ANNUAL REPORT 2011 - DONG Energy

The excess of the cost of the acquiree over the fair value of the
assets, liabilities and contingent liabilities acquired is recognised
as goodwill and allocated to the cash-generating units,
which subsequently form the basis for impairment testing. In
that connection, management makes estimates of acquired
and existing cash-generating units and the associated allocation
of goodwill.
Judgements in connection
with accounting policies
As part of the Group’s accounting policies, management
makes judgements, apart from those involving estimations,
that may have a signifi cant effect on the consolidated fi nancial
statements. These judgements primarily comprise a) choice
of recognition methods for exploration assets, b) recognition
and classifi cation of derivative fi nancial instruments and commodity
contracts, c) classifi cation of hybrid capital, d) jointly
controlled assets and entities, and e) business combinations.
accounting treatment of exploration
When capitalising exploration costs, DONG Energy applies
the successful efforts method rather than the full cost method.
Accordingly, general exploration costs and costs for unsuccessful
exploration wells are expensed as incurred. DONG
Energy will therefore have a lower value of exploration assets
than companies that apply the full cost method. At 31
December 2011, exploration assets amounted to DKK 1.6 billion
(2010: DKK 1.0 billion). Depreciation of production assets
that have been transferred from exploration assets will also be
lower when applying the successful efforts method than when
applying the full cost method.
accounting treatment of derivative fi nancial
instruments and commodity contracts
DONG Energy hedges commodity, currency and interest rate
risks. These hedging transactions predominantly relate to future
income from the sale of oil, gas and electricity, and costs
for the purchase of coal, gas and CO2. From and including 1
January 2011, new and existing commodity hedge transactions
and related foreign currency exposures are no longer accounted
for as cash fl ow hedge accounting.
As part of its fi nancial risk management, the Group enters into
transactions to hedge certain physical and fi nancial risks in oil,
gas, coal, electricity, CO2 and related currency exposures. The
Group considers the hedging transactions entered into on the
basis of its internal processes for optimisation of its purchase,
sale and consumption of oil, gas, coal, electricity and CO2 , as
effective economic hedges. Some of the hedging transactions
will meet IAS 39’s criteria for cash fl ow hedge accounting,
while others will not. For this reason, the Group has elected to
no longer apply the provisions on hedge accounting to these
transactions from 1 January 2011. When determining profi t for
the year, fair value adjustments to these derivative fi nancial
instruments are therefore recognised in the period in which
they arise, regardless of the date of realisation of the hedged
transaction. Value adjustments from fi nancial contracts therefore
have a greater impact on the income statement for 2011
than in previous years.
Contracts to which the Group is a party are reviewed to assess
whether they contain any components that are required to be
recognised and measured as separate fi nancial instruments.
The Group enters into contracts that include price formulas
that are indexed to various energy prices, commodity indices,
etc. Based on a review of these contracts, it has been judged
that the individual components of the contracts feature identical
characteristics and therefore do not differ signifi cantly.
Separation of the individual components of the contracts is
therefore not required, except in the case of the assessment of
hybrid capital.
Under IFRS, contracts that involve physical delivery must,
under certain circumstances, be accounted for as derivative
fi nancial instruments. The classifi cation is determined based
on an evaluation of the purpose of the contract compared
with the Group’s other activities. It is generally assumed that
those of the Group’s contracts that are settled on physical delivery
do not satisfy the criteria for classifi cation as derivative
fi nancial instruments, as they are normal purchase and sale
contracts. By contrast, contracts entered into in the course of
the Group’s trading activities or as part of certain hedging activities
are recognised as derivative fi nancial instruments, even
though they are settled on physical delivery.
accounting treatment of hybrid capital
Hybrid capital, DKK 9.5 billion (2010: DKK 8.1 billion), comprises
issued bonds that have been recognised in a special item
in equity due to the special characteristics of the loan and the
provisions on compound fi nancial instruments. Accordingly,
any coupon payments are accounted for as dividends that
are recognised directly in equity at the time the payment
obligation arises. This is because the coupon payments are
discretionary and relate to the part of the hybrid capital that
is recognised in equity. Coupon payments consequently do
not have any effect on profi t for the year and are recognised in
fi nancing activities in the statement of cash fl ows in the same
way as dividend payments.
Jointly controlled assets and entities
DONG Energy has opted to recognise the Group’s jointly
controlled assets and entities using proportionate consolidation.
These primarily comprise oil and gas exploration and
production licences, and wind farms and power stations. New
DONG ENERGY DONG ENERGY GROUP ANNUAL REPORT 2011 – COnsOliDatED finanCial statEmEnts
75 71
notes