ANNUAL REPORT 2011 - DONG Energy

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