- Talisman 2010 Highlights
- About Our Company
- Financial and Operating Highlights
- President's Message
- Where We Operate
- Looking to 2011
- Management's Discussion and Analysis
- 2010 Performance
- 2010 Net Income Variance
- Continuing Operations Review
- Acquisitions
- Discontinued Operations
- Reserves Replacement
- Liquidity and Capital Resources
- Sensitivities
- Commitments and Off-Balance Sheet Arrangements
- Risk Management
- Summary of Quarterly Results
- Outlook for 2011
- Internal Control Over Financial Reporting and Disclosure Controls and Procedures
- Litigation
- Application of Critical Accounting Policies and Use of Estimates
- Changes in Reporting Conventions
- New US Accounting Pronouncements
- New Regulatory Developments
- International Financial Reporting Standards (IFRS)
- Risk Factors
- Advisories
- Abbreviations and Definitions
- Consolidated Financial Statements
- Report of Management
- Management Report on Internal Control Over Financial Reporting
- Independent Auditors' Report on Internal Controls Under Standards of the Public Company Accounting Oversight Board (United States)
- Independent Auditors' Report of Registered Public Accounting Firm
- Consolidated Balance Sheets
- Consolidated Statements of Income
- Consolidated Statements of Comprehensive Income (Loss)
- Consolidated Statements of Changes in Shareholders' Equity
- Consolidated Statements of Cash Flows
- Notes to the Consolidated Financial Statements
- Supplementary Oil and Gas Information
- Results of Operations from Oil and Gas Producing Activities
- Capitalized Costs Relating to Oil and Gas Activities
- Costs Incurred in Oil and Gas Activities
- Standardized Measure of Discounted Future Net Cash Flows from Proved Reserves
- Discounted Future Net Cash Flows from Proved Reserves
- Principal Sources of Changes in Discounted Cash Flows
- Continuity of Net Proved Reserves 1
- Additional Information
- Detailed Property Reviews
- Governance
- Investor Information
- Corporate Information
- Advisories
- Market Information
In 2008, the Canadian Accounting Standards Board (AcSB) confirmed that IFRS will be required for interim and annual reporting by publicly accountable enterprises effective for January 1, 2011, including 2010 comparative information. The Company established a dedicated IFRS project team to address the conversion to IFRS that reports regularly to a steering committee, senior management and the Audit Committee. The project team is now in the final stages of concluding the conversion project.
The adoption of IFRS does not impact the underlying economics of Talisman’s operations or its cash flows. The most significant impacts will be from the application of new accounting policies that will reset the Company’s balance sheet, and financial statement presentational changes. Management is currently finalizing the adjustments required to the Company’s previously reported Canadian GAAP results of operations, cash flows and financial position to adopt IFRS.
Based on work performed to date, management anticipates resetting the Company’s previously reported December 31, 2009 balance sheet for changes in the carrying value of PP&E, current and long-term liabilities and retained earnings.
As a result of the changes in accounting policies with the adoption of IFRS, management anticipates adjusting the Company’s previously reported quarterly net income due principally to lower DD&A and accretion expense, unrealized foreign exchange gains and losses, deferred income taxes (referred to as future income taxes under Canadian GAAP), a change in the accounting for stock-based compensation and the timing of the recognition of gains and losses on the disposal of assets. The Company does not anticipate a change to the previously reported cash flows as a result of adopting IFRS except for a reclassification of exploration expense from an investing activity to an operating activity and a reclassification of financing charges from an operating to a financing activity.
Assets held for sale, previously reported as discontinued operations under Canadian GAAP, will no longer be classified as such under IFRS, which results in additional reclassifications on the financial statements between continuing and discontinued operations.
These adjustments are impacted by a number of exemptions permitted upon first time adoption as well as management’s choice of policies and assumptions, which are more fully described below.
IFRS 1 Exemptions
The general principle that should be applied on first-time adoption of IFRS is that standards in force at the first reporting date should be applied retrospectively. However, IFRS 1 First-time Adoption of International Financial Reporting Standards contains a number of exemptions which companies are permitted to apply. The Company has elected to apply the following exemptions:
- to measure certain properties at fair values and use those fair values as deemed cost;
- to apply a modified approach described in IFRS 1 to calculating the retrospective cost component of PP&E relating to the Company’s ARO;
- to not restate past business combinations that occurred before January 1, 2010;
- to not apply IFRS 2 Share-based Payments to awards that vested prior to January 1, 2010;
- to recognize cumulative unrecognized actuarial gains and losses on employee future benefits in opening retained earnings as at January 1, 2010; and
- to prospectively apply the Borrowing Costs standard from January 1, 2010, including the derecognition of capitalized borrowing costs recorded under Canadian GAAP at January 1, 2010.
In addition, the Company has determined not to reset its cumulative translation adjustment to nil.
During the fourth quarter of 2010, the Company:
- modified the accounting for stock options from the liability method (cash-settled awards) to the equity method (equity-settled awards) for Canadian based employees. This accounting change was a result of tax legislation changes to stock options announced by the Federal Government in March 2010 which made it highly tax inefficient for employees to settle for cash rather than shares. The Company communicated its intended policy on this matter to employees subsequent to the Federal Government announcement and the change in accounting was deemed to be effective July 1, 2010. As a result of this change, the fair value of the stock option liability at July 1, 2010 is transferred to shareholders’ equity and the unamortized value of the stock options not vested is expensed over the remaining vesting period. No further fair value revaluations are applied to options outstanding and new grants under the existing plan are also treated as equity settled instruments and recorded as part of shareholders’ equity;
- derecognized capitalized borrowing costs recorded under previous Canadian GAAP at January 1, 2010 as part of applying the IFRS 1 exemption to prospectively apply the Borrowing Costs standard from January 1, 2010; and
- incorporated necessary actions into the project plan to consider the impact of moving to US$ reporting effective January 1, 2011.
Estimated Impact on Reported Financial Position
The following information summarizes adjustments required to reset the opening balance sheet at January 1, 2010 on adoption of IFRS:
| (billions of C$) | Canadian GAAP | IFRS Adjustments | IFRS |
|---|---|---|---|
| Current assets | 3.2 | – | 3.2 |
| Long‑term assets | 20.4 | (2.6) to (2.8) | 17.6 to 17.8 |
| Total assets | 23.6 | (2.6) to (2.8) | 20.8 to 21.0 |
| Current liabilities | 2.6 | 0.2 to 0.3 | 2.8 to 2.9 |
| Long‑term liabilities | 9.9 | (1.0) to (1.2) | 8.7 to 8.9 |
| Equity | 11.1 | (1.7) to (1.9) | 9.2 to 9.4 |
| Total liabilities & equity | 23.6 | (2.6) to (2.8) | 20.8 to 21.0 |
Retained earnings are expected to decrease by approximately $1.8 billion as a result of the net after tax impact of adjustments to the opening balance sheet described below. These comprise approximately $1.2 billion for the deemed fair value election of which a significant portion related to assets sold during 2010, and approximately $0.6 billion relating to stock-based compensation, employee future benefits, deferred taxes and derecognition of capitalized borrowing costs.
The carrying value of the Company’s PP&E at the time of adoption is expected to decrease by approximately $2.7 billion as a result of electing to measure certain of the Company’s properties at fair value and where permitted deeming these fair values as cost (decrease of approximately $2.0 billion), changes to the cost component of PP&E relating to the Company’s ARO (decrease of approximately $0.2 billion), derecognizing capitalized borrowing costs recorded under Canadian GAAP (decrease of approximately $0.2 billion), as well as removing the tax adjustment from PP&E previously recorded for historical asset acquisitions under Canadian GAAP, which is not permitted under IFRS (decrease of approximately $0.3 billion).
Current liabilities at the time of adoption are expected to increase by approximately $0.2 billion due to the IFRS requirement to measure cash-settled share-based payments at fair values rather than the intrinsic method permitted under Canadian GAAP which, in effect, accelerates the timing of the expense recognition under IFRS. Effective July 1, 2010, stock options will be accounted for using the equity method, which will result in a decrease in current liabilities of $0.4 billion, and a corresponding increase in equity.
Long-term liabilities are expected to decrease by approximately $1.1 billion largely as a result of the deferred tax effect of other IFRS adjustments, deferred income tax adjustments required for historical asset acquisitions and changes in accounting methodology for deferred tax and Petroleum Revenue Tax.
In estimating the adjustment to PP&E as a result of electing to measure certain of the Company’s properties at fair value and where permitted deeming these fair values as cost, management has estimated fair value based on market information which consisted of offers to purchase the asset or comparable assets, independent market surveys and values derived from exchange quoted prices. Where reliable market information was not available, management relied upon internally generated discounted cash flows using a long term view of commodity prices.
Estimated Impact on Reported Financial Results
The resetting of the Company’s balance sheet under IFRS which primarily impacted PP&E and the liabilities for ARO, stock based compensation and deferred income tax, in conjunction with other changes in accounting policies under IFRS is expected to increase the Company’s previously reported net income for the nine months ended September 30, 2010 by approximately $0.5 billion. The changes in accounting policies under IFRS are expected to decrease DD&A, accretion, and other expense ($0.3 billion) and will also impact such items as unrealized foreign exchange gains and losses and reported stock-based compensation ($0.1 billion), and the timing of when gains and losses are recognized on disposed assets ($0.2 billion), offset by deferred income tax recovery ($0.1 billion).
The areas impacted by IFRS discussed above should not be regarded as a comprehensive list of changes that will result from the transition to IFRS. The Company continues to work with advisors and monitor the development of standards to understand the practical application of the IFRS principles which will affect the quantification of IFRS retrospective adjustments as at January 1, 2010 and the subsequent IFRS Consolidated Financial Statements.
IFRS Changeover Process
- Control Environment – The Company is currently evaluating design over IFRS financial reporting which is expected to be completed by the first quarter of 2011, with evaluation of operating effectiveness to be conducted during 2011;
- Training and Communication – The Company is focusing on final training sessions to support the successful transition of IFRS into routine business processes;
- IT Systems – Work is on schedule to deliver live IFRS systems in early March 2011;
- Business Activities – The project will successfully provide IFRS financial reporting results with the changes to the Company’s functional and presentational currency embedded.