on derecognition of financial assets are recognised as finance income/cost.

Financial liabilities

The Company derecognises a financial liability when it is extinguished i.e. when the obligation specified in the contract is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised immediately in the statement of profit or loss.

n)    Modification

When the contractual cash flows of a financial instrument are renegotiated or otherwise modified and the renegotiation or modification does not result in the derecognition of that financial instrument, the Company recalculates the gross carrying amount of the financial instrument and recognises a modification gain or loss immediately within finance income/(cost)-net at the date of the modification. The gross carrying amount of the financial instrument is recalculated as the present value of the renegotiated or modified contractual cash flows that are discounted at the financial instrument's original effective interest rate.

o)    Offsetting of financial assets and financial liabilities

Financial assets and liabilities are offset and the net amount is reported in the statement of financial position. Offsetting can be applied when there is a legally enforceable right to offset the recognised amounts, and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously.

The legally enforceable right is not contingent on future events and is enforceable in the normal course of business, and in the event of default, insolvency or bankruptcy of the Company or the counterparty.

p)    Derivatives

The Company uses derivative financial instruments such as forward exchange contracts to hedge its foreign exchange, risks as well as put options to hedge against its oil price risk. However, such contracts are not accounted for as designated hedges. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and subsequently remeasured to their fair value at the end of each reporting period. Any gains or losses arising from changes in the fair value of derivatives are recognised within operating profit in profit or loss for the period. An analysis of the fair value of derivatives is provided in Note 5, Financial risk Management.

The Company accounts for financial assets with embedded derivatives (hybrid instruments) in their entirety on the basis of its contractual cash flow features and the business model within which they are held, thereby eliminating the complexity of bifurcation for financial assets. For financial liabilities, hybrid instruments are bifurcated into hosts and embedded features. In these cases, the Company measures the host contract at amortised cost and the embedded features is measured at fair value through profit or loss.

For the purpose of the maturity analysis, embedded derivatives included in hybrid financial instruments are not separated. The hybrid instrument, in its entirety, is included in the maturity analysis for non-derivative financial liabilities.

q)    Fair value of financial instruments

The Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When available, the Company measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily available and represent actual and regularly occurring market transactions on an arm's length basis.

If a market for a financial instrument is not active, the Company establishes fair value using valuation techniques. Valuation techniques include using recent arm's length transactions between knowledgeable, willing parties (if available), reference to the current fair value of other instruments that are substantially the same, and discounted cash flow analysis. The chosen valuation technique makes maximum use of market inputs, relies as little as possible on estimates specific to the Company, incorporates all factors that market participants would consider in setting a price, and is consistent with accepted economic methodologies for pricing financial instruments.

Inputs to valuation techniques reasonably represent market expectations and measure the risk-return factors inherent in the financial instrument. The Company calibrates valuation techniques and tests them for validity using prices from observable current market transactions in the same instrument or based on other available observable market data.

The best evidence of the fair value of a financial instrument at initial recognition is the transaction price - i.e. the fair value of the consideration given or received. However, in some cases, the fair value of a financial instrument on initial recognition may be different to its transaction price. If such fair value is evidenced by comparison with other observable current market transactions in the same instrument (without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets, then the difference is recognised in the income statement on initial recognition of the instrument. In other cases, the difference is not recognised in the income statement immediately but is recognised over the life of the instrument on an appropriate basis or when the instrument is redeemed, transferred or sold, or the fair value becomes observable.

3.13.2.   Financial instruments (Policy prior to 1 January 2018)

e)    Financial assets

i)     Financial assets initial recognition and measurement 

The Company determines the classification of its financial assets at initial recognition.

All financial assets are recognised initially at fair value plus transaction costs, except in the case of financial assets recorded at fair value through profit or loss which do not include transaction costs. The Company's financial assets include cash and short-term deposits, trade and other receivables, favourable derivatives, intercompany receivables and other receivables.

ii )  Subsequent measurement

The subsequent measurement of financial assets depends on their classification, as follows:

Trade and other receivables

Trade and other receivables, which are non-derivative financial assets that have fixed or determinable payments that are not quoted in an active market, are classified as loans and receivables. They are included in the current assets, except for maturities greater than 12 months after the reporting date. The Company's receivables comprised of trade and other receivables in the historical financial information.

Loans and receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest rate method net of any impairment.

A provision for impairment of trade receivables is established when there is objective evidence that the Company will not be able to collect all the amounts due according to the original terms of the receivable.

Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation and default or delinquency in payments are considered as indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate.

The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in profit or loss. When a trade is uncollectable, it is written off against the allowance account for trade receivables.

iii)           Impairment of financial assets

The Company assesses at each reporting date whether there is objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if there is objective evidence of impairment as a result of one or more events that has occurred since the initial recognition of the asset (an incurred loss event) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtor or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation and observable data indicating that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

iv)            Derecognition of financial assets

A financial asset is derecognised when the contractual rights to the cash flows from the financial asset expire. When an existing financial assets is transferred, the transfer qualifies for derecognition if the Company transfers the contractual rights to receive the cash flows of the financial asset or retains the contractual rights to receive the cash flows of the financial asset, but assumes a contractual obligation to pay the cash flows to one or more recipients in an arrangement.

f)     Financial liabilities

Financial liabilities in the scope of IAS 39 are classified as financial liabilities at fair value through profit or loss, and financial liabilities at amortised cost as appropriate. The Company determines the classification of its financial liabilities at initial recognition.

iii)            Financial liabilities initial recognition and measurement 

All financial liabilities are recognised initially at fair value and, in the case of loans and borrowings, net of directly attributable transaction costs.

The Company's financial liabilities include trade and other payables, and interest bearing loans and borrowings.

iv)            Subsequent measurement

The measurement of financial liabilities depends on their classification as described below:

Trade payables

Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Trade payables are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities.

Trade payables are recognised initially at fair value and subsequently measured at amortised cost using effective interest method.

Interest bearing loans and borrowings

Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently carried at amortised cost while any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the statement of profit or loss over the period of borrowings using the effective interest method.

Fees paid on establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw down occurs. To the extent that there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a pre-payment for liquidity services and amortised over the period of the facility to which it relates.

v)             Derecognition of financial liabilities 

A financial liability is derecognised when the associated obligation is discharged or cancelled or expired. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the statement of profit or loss.

g)     Derivative financial instruments

The Company uses derivative financial instruments, such as forward exchange contracts, to hedge its foreign exchange risks as well as put options to hedge against its oil price risk. However, such contracts are not accounted for as designated hedges. Derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative. Any gains or losses arising from changes in the fair value of derivatives are taken directly to profit or loss and presented within operating profit.

Commodity contracts that were entered into and continue to be held for the purpose of the receipt or delivery of a non-financial item in accordance with the Company's expected purchase, sale or usage requirements fall within the exemption from IAS 32 and IAS 39, which is known as the 'normal purchase or sale exemption'. For these contracts and the host part of the contracts containing embedded derivatives, they are accounted for as executory contracts. The Company recognises such contracts in its statement of financial position only when one of the parties meets its obligation under the contract to deliver either cash or a non-financial asset. An analysis of fair values of financial instruments and further details as to how they are measured are provided in Note 5 financial risk management.

h)    Fair value of financial instruments

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When available, the Company measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily available and represent actual and regularly occurring market transactions on an arm's length basis.

If a market for a financial instrument is not active, the Company establishes fair value using valuation techniques. Valuation techniques include using recent arm's length transactions between knowledgeable, willing parties (if available), reference to the current fair value of other instruments that are substantially the same, and discounted cash flow analysis. The chosen valuation technique makes maximum use of market inputs, relies as little as possible on estimates specific to the Company, incorporates all factors that market participants would consider in setting a price, and is consistent with accepted economic methodologies for pricing financial instruments.

Inputs to valuation techniques reasonably represent market expectations and measures of the risk-return factors inherent in the financial instrument. The Company calibrates valuation techniques and tests them for validity using prices from observable current market transactions in the same instrument or based on other available observable market data.

The best evidence of the fair value of a financial instrument at initial recognition is the transaction price - i.e. the fair value of the consideration given or received. However, in some cases, the fair value of a financial instrument on initial recognition may be different to its transaction price. If such fair value is evidenced by comparison with other observable current market transactions in the same instrument (without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets, then the difference is recognised in the income statement on initial recognition of the instrument. In other cases, the difference is not recognised in the income statement immediately but is recognised over the life of the instrument on an appropriate basis or when the instrument is redeemed, transferred or sold, or the fair value becomes observable.

3.14.      Share capital

On issue of ordinary, shares any consideration received net of any directly attributable transaction costs is included in equity. Shares held by the Company are disclosed as treasury shares and deducted from equity. Issued share capital has been translated at the exchange rate prevailing at the date of the transaction and is not retranslated subsequent to initial recognition.

3.15.      Earnings and dividends per share

Basic EPS

Basic earnings per share is calculated on the Company's profit or loss after taxation attributable to the company and on the basis of weighted average of issued and fully paid ordinary shares at the end of the year.

Diluted EPS

Diluted EPS is calculated by dividing the profit or loss after taxation attributable to the company by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on conversion of all the dilutive potential ordinary shares (after adjusting for outstanding share options arising from the share based payment scheme) into ordinary shares.

Dividend

Dividends on ordinary shares are recognised as a liability in the period in which they are approved.

3.16.      Post-employment benefits

Defined contribution scheme

The Company contributes to a defined contribution scheme for its employees in compliance with the provisions of the Pension Reform Act 2014. The scheme is fully funded and is managed by licensed Pension Fund Administrators. Membership of the scheme is automatic upon commencement of duties at the Company. The Company's contributions to the defined contribution scheme are charged to the profit and loss account in the year to which they relate.

Employee benefits are all forms of consideration given by an entity in exchange for service rendered by employees or for the termination of employment. The Company operates a defined contribution plan and it is accounted for based on IAS 19 Employee benefits.

Defined contribution plans are post-employment benefit plans under which an entity pays fixed contributions into a separate entity (a fund) and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods. Under defined contribution plans the entity's legal or constructive obligation is limited to the amount that it agrees to contribute to the fund.

Thus, the amount of the post-employment benefits received by the employee is determined by the amount of contributions paid by an entity (and perhaps also the employee) to a post-employment benefit plan or to an insurance company, together with investment returns arising from the contributions. In consequence, actuarial risk (that benefits will be less than expected) and investment risk (that assets invested will be insufficient to meet expected benefits) fall, in substance, on the employee.

Defined benefit scheme

The Company operates a defined benefit gratuity plan, which requires contributions to be made to a separately administered fund. The Company also provides certain additional post-employment benefits to employees. These benefits are unfunded.

The cost of providing benefits under the defined benefit plan is determined using the projected unit credit method and calculated annually by independent actuaries. The liability or asset recognised in the balance sheet in respect of the defined benefit plan is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets (if any). The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using government bonds.

Remeasurements gains and losses, arising from changes in financial and demographic assumptions and experience adjustments, are recognised immediately in the statement of financial position with a corresponding debit or credit to retained earnings through OCI in the period in which they occur. Remeasurements are not reclassified to profit or loss in subsequent periods.

Past service costs are recognised in profit or loss on the earlier of:

·      The date of the plan amendment or curtailment; and

·      The date that the Company recognises related restructuring costs.

Net interest is calculated by applying the discount rate to the net defined benefit obligation and the fair value of the plan assets.

The Company recognises the following changes in the net defined benefit obligation under employee benefit expenses in general and administrative expenses.

·      Service costs comprises current service costs, past-service costs, gains and losses on curtailments and non-routine settlements.

·      Net interest cost

 

3.17.      Provisions

Provisions are recognised when (i) the Company has a present legal or constructive obligation as a result of past events; (ii) it is probable that an outflow of economic resources will be required to settle the obligation as a whole; and (iii) the amount can be reliably estimated. Provisions are not recognised for future operating losses.

In measuring the provision:

risks and uncertainties are taken into account;

the provisions are discounted (where the effects of the time value of money is considered to be material) using a pretax rate that is reflective of current market assessments of the time value of money and the risk specific to the liability;

when discounting is used, the increase of the provision over time is recognised as interest expense;

future events such as changes in law and technology, are taken into account where there is subjective audit evidence that they will occur; and

gains from expected disposal of assets are not taken into account, even if the expected disposal is closely linked to the event giving rise to the provision.

Decommissioning        

Liabilities for decommissioning costs are recognised as a result of the constructive obligation of past practice in the oil and gas industry, when it is probable that an outflow of economic resources will be required to settle the liability and a reliable estimate can be made. The estimated costs, based on current requirements, technology and price levels, prevailing at the reporting date, are computed based on the latest assumptions as to the scope and method of abandonment.

Provisions are measured at the present value of management's best estimates of the expenditure required to settle the present obligation at the end of the reporting period. The discount rate used to determine the present value is a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The increase in the provision due to the passage of time is recognised as a finance cost. The corresponding amount is capitalised as part of the oil and gas properties and is amortised on a unit-of-production basis as part of the depreciation, depletion and amortisation charge. Any adjustment arising from the estimated cost of the restoration and abandonment cost is capitalised, while the charge arising from the accretion of the discount applied to the expected expenditure is treated as a component of finance costs.

If the change in estimate results in an increase in the decommissioning provision and, therefore, an addition to the carrying value of the asset, the Company considers whether this is an indication of impairment of the asset as a whole, and if so, tests for impairment in accordance with IAS 36. If, for mature fields, the revised oil and gas assets net of decommissioning provisions exceed the recoverable value, that portion of the increase is charged directly to expense.

3.18.      Contingencies

A contingent asset or contingent liability is a possible asset or obligation that arises from past events and whose existence will be confirmed by the occurrence or non-occurrence of uncertain future events. The assessment of the existence of the contingencies will involve management judgement regarding the outcome of future events.

3.19.      Income taxation

i)     Current income tax

The tax expense for the period comprises current and deferred tax. Tax is recognised in the statement of profit or loss and other comprehensive income, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity.

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the country where Company operates and generates taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulations are subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.

Taxation on crude oil activities is provided in accordance with the Petroleum Profits Tax Act ('PPTA') CAP. P13 Vol. 13 LFN 2004 and on gas operations in accordance with the Companies Income Tax Act ('CITA') CAP. C21 Vol. 3 LFN 2004. Education tax is assessed at 2% of the assessable profits.

ii) Deferred tax

Deferred tax is recognised, using the liability method, on temporary differences arising between the carrying amounts of assets and liabilities in the historical financial information and the corresponding tax bases used in the computation of taxable profit.

A deferred income tax charge is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such deferred tax assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. 

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.

iii)           New tax regime

During the year 2013, applications were made by Seplat for the tax incentives available under the provisions of the Industrial Development (Income Tax Relief) Act. In February 2014, Seplat was granted the incentives in respect of the tax treatment of OMLs 4, 38 and 41. Under these incentives, the Company's profits were subject to a tax rate of 0% with effect from 1 January 2013 to 31 December 2015 in the first instance and then for an additional two years if certain conditions included in the Nigerian Investment Promotion Commission (NIPC) pioneer status award document were met. After the expiration of the initial three years, the company considered the extension and concluded that it would be of no benefit to the business.

In May 2015, in line with Sections of the Companies Income Tax Act which provides incentives to companies that deliver gas utilisation projects, Seplat was granted a tax holiday for three years with a possible extension of two years. In 2018, on review of the performance of the business, the Company provided a notification to the Federal Inland Revenue Service (FIRS) for the extension of claim for the additional two years tax holiday.

3.20.      Leases

The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at the inception date. The arrangement is assessed for whether fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset or assets, even if that right is not explicitly specified in an arrangement.

Leases in which a significant portion of the risks and rewards of ownership are not transferred to the Company as lessee are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to profit or loss on a straight-line basis over the period of the lease.

3.21.      Share based payments

Employees (including senior executives) of the Company receive remuneration in the form of share-based payments, whereby employees render services as consideration for equity instruments (equity-settled transactions).

i)             Equity-settled transactions

The cost of equity-settled transactions is determined by the fair value at the date when the grant is made using an appropriate valuation model.

That cost is recognised in employee benefits expense together with a corresponding increase in equity (share based payment reserve), over the period in which the service and, where applicable, the performance conditions are fulfilled (the vesting period). The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Company's best estimate of the number of equity instruments that will ultimately vest. The expense or credit in profit or loss for a period represents the movement in cumulative expense recognised as at the beginning and end of that period.

Service and non-market performance conditions are not taken into account when determining the grant date and for fair value of awards, but the likelihood of the conditions being met is assessed as part of the Company's best estimate of the number of equity instruments that will ultimately vest. Market performance conditions are reflected within the grant date fair value. Any other conditions attached to an award, but without an associated service requirement, are considered to be non-vesting conditions. Non-vesting conditions are reflected in the fair value of an award and lead to an immediate expensing of an award unless there are also service and/or performance conditions.

No expense is recognised for awards that do not ultimately vest because non-market performance and/or service conditions have not been met. Where awards include a market or non-vesting condition, the transactions are treated as vested irrespective of whether the market or non-vesting condition is satisfied, provided that all other performance and/or service conditions are satisfied. When the terms of an equity-settled award are modified, the minimum expense recognised is the grant date fair value of the unmodified award, provided the original terms of the award are met. An additional expense, measured as at the date of modification, is recognised for any modification that increases the total fair value of the share-based payment transaction, or is otherwise beneficial to the employee. Where an award is cancelled by the entity or by the counterparty, any remaining element of the fair value of the award is expensed immediately through profit or loss. The dilutive effect of outstanding awards is reflected as additional share dilution in the computation of diluted earnings per share.

4.    Significant accounting judgements, estimates and assumptions

The preparation of the Company's historical financial information requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the accompanying disclosures, and the disclosure of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods.

4.1. Judgements

In the process of applying the Company's accounting policies, management has made the following judgements, which have the most significant effect on the amounts recognised in the historical financial information:

i)             OMLs 4, 38 and 41

OMLs 4, 38, 41 are grouped together as a cash generating unit for the purpose of impairment testing. These three OMLs are grouped together because they each cannot independently generate cash flows. They currently operate as a single block sharing resources for the purpose of generating cash flows. Crude oil and gas sold to third parties from these OMLs are invoiced when the company has an unconditional right to receive payment.

ii)            New tax regime

Effective 1 January 2013, the Company was granted the inter tax status incentive by the Nigerian Investment Promotion Commission for an initial three-year period and a further two-year period on approval. For the period the incentive applies, the Company was exempted from paying petroleum profits tax on crude oil profits (at 85%), corporate income tax on natural gas profits (currently taxed at 30%) and education tax of 2%. After the expiration of the initial three years, the company considered the extension and concluded that it would be of no benefit to the business.

In May 2015, in line with Sections of the Companies Income Tax Act which provides incentives to companies that deliver gas utilisation projects, Seplat was granted a tax holiday for three years with a possible extension of two years. In 2018, on review of the performance of the business, the Company provided a notification to the Federal Inland Revenue Service (FIRS) for the extension of claim for the additional two years tax holiday.

The impact of the tax holiday has been considered in calculating the current income tax and deferred tax asset recognised in the financial statements.

iii)           Deferred tax asset

Deferred tax assets are recognised for tax losses carried forward to the extent that the realisation of the related tax benefit through future taxable profits is probable. See further details in note 15.

iv)            Foreign currency translation reserve

The Company has used the CBN rate to translate its Dollar currency to its Naira presentation currency. Management has determined that this rate is available for immediate delivery. If the rate used was 10% higher or lower, revenue in Naira would have increased/decreased by 21.7 billion (2017: 12.8 billion). See note 45 for the applicable translation rate.

v)             Revenue recognition

Definition of contracts

The Company has entered into a non-contractual promise with PanOcean where it allows Panocean to pass crude oil through its pipelines from a field just above Seplat's to the terminal for loading. Management has determined that the non-existence of an enforceable contract with Panocean means that it ma