Effective January 1, 2011, the Company has begun reporting its financial results in accordance with International Financial Reporting Standards (IFRS).
The transition from Canadian generally accepted accounting principles (Canadian GAAP) to IFRS has been mandated for all Canadian publicly traded companies.
The transition to IFRS has resulted in changes to certain accounting practices. These were discussed in detail in Note 24 in the 2010 Annual Consolidated Financial Statements. The Company would like to provide information on the new practices that will result in substantial changes to the reporting of financial results, as well as guidance on the likely impacts of those changes. While the changes will impact retained earnings and net earnings, there will be no change to reported cash flow.
Under Canadian GAAP, Husky followed the full cost method of accounting for oil and gas interests, whereby all costs of acquisition, exploration for, and development of oil and gas reserves were capitalized and accumulated within cost centres on a country-by-country basis. Under IFRS, pre-licensing and certain exploration costs are expensed as incurred.
After the legal right to explore is acquired, acquisition costs and expenditures directly associated with exploratory wells are capitalized as exploration and evaluation assets. Exploratory wells remain capitalized until the drilling operation is completed and the results have been evaluated.
If a well does not encounter commercial quantities of reserves, either on its own or in combination with other wells in an area of exploration, the costs of drilling the well or wells are expensed. Wells that are successful, resulting in commercial quantities of reserves, remain capitalized and are reclassified into property, plant and equipment.
Under Canadian GAAP, Husky pooled proved properties in cost centres and accounted for depletion at a country level. Under IFRS, depletion is accounted for at an individual field level.
Under Canadian GAAP, impairment of long-lived assets was assessed on the basis of an asset’s estimated undiscounted future cash flows, compared with the asset’s book value. If impairment is indicated, discounted cash flows quantified the amount of the impairment.
Under IFRS, impairment is assessed by comparing discounted cash flows with an asset’s book value to determine the recoverable amount and to measure the amount of the impairment. Companies must also segregate their assets into separate cash generating units for the purposes of determining impairment, whereas under Canadian GAAP, assets could be grouped and assessed for impairment on a country-by-country basis.
In the reporting of its 2010 financial results, the Company prepared comparative financial statements showing results under Canadian GAAP and under IFRS. Under IFRS, the Company reported a reduction in retained earnings of $959 million for the year ended December 31, 2010, and a reduction in net earnings of $226 million.
For 2011, the Company is estimating the transition to IFRS will result in a reduction to net earnings in the range of $200 to $275 million as compared to Canadian GAAP reporting.
More information on the impacts of transitioning to IFRS, may be found in Note 24 in our 2010 Annual Consolidated Financial Statements