ANNUAL REPORT 2011 - DONG Energy
ANNUAL REPORT 2011 - DONG Energy
ANNUAL REPORT 2011 - DONG Energy
Create successful ePaper yourself
Turn your PDF publications into a flip-book with our unique Google optimized e-Paper software.
02 Critical accounting estimates and judgements<br />
In the process of preparing the consolidated fi nancial statements,<br />
management makes a number of estimates and<br />
judgements that affect the reported amounts of assets and<br />
liabilities at the balance sheet date, the reported amounts of<br />
income and expenses in the reporting period and disclosures<br />
on contingent assets and contingent liabilities at the balance<br />
sheet date.<br />
Estimation uncertainties<br />
Estimates made are based on historical experience and other<br />
factors that are believed by management to be reasonable<br />
under the circumstances, but that, by their nature, are uncertain<br />
and unpredictable. The effect of such estimates and<br />
judgements may lead to results that differ signifi cantly from<br />
those that would result from the use of other judgements and<br />
assumptions.<br />
Again in <strong>2011</strong>, the international fi nancial crisis led to heightened<br />
focus on the estimates made in respect of, for example,<br />
discount rates and expectations concerning the future development<br />
of energy prices and exchange rates to ensure that<br />
the consolidated fi nancial statements are not affected by<br />
short-term fl uctuations that are not expected to apply in the<br />
long term.<br />
Estimates and judgements relating to impairment testing<br />
of intangible assets and property, plant and equipment, and<br />
relating to recoverable oil and gas reserves, have had a signifi -<br />
cant effect on the consolidated fi nancial statements for <strong>2011</strong>.<br />
These areas are described in the following.<br />
impairment testing<br />
<strong>DONG</strong> <strong>Energy</strong> has signifi cant investments in intangible assets<br />
and property, plant and equipment, including primarily<br />
production assets, DKK 65.4 billion (2010: DKK 57.5 billion),<br />
the values of which are sensitive to various factors, including<br />
changes in energy prices, exchange rates, interest rates and<br />
regulatory provisions.<br />
Goodwill and in-process development projects, DKK 0.4 billion<br />
(2010: DKK 0.7 billion), are tested annually for impairment.<br />
Other intangible assets and property, plant and equipment<br />
are tested if there are any indications of impairment. Such<br />
indications may include, for example, long-term changes in<br />
future market conditions, market prices of oil, gas, electricity,<br />
fuel and CO2 , changes in the weighted average cost of capital,<br />
reductions in estimated reserves, or changes in regulatory<br />
provisions.<br />
If a specifi c judgement indicates a possible impairment, and<br />
neither quoted market prices in active markets nor prices of<br />
similar assets are available, discounted cash fl ows are used<br />
to measure the recoverable amount to determine whether the<br />
value of the assets is impaired. The assumptions and criteria<br />
applied to determine the assets’ recoverable amounts constitute<br />
management’s best estimates based on the available<br />
information such as market prices, cost levels, revenue growth<br />
rates and reserve estimates.<br />
Determination of oil and gas reserves<br />
The evaluation of oil and gas reserves affects the assessment<br />
of the recoverable amount and depreciation profi le for <strong>DONG</strong><br />
<strong>Energy</strong>’s Exploration & Production’s assets, DKK 33.1 billion<br />
(2010: DKK 29.0 billion). The assessment of oil and gas<br />
reserves is based on estimates of both proved and probable<br />
reserves (Proved and Probable/2P). Proved reserves are the estimated<br />
volumes of oil and gas that, under existing economic<br />
conditions, are recoverable using known technology from<br />
reservoirs in which oil or gas has been proved. Oil and gas exploration<br />
and extraction technology is undergoing continuous<br />
development. Probable reserves are those additional reserves<br />
that are less likely to be recovered than proved reserves.<br />
<strong>DONG</strong> <strong>Energy</strong> conducts an annual internal evaluation and<br />
review of the Group’s reserves. An independent valuer has<br />
reviewed <strong>DONG</strong> <strong>Energy</strong>’s reserves classifi cation system and<br />
guidelines and has verifi ed that the internal guidelines are in<br />
agreement with the SPE-PRMS directives.<br />
useful lives and residual values for production assets<br />
The expected useful lives and residual values of production assets,<br />
DKK 65.4 billion (2010: DKK 57.5 billion), are determined<br />
based on historical experience and expectations concerning<br />
the future use of these assets. The depreciation profi le for<br />
production assets depends on the type of production asset<br />
and is described in note 40 in the complete annual report. The<br />
expected future applications and residual values may subsequently<br />
prove not to be realisable, which may require useful<br />
lives and residual values to be reviewed and may result in a<br />
need for the recognition of impairment losses or the charging<br />
of a loss on disposal of the assets. The depreciation periods<br />
applied are set out in note 40 in the complete annual report.<br />
investments in associates, other securities and equity<br />
investments, and other non-current investments<br />
Investments in associates, other securities and equity investments,<br />
and other non-current investments, DKK 7.1 billion in<br />
total (2010: DKK 6.6 billion), are tested for impairment if there<br />
are indications of impairment. Such indications may include<br />
changes in regulatory, fi nancial and technological factors and<br />
general market conditions.<br />
<strong>DONG</strong> ENERGY <strong>DONG</strong> ENERGY GROUP <strong>ANNUAL</strong> <strong>REPORT</strong> <strong>2011</strong> – COnsOliDatED finanCial statEmEnts<br />
69 73<br />
notes