Keyera
Annual Report 2011

Plain-text annual report

Key Petroleum Limited and its Controlled Entities ABN 50 120 580 618 Annual Report for the year ended 30 June 2011 Key Petroleum Limited and its Controlled Entities Corporate Information ABN 50 120 580 618 Directors Dennis Wilkins (Non Executive Chairman) Kenneth Russell (Managing Director) John Sheppard (Non Executive Director) Company Secretary John Ribbons Registered Office Ground Floor, 20 Kings Park Road WEST PERTH WA 6005 Principal Place of Business 163 Stirling Highway NEDLANDS WA 6009 Telephone: +61 8 9389 3200 Facsimile: +61 8 9389 3299 Postal Address PO Box 1622 WEST PERTH WA 6872 Solicitors Richard O’Shannassy & Co Pty Ltd Level 3, 46 Ord Street WEST PERTH WA 6005 Bankers National Australia Bank Limited 1232 Hay Street WEST PERTH WA 6005 Share Register Computershare Investor Services Pty Ltd Level 2, Reserve Bank Building 45 St George’s Terrace PERTH WA 6000 Auditors Bentleys Level 1, 12 Kings Park Road WEST PERTH WA 6005 Internet Address www.keypetroleum.com Email Address info@keypetroleum.com Stock Exchange Listings Key Petroleum Limited shares (Code: KEY) and the 7.5 cent options (Code: KEYO) expiring on 30 November 2011 are listed on the Australian Securities Exchange. 1 Key Petroleum Limited and its Controlled Entities Contents Chief Executive’s Review Directors' Report Auditor’s Independence Declaration Corporate Governance Statement Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements Directors' Declaration Independent Auditor’s Report ASX Additional Information 3 5 11 12 16 17 18 19 20 51 52 55 2 Key Petroleum Limited and its Controlled Entities Chief Executive’s Review It has been a very difficult year for many junior oil and gas companies around the world with so much uncertainty in the financial market. To counteract that uncertainty we have seen there has been a number of mergers and acquisitions between industry participants, some have been successful, and others have not. Key has not escaped from that worldwide impact and has been actively pursuing opportunities that would elevate that pressure with potential acquisitions instigated by itself. Reducing Financial Impact There is no getting away from the fact that it’s a different world that we operate in today. Not only different, but in many respects a difficult world in which to operate in. We are plagued by financial uncertainties making the conventional methods of raising funds much harder. To counter this it has been imperative for all involved in the day to day operations of the Company to focus on reducing financial exposure wherever possible. This could be from our 100% owned onshore oil production operations located in the United Kingdom or from our exploration activity, in areas such as recently in Tanzania. This focus has been, and is continuing to be, achieved through the reduction in our drilling commitments which were considerable for a company of Key’s size in places such as Tanzania. For instance, the Nyuni 2 well offshore Tanzania drilled from Nyuni island approximately 35km off the coast of Tanzania could have impacted considerably on the Company but the fact that Key was free carried through this difficult well following a reduction in its percentage interest in the permit provided the Company with a level of much needed protection. Additionally, we have been downsizing internally within the Company by minimising our permanent staff numbers and relying more on the use of geological, technical and engineering consultants for specific requirements as and when required. As we discuss personnel, we should acknowledge the dedication and hard work being performed by our field based and technical support personnel in the United Kingdom who have been working to minimize disruptions to our oil production. Operating Costs We have been concentrating on reducing our day to day operating overheads by undertaking such things as office downsizing. The reduction in staff levels has allowed the Company to reduce office space required. Actions such as this are all aimed at protecting the Company from financial impacts that in many instances are beyond our control. It is, we believe, allowing us to position Key to take advantage when world markets stabilise and a degree of certainty returns to business forecasting. Looking for Opportunities It is important for the Company to continue reviewing opportunities that are presented which may offer the potential to expand the Company into growth areas. The Company is continuing to evaluating opportunities that are made available. Any one of these opportunities could be the one that provides a turn-a-round point for our Company. As an example, one of the main transactions attempted by the team at Key during the year was the acquisition of Zeta Petroleum Ltd, a United Kingdom based, privately held company with oil and gas assets located onshore in Romania. That transaction ultimately did not come to fruition through the failure of the vendor to meet conditions precedent, but, the reasoning behind the company attempting the acquisition was that Zeta had gas assets in Romania that could replace those of Key held in Tanzania. It was also felt that i t was where the cost impact for operating there was considerable and where the Company felt that there would be a long time before shareholders would receive a return on their investments in any drilling. As can be seen from recent Australian Securities Exchange (ASX) announcements made by Key the proposed Zeta transaction has now been replaced with an alternative one that is expanding Keys position in Western Australia’s with entry into the onshore Canning Basin area. This is an area that has caught the interest of a number of mid and large sized oil and gas companies recently and complements Keys position already in Western Australia where we have our 45% interest in EP 437. Feed back to the Company so far from Keys announcement that it was to acquire the assets of Gulliver Productions Pty Ltd has been favourable. Increasing Position in Western Australia It may be worth remembering at this point as we discuss increasing the Company’s position in Western Australia that, as has been written about in the media recently, Australia has moved over the years from a net exporter of produced oil to an importer of approximately 75% of its oil requirements. With current oil pricing expected to continue this is a perilous position for any country and Key is hoping to take advantage of this market placed opportunity by better positioning itself into a prospective location in Australia. Any success in these areas in Western Australia will complement the current oil production being obtained by the Company in the UK. This production has been creating a viable revenue stream for Key and helping to reduce the financial pressures being observed. We’ve also been protected from the volatile swings seen in WTI (West Texas Intermediate) as Keys oil is sold using North Sea Brent oil as its bench mark. 3 Key Petroleum Limited and its Controlled Entities Drilling Activity During The Year As we continue to discuss our focus on Western Australia it will be remembered that towards the end of 2010 and into the beginning of 2011, Key participated in the drilling of two shallow, low cost wells named Dunnart and Dibbler in permit EP 437. Participation in those two wells has provided the Company with a 45% earned interest in that block, in a known hydrocarbon province, the Perth Basin. Ours and the joint ventures technical teams are reviewing the results of those wells to better understand the permit and determine further drilling targets and opportunities. Although the Company has had plans in place to drill the Lidsey 2 horizontal well for some time, the reality is that Key has not been in a position to undertake this work. The Company has already prepared the location with a concrete pad and cellar in anticipation. This well is now currently scheduled for post the Gulliver Productions Pty Ltd acquisition. Gas Field Development As mentioned earlier, in Tanzania we have reduced our exploration exposure in the Nyuni block to a 5% interest. It is important to remember the Company has maintained an interest in the Kiliwani North Gas field which is now being developed. Progress had been slow however this is now changing and a number of what is known as long lead items have been ordered order for the tie-in of this project. We also see the government of Tanzania in the last few months making some major changes to the way that gas is allowed into the distribution network via the Songo Songo gas plant and interconnecting pipeline which is a clear indicator for the development of the Kiliwani North Gas Field. Europe - Italy The Company always regarded Italy as a long term company building exercise due to the size of its surrounding market place for oil and gas and the history of the surrounding countries’ close links with it. However, the frustrations of operating in the country have continued with the enactment of environmental laws that have seriously curtailed our subsidiary Company, Puma Petroleum Srl’s activities. Italy has been a costly exercise with no sign of relief on the horizon for the Company and we are therefore working towards an exit from Italy. Health and Safety and Environment Although not positioned in the opening paragraph of this Chief Executives review, Health and Safety is always paramount in all of Key Petroleum’s activities. The Company has instigated and maintains a culture of Safety First and our personnel have worked well in this regard during the year. Third parties entering Company sites must adhere to the same culture at all times. Key is extremely vigilante and aware of the need to undertake our operations, be they large or small, with environmental sensitivity and awareness. If Safety is first on our list of requirements, then Environmental is a very close second. Outlook The Company’s believes that with the new opportunities in Western Australia that have recently been announced, together with our continuing oil production from the UK, the gas field development in Tanzania and our strong in house commitment to cost control, we can succeed in attaining our objectives. Our vision as always still remains unchanged, that is, ‘To build Key Petroleum Ltd into a midsized oil and gas exploration and production company that provides a good return for shareholders”. We will continue to try to do this by: Acquiring additional oil producing assets where possible; Continually improving those assets we already have; Ensuring that we are focusing on specific areas and countries that can provide growth opportunities; and by Always remembering that we are working for the benefit of all shareholders as we make our decisions. 4 Key Petroleum Limited and its Controlled Entities Directors’ Report Your directors submit their report on the consolidated entity (referred to hereafter as the Group) consisting of Key Petroleum Limited and the entities it controlled at the end of, or during, the year ended 30 June 2011. DIRECTORS The names and details of the Company’s directors in office during the year and until the date of this report are as follows. Where applicable, all current and former directorships held in listed public companies over the last three years have been detailed below. Directors were in office for this entire period unless otherwise stated. Names, qualifications, experience and special responsibilities Dennis Wilkins, B.Bus, AICD, ACIS (Non Executive Chairman) Mr Wilkins is an accountant who has been a director, company secretary or acted in a corporate advisory capacity to listed resou rce companies for over 22 years. Mr Wilkins previously served as the Finance Director and Company Secretary for a mid-tier gold producer and also spent five years working for a leading merchant bank in the United Kingdom. Resource postings to Indonesia, South Africa and New Zealand in managerial roles has broadened his international experience. Mr Wilkins has extensive experience in capital raising specifically for the resources industry and is the principal of DWCorporate Pty Ltd which provides advisory, funding and administrative management services to the resource sector. Mr Wilkins is a director of Minemakers Limited and Enterprise Metals Limited. Mr Wilkins is a former director of Marengo Mining Limited and South Boulder Mines Limited within the last 3 years. Kenneth Russell (Managing Director) Mr Russell is a petroleum engineering and production technology specialist with over 35 years experience in the international oil and gas industry. He commenced his career in the oil producing offshore fields of West Africa with Gulf Oil Limited in Angola and later worked for Flopetrol Schlumberger Limited, involved in well testing, wireline services and production and worked in areas such as Australia, Asia and various parts of Africa and Europe. In 1984 he established a petroleum engineering and production technology consultancy business which participated in the development of a large number of the oil and gas fields in Australia and also in parts of South East Asia, Brazil, and Russia. His client list included companies such as Royal Dutch Shell plc (Shell), Enterprise Oil plc, Chevron Limited, BHP Billiton Limited and Hardman Resources Limited as well as a number of smaller entities. Mr Russell has held a number of managerial roles and directorships in the oil and gas industry throughout his career and was a founding Director of Bounty Oil and Gas NL. He has considerable experience, developed over the last 24 years, in international business and has practical operating experience operating in the areas of Key Petroleum’s exploration permits. Mr Russell has not held any former directorships in the last 3 years. John Sheppard, MBA, B. Eng, Met Cert, M Aus IMM, GAICD (Non Executive Director - appointed 31 August 2010) Mr Sheppard is a senior executive with oil and gas, finance and business development skills. He has extensive experience in corporate governance, strategic planning, business development, mergers and acquisitions, capital development and project financing nationally and internationally in the resources and finance areas which has been built up over 42 years. Mr Sheppard has not held any former directorships in the last 3 years. Edward Ellyard was a director from the beginning of the year until 31 August 2010. Richard O’Shannassy was a director from the beginning of the year until 31 August 2010. COMPANY SECRETARY John Ribbons, B.Bus., CPA, ACIS Mr Ribbons is an accountant who has worked within the resources industry for over 17 years in the capacity of company accountant, group financial controller or company secretary. Mr Ribbons has extensive knowledge and experience with ASX listed production and exploration companies. He has considerable site based experience with operating mines and has also been involved with the listing of several exploration companies on ASX. Mr Ribbons has experience in capital raising, ASX compliance and regulatory requirements. Interests in the shares and options of the Company and related bodies corporate As at the date of this report, the interests of the directors in the shares and options of Key Petroleum Limited were: Dennis Wilkins Kenneth Russell John Sheppard 5 Ordinary Shares 1,000,000 5,815,000 70,000 Options over Ordinary Shares - - 17,500 Key Petroleum Limited and its Controlled Entities Directors’ Report (continued) PRINCIPAL ACTIVITIES The principal activities of the Group during the year were the production of oil, acquisition of petroleum permits, and the exploration of these permits with the objective of identifying economic oil and gas deposits. DIVIDENDS No dividends were paid or declared during the year. No recommendation for payment of dividends has been made. OPERATING AND FINANCIAL REVIEW Finance Review The Group has recorded an operating loss after income tax for the year ended 30 June 2011 of $8,845,724 (2010: $6,072,006). At 30 June 2011 funds available totalled $1,972,248. Operating Results for the Year Summarised operating results are as follows: Geographic segments Australia United Kingdom Tanzania Italy Consolidated entity revenues and loss Shareholder Returns Basic loss per share (cents) 2011 Revenues $ Results $ 114,350 1,879,806 - 17 (6,973,389) (1,232,622) (508,264) (131,449) 1,994,173 (8,845,724) 2011 (4.8) 2010 (4.9) Risk Management The board is responsible for ensuring that risks, and also opportunities, are identified on a timely basis and that activities are aligned with the risks and opportunities identified by the board. The Company believes that it is crucial for all board members to be a part of this process, and as such the board has not established a separate risk management committee. The board has a number of mechanisms in place to ensure that management's objectives and activities are aligned with the risks identified by the board. These include the following: • Board approval of a strategic plan, which encompasses strategy statements designed to meet stakeholders needs and manage business risk. Implementation of board approved operating plans and budgets and board monitoring of progress against these budgets. • SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS Other than as disclosed in this Annual Report, no significant changes in the state of affairs of the Group occurred during the financial year. SIGNIFICANT EVENTS AFTER THE BALANCE DATE No matters or circumstances, besides those disclosed at note 27, have arisen since the end of the financial year which significantly affected or may significantly affect the operations of the Group, the results of those operations, or the state of affairs of the Group in future financial years. LIKELY DEVELOPMENTS AND EXPECTED RESULTS The Group expects to maintain the present status and level of operations and hence there are no likely developments in the Group’s operations. 6 Key Petroleum Limited and its Controlled Entities Directors’ Report (continued) ENVIRONMENTAL REGULATION AND PERFORMANCE The Group is subject to significant environmental regulation in respect of its production and exploration activities. The Group aims to ensure the appropriate standard of environmental care is achieved, and in doing so, that it is aware of and is in compliance with all environmental legislation. The directors of the Company are not aware of any breach of environmental legislation for the year under review. The Group is in compliance with the various environmental legislation and regulations that govern its activities in the jurisdictions in which it operates. REMUNERATION REPORT The information provided in this remuneration report has been audited as required by section 308(3C) of the Corporations Act 2001. Principles used to determine the nature and amount of remuneration Remuneration Policy The remuneration policy of Key Petroleum Limited has been designed to align director and executive objectives with shareholder and business objectives by providing a fixed remuneration component and offering specific long-term incentives based on key performance areas affecting the Company’s financial results. The board of Key Petroleum Limited believes the remuneration policy to be appropriate and effective in its ability to attract and retain the best executives and directors to run and manage the Group. The board’s policy for determining the nature and amount of remuneration for board members and senior executives of the Group is as follows: The remuneration policy, setting the terms and conditions for the executive directors and other senior executives, was developed by the board. All executives receive a base salary or an agreed fee (which is based on factors such as length of service and experience) and superannuation or GST. The board reviews executive packages annually by reference to the Group’s performance, executive performance and comparable information from industry sectors and other listed companies in similar industries. The board may exercise discretion in relation to approving incentives, bonuses and options. The policy is designed to attract and retain the highest calibre of executives and reward them for performance that results in long-term growth in shareholder wealth. Executives are also eligible to participate in the employee share and option arrangements. The executives receive a superannuation guarantee contribution required by the government, which is currently 9%, and do not receive any other retirement benefits. All remuneration paid to directors and executives is valued at the cost to the Group. Based on each individual’s timesheet, costs are allocated to exploration projects and treated in accordance with the accounting policy described at note 1(p), or expensed where the time is not allocated directly to a project. Options are valued using the Black-Scholes methodology. The board policy is to remunerate non-executive directors at market rates for comparable companies for time, commitment and responsibilities. The board determines payments to the non-executive directors and reviews their remuneration annually, based on market practice, duties and accountability. Independent external advice is sought when required. The maximum aggregate amount of fees that can be paid to non-executive directors is subject to approval by shareholders at the Annual General Meeting (currently $300,000). Fees for non-executive directors are not linked to the performance of the Group. However, to align directors’ interests with shareholder interests, the directors are encouraged to hold shares in the Company and are eligible to participate in the employee option plan. Performance based remuneration The Group currently has no specific performance based remuneration component built into director and executive remuneration packages. Group performance, shareholder wealth and directors' and executives' remuneration The remuneration policy has been tailored to increase the direct positive relationship between shareholders’ investment objectives and directors’ and executives’ performance. The Company plans to facilitate this process by directors and executives participating in future option issues to encourage the alignment of personal and shareholder interests. The Company believes this policy will be effective in increasing shareholder wealth. For details of directors’ and executives’ interests in options at year end, refer to note 18 of the financial statements. Details of remuneration Details of the remuneration of the directors, the key management personnel of the Group (as defined in AASB 124 Related Party Disclosures) and specified executives of Key Petroleum Limited and the Key Petroleum Group are set out in the following table. The key management personnel of Key Petroleum Limited include the directors and company secretary as per page 5 above. Given the size and nature of operations of Key Petroleum Limited, there are no other employees who are required to have their remuneration disclosed in accordance with the Corporations Act 2001. 7 Key Petroleum Limited and its Controlled Entities Directors’ Report (continued) Key management personnel and other executives of Key Petroleum Limited Short Term Benefits Profit Share & Bonuse s Salary & Fees Non Monetary Other Post- employment benefits Long-Term Benefits Pension & super- annuation Other Incentive plans LSL Equity-Settled Share-Based Payments Share s/ Units Options/ Rights Total Termin- ation benefits Cash- Settled Share Based Payments $ $ $ $ $ $ $ $ $ $ $ $ $ Directors Dennis Wilkins(1) Kenneth Russell John Sheppard (appointed 31 August 2010) Edward Ellyard (Resigned 31 August 2010) Richard O’Shannassy (2) (Resigned 31 August 2010) 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 45,625 30,000 315,000 302,500 25,000 - 8,333 46,840 5,417 33,750 Other key management personnel John Ribbons(3) Total key management personnel 2011 2010 2011 2010 - - 399,375 413,090 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 2,250 - 750 4,126 - - - - 3,000 4,126 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 45,625 30,000 315,000 302,500 27,250 - 9,083 50,966 5,417 33,750 - - 402,375 417,216 (1) In addition to the above remuneration, which is for Mr Wilkins’ services as director/chairman, a total of $177,895 (2010: $132,026) was paid to DWCorporate Pty Ltd, a business of which Mr Wilkins is principal. DWCorporate Pty Ltd provided company secretarial, bookkeeping and other corporate services to the Key Group during the year. The amounts paid were at usual commercial rates with fees charged on an hourly basis. (2) In addition to the above remuneration a total of $62,102 (2010: $69,050) was paid to Richard O’Shannassy & Co Pty Ltd, a business of which Mr O’Shannassy is principal. Richard O’Shannassy & Co Pty Ltd provided legal services. The amounts paid were at usual commercial rates. (3) Mr Ribbons is a full-time employee of DWCorporate Pty Ltd. Service agreements The details of service agreements of the key management personnel of Key Petroleum Limited are as follows: Dennis Wilkins, Non Executive Chairman (for services other than directors duties): • Term of agreement – four months written notice of termination by either party. • Mr Wilkins’ firm, DWCorporate Pty Ltd, is engaged to provide book-keeping, accounting and company secretarial services. A fixed fee of $1,750 per month is payable and additional services are charged on an hourly basis. This engagement is subject to four months notification of termination. Share-based compensation No shares or options were issued to directors and executives as part of their remuneration during the year. There were no ordinary shares issued upon exercise of remuneration options to directors or other key management personnel of Key Petroleum Limited during the year. Refer to note 30 for model inputs for the options granted. 8 Key Petroleum Limited and its Controlled Entities Directors’ Report (continued) DIRECTORS’ MEETINGS During the year the Company held ten meetings of directors. The attendance of directors at meetings of the board were: Meetings of Committees Directors Meetings Audit A 1 * 1 A 10 10 8 B 10 10 8 Dennis Wilkins Kenneth Russell John Sheppard (appointed 31 August 2010) Edward Ellyard (resigned 31 August 2010) Richard O’Shannassy (resigned 31 August 2010) Notes A – Number of meetings attended. B – Number of meetings held during the time the director held office during the year. * - Not a member of the relevant committee. 3 3 3 3 - - B 1 * 1 - - Remuneration B A 1 1 * * 1 1 - - - - SHARES UNDER OPTION At the date of this report there are 41,425,058 unissued ordinary shares in respect of which options are outstanding. Balance at the beginning of the year Movements of share options during the year Issued, exercisable at 7.5 cents, on or before 30 November 2011 Expired on 30 November 2010, exercisable at 20 cents Expired on 30 November 2010, exercisable at 50 cents Total number of options outstanding as at 30 June 2011 and the date of this report The balance is comprised of the following: Expiry date 30 November 2011 30 November 2011 Exercise price (cents) 7.5 30 Total number of options outstanding at the date of this report Number of options 5,950,000 41,175,058 (700,000) (5,000,000) 41,425,058 Number of options 41,175,058 250,000 41,425,058 No person entitled to exercise any option referred to above has or had, by virtue of the option, a right to participate in any share issue of any other body corporate. INSURANCE OF DIRECTORS AND OFFICERS During or since the financial year, the Group has paid premiums insuring all the directors of Key Petroleum Limited against costs incurred in defending proceedings for conduct involving: (a) a wilful breach of duty; or (b) a contravention of sections 182 or 183 of the Corporations Act 2001, as permitted by section 199B of the Corporations Act 2001. The total amount of insurance contract premiums paid is $24,640. 9 Key Petroleum Limited and its Controlled Entities Directors’ Report (continued) NON-AUDIT SERVICES The following non-audit services were provided by the auditor of one of the entity’s subsidiaries, Mazars LLP or associated entities. The directors are satisfied that the provision of non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are satisfied that the provision of non-audit services by the auditor, as set out below, did not compromise the auditor independence requirements of the Corporations Act 2001 for the following reasons:  All non-audit services have been reviewed by the audit committee to ensure they do not impact the impartiality and objectivity of the auditor;  None of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants. The following fees were paid or payable to Mazars LLP for non-audit services provided during the year ended 30 June 2011. 2011 $ Preparation of financial statements for UK entities 3,675 3,675 PROCEEDINGS ON BEHALF OF THE COMPANY No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Group, or to intervene in any proceedings to which the Group is a party, for the purpose of taking responsibility on behalf of the Group for all or any part of those proceedings. No proceedings have been brought or intervened in on behalf of the Group with leave of the Court under section 237 of the Corporations Act 2001. AUDITOR’S INDEPENDENCE DECLARATION A copy of the auditor's independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 11. Signed in accordance with a resolution of the directors for Key Petroleum Limited. Ken Russell Managing Director Perth, 23 August 2011 10 To The Board of Directors This declaration is made in connection with our audit of the financial report of Key Petroleum Limited and Controlled Entities for the year ended 30 June 2011 and in accordance with the provisions of the Corporations Act 2001. We declare that, to the best of our knowledge and belief, there have been: no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; no contraventions of the Code of Professional Conduct of the Institute of Chartered Accountants in Australia in relation to the audit. Yours faithfully BENTLEYS Chartered Accountants CHRIS WATTS CA Director DATED at PERTH this 23rd day of August 2011 Key Petroleum Limited and its Controlled Entities Corporate Governance Statement The Board of Directors The Company's constitution provides that the number of directors shall not be less than three and not more than nine. There is no requirement for any share holding qualification. As and if the Company's activities increase in size, nature and scope the size of the board will be reviewed periodically, and as circumstances demand. The optimum number of directors required to supervise adequately the Company’s constitution will be determined within the limitations imposed by the constitution. The membership of the board, its activities and composition, is subject to periodic review. The criteria for determining the identification and appointment of a suitable candidate for the board shall include quality of the individual, background of experience and achievement, compatibility with other board members, credibility within the Company's scope of activities, intellectual ability to contribute to board's duties and physical ability to undertake board's duties and responsibilities. Directors are initially appointed by the full board subject to election by shareholders at the next general meeting. Under the Company's constitution the tenure of a director (other than managing director, and only one managing director where the positi on is jointly held) is subject to reappointment by shareholders not later than the third anniversary following his or her last appointment. Subject to the requirements of the Corporations Act 2001, the board does not subscribe to the principle of retirement age and there is no maximum period of service as a director. A managing director may be appointed for any period and on any terms the directors think fit and, subject to the terms of any agreement entered into, may revoke any appointment. The board considers that the Group is not currently of a size, nor are its affairs of such complexity to justify the formation of separate or special committees (other than an Audit Committee) at this time. The board as a whole is able to address the governance aspects of the full scope of the Group’s activities and to ensure that it adheres to appropriate ethical standards. Role of the Board The board's primary role is the protection and enhancement of long-term shareholder value. To fulfil this role, the board is responsible for oversight of management and the overall corporate governance of the Group including its strategic direction, establishing goals for management and monitoring the achievement of these goals. Appointments to Other Boards Directors are required to take into consideration any potential conflicts of interest when accepting appointments to other boards. Independent Professional Advice The board has determined that individual directors have the right in connection with their duties and responsibilities as dir ectors, to seek independent professional advice at the Group’s expense. With the exception of expenses for legal advice in relation to director's rights and duties, the engagement of an outside adviser is subject to prior approval of the Chairman and this will not be withheld unreasonably. Continuous Review of Corporate Governance Directors consider, on an ongoing basis, how management information is presented to them and whether such information is sufficient to enable them to discharge their duties as directors of the Company. Such information must be sufficient to enable the directors to determine appropriate operating and financial strategies from time to time in light of changing circumstances and economic conditions. The directors recognise that petroleum exploration is an inherently risky business and that operational strategies adopted should, notwithstanding, be directed towards improving or maintaining the net worth of the Group. ASX Principles of Good Corporate Governance The board has reviewed its current practices in light of the revised ASX Corporate Governance Principles and Recommendations with a view to making amendments where applicable after considering the Group’s size and the resources it has available. As the Group’s activities develop in size, nature and scope, the size of the board and the implementation of any additional formal corporate governance committees will be given further consideration. The board has adopted the revised Recommendations and the following table sets out the Company's present position in relation to each of the revised Principles. 12 Key Petroleum Limited and its Controlled Entities Corporate Governance Statement continued ASX Principle Status Reference/comment Principle 1: 1.1 1.2 1.3 Lay solid foundations for management and oversight Companies should establish the functions reserved to the board and those delegated to senior executives and disclose those functions Companies should disclose the process for evaluating the performance of senior executives A Matters reserved for the board are included on the Company’s website. N/A Acting in its ordinary capacity, the board from time to time carries out the process of considering and determining performance issues. The remuneration of executive and non executive Directors is reviewed by the board with the exclusion of the Director concerned. The remuneration of executive management is reviewed and approved by the Board. Companies should provide the information indicated in the Guide to reporting on Principle 1 A (in part) Principle 2: 2.1 Structure the board to add value A majority of the board should N/A be independent directors 2.2 2.3 2.4 2.5 2.6 The chair should be an independent director The roles of chair and chief executive officer should not be exercised by the same individual A A The board should establish a N/A nomination committee Companies should disclose the process for evaluating the performance of the board, its committees and individual directors Companies should provide the information indicated in the Guide to reporting on Principle 2 N/A A (in part) Given the Company’s background, the nature and size of its business and the current stage of its development the board compromises three directors, two of whom are non-executive. The board believes that this is both appropriate and acceptable at this stage of the Company’s development. The positions of Chairman and Managing Director are held by separate persons. The board has no formal nomination committee. Acting in its ordinary capacity from time to time as required, the board carries out the process of determining the need for screening and appointing new directors. In view of the size and resources available to the Company, it is not considered that a separate nomination committee would add any substance to the process. Given the size of the Company, formal procedures for evaluating the performance of the board, committees and individual directors have not been developed. The Company conducts these aspects on an ongoing basis and takes action to correct any abnormalities. The skills and experience of Directors are set out in the Company’s Annual Report and on its website. A The Company has formulated a Code of Conduct which can be viewed on the Company’s website. Principle 3: 3.1 Promote ethical and responsible decision-making Companies should establish a code of conduct and disclose the code or a summary of the code as to:  the practices necessary to maintain confidence in the company’s integrity  the practices necessary to take into account their legal obligations and the reasonable expectations of their stakeholders  the responsibility and accountability of individuals for reporting and investigating reports of unethical practices A = Adopted N/A = Not adopted 13 Key Petroleum Limited and its Controlled Entities Corporate Governance Statement continued ASX Principle Status Reference/comment 3.2 Companies should establish a policy concerning trading in company securities by directors, senior executives and employees, and disclose the policy or a summary of that policy 3.3 Companies should provide the information indicated in the Guide to reporting on Principle 3 A A Principle 4: 4.1 Safeguard integrity in financial reporting The board should establish an audit A committee 4.2 The audit committee should be A The Company has formulated a securities trading policy, which can be viewed on its website. The Company has established an audit committee which compromises two members, both being non executive, with one independent, director. The charter for this committee is disclosed on the Company’s website. Sourcing alternative or additional directors to strictly comply with this Principle is considered expensive with costs outweighing the potential benefits. In addition, the board as a whole addresses the governance aspects to the full scope of the Company’s activities to ensure that it adheres to appropriate ethical standards. All matters which might properly be dealt with by special committees are subject to regular scrutiny at full board meetings. consists of a majority of consists only of non-executive structured so that it: • directors • independent directors is chaired by an independent • chair, who is not chair of the board has at least three members • The audit committee should have a formal charter Companies should provide the information indicated in the Guide to reporting on Principle 4 Make timely and balanced disclosure Companies should establish written policies designed to ensure compliance with ASX Listing Rule disclosure requirements and to ensure accountability at a senior executive level for that compliance and disclose those policies or a summary of those policies Companies should provide the information indicated in the Guide to reporting on Principle 5 Respect the rights of shareholders Companies should design a communications policy for promoting effective communication with shareholders and encouraging their participation at general meetings and disclose their policy or a summary of that policy 4.3 4.4 Principle 5: 5.1 5.2 Principle 6: 6.1 N/A The Company only has two non executive directors. A A A A A A A A The Company has instigated internal procedures designed to provide reasonable assurance to the effectiveness and efficiency of operations, the reliability of financial reporting and compliance with relevant laws and regulations. The board is acutely aware of the continuous disclosure regime and there are strong informational systems in place to ensure compliance, underpinned by experience. The Board receives monthly updates on the status of the Company’s activities and any new or proposed activities. Disclosure is reviewed as a routine agenda item at each Board Meeting. In line with adherence to continuous disclosure requirements of ASX, all shareholders are kept informed of major developments affecting the Company. This disclosure is through regular shareholder communications including the Annual Reports, Half Yearly Reports, Quarterly Reports, the Company Website and the distribution of specific releases covering major transactions and events or other price sensitive information. A = Adopted N/A = Not adopted 14 Key Petroleum Limited and its Controlled Entities Corporate Governance Statement continued ASX Principle Status Reference/comment 6.2 Principle 7: 7.1 Companies should provide the information indicated in the Guide to reporting on Principle 6 Recognise and manage risk A The Company has formulated a Communication Policy which can be viewed on the Company website. Companies should establish policies for A the oversight and management of material business risks and disclose a summary of those policies While the Company does not have formalised policies on risk management the Board recognises its responsibility for identifying areas of significant business risk and for ensuring that arrangements are in place for adequately managing these risks. This issue is regularly reviewed at Board meetings and risk management culture is encouraged amongst employees and contractors. Determined areas of risk which are regularly considered include: • • • • performance and funding of exploration activities budget control and asset protection status of mineral tenements land access and native title considerations compliance with government laws and regulations safety and the environment continuous disclosure obligations share market conditions sovereign risk • • • • • While the Company does not have formalised policies on risk management it recognises its responsibility for identifying areas of significant business risk and for ensuring that arrangements are in place for adequately managing these risks. This issue is regularly reviewed at board meetings and risk management culture is encouraged amongst employees and contractors. For information on the Company’s Remuneration Committee refer to its website. Refer to the Remuneration Report in the Company’s Annual Report. 7.2 7.3 7.4 The board should require management to design and implement the risk management and internal control system to manage the company’s material business risks and report to it on whether those risks are being managed effectively. The board should disclose that management has reported to it as to the effectiveness of the company’s management of its material business risks The board should disclose whether it has received assurance from the chief executive officer (or equivalent) and the chief financial officer (or equivalent) that the declaration provided in accordance with section 295A of the Corporations Act is founded on a sound system of risk management and internal control and that the system is operating effectively in all material respects in relation to financial reporting risks Companies should provide the information indicated in the Guide to reporting on Principle 7 Principle 8: 8.1 8.2 8.3 Remunerate fairly and responsibly The board should establish a remuneration committee Companies should clearly distinguish the structure of non-executive directors’ remuneration from that of executive directors and senior executives Companies should provide the information indicated in the Guide to reporting on Principle 8 A = Adopted N/A = Not adopted N/A A N/A A A A 15 Key Petroleum Limited and its Controlled Entities Consolidated Statement of Comprehensive Income YEAR ENDED 30 JUNE 2011 Notes REVENUE AND OTHER INCOME 2 1,994,173 1,243,973 2011 $ 2010 $ EXPENDITURE Cost of Goods Sold Depreciation expense Salaries and employee benefits expense Corporate expenditure Administration costs Exploration costs written off Impairment expense Interest expense Share based expense Share of net loss of associate accounted for using the equity method LOSS BEFORE INCOME TAX INCOME TAX BENEFIT / (EXPENSE) LOSS FOR THE YEAR OTHER COMPREHENSIVE INCOME Exchange differences on translation of foreign operations Other comprehensive income for the year, net of tax (817,993) (1,933,359) (253,104) (549,101) (1,310,382) (5,970,880) - (5,078) - - (974,903) (1,211,997) (246,611) (930,102) (1,478,604) (1,934,789) (503,779) - (32,620) (2,574) (8,845,724) (6,072,006) - - (8,845,724) (6,072,006) (568,727) (568,727) (692,476) (692,476) 30 25(c) 3 4 TOTAL COMPREHENSIVE INCOME FOR THE YEAR ATTRIBUTABLE TO MEMBERS OF KEY PETROLEUM LIMITED (9,414,451) (6,764,482) Basic loss per share for loss attributable to the ordinary equity holders of the company (cents per share) 29 (4.76) (4.87) The above Consolidated Statement of Comprehensive Income should be read in conjunction with the Notes to the Consolidated Financial Statements. 16 Key Petroleum Limited and its Controlled Entities Consolidated Statement of Financial Position AT 30 JUNE 2011 Notes CURRENT ASSETS Cash and cash equivalents Trade and other receivables Inventories TOTAL CURRENT ASSETS NON-CURRENT ASSETS Receivables Plant and equipment Intangible assets Petroleum assets Capitalised exploration costs TOTAL NON-CURRENT ASSETS TOTAL ASSETS CURRENT LIABILITIES Trade and other payables TOTAL CURRENT LIABILITIES NON CURRENT LIABILITIES Provisions TOTAL NON CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS EQUITY Issued capital Reserves Accumulated losses TOTAL EQUITY 5 6 7 8 9 10 11 12 13 14 2011 $ 1,972,248 560,624 93,806 2,626,678 48,903 92,211 - 452,286 637,711 1,231,111 2010 $ 2,902,916 594,536 47,237 3,544,689 75,254 145,305 - 2,787,049 3,546,076 6,553,684 3,857,789 10,098,373 333,728 333,728 499,211 499,211 832,939 667,192 667,192 575,707 575,707 1,242,899 3,024,850 8,855,474 15 16 (a) 28,214,283 (1,140,173) (24,049,260) 24,599,056 (471,169) (15,272,413) 3,024,850 8,855,474 The above Consolidated Statement of Financial Position should be read in conjunction with the Notes to the Consolidated Financial Statements. 17 Key Petroleum Limited and its Controlled Entities Consolidated Statement of Changes in Equity YEAR ENDED 30 JUNE 2011 BALANCE AT 1 JULY 2009 Loss for the year OTHER COMPREHENSIVE INCOME Exchange differences on translation of foreign operations TOTAL COMPREHENSIVE INCOME TRANSACTIONS WITH OWNERS IN THEIR CAPACITY AS OWNERS Employee options Shares issued during the year Issued Capital $ 19,868,699 - Options Reserve $ 276,557 - Foreign Currency Translation Reserve $ Accumulated Losses $ Total $ (87,870) - (9,200,407) (6,072,006) 10,856,979 (6,072,006) - - - - (692,476) (692,476) - (6,072,006) (692,476) (6,764,482) - 4,730,357 32,620 - - - - - 32,620 4,730,357 BALANCE AT 30 JUNE 2010 24,599,056 309,177 (780,346) (15,272,413) 8,855,474 Loss for the year OTHER COMPREHENSIVE INCOME Exchange differences on translation of foreign operations TOTAL COMPREHENSIVE INCOME TRANSACTIONS WITH OWNERS IN THEIR CAPACITY AS OWNERS Employee options Shares issued during the year Share issue transaction costs - - - - - - - (8,845,724) (8,845,724) (568,727) (568,727) - (8,845,724) (568,727) (9,414,451) 220,000 3,691,604 (296,377) (100,277) - - - - - 68,877 - - 188,600 3,691,604 (296,377) BALANCE AT 30 JUNE 2011 28,214,283 208,900 (1,349,073) (24,049,260) 3,024,850 The above Consolidated Statement of Changes in Equity should be read in conjunction with the Notes to the Consolidated Financial Statements. 18 Key Petroleum Limited and its Controlled Entities Consolidated Statement of Cash Flows YEAR ENDED 30 JUNE 2011 Notes CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers Payments to suppliers and employees Interest received Expenditure on petroleum interests NET CASH (OUTFLOW) FROM OPERATING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES Payments for plant and equipment Payments for subsidiaries, net of cash acquired NET CASH (OUTFLOW) FROM INVESTING ACTIVITIES CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issues of ordinary shares and options Payments of share issue transaction costs Repayment of borrowings NET CASH INFLOW FROM FINANCING ACTIVITIES NET (DECREASE) IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at the beginning of the financial year Effects of exchange rate changes on cash and cash equivalents 28 23(c) 2011 $ 1,836,057 (3,229,972) 113,245 (3,225,412) (4,506,082) (5,905) - (5,905) 3,691,604 (107,777) - 3,583,827 (928,160) 2,902,916 (2,508) 2010 $ 912,215 (3,234,574) 153,862 (915,423) (3,083,920) (25,733) (202,384) (228,117) 4,635,357 - (4,001,662) 633,695 (2,678,342) 5,594,855 (13,597) CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 5 1,972,248 2,902,916 The above Consolidated Statement of Cash Flows should be read in conjunction with the Notes to the Consolidated Financial Statements. 19 Key Petroleum Limited and its Controlled Entities Notes to the Financial Statements 30 JUNE 2011 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies adopted in the preparation of the financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The financial statements are for the consolidated entity consisting of Key Petroleum Limited and its subsidiaries. The financial statements are presented in the Australian currency. Key Petroleum Limited is a company limited by shares, domiciled and incorporated in Australia. The financial statements were authorised for issue by the directors on 23 August 2011. The directors have the power to amend and reissue the financial statements. (a) Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board, Australian Accounting Interpretations and the Corporations Act 2001. Compliance with IFRS The consolidated financial statements of the Key Petroleum Limited Group comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Accruals basis These financial statements have been prepared on an accruals basis and are based on historical costs, modified, where applicable, by the measurement at fair value of selected non-current assets, financial assets and financial liabilities. Going concern The accounts have been prepared on the going concern basis, which contemplates continuity of normal activities and the reali sation of assets and settlement of liabilities in the ordinary course of business. The Group incurred a loss from general business activities of $8,845,724 for the year ended 30 June 2011 (2010: $6,072,006 loss). Included within this loss was the write off of exploration expenditure of $5,970,880 (2010: $1,934,789). The net working capital position of the Group at 30 June 2011 was $2,199,144 (2010: $2,830,260) and the net decrease in cash held during the year was $928,160 (2010: $2,830,260). The Group has expenditure commitments relating to work programme obligations of their assets of $1,264,117 which potentially could fall due in the twelve months to 30 June 2012. The ability of the Group to continue to pay its debts as and when they fall due is dependent upon the Company successfully r aising additional share capital. The Company constantly considers capital needs and capital raising opportunities. Should the Group not be successful in its planned capital raisings, it may be necessary to sell further assets and reduce exploration expenditure by various methods including surrendering or withdrawing from less prospective tenements. Although the Directors believe that they will be successful in these measures, if they are not, the Group may be unable to continue as a going concern and therefore may be unable to realise its assets and extinguish its liabilities in the normal course of business and at the amounts stated in the financial statements. The Directors also recognise, that should the Group fail to secure the required funding to maintain its assets in good standing then the Directors would then be in a position whereby they could not commit to further capital expenditure on them. The consequences of this eventuating are that some of the Group’s asset values could be severely impaired or even lost. However, whilst bearing all of the above comments in mind, in light of the Group’s current exploration and development projects , the Directors believe it is appropriate to prepare these accounts on a going concern basis because they have an ongoing and appropriate business plan which includes raising additional funds as and when required. (b) Principles of consolidation (i) Subsidiaries The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Key Petroleum Limited (“Company” or “parent entity”) as at 30 June 2011 and the results of all subsidiaries for the year then ended. Key Petroleum Limited and its subsidiaries together are referred to in this financial report as the Group or the consolidated entity. Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one-half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. The acquisition method of accounting is used to account for business combinations by the Group (refer note 1(h)). Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. Non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated statement of comprehensive income, statement of changes in equity and statement of financial position respectively. 20 Key Petroleum Limited and its Controlled Entities Notes to the Financial Statements continued NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D) Investments in subsidiaries are accounted for at cost in the separate financial statements of Key Petroleum Limited. (ii) Associates Associates are all entities over which the Group has significant influence but not control, generally accompanying a sharehol ding of between 20% and 50% of the voting rights. Investments in associates are accounted for in the parent entity financial statements using the equity method of accounting, after initially being recognised at cost. The Group’s investment in associates includes goodwill (net of any accumulated impairment loss) identified on acquisition (refer to note 25). The Group’s share of its associates’ post-acquisition profits or losses is recognised in the statement of comprehensive income, and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. Dividends receivable from associates are recognised in the parent entity’s statement of comprehensive income, whilst in the consolidated financial statements they reduce the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured long- term receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group. (iii) Joint ventures Jointly controlled assets The proportionate interests in the assets, liabilities and expenses of joint venture activities have been incorporated in the financial statements under the appropriate headings. Details of the joint ventures are set out in note 26. (iv) Changes in ownership interests The Group treats transactions with non-controlling interests that do not result in a loss of control as transactions with equity owners of the Group. A change in ownership interest results in an adjustment between the carrying amounts of the controlling and non- controlling interests to reflect their relative interests in the subsidiary. Any difference between the amount of the adjustment to non- controlling interests and any consideration paid or received is recognised in a separate reserve within equity attribut able to owners of Key Petroleum Limited. When the Group ceases to have control, joint control or significant influence, any retained interest in the entity is remeasu red to its fair value with the change in carrying amount recognised in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, jointly controlled entity or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensi ve income are reclassified to profit or loss. If the ownership interest in a jointly controlled entity or associate is reduced but joint control or significant influence is retained, only a proportionate share of the amounts previously recognised in other comprehensive income are reclassified to profit or loss where appropriate. (c) Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the full Board of Directors. (d) Foreign currency translation (i) Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in Australian dollars, which is Key Petroleum Limited's functional and presentation currency. (ii) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss, except when they are deferred in equity as qualifying cash flow hedges and qualifying net investment hedges or are attributable to part of the net investment in a foreign operation. Translation differences on financial assets and liabilities carried at fair value are reported as part of the fair value gain or loss. Translation differences on non-monetary financial assets and liabilities such as equities held at fair value through profit or loss are recognised in profit or loss as part of the fair value gain or loss. Translation differences on non-monetary financial assets such as equities classified as available-for-sale financial assets are included in the fair value reserve in equity. 21 Key Petroleum Limited and its Controlled Entities Notes to the Financial Statements continued NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D) (iii) Group companies The results and financial position of all the Group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of that  statement of financial position;  income and expenses for each statement of comprehensive income are translated at average exchange rates (unless that is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and all resulting exchange differences are recognised in other comprehensive income.  On consolidation, exchange differences arising from the translation of any net investment in foreign entities, and of borrowings and other financial instruments designated as hedges of such investments, are recognised in other comprehensive income. When a foreign operation is sold or any borrowings forming part of the net investment are repaid, a proportionate share of such exchange differences is reclassified to profit or loss, as part of the gain or loss on sale where applicable. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entities and translated at the closing rate. (e) Revenue recognition The consolidated entity’s revenue is derived primarily from oil sales. Sales revenue is recognised when the physical product and associated risks and rewards of ownership pass to the purchaser. This is generally at the time of delivery to the purchaser’s premises. Interest revenue is recognised on a time proportionate basis that takes into account the effective yield on the financial assets. (f) Income tax The income tax expense or revenue for the year is the tax payable on the current year’s taxable income based on the applicable income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary di fferences and to unused tax losses. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the Company’s subsidiaries and associated operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the reporting date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in controlled entities where the parent entity is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and lia bilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. Current and deferred tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. (g) Leases Leases of property, plant and equipment where the Group, as lessee, has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the lease’s inception at the fair value of the leased prop erty or, if lower, the present value of the minimum lease payments. The corresponding rental obligations, net of finance charges, are included in other short-term and long-term payables. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The property, plant and equipment acquired under finance leases is depreciated over the shorter of the asset’s useful life and the lease term. Leases where a significant portion of the risks and rewards of ownership are not transferred to the Group as lessee are classified as 22 Key Petroleum Limited and its Controlled Entities Notes to the Financial Statements continued NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D) operating leases (note 21). Payments made under operating leases (net of any incentives received from the lessor) are charged to profit or loss on a straight-line basis over the period of the lease. (h) Business combinations The purchase method of accounting is used to account for all business combinations, including business combinations involving entities or businesses under common control, regardless of whether equity instruments or other assets are acquired. Cost is measured as the fair value of the assets given, equity instruments issued or liabilities incurred or assumed at the date of exchange plus costs directly attributable to the acquisition. Where equity instruments are issued in an acquisition, the fair value of the instruments is their published market price as at the date of exchange unless, in rare circumstances, it can be demonstrated that the published price at the date of exchange is an unreliable indicator of fair value and that other evidence and valuation methods provide a more reliable measure of fair value. Transaction costs arising on the issue of equity instruments are recognised directly in equity. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill (refer to note 1(n)). If the cost of acquisition is less than the Group’s share of the fair value of the identifiable net assets of the subsidiary acquired, the difference is recognised directly in the statement of comprehensive income, but only after a reassessment of the identification and measurement of the net assets acquired. Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their pre sent value as at the date of exchange. The discount rate used is the entity’s incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions. (i) Impairment of assets Goodwill and intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recover able amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the ca sh inflows from other assets or groups of assets (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. (j) Cash and cash equivalents For statement of cash flows presentation purposes, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to insignificant risk of changes in value, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the statement of financial position. (k) Trade and other receivables Receivables are recognised and carried at original invoice amount less a provision for any uncollectible debts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written-off as incurred. (l) Investments and other financial assets Classification The Group classifies its investments in the following categories: financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments and available-for-sale financial assets. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments at initial recognition and, in the case of assets classified as held-to-maturity, re-evaluates this designation at each reporting date. (i) Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in th is category if acquired principally for the purpose of selling in the short term. Derivatives are classified as held for trading unless they are designated as hedges. Assets in this category are classified as current assets. (ii) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for those with maturities greater than 12 months after the reporting date which are classified as non-current assets. Loans and receivables are included in trade and other receivables in the statement of financial position. (iii) Held-to-maturity investments 23 Key Petroleum Limited and its Controlled Entities Notes to the Financial Statements continued NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D) Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Company’s management has the positive intention and ability to hold to maturity. If the Group were to sell other than an insignificant amount of held-to-maturity financial assets, the whole category would be tainted and reclassified as available-for-sale. Held-to-maturity financial assets are included in non-current assets, except for those with maturities less than 12 months from the reporting date, which are classified as current assets. (iv) Available-for-sale financial assets Available-for-sale financial assets, comprising principally marketable equity securities, are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the reporting date. Investments are designated available-for-sale if they do not have fixed maturities and fixed or determinable payments and management intends to hold them for the medium to long term. Financial assets - reclassification The Group may choose to reclassify a non-derivative trading financial asset out of the held-for-trading category if the financial asset is no longer held for the purpose of selling it in the near term. Financial assets other than loans and receivables are permi tted to be reclassified out of the held-for-trading category only in rare circumstances arising from a single event that is unusual and highly unlikely to recur in the near term. In addition, the Group may choose to reclassify financial assets that would meet the defi nition of loans and receivables out of the held-for-trading or available-for-sale categories if the Group has the intention and ability to hold these financial assets for the foreseeable future or until maturity at the date of reclassification. Reclassifications are made at fair value as of the reclassification date. Fair value becomes the new cost or amortised cost as applicable, and no reversals of fair value gains or losses recorded before reclassification date are subsequently made. Effective interest rates for financial assets reclassified to loans and receivables and held-to-maturity categories are determined at the reclassification date. Further increases in estimates of cash flows adjust effective interest rates prospectively. Recognition and derecognition Regular purchases and sales of financial assets are recognised on trade-date – the date on which the Group commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carrie d at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognised at fair value and transaction costs are expensed to the statement of comprehensive income. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership. When securities classified as available-for-sale are sold, the accumulated fair value adjustments recognised in equity are included in the statement of comprehensive income as gains and losses from investment securities. Subsequent measurement Loans and receivables and held-to-maturity investments are carried at amortised cost using the effective interest method. Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Gains or losses arising from changes in the fair value of the ‘financial assets at fair value through profit or loss’ category are presented in the statement of comprehensive income within other income or other expenses in the period in which they arise. Dividend income from financial assets at fair value through profit or loss is recognised in the statement of comprehensive income as part of revenue from continuing operations when the Group’s right to receive payments is established. Changes in the fair value of monetary securities denominated in a foreign currency and classified as available -for-sale are analysed between translation differences resulting from changes in amortised cost of the security and other changes in the carrying am ount of the security. The translation differences related to changes in the amortised cost are recognised in profit or loss, and other changes in carrying amount are recognised in equity. Changes in the fair value of other monetary and non -monetary securities classified as available-for-sale are recognised in equity. Details on how the fair value of financial investments are determined are disclosed in note 32. Impairment The Group assesses at each balance date whether there is objective evidence that a financial asset or group of financial assets is impaired. In the case of equity securities classified as available-for-sale, a significant or prolonged decline in the fair value of a security below its cost is considered as an indicator that the securities are impaired. If any such evidence exists for avail able-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss – is removed from equity and recognised in the statement of comprehensive income. Impairment losses recognised in the statement of comprehensive income on equity instruments classified as available-for-sale are not reversed through the statement of comprehensive income. If there is evidence of impairment for any of the Group’s financial assets carried at amortised cost, the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows, excluding future credit losses that have not been incurred. The cash flows are discounted at the financial asset’s original effective interest rate. The loss is recognised in the statement of comprehensive income. 24 Key Petroleum Limited and its Controlled Entities Notes to the Financial Statements continued NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D) (m) Plant and equipment All plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of any component accounted for as a separate asset is derecognised when replaced. All other repairs and maintenance are charged to the statement of comprehensive income during the reporting period in which they are incurred. Depreciation of plant and equipment is calculated using the reducing balance method to allocate their cost or revalued amount s, net of their residual values, over their estimated useful lives or, in the case of leasehold improvements and certain leased plant and equipment, the shorter lease term. The rates vary between 20% and 40% per annum. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (note 1(i)). Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the statement of comprehensive income. When revalued assets are sold, it is Group policy to transfer the amounts included in other reserves in respect of those assets to retained earnings. (n) Intangible assets Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the consolidated entity’s share of the net identifiable assets of the acquired subsidiary/associate at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill on acquisitions of associates is included in investments in associates. Goodwill is not amortised. Instead, goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing. Each of those cash-generating units represents the Group’s investment in each country of operation (note 33). (o) Petroleum assets Petroleum assets are measured on the cost basis less amortisation and impairment losses. The carrying amount of petroleum assets is reviewed bi-annually by Directors to ensure that it is not in excess of the recoverable amount from these assets. The recoverable amount is assessed on the basis of the expected net cash flows that will be received from the assets employment and subsequent disposal. The expected net cash flows have been discounted to their present values in determining recoverable amounts. Amortisation Amortisation of petroleum and gas licences, production facilities, field equipment and buildings are determined based on the proven and probable hydrocarbon reserves. (p) Exploration and evaluation costs Exploration, evaluation and development costs incurred are accumulated in respect of each identifiable area of interest. These costs are carried forward only if they relate to an area of interest for which rights of tenure are current and in respect of which: (i) such costs are expected to be recouped through successful development and exploitation or from sale of area; or (ii) expl oration and evaluation activities in the area have not yet reached a stage that permits a reasonable assessment of the existence or otherwise of economically recoverable reserves, and active operations in, or relating to, the area are continuing. When an area of interest is abandoned or the directors decide that it is not commercial, any accumulated costs in respect of that area are written off in the financial year the decision is made. (q) Inventories Inventories are stated at the lower of cost and net realisable value. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. (r) Trade and other payables These amounts represent liabilities for goods and services provided to the Group prior to the end of the financial year which are unpaid. The amounts are unsecured, non-interest bearing and are paid on normal commercial terms. (s) Employee benefits (i) Wages and salaries and annual leave 25 Key Petroleum Limited and its Controlled Entities Notes to the Financial Statements continued NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D) Liabilities for wages and salaries, including non-monetary benefits, and annual leave expected to be settled within 12 months of the reporting date are recognised in other payables in respect of employees’ services up to the reporting date and are measured a t the amounts expected to be paid when the liabilities are settled. (ii) Share-based payments The Group provides benefits to employees (including directors) of the Company in the form of share-based payment transactions, whereby employees render services in exchange for shares or rights over shares (‘equity-settled transactions’). The cost of these equity-settled transactions with employees is measured by reference to the fair value at the date at which they are granted. The fair value is determined by an internal valuation using a Black-Scholes option pricing model. The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (‘vesting date’). The cumulative expense recognised for equity-settled transactions at each reporting date until vesting date reflects (i) the extent to which the vesting period has expired and (ii) the number of options that, in the opinion of the directors of the Company, will ultimately vest. This opinion is formed based on the best available information at balance date. No adjustment is made for the likelihood of market performance conditions being met as the effect of these conditions is included in the determination of fair value at grant date. No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition. Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new award are treated as if they were a modification of the original award. (t) Provisions Provisions are recognised when the Group has a legal or constructive obligation, as a result of past events, for which it is probable that an outflow of economic benefits will result and that outflow can be reliably measured. (u) Issued capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Incremental costs directly attributable to the issue of new shares or options for the acquisition of a business are not included in the cost of the acquisition as part of the purchase consideration. (v) Earnings per share (i) Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to owners of the Company, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the year. (w) Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case it is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the statement of financial position. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the taxation authority, are presented as operating cash flows. (x) Comparative figures When required by Accounting Standards, comparative figures have been adjusted to conform to changes in presentation for the current financial year. (y) New accounting standards and interpretations Certain new accounting standards and interpretations have been published that are not mandatory for 30 June 2011 reporting periods. The Group’s assessment of the impact of these new standards and interpretations is set out below. AASB 9: Financial Instruments (December 2010) (applicable for annual reporting periods commencing on or after 1 January 2013) 26 Key Petroleum Limited and its Controlled Entities Notes to the Financial Statements continued NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D) simplifying the classifications of financial assets into those carried at amortised cost and those carried at fair value; simplifying the requirements for embedded derivatives; removing the tainting rules associated with held-to-maturity assets; removing the requirements to separate and fair value embedded derivatives for financial assets carried at amortised cost; This Standard is applicable retrospectively and includes revised requirements for the classification and measurement of financial instruments, as well as recognition and derecognition requirements for financial instruments. The Group has not yet determine d any potential impact on the financial statements. The key changes made to accounting requirements include:      allowing an irrevocable election on initial recognition to present gains and losses on investments in equity instruments that are not held for trading in other comprehensive income. Dividends in respect of these investments that are a return on investment can be recognised in profit or loss and there is no impairment or recycling on disposal of the instrument; requiring financial assets to be reclassified where there is a change in an entity’s business model as they are initially cla ssified based on: (a) the objective of the entity’s business model for managing the financial assets; and (b) the characteristics of the contractual cash flows; and requiring an entity that chooses to measure a financial liability at fair value to present the portion of the change in its fair value due to changes in the entity’s own credit risk in other comprehensive income, except when that would create an accounting mismatch. If such a mismatch would be created or enlarged, the entity is required to present all changes in fair value (inclu ding the effects of changes in the credit risk of the liability) in profit or loss.   AASB 124: Related Party Disclosures (applicable for annual reporting periods commencing on or after 1 January 2011) This Standard removes the requirement for government-related entities to disclose details of all transactions with the government and other government-related entities and clarifies the definition of a “related party” to remove inconsistencies and simplify the structure of the Standard. No changes are expected to materially affect the Group. AASB 1053: Application of Tiers of Australian Accounting Standards and AASB 2010–2: Amendments to Australian Accounting Standards arising from Reduced Disclosure Requirements [AASB 1, 2, 3, 5, 7, 8, 101, 102, 107, 108, 110, 111, 112, 116, 117, 119, 121, 123, 124, 127, 128, 131, 133, 134, 136, 137, 138, 140, 141, 1050 & 1052 and Interpretations 2, 4, 5, 15, 17, 127, 129 & 1052] (applicable for annual reporting periods commencing on or after 1 July 2013) AASB 1053 establishes a revised differential financial reporting framework consisting of two tiers of financial reporting requirements for those entities preparing general purpose financial statements:  Tier 1: Australian Accounting Standards; and  Tier 2: Australian Accounting Standards – Reduced Disclosure Requirements. Tier 2 of the framework comprises the recognition, measurement and presentation requirements of Tier 1, but contains significantly fewer disclosure requirements. The following entities are required to apply Tier 1 reporting requirements (ie full IFRS):   Since the Group is a for-profit private sector entity that has public accountability, it does not qualify for the reduced disclosure requirements for Tier 2 entities. AASB 2010–2 makes amendments to Australian Accounting Standards and Interpretations to give effect to the reduced disclosure requirements for Tier 2 entities. It achieves this by specifying the disclosure paragraphs that a Tier 2 entity need not comply with as well as adding specific “RDR” disclosures. for-profit private sector entities that have public accountability; and the Australian Government and state, territory and local governments. AASB 2009–12: Amendments to Australian Accounting Standards [AASBs 5, 8, 108, 110, 112, 119, 133, 137, 139, 1023 & 1031 and Interpretations 2, 4, 16, 1039 & 1052] (applicable for annual reporting periods commencing on or after 1 January 2011) This Standard makes a number of editorial amendments to a range of Australian Accounting Standards and Interpretations, including amendments to reflect changes made to the text of IFRSs by the IASB. The Standard also amends AASB 8 to require entities to exercise judgment in assessing whether a government and entities known to be under the control of that government are considered a single customer for the purposes of certain operating segment disclosures. The amendments are not expected to impact the Group. AASB 2009–14: Amendments to Australian Interpretation – Prepayments of a Minimum Funding Requirement [AASB Interpretation 14] (applicable for annual reporting periods commencing on or after 1 January 2011) This Standard amends Interpretation 14 to address unintended consequences that can arise from the previous accounting requirements when an entity prepays future contributions into a defined benefit pension plan. This Standard is not expected to impact the Group. AASB 2010–4: Further Amendments to Australian Accounting Standards arising from the Annual Improvements Project [AASB 1, AASB 7, AASB 101 & AASB 134 and Interpretation 13] (applicable for annual reporting periods commencing on or after 1 January 2011) This Standard details numerous non-urgent but necessary changes to Accounting Standards arising from the IASB’s annual improvements project. Key changes include: 27 Key Petroleum Limited and its Controlled Entities Notes to the Financial Statements continued NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)  clarifying the application of AASB 108 prior to an entity’s first Australian-Accounting-Standards financial statements;  adding an explicit statement to AASB 7 that qualitative disclosures should be made in the context of the quantitative disclos ures to better enable users to evaluate an entity’s exposure to risks arising from financial instruments;  amending AASB 101 to the effect that disaggregation of changes in each component of equity arising from transactions recognised in other comprehensive income is required to be presented, but is permitted to be presented in the statement of changes in equity or in the notes;  adding a number of examples to the list of events or transactions that require disclosure under AASB 134; and  making sundry editorial amendments to various Standards and Interpretations. This Standard is not expected to impact the Group. AASB 2010–5: Amendments to Australian Accounting Standards [AASB 1, 3, 4, 5, 101, 107, 112, 118, 119, 121, 132, 133, 134, 137, 139, 140, 1023 & 1038 and Interpretations 112, 115, 127, 132 & 1042] (applicable for annual reporting periods beginning on or after 1 January 2011) This Standard makes numerous editorial amendments to a range of Australian Accounting Standards and Interpretations, including amendments to reflect changes made to the text of IFRSs by the IASB. However, these editorial amendments have no major impact on the requirements of the respective amended pronouncements. AASB 2010–6: Amendments to Australian Accounting Standards – Disclosures on Transfers of Financial Assets [AASB 1 & AASB 7] (applicable for annual reporting periods beginning on or after 1 July 2011) This Standard adds and amends disclosure requirements about transfers of financial assets, especially those in respect of the nature of the financial assets involved and the risks associated with them. Accordingly, this Standard makes amendments to AASB 1: First- time Adoption of Australian Accounting Standards, and AASB 7: Financial Instruments: Disclosures, establishing additional disclosure requirements in relation to transfers of financial assets. This Standard is not expected to impact the Group. AASB 2010–7: Amendments to Australian Accounting Standards arising from AASB 9 (December 2010) [AASB 1, 3, 4, 5, 7, 101, 102, 108, 112, 118, 120, 121, 127, 128, 131, 132, 136, 137, 139, 1023 & 1038 and Interpretations 2, 5, 10, 12, 19 & 127] (applies to periods beginning on or after 1 January 2013) This Standard makes amendments to a range of Australian Accounting Standards and Interpretations as a consequence of the issuance of AASB 9: Financial Instruments in December 2010. Accordingly, these amendments will only apply when the entity adopts AASB 9. As noted above, the Group has not yet determined any potential impact on the financial statements from adopting AASB 9. AASB 2010–8: Amendments to Australian Accounting Standards – Deferred Tax: Recovery of Underlying Assets [AASB 112] (applies to periods beginning on or after 1 January 2012) This Standard makes amendments to AASB 112: Income Taxes. The amendments brought in by this Standard introduce a more practical approach for measuring deferred tax liabilities and deferred tax assets when investment property is measured using the fair value model under AASB 140: Investment Property. Under the current AASB 112, the measurement of deferred tax liabilities and deferred tax assets depends on whether an entity expects to recover an asset by using it or by selling it. The amendments introduce a presumption that an investment property is recovered entirely through sale. This presumption is rebutted if the investment property is held within a business model whose objective is to consume substantially all of the economic benefits embodied in the investment property over time, rather than through sale. The amendments brought in by this Standard also incorporate Interpretation 121 into AASB 112. The amendments are not expected to impact the Group. AASB 2010–9: Amendments to Australian Accounting Standards – Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters [AASB 1] (applies to periods beginning on or after 1 July 2011) This Standard makes amendments to AASB 1: First-time Adoption of Australian Accounting Standards. The amendments brought in by this Standard provide relief for first-time adopters of Australian Accounting Standards from having to reconstruct transactions that occurred before their date of transition to Australian Accounting Standards. Furthermore, the amendments brought in by this Standard also provide guidance for entities emerging from severe hyperinflation either to resume presenting Australian-Accounting-Standards financial statements or to present Australian-Accounting-Standards financial statements for the first time. This Standard is not expected to impact the Group. AASB 2010–10: Further Amendments to Australian Accounting Standards – Removal of Fixed Dates for First-time Adopters [AASB 2009–11 & AASB 2010–7] (applies to periods beginning on or after 1 January 2013) This Standard makes amendments to AASB 2009–11: Amendments to Australian Accounting Standards arising from AASB 9, and AASB 2010–7: Amendments to Australian Accounting Standards arising from AASB 9 (December 2010). The amendments brought in by this Standard ultimately affect AASB 1: First-time Adoption of Australian Accounting Standards and 28 Key Petroleum Limited and its Controlled Entities Notes to the Financial Statements continued NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D) provide relief for first-time adopters from having to reconstruct transactions that occurred before their transition date. [The amendments to AASB 2009–11 will only affect early adopters of AASB 2009–11 (and AASB 9: Financial Instruments that was issued in December 2009) as it has been superseded by AASB 2010–7.] This Standard is not expected to impact the Group. (z) Critical accounting judgements, estimates and assumptions The preparation of these financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are: Exploration and evaluation costs Exploration and evaluation costs are accumulated in respect of each identifiable area of interest. These costs are carried forward only if they relate to an area of interest for which rights of tenure are current and in respect of which: (i) such costs are expected to be recouped through successful development and exploitation or from sale of area; or (ii) expl oration and evaluation activities in the area have not yet reached a stage that permits a reasonable assessment of the existence or otherwise of economically recoverable reserves, and active operations in, or relating to, the area are continuing. When an area of interest is abandoned or the directors decide that it is not commercial, any accumulated costs in respect of that area are written off in the financial year the decision is made. Environmental Issues Balances disclosed in the financial statements and notes thereto are not adjusted for any pending or enacted environmental legislation, and the directors understanding thereof. At the current stage of the Group’s development and its current environmental impact the directors believe such treatment is reasonable and appropriate. Taxation Balances disclosed in the financial statements and the notes thereto related to taxation are based on the best estimates of the directors. These estimates take into account both the financial performance and position of the Group as they pertain to current income taxation legislation, and the directors understanding thereof. No adjustment has been made for pending or future taxation legislation. The current income tax position represents that directors’ best estimate, pending an assessment by the Australian Taxation Office. Share-based payments Share-based payment transactions, in the form of options to acquire ordinary shares, are valued using the Black-Scholes option pricing model. This model uses assumptions and estimates as inputs. Provision for site restoration Where a restoration obligation exists, the Group estimates the future removal costs of production facilities at the time of installation of the assets. In most instances, removal of assets occurs many years into the future. This requires judgemental assumptions regarding removal date, future environmental legislation, the extent of reclamation activities required, the engineering methodology for estimating cost, future removal techniques in determining the removal cost and asset specific discount rates to determine the present value of these cash flows. 29 Key Petroleum Limited and its Controlled Entities Notes to the Financial Statements continued 30 JUNE 2011 2. REVENUE AND OTHER INCOME From continuing operations Sales revenue Oil Sales Other revenue Interest from financial institutions 3. EXPENSES Loss before income tax includes the following specific expenses: Defined contribution superannuation expense Impairment of Goodwill Impairment of Investment Minimum lease payments relating to operating leases 4. INCOME TAX (a) Income tax expense Current tax Deferred tax (b) Reconciliation of income tax expense to prima facie tax payable The prima facie tax payable on profit from ordinary activities before income tax is reconciled to the income tax expense as follows: 2011 $ 2010 $ 1,879,805 1,090,538 114,368 1,994,173 153,435 1,243,973 23,908 - - 106,422 - - - 50,776 2,891 500,888 112,185 - - - Loss from continuing operations before income tax expense (8,845,724) (6,072,006) Prima facie tax benefit at the Australian tax rate of 30% Tax effect of amounts which are not deductible (taxable) in calculating taxable income: Share of associate loss Exploration expenditure written off Impairment of Investments Impairment of Goodwill Sundry items Movements in unrecognised temporary differences Tax effect of current year tax losses for which no deferred tax asset has been recognised Income tax expense (2,653,717) (1,821,602) - 1,791,264 - - 15,449 (847,004) 772 580,437 150,266 867 206,831 (882,429) (441,366) (1,050) 1,288,370 - 883,479 - 30 Key Petroleum Limited and its Controlled Entities Notes to the Financial Statements continued 30 JUNE 2011 4. INCOME TAX (cont.) (c) Deferred Tax Assets Employee entitlements Capital raising costs and other section 40-880 deductions Tax losses Set off deferred tax liabilities Net deferred tax assets (d) Deferred Tax Liabilities Accrued interest revenue Capitalised exploration and evaluation costs Set-off deferred tax assets Net deferred tax liabilities (e) Tax Losses Unused tax losses for which no deferred tax asset has been recognised Notes 2011 $ 2010 $ 4(d) 4(c) 283 46,377 896,830 943,490 (943,490) - 1,082 942,408 943,490 (943,490) - 17,362 140,132 130,498 287,992 (287,992) - 20,092 267,900 287,992 (287,992) - 6,136,346 6,136,346 6,540,207 6,540,207 Potential deferred tax assets attributable to tax losses and exploration expenditure carried forward have not been brought to account at 30 June 2011 because the directors do not believe it is appropriate to regard realisation of the deferred tax assets as probable at this point in time. These benefits will only be obtained if: the Group derives future assessable income of a nature and of an amount sufficient to enable the benefit from the deductions i. for the loss and exploration expenditure to be realised; ii. the Group continues to comply with conditions for deductibility imposed by law; and no changes in tax legislation adversely affect the Group in realising the benefit from the deductions for the loss and iii. exploration expenditure. 5. CURRENT ASSETS - CASH AND CASH EQUIVALENTS Cash at bank and in hand Short-term deposits Cash and cash equivalents as shown in the statement of financial position and the statement of cash flows 672,248 1,300,000 602,916 2,300,000 1,972,248 2,902,916 Cash at bank and in hand earns interest at floating rates based on daily bank deposit rates. Short-term deposits are made for varying periods of between one day and three months depending on the immediate cash requirements of the Group, and earn interest at the respective short-term deposit rates. 6. CURRENT ASSETS - TRADE AND OTHER RECEIVABLES Trade receivables Other receivables 415,566 145,058 560,624 378,236 216,300 594,536 Credit Risk – Trade and Other Receivables The Group has no significant concentration of credit risk with respect to any single counter party or group of counterparties other than those receivables specifically provided for and mentioned within note 32. The class of assets described as Trade and Other Receivables is considered to be the main source of credit risk related to the group. On a geographical basis, the Group has credit risk exposures in Australia and the United Kingdom given the operations in those regions. The Group’s exposure to credit risk for receivables at the end of the reporting period in those regions is as follows: 31 Key Petroleum Limited and its Controlled Entities Notes to the Financial Statements continued 30 JUNE 2011 6. CURRENT ASSETS – TRADE AND RECEIVABLES (cont.) AUD Australia United Kingdom Notes 2011 $ 153,541 354,219 507,760 2010 $ 143,757 430,842 574,599 The following table details the Group’s trade and other receivables exposed to credit risk with ageing analysis and impairment provided for thereon. Amounts are considered to be ‘past due’ when the debt has not been settled, with the terms and conditi ons agreed between the Group and the customer or counterparty to the transaction. Receivables that are past due are assessed for impairment by ascertaining solvency of the debtors and are provided for where there are specific circumstances indicating that the debt may not be fully repaid to the Group. The balances of receivables that remain within initial trade terms (as detailed in the table) are considered to be of high credit quality. Gross Amount Past due and impaired Past due but not impaired (days overdue) $ $ < 30 $ 31 - 60 $ 61 - 90 $ > 90 $ 2011 Trade receivables Other receivables Total 2010 Trade receivables Other receivables Total 415,566 145,048 560,624 378,236 216,300 594,536 - - - - - - - - - - - - - - - - - - 7. CURRENT ASSETS - INVENTORY Petroleum products at cost Chemical stocks at cost 8. NON-CURRENT ASSETS – RECEIVABLES Bank guarantees Loan to associate company Other non-current receivables - - - - - - 73,052 20,754 93,806 33,768 9,601 5,534 48,903 Within initial trade terms $ 415,566 145,048 560,624 378,236 216,300 594,536 - - - - - - 13,786 33,451 47,237 62,275 8,101 4,878 75,254 The recovery of the carrying value of loans to subsidiaries (refer note 31) and loan to associate company is dependent on the successful development and commercial exploitation, or alternatively, sale of the respective exploration areas of interest. Key Petroleum Limited has provided an unsecured, interest free loan to Portsea Oil & Gas Pty Ltd, a company the Group has account ed for as an associate. 32 Key Petroleum Limited and its Controlled Entities Notes to the Financial Statements continued 30 JUNE 2011 9. NON-CURRENT ASSETS - PLANT AND EQUIPMENT Plant and equipment Cost Accumulated depreciation Net book amount Plant and equipment Opening net book amount Exchange differences Additions Depreciation charge Closing net book amount 10. NON-CURRENT ASSETS – INTANGIBLE ASSETS Goodwill Cost Accumulated impairment Net book amount Goodwill Opening net book amount Impairment Closing net book amount 11. NON CURRENT ASSETS – PETROLEUM ASSETS Petroleum assets at cost Less accumulated amortisation Total petroleum assets Reconciliation of movement in petroleum assets Opening net book amount Exchange differences Additions Acquisitions Amortisation expense Closing net book amount 2011 $ 2010 $ 503,123 (410,912) 92,211 145,305 (4,588) 5,905 (54,411) 92,211 2,891 (2,891) - - - - 2,770,359 (2,318,073) 452,286 2,787,049 (455,815) - - (1,878,948) 452,286 539,317 (394,012) 145,305 134,342 - 63,569 (52,606) 145,305 2,891 (2,891) - 2,891 (2,891) - 3,944,042 (1,156,993) 2,787,049 - - 13,806 3,930,236 (1,156,993) 2,787,049 12. NON-CURRENT ASSETS –CAPITALISED EXPLORATION COSTS Exploration, evaluation and development costs carried forward in respect of areas of interest Pre-production Opening net book amount Exchange differences Capitalised exploration and evaluation costs Exploration and evaluation costs written off Closing net book amount 3,546,076 (78,846) 3,141,361 (5,970,880) 637,711 4,587,866 - 892,999 (1,934,789) 3,546,076 The ultimate recoupment of costs carried forward for exploration and evaluation phases is dependent on the successful development and commercial exploitation or sale of the respective petroleum interests. 33 Key Petroleum Limited and its Controlled Entities Notes to the Financial Statements continued 30 JUNE 2011 13. CURRENT LIABILITIES - TRADE AND OTHER PAYABLES Trade payables Other payables and accruals 14. NON CURRENT LIABILITIES - PROVISIONS Site Restoration Provision Opening balance Exchange differences Purchase of controlled entity Unwind discount Amount capitalised Closing balance 2011 $ 2010 $ 285,731 47,997 333,728 575,707 (81,574) - 5,078 - 499,211 549,144 118,048 667,192 - - 555,986 19,721 - 575,707 Provision for Site Restoration A provision has been recognised for the costs to be incurred for the restoration of the oil well sites in the United Kingdom. It is anticipated that the sites will require restoration within the next five years if no further discoveries are made. 15. ISSUED CAPITAL (a) Share capital Ordinary shares fully paid Total issued capital (b) Movements in ordinary share capital Beginning of the financial year  Entitlements issue  Share placement  Supplier shares issued  Vendor shares issued  Share issue transaction costs  Transfer from Options Reserve End of the financial year (c) Movements in options on issue Notes 15(b), 15(d) 2011 2010 Number of shares $ Number of shares $ 216,047,707 28,214,283 130,175,518 24,599,056 216,047,707 28,214,283 130,175,518 24,599,056 130,175,518 65,950,134 19,501,887 420,168 - - - 216,047,707 24,599,056 2,638,004 1,033,600 20,000 - (296,377) 220,000 28,214,283 86,000,005 43,175,513 - - 1,000,000 - - 130,175,518 19,868,699 4,749,307 - - 95,000 (113,950) - 24,599,056 Beginning of the financial year Issued during the year:  Exercisable at 7.5 cents, on or before 30 November 2011 (listed)  Exercisable at 20 cents, on or before 30 November 2010  Exercisable at 30 cents, on or before 30 November 2011 Expired/cancelled during the year  Exercisable at 20 cents, on or before 30 November 2010  Exercisable at 50 cents, on or before 30 November 2010 End of the financial year 34 Number of options 2010 2011 5,950,000 5,750,000 41,175,058 - - (700,000) (5,000,000) 41,425,058 - 200,000 250,000 (250,000) - 5,950,000 Key Petroleum Limited and its Controlled Entities Notes to the Financial Statements continued 30 JUNE 2011 15. ISSUED CAPITAL (cont.) (d) Ordinary shares Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of the Company in proportion to the number of and amounts paid on the shares held. On a show of hands every holder of ordinary shares present at a meeting in person or by proxy, is entitled to one vote, and upon a poll each share is entitled to one vote. Ordinary shares have no par value and the Company does not have a limited amount of authorised capital. (e) Capital risk management The Group’s objectives when managing capital are to safeguard their ability to continue as a going concern, so that they may continue to provide returns for shareholders and benefits for other stakeholders. Due to the nature of the Group’s activities, being petroleum exploration, the Group does not have ready access to credit faci lities, with the primary source of funding being equity raisings. Therefore, the focus of the Group’s capital risk management is the current working capital position against the requirements of the Group to meet exploration programmes and corporate overheads. The Group’s strategy is to ensure appropriate liquidity is maintained to meet anticipated operating requirements, with a view to initiating appropriate capital raisings as required. Refer to Note 1 for managements plans to remain a going concern. The working capital position of the Group at 30 June 2011 and 30 June 2010 are as follows: Cash and cash equivalents Trade and other receivables Trade and other payables Working capital position 16. RESERVES (a) Reserves Foreign currency translation reserve Share-based payments reserve Movements: Foreign currency translation reserve Balance at beginning of year Currency translation differences arising during the year Balance at end of year Share-based payments reserve Balance at beginning of year Employees and contractors option expense Transferred to Issued Capital Transferred to Accumulated Losses Balance at end of year 2011 $ 1,972,248 560,624 (333,728) 2,199,144 (1,349,073) 208,900 (1,140,173) (780,346) (568,727) (1,349,073) 309,177 188,600 (220,000) (68,877) 208,900 2010 $ 2,902,916 594,536 (667,192) 2,830,260 (780,346) 309,177 (471,169) (87,870) (692,476) (780,346) 276,557 32,620 - - 309,177 (b) Nature and purpose of reserves (i) Foreign currency translation reserve Exchange differences arising on translation of the foreign controlled entities are taken to the foreign currency translation reserve, as described in note 1(d). The reserve is recognised in profit and loss when the net investment is disposed. (ii) Share-based payments reserve The share-based payments reserve is used to recognise the fair value of options issued. 35 Key Petroleum Limited and its Controlled Entities Notes to the Financial Statements continued 30 JUNE 2011 17. DIVIDENDS No dividends were paid during the financial year. No recommendation for payment of dividends has been made 18. KEY MANAGEMENT PERSONNEL DISCLOSURES (a) Key management personnel compensation Short-term benefits Post employment benefits Other long-term benefits Termination benefits Share-based payments 2011 $ 399,375 3,000 - - - 402,375 2010 $ 413,090 4,126 - - - 417,216 Detailed remuneration disclosures are provided in the remuneration report on pages 7 and 8. (b) Equity instrument disclosures relating to key management personnel (i) Options provided as remuneration and shares issued on exercise of such options No options were provided as remuneration to key management personnel in 2011. (ii) Option holdings The numbers of options over ordinary shares in the Company held during the financial year by each director of Key Petroleum Limited and other key management personnel of the Group, including their personally related parties, are set out below: 2011 Balance at start of the year Granted as compensat ion Exercised Other changes Balance at end of the year Vested and exercisable Unvested 750,000 2,000,000 Directors of Key Petroleum Limited Dennis Wilkins Kenneth Russell John Sheppard (Appointed 31 August 2010) Edward Ellyard (Resigned 31 August 2010) Richard O’Shannassy (Resigned 31 August 2010) - 1,000,000 750,000 Other key management personnel of the Group John Ribbons 500,000 All vested options are exercisable at the end of the year. - - - - - - - - - - - - (750,000) (2,000,000) - - - - 17,500 17,500 17,500 (1,000,000) (750,000) - - - - (200,000) 300,000 300,000 - - - - - - 2010 Balance at start of the year Granted as compensat ion Exercised Other changes Balance at end of the year Vested and exercisable Unvested Directors of Key Petroleum Limited Dennis Wilkins Kenneth Russell Edward Ellyard Richard O’Shannassy 750,000 2,000,000 1,000,000 750,000 Other key management personnel of the Group John Ribbons 500,000 - - - - - - - - - - 750,000 2,000,000 1,000,000 750,000 750,000 2,000,000 1,000,000 750,000 500,000 500,000 - - - - - - - - - - 36 Key Petroleum Limited and its Controlled Entities Notes to the Financial Statements continued 30 JUNE 2011 18. KEY MANAGEMENT PERSONNEL DISCLOSURES (cont’d) (iii) Share holdings The numbers of shares in the Company held during the financial year by each director of Key Petroleum Limited and other key management personnel of the Group, including their personally related parties, are set out below. There were no shares granted during the reporting period as compensation. 2011 Directors of Key Petroleum Limited Ordinary shares Dennis Wilkins Kenneth Russell John Sheppard (Appointed 31 August 2010) Edward Ellyard (Resigned 31 August 2010) Richard O’Shannassy (Resigned 31 August 2010) Other key management personnel of the Group Ordinary shares John Ribbons 2010 Directors of Key Petroleum Limited Ordinary shares Dennis Wilkins Kenneth Russell Edward Ellyard Richard O’Shannassy Other key management personnel of the Group Ordinary shares John Ribbons Balance at start of the year 1,000,000 5,815,000 - 6,675,000 300,000 600,005 Balance at start of the period 1,000,000 5,565,000 4,450,000 200,000 600,005 Received during the year on the exercise of options - - - - - - Received during the period on the exercise of options - - - - - Other changes during the year - - 70,000 (6,675,000) (300,000) Balance at end of the year 1,000,000 5,815,000 70,000 - - 399,995 1,000,000 Other changes during the period - 250,000 2,225,000 100,000 Balance at end of the period 1,000,000 5,815,000 6,675,000 300,000 - 600,005 (c) Loans to key management personnel There were no loans to key management personnel during the year. (d) Other transactions with key management personnel The services of Mr Ken Russell as Managing Director of Key Petroleum Limited are provided by Russell Group Holdings Pty Ltd, a company of which Mr Russell is a director and shareholder. The amounts are included as part of Mr Russell’s compensation. During the 2011 financial year the Group moved its principal place of business to premises owned by Russell Group Holdings Pt y Ltd on a casual lease with no fixed period, with monthly rent payable at usual commercial rates. Total rent and outgoings paid during the year amounted to $19,032 (2010: N/A). A total of $177,895 (2010: $132,026) was paid to DWCorporate Pty Ltd, a business of which Mr Wilkins is principal. DWCorporate Pty Ltd provided company secretarial, bookkeeping and other corporate services to the Key Group during the year. The amounts paid were at usual commercial rates with fees charged on an hourly basis. Richard O’Shannassy & Co Pty Ltd, a business of which Mr O’Shannassy is principal, provided legal services to the Key Petroleum Group during the year. The amounts paid were at arm’s length and are included as part of Mr O’Shannassy’s compensation for the period he was a director. 37 Key Petroleum Limited and its Controlled Entities Notes to the Financial Statements continued 30 JUNE 2011 19. REMUNERATION OF AUDITORS 2011 $ 2010 $ During the year the following fees were paid or payable for services provided by the auditor of the parent entity, its related practices and non-related audit firms: Audit services Bentleys – audit of financial reports Mazars – audit of UK financial reports Total remuneration for audit services 31,450 10,435 41,885 56,450 3,165 59,615 Non audit services Mazars – preparation of financial statements Total remuneration for audit services 20. CONTINGENCIES 3,675 3,675 8,956 8,956 400,000 Key shares upon the granting of an Exploration Permit for the second Offshore Block. 200,000 Key shares upon the granting of an Exploration Permit for the third Offshore Block 400,000 Key shares upon the granting of an extension of permission to drill on the Borsano Permit. A contingent liability exists in relation to the purchase of Puma Petroleum S.r.l which occurred in 2007. Key Petroleum Limited will issue:    In relation to the Group's interest in the West Songo Songo joint venture correspondence has been received from its joint venture participant’s legal representative notifying the Company of its obligations under the West Songo Songo Production Sharing Agreement. The Company’s response has been that it is fully aware of its obligations as Operator and of its work commitments. The directors believe the issues raised in the correspondence will be able to be satisfactorily resolved. There are no material contingent assets of the Group at balance date. 21. COMMITMENTS (a) Exploration commitments The Company has certain commitments to meet minimum expenditure requirements on the mineral exploration assets it has an interest in. Outstanding exploration commitments are as follows: within one year later than one year but not later than five years (b) Lease commitments: Group as lessee Operating leases (non-cancellable): Minimum lease payments within one year later than one year but not later than five years Aggregate lease expenditure contracted for at reporting date but not recognised as liabilities 1,264,117 4,812,360 6,076,477 20,045,000 5,956,000 26,001,000 - - - 113,241 84,931 198,172 The current office premises are rented on monthly basis with no minimum commitment or notice period required on termination from a related party, refer to note 18(d). 38 Key Petroleum Limited and its Controlled Entities Notes to the Financial Statements continued 30 JUNE 2011 21. COMMITMENTS (cont’d) 2011 $ 2010 $ (c) Remuneration commitments Amounts disclosed as remuneration commitments include commitments arising from the service contracts of key management personnel referred to in the remuneration report on pages 7 and 8 that are not recognised as liabilities and are not included in the key management personnel compensation. within one year later than one year but not later than five years 6,000 - 6,000 88,750 - 88,750 22. RELATED PARTY TRANSACTIONS (a) Parent entity The ultimate parent entity within the Group is Key Petroleum Limited. (b) Subsidiaries Interests in subsidiaries are set out in note 24. (c) Key management personnel Disclosures relating to key management personnel are set out in note 18. (d) Loans to related parties Loan to associate Key Petroleum Limited has provided an unsecured, interest free loan to Portsea Oil & Gas Pty Ltd, a company the Group has accounted for as an associate. The balance of the loan at 30 June 2011 is $9,601 (2010: $8,101). 23. BUSINESS COMBINATIONS Prior period (a) Summary of acquisitions Key Petroleum (UK) Limited, a United Kingdom registered private company, was incorporated on 28 July 2009 with Key Petroleum Limited being the sole shareholder. On 30 September 2009 Key Petroleum (UK) Limited acquired 100% of the issued share capital of Midmar Energy Onshore Limited, a company registered in the United Kingdom. Subsequently the name of the acquired entity has been changed to Key Petroleum Weald Basin Limited. As part of the acquisition the Company acquired third party borrowings of $3,648,800. These were repaid on the day of the acquisition. The acquired business contributed $1,090,538 revenue and a loss of $1,529,893 to the Group for the period from 30 September 2009 to 30 June 2010. If the acquisition had occurred on 1 July 2009, consolidated revenue and consolidated loss for the year ended 30 June 2010 would have been $2,102,628 and $6,148,328 respectively. At the date of acquisition, the acquired entity was involved in oil production in England. Details of the fair value of the assets and liabilities acquired and goodwill are as follows: Purchase consideration (refer to (c) below): Cash paid Total purchase consideration Fair value of net identifiable assets acquired (refer to (b) below) Goodwill $ 297,494 297,494 297,494 - 39 Key Petroleum Limited and its Controlled Entities Notes to the Financial Statements continued 30 JUNE 2011 23. BUSINESS COMBINATIONS (cont.) (b) Assets and liabilities acquired The assets and liabilities arising from the acquisition are as follows: Cash Trade and other receivables Inventory Plant and equipment Petroleum permits and capitalised exploration costs Trade and other payables Borrowings Provisions Net identifiable assets acquired (c) Purchase consideration Outflow of cash to acquire business, net of cash acquired Cash consideration Less: Balances acquired Cash and cash equivalents Outflow of cash 24. SUBSIDIARIES Acquiree’s carrying amount $ 95,110 258,300 65,810 37,834 6,624,359 (119,208) (3,648,800) (555,986) 2,757,419 2011 $ - - - Fair value $ 95,110 258,300 65,810 37,834 4,164,434 (119,208) (3,648,800) (555,986) 297,494 2010 $ 297,494 (95,110) 202,384 The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in note 1(b): Name Country of Incorporation Class of Shares Equity Holding* Puma Petroleum S.r.L. Key Petroleum (Australia) Pty Ltd Funguo Petroleum Pty Limited Key Petroleum (UK) Limited Key Petroleum Weald Basin Limited Italy Australia Tanzania England England Ordinary Ordinary Ordinary Ordinary Ordinary * The proportion of ownership interest is equal to the proportion of voting power held. 2011 % 100 100 100 100 100 2010 % 100 100 100 100 100 25. INVESTMENT IN ASSOCIATE (a) Carrying amount Information relating to the associate is set out below. Name of Company Principal Activity Unlisted Portsea Oil & Gas Pty Ltd Oil and gas exploration The above associate was incorporated in Australia. Ownership Interest Consolidated 2011 % 2010 % 2011 $ 2010 $ 50 50 - - 40 Key Petroleum Limited and its Controlled Entities Notes to the Financial Statements continued 30 JUNE 2011 25. INVESTMENT IN ASSOCIATE (cont.) (b) Movements in carrying amount Carrying amount at the beginning of the year Share of loss after income tax Impairment of Investment Carrying amount at the end of the year (c) Share of associate profit or loss Loss before income tax Income tax Loss after income tax (d) Unrecognised share of associate loss Losses unrecognised at the beginning of the year Share of associate loss not recognised during the year Losses unrecognised at the end of the year (e) Summarised financial information of associate 2011 $ 2010 $ - - - - - - - - (1,823) (1,823) 503,462 (2,574) (500,888) - (2,574) - (2,574) - - - 2011 Portsea Oil & Gas Pty Ltd 2010 Portsea Oil & Gas Pty Ltd Gross Amount of: Assets $ Liabilities Revenues $ $ Loss $ 2,213 5,695 204,080 203,917 3 1 (3,645) (5,150) (f) Share of associate’s expenditure commitments, other than for the supply of inventories Portsea Oil & Gas Pty Ltd does not have any expenditure commitments at balance date. (g) Contingent liabilities of associate Portsea Oil & Gas Pty Ltd does not have any contingent liabilities at 30 June 2011. 26. INTERESTS IN JOINT VENTURES Tanzanian Agreement - Nyuni Key Petroleum Limited owns a 5% interest in the Nyuni Production Sharing Agreement (“Nyuni PSA”) and a 5% participating interest in the Joint Operating Agreement (“JOA”) between Ndovu Resources Limited (“Ndovu”), a Tanzanian company, Rakgas Tanzania Ltd and Bounty Oil and Gas NL. Tanzanian Agreement – West Songo Songo Key Petroleum Limited, through its wholly owned subsidiary Funguo Petroleum Pty Ltd, owns a 50% interest in a Production Sharing Contract with the Government of the Republic of Tanzania in respect of the West Songo Songo area. 27. EVENTS OCCURRING AFTER THE STATEMENT OF FINANCIAL POSITION DATE The Company will be holding a meeting of shareholders on 29 August 2011 seeking approval to acquire 100% of the issued capital of Zeta Petroleum Limited (“Zeta”). 41 Key Petroleum Limited and its Controlled Entities Notes to the Financial Statements continued 30 JUNE 2011 28. STATEMENT OF CASH FLOWS (a) Reconciliation of net loss after income tax to net cash outflow from operating activities Net loss for the year Non-Cash Items Depreciation of non-current assets Employee and contractors options expense Share of loss of associate Impairment expense Net exchange differences Change in operating assets and liabilities, net of effects from purchase of controlled entity Decrease/(increase) in trade and other receivables (Increase)/decrease in inventories (Decrease)/increase in provisions Decrease in petroleum permits and capitalised exploration costs (Decrease)/increase in trade and other payables Net cash outflow from operating activities 2011 $ 2010 $ (8,845,724) (6,072,006) 1,933,359 - - - (91,722) 60,264 (53,237) (5,078) 2,829,519 (333,463) (4,506,082) 1,211,997 32,620 2,574 503,779 (3,013) (205,240) 16,246 39,378 1,019,366 370,379 (3,083,920) Share issue (b) Non-cash financing and investing activites (i) During the current year 420,168 ordinary shares were issued, with a deemed value of $20,000, as consideration for consulting services. During the prior year 1,000,000 ordinary shares were issued at 30 cents as a result of the granting of the Exploration Permit for West Sardinia as part of the consideration for the purchase of Puma Petroleum S.r.L. 29. LOSS PER SHARE (a) Reconciliation of earnings used in calculating loss per share Loss attributable to the owners of the Company used in calculating basic and diluted loss per share (b) Weighted average number of shares used as the denominator Weighted average number of ordinary shares used as the denominator in calculating basic and diluted loss per share 2011 $ 2010 $ (8,845,724) (6,072,006) Number of shares Number of shares 185,647,744 124,670,935 (c) Information on the classification of options As the Group has made a loss for the year ended 30 June 2011, all options on issue are considered anti-dilutive and have not been included in the calculation of diluted earnings per share. These options could potentially dilute basic earnings per share in the future. 30. SHARE-BASED PAYMENTS (a) Employees and contractors options The Group provides benefits to employees (including Directors) and contractors of the Group in the form of share-based payment transactions, whereby options to acquire ordinary shares are issued as an incentive to improve employee and shareholder goal congruence. The exercise price of the options currently on issue is 30 cents, with an expiry date of 30 November 2011. Options granted carry no dividend or voting rights. When exercisable, each option is convertible into one ordinary share of the Company with full dividend and voting rights. 42 Key Petroleum Limited and its Controlled Entities Notes to the Financial Statements continued 30 JUNE 2011 30. SHARE BASED PAYMENTS (cont.) Set out below are summaries of the options granted: Outstanding at the beginning of the year Granted Forfeited/cancelled Exercised Expired Outstanding at year-end Exercisable at year-end 2011 2010 Number of options 5,950,000 - - - (5,700,000) 250,000 250,000 Weighted average exercise price cents 45.6 - - - 46.3 30.0 30.0 Number of options 5,750,000 450,000 (250,000) - - 5,950,000 5,950,000 Weighted average exercise price cents 46.1 25.6 20.0 - - 45.6 45.6 The weighted average remaining contractual life of share options outstanding at the end of the financial year was 0.45 years (2010: 0.46), and the exercise price is 30 cents. There were no options granted during the current period. The weighted average fair value of the options granted during the prior year was 7.25 cents. The price was calculated by using the Black-Scholes European Option Pricing Model applying the following inputs: Weighted average exercise price (cents) Weighted average life of the option (years) Weighted average underlying share price (cents) Expected share price volatility Risk free interest rate 2011 - - - - - 2010 25.6 1.46 14.0 148.44% 3.75% Historical volatility has been used as the basis for determining expected share price volatility as it assumed that this is i ndicative of future trends, which may not eventuate. The life of the options is based on historical exercise patterns, which may not eventuate in the future. (b) Options Issued to Suppliers The Group issued options during the current financial year as consideration for capital raising services. The options granted had an exercise price of 7.5 cents and an expiry date of 30 November 2011. The options granted carried no dividend or voting rights. When exercised, each option was converted into one ordinary share in the capital of the Company with full dividend and voting rights. Set out below are summaries of granted options: Outstanding at the beginning of the year Granted Forfeited Exercised Expired Outstanding at year-end Exercisable at year-end Consolidated 2011 2010 Weighted average exercise price cents Number of options Weighted average exercise price cents - 7.5 - - - 7.5 7.5 - - - - - - - - - - - - - - Number of options - 8,200,000 - - - 8,200,000 8,200,000 The weighted average remaining contractual life of share options outstanding at the end of the year was 0.45 years. 43 Key Petroleum Limited and its Controlled Entities Notes to the Financial Statements continued 30 JUNE 2011 30. SHARE BASED PAYMENTS (cont.) The weighted average fair value of the options granted during the year was 2.3 cents. The price was calculated by using the Black- Scholes European Option Pricing Model applying the following inputs: Weighted average exercise price (cents) Weighted average life of the option (years) Weighted average underlying share price (cents) Expected share price volatility Risk free interest rate 2011 7.5 1.25 4.7 145.11% 4.5% Historical volatility has been the basis for determining expected share price volatility as it assumed that this is indicative of future trends, which may not eventuate. The life of the options is based on historical exercise patterns, which may not eventuate in the future. (c) Expenses arising from share-based payment transactions Total expenses arising from share-based payment transactions recognised during the year were as follows: Options issued to employees and contractors Options issued to suppliers recognised in share issue transaction costs 2011 $ - 188,600 188,600 2010 $ 32,620 - 32,620 31. PARENT ENTITY INFORMATION The following information relates to the parent entity, Key Petroleum Limited, at 30 June 2011. The information presented her e has been prepared using accounting policies consistent with those presented in Note 1. Current assets Non-current assets Total assets Current liabilities Total liabilities Issued capital Share-based payments reserve Accumulated losses Total equity Loss for the year Total comprehensive loss for the year 1,734,767 2,207,173 3,941,940 86,502 86,502 28,214,283 208,900 (24,567,745) 3,855,438 (9,398,917) (9,398,917) 2,793,707 7,116,800 9,910,507 239,980 239,980 24,599,055 309,177 (15,237,705) 9,670,527 (6,485,369) (6,485,369) 44 Key Petroleum Limited and its Controlled Entities Notes to the Financial Statements continued 30 JUNE 2011 31. PARENT ENTITY INFORMATION (cont.) The parent entity is responsible for the contingent liabilities outlined in note 20. The parent entity is responsible for the commitments outlined in note 21. Interests in subsidiaries are set out in note 24. Disclosures relating to key management personnel are set out in note 18. Loans to related parties Loans to subsidiaries Beginning of the year Loans advanced Interest charged Impairments Closing balance Key Petroleum (UK) Ltd Other subsidiaries Total 2011 $ 2010 $ 3,346,054 175,192 364,270 (1,838,553) 2,046,963 - 4,911,872 268,254 (1,834,072) 3,346,054 2011 $ 373,505 219,856 48,195 (603,498) 38,058 2010 $ 453,081 50,963 29,915 (160,454) 373,505 2011 $ 2010 $ 3,719,559 395,048 412,465 (2,442,051) 2,085,021 453,081 4,962,835 298,169 (1,994,526) 3,719,559 Key Petroleum Limited has provided unsecured loans to its wholly owned subsidiaries Key Petroleum (UK) Ltd and Funguo Petroleum Pty Limited with monthly interest charged at the BBSW rate plus 2%. Key Petroleum Limited has also provided an unsecured, interest free loan to its wholly owned subsidiary Key Petroleum (Australia) Pty Ltd. An impairment assessment is undertaken each financial year by examining the financial position of each subsidiary and the market in which the respective subsidiary operates to determine whether there is objective evidence that any of the subsidiaries are impaired. When such obj ective evidence exists, the Group recognises an allowance for the impairment loss. 32. FINANCIAL RISK MANAGEMENT The Group’s financial instruments consist mainly of deposits with banks and accounts receivable and payable. The totals for each category of financial instruments, measured in accordance with AASB 139 as detailed in the accounting policies to these financial statements, are as follows: Financial Assets Cash and cash equivalents Loans and Receivables Total Financial Assets Financial Liabilities Trade and other payables Total Financial Liabilities 2011 $ 1,972,248 609,527 2,581,775 2010 $ 2,902,916 669,790 3,572,706 333,728 333,728 667,191 667,191 Specific Financial Risk Exposures and Management The Group’s activities expose it to a variety of financial risks: market risk (including currency risk, interest rate risk and price risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. Risk management is carried out by the full Board of Directors as the Group believes that it is crucial for all board members to be involved in this process. The Managing Director, with the assistance of senior management as required, has responsibility for identifying, assessing, treating and monitoring risks and reporting to the board on risk management. 45 Key Petroleum Limited and its Controlled Entities Notes to the Financial Statements continued 30 JUNE 2011 32. FINANCIAL RISK MANAGEMENT (cont.) (a) Market risk (i) Foreign exchange risk The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures. Foreign exchange risk arises from future commercial transactions and recognised assets and liabilities denominated in a curre ncy that is not the entity’s functional currency and net investments in foreign operations. The Group has not formalised a foreign currency risk management policy however, it monitors its foreign currency expenditure in light of exchange rate movements. The Group’s exposure to foreign currency risk at the reporting date was as follows: Cash and cash equivalents Trade and other receivables Trade and other payables GBP 234,288 234,350 (110,256) 2011 USD 24,179 35,931 (40,974) EUR GBP 10,295 41,441 (54,671) 110,207 42,488 (204,201) 2010 USD 12,782 64,735 (37,506) EUR 29,097 46,828 (25,793) Sensitivity analysis Based on the financial instruments held at 30 June 2011, had the Australian dollar weakened/strengthened by 10% against the US dollar, the Euro or the British pound with all other variables held constant, there would have been an immaterial impact on the Group’s post-tax losses for the year (2010: Nil) and immaterial movements to the Group’s equity for both years presented. (ii) Price risk The Group is exposed to movements in the world oil price as its revenues are generated through the sale of crude oil. Sensitivity analysis At 30 June, 2011 if the oil price had changed by -/+ 5% from the weighted average rate for the year with all other variables held constant, the post-tax loss for the Group would have been $94,000 higher/lower (2010: $54,500) as a result of lower/higher oil sales revenue. (iii) Interest rate risk The Group is exposed to movements in market interest rates on cash and cash equivalents. The Group policy is to monit or the interest rate yield curve out to six months to ensure a balance is maintained between the liquidity of cash assets and the interest rate return. The entire balance of cash and cash equivalents for the Group $1,972,248 (2010: $2,902,916) is subject to interest rate risk. The proportional mix of floating interest rates and fixed rates to a maximum of six months fluctuate during the year depending on current working capital requirements. The weighted average interest rate received on cash and cash equivalents by the Group was 4.0% (2010: 4.4%). Sensitivity analysis At 30 June 2011, if interest rates had changed by -/+ 80 basis points from the weighted average rate for the year with all other variables held constant, post-tax loss for the Group would have been $23,000 lower/higher (2010: $28,000 lower/higher) as a result of lower/higher interest income from cash and cash equivalents. (b) Credit risk Exposure to credit risk relating to financial assets arises from the potential non-performance by counterparties of contract obligations that could lead to a financial loss to the Group. Credit risk is minimised by investing surplus funds in financial institutions that maintain AAA credit ratings and by ensuring customers and counterparties to transactions are of sound credit worthiness. Credit Risk Exposures The maximum exposure to credit risk by class of recognised financial assets at balance date is equivalent to the carrying val ue and classification of those financial assets (net of any provisions) as presented in the statement of financial position. The Group has a concentration of credit risk relating to sales of oil in the UK which are to only one customer (BP Exploration Operating Company Ltd). There was an outstanding balance for this debtor at 30 June 2011 of $222,071 (2010: $178,322). All cash holdings within the Group are currently held with AAA rated financial institutions. 46 Key Petroleum Limited and its Controlled Entities Notes to the Financial Statements continued 30 JUNE 2011 32. FINANCIAL RISK MANAGEMENT (cont.) (c) Liquidity risk The Group manages liquidity risk by continuously monitoring forecast and actual cash flows and ensuring sufficient cash and marketable securities are available to meet the current and future commitments of the Group. Due to the nature of the Group’s activities, being oil and gas exploration, the Group does not have ready access to credit facilities, with the primary source of funding being equity raisings. The Board of Directors constantly monitor the state of equity markets in conjunction with the Group’s current and future funding requirements, with a view to initiating appropriate capital raisings as required. Refer to Note 1 for managements plans to remain a going concern. The tables below reflect an undiscounted contractual maturity analysis for financial liabilities. Cash flows realised from financial assets reflect management’s expectation as to the timing of realisation. Actual timing may therefore differ from that disclosed. The timing of cash flows presented in the table to settle financial liabilities reflects the earliest contractual settlement dates. Financial Liability and Financial Asset Maturity Analysis Within 1 Year 1 to 5 Years Total 2011 $ 2010 $ 2011 $ 2010 $ 2011 $ 2010 $ Financial liabilities due for payment Trade and other payables (excluding estimated annual leave) Operating lease liabilities Exploration commitments Total contractual outflows Financial assets – cash flows realisable Cash and cash equivalents Trade and loan receivables Total anticipated inflows Net (outflow)/inflow on financial instruments 333,728 - 609,318 113,241 - - - 333,728 84,931 - 609,318 198,172 1,264,117 20,045,000 4,812,360 5,956,000 6,076,477 26,001,000 1,597,845 20,767,559 4,812,360 6,040,931 6,410,205 26,808,490 1,972,248 2,902,916 609,527 669,790 2,581,775 3,572,706 - - - - - - 1,972,248 2,902,916 609,527 669,790 2,581,775 3,572,706 983,930 (17,194,853) (4,812,360) (6,040,931) (3,828,430) (23,235,784) (d) Fair value estimation The fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes. All financial assets and financial liabilities of the Group at the balance date are recorded at amounts approximati ng their fair value. The fair value of financial instruments traded in active markets is based on quoted market prices at the reporting date. The quoted market price used for financial assets held by the Group is the current bid price. The carrying value less impairment provision of trade receivables and payables are assumed to approximate their fair values due to their short-term nature. As disclosed in note 1 should the Company not continue as a going concern then the fair value of financial assets and financi al liabilities may not reflect the true fair value of financial assets and financial liabilities on a liquidation basis. 33. SEGMENT INFORMATION Identification of reportable segments The Group has identified its operating segments based on the internal reports that are reviewed and used by the board of directors (chief operating decision makers) in assessing performance and determining the allocation of resources. The Group is managed primarily on the basis of geographic location of assets given that the type of work done in each location is of a similar nature. Operating segments are therefore determined on this basis. Types of activites by segment United Kingdom The United Kingdom segment produces oil for sale and conducts exploration on the Company’s licenses. 47 Key Petroleum Limited and its Controlled Entities Notes to the Financial Statements continued 30 JUNE 2011 33. SEGMENT INFORMATION (cont.) Tanzania The Tanzanian segment is engaged in exploration for oil and gas in the Company’s interests in Tanzania. Italy The Italian segment is engaged in exploration for oil and gas in the Company’s interests in Italy. Basis of accounting for purposes of reporting by operating segments Accounting policies adopted Unless stated otherwise, all amounts reported to the Board of Directors as the chief decision maker with respect to operating segments are determined in accordance with accounting policies that are consistent to those adopted in the annual financial statements of the Group. Inter-segment transactions An internally determined transfer price is set for all inter-entity sales. This price is re-set quarterly and is based on what would be realised in the event the sale was made to an external party at arm’s-length. All such transactions are eliminated on consolidation for the Group’s financial statements. Inter-segment loans payable and receivable are initially recognised at the consideration received net of transact ion costs. If inter- segment loans receivable and payable are not on commercial terms, these are not adjusted to fair value based on market intere st rates. This policy represents a departure from that applied to the statutory financial statements. Segment assets Where an asset is used across multiple segments, the asset is allocated to the segment that receives the majority of economic value from the asset. In the majority of instances, segment assets are clearly identifiable on the basis of their nature and physical location. Unless indicated otherwise in the segment assets note, investments in financial assets, deferred tax assets and intangible assets have not been allocated to operating segments. Segment liabilities Liabilities are allocated to segments where there is direct nexus between the incurrence of the liability and the operations of the segment. Borrowings and tax liabilities are generally considered to relate to the Group as a whole and are not allocated. Segment liabilities include trade and other payables and certain direct borrowings. Unallocated items The following items of revenue, expenses, assets and liabilities are not allocated to operating segments as they are not cons idered part of the core operations of any segment:       Interest income Administration expenses Corporate expenses Equity accounted profits and losses of associates Impairment of investment in associates Corporate liabilities  Cash Major Customers Details of major customers are disclosed in note 32(b). Comparative information This is the first reporting period in which AASB 8 Operating Segments has been adopted. Comparative information has been restated to conform to the requirements of the Standard. 48 Key Petroleum Limited and its Controlled Entities Notes to the Financial Statements continued 30 JUNE 2011 33. SEGMENT INFORMATION (cont.) Segment revenue External sales Interest revenue Total segment revenue Reconciliation of segment revenue to Group revenue Amounts not included in the segment result but reviewed by the Board: Interest revenue Total Group revenue Segment result Segment result before income tax Reconciliation of segment result to Group loss before tax Amounts not included in the segment result but reviewed by the Board: Depreciation and amortisation Impairment of capitalised exploration costs Equity accounted profits of associates and JVs Impairment of goodwill Impairment of investment Interest revenue Administration charges Corporate charges Unallocated items: Depreciation and amortisation Other Loss for the year United Kingdom Tanzania Italy Total 2011 $ 2010 $ 2011 $ 2010 $ 2011 $ 2010 $ 2011 $ 2010 $ 1,879,806 - 1,879,806 1,090,538 - 1,090,538 - - - - - - - 17 17 - 427 427 1,879,806 17 1,879,823 1,090,538 427 1,090,965 677,106 (349,564) (9,565) (14,219) (121,086) (203,509) 546,455 (567,292) 114,350 1,994,173 153,008 1,243,973 (1,904,650) (1,175,480) - - - - (1,904,650) (1,175,480) (5,960,517) (1,695,896) (10,363) (253,695) (5,970,880) (1,949,591) - (2,891) - - - 114,350 (1,029,188) (535,166) (2,574) (2,891) (500,888) 153,435 (1,215,738) (692,046) (28,709) (37,936) (8,845,724) (36,516) (82,425) (6,072,006) Segment assets 1,905,677 3,757,518 62,254 3,280,197 70,252 117,846 2,038,183 7,155,561 Reconciliation of segment assets to Group assets Intersegment elimination Unallocated items: Corporate assets Total Group assets from continuing operations Segment asset increases for the year Capital expenditure Acquisitions - - 1,819,606 2,942,812 3,857,789 10,098,373 423,645 - 423,645 271,846 4,202,268 4,474,114 586,858 - 586,858 565,195 - 565,195 - - - - - - 1,010,503 - 1,010,503 837,041 4,202,268 5,039,309 Segment liabilities 5,218,219 5,662,001 655,724 509,671 74,237 36,773 5,948,180 6,208,445 Reconciliation of segment liabilities to Group liabilities Intersegment elimination Unallocated items: Corporate liabilities Total Group liabilities from continuing operations (5,201,743) (5,205,524) 86,502 239,978 832,939 1,242,899 49 Key Petroleum Limited and its Controlled Entities Notes to the Financial Statements continued 30 JUNE 2011 34. COMPANY DETAILS The registered office of the company is: Key Petroleum Limited Ground Floor, 20 Kings Park Road WEST PERTH WA 6005 The principal place of business is: Key Petroleum Limited 163 Stirling Highway NEDLANDS WA 6009 50 Key Petroleum Limited and its Controlled Entities Directors' Declaration In the directors’ opinion: (a) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting the financial statements and notes set out on pages 16 to 50 are in accordance with the Corporations Act 2001, including: (i) requirements; and (ii) financial year ended on that date; there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and giving a true and fair view of the Company’s financial position as at 30 June 2011 and of its performance for the a statement that the attached financial statements are in compliance with International Financial Reporting Standards has been (b) payable; and (c) included in the notes to the financial statements. The directors have been given the declarations by the chief executive officer and chief financial officer required by section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the directors for Key Petroleum Limited. Ken Russell Managing Director Perth, 23 August 2011 51 We have audited the accompanying financial report of Key Petroleum Limited, which comprises the consolidated statement of financial position as at 30 June 2011, and the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, notes comprising a summary of significant accounting policies and other explanatory information, and the directors’ declaration of the Company and the Consolidated Entity, comprising the Company and the entities it controlled at the year’s end or from time to time during the financial year. The directors of the Company are responsible for the preparation and fair presentation of the financial report in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. In Note 1, the directors also state, in accordance with Accounting Standards AASB 101: Presentation of Financial Statements, that the financial statements comply with International Financial Reporting Standards. Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. In conducting our audit, we followed applicable independence requirements of Australian professional ethical pronouncements and the Corporations Act 2001. As disclosed in Note 1 to the financial statements, the accounts have been prepared on the going concern basis, which contemplates continuity of normal activities and the realisation of assets and settlement of liabilities in the ordinary course of business. The Consolidated Entity incurred a loss from general business activities of $8,845,724 for the year ended 30 June 2011 (2010: $6,072,006 loss). Included within this loss was the write off of exploration expenditure of $5,970,880 (2010: $1,934,789). The net working capital position of the Consolidated Entity at 30 June 2011 was $2,199,144 (2010: $2,830,260) and the net decrease in cash held during the year was $928,160 (2010: $2,830,260). The Consolidated Entity has expenditure commitments relating to work programme obligations of their assets of $1,264,117 which potentially could fall due in the twelve months to 30 June 2012. The ability of the Consolidated Entity to continue to pay its debts as and when they fall due is dependent upon the Company successfully raising additional share capital. The Company constantly considers capital needs and capital raising opportunities. Should the Consolidated Entity not be successful in its planned capital raisings, it may be necessary to sell further assets and reduce exploration expenditure by various methods including surrendering or withdrawing from less prospective tenements. As a result of these matters, a significant uncertainty exists which may cast significant doubt on the Consolidated Entity’s ability to continue as a going concern and therefore it may be unable to realise its assets and discharge its liabilities in the normal course of business. The financial report does not include any adjustments relating to the recoverability and classification of recorded asset amounts or to the amounts and classification of liabilities that might be necessary should the Consolidated Entity not continue as a going concern. In our opinion, except for the matter included in the preceding paragraph: a. The financial report of Key Petroleum Limited is in accordance with the Corporations Act 2001, including: i. giving a true and fair view of the Consolidated Entity’s financial position as at 30 June 2011 and of its performance for the year ended on that date; and ii. complying with Australian Accounting Standards and the Corporations Regulations 2001; b. The financial report also complies with International Financial Reporting Standards as disclosed in Note 1. We have audited the Remuneration Report included in directors’ report of the year ended 30 June 2011. The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. In our opinion, the Remuneration Report of Key Petroleum Limited for the year ended 30 June 2011, complies with section 300A of the Corporations Act 2001. BENTLEYS Chartered Accountants CHRIS WATTS CA Director DATED at PERTH this 23rd day of August 2011 ASX Additional Information Key Petroleum Limited Additional information required by Australian Stock Exchange Ltd and not shown elsewhere in this report is as follows. The information is current as at 27 October 2011. (a) Distribution of equity securities Analysis of numbers of equity security holders by size of holding: 1 1,001 5,001 10,001 100,001 - - - - 1,000 5,000 10,000 100,000 and over The number of equity security holders holding less than a marketable parcel of securities are: Ordinary shares Number of holders Number of shares Options Number of holders Number of options 51 108 191 705 256 1,311 9,345 367,637 1,687,362 27,872,137 186,111,226 216,047,707 10 56 52 136 57 311 3,504 208,294 417,332 4,528,373 36,017,555 41,175,058 660 7,738,664 291 13,315,319 (b) Twenty largest shareholders The names of the twenty largest holders of quoted ordinary shares are: 1 HSBC Custody Nominees (Australia) Limited 2 Leet Investments Pty Ltd 3 DMG & Partners Securities Pte Ltd 4 Leet investments Pty Limited 5 Jerele Mining Pty Ltd 6 Mr Paul Noble Bennett 7 Mr Kenneth Russell 8 Citicorp Nominees Pty Limited 9 HSBC Custody Nominees (Australia) Limited 10 Mr Allen King & Mrs Jolanka King & Mr John King 11 Dr Donald Stewart Anson 12 Mr Kie Yik Wong 13 Centaur Oil Services Pty Ltd 14 Mr Stephen Cansdell Hirst 15 Campetre Enterprises Pty Ltd Key International Pty Ltd 16 17 Woolsthorpe Investments Limited 18 19 20 Resource Investment Capital Holdings Pty Ltd Kurraba Investments Pty Ltd Mr Gordon Richard Lehmensich & Mr Robin Gordon Lehmensich Listed ordinary shares Number of shares 14,000,000 9,599,500 7,250,950 6,600,000 6,000,000 5,621,902 5,290,000 5,199,678 5,051,115 4,500,000 4,000,000 3,500,000 3,429,410 3,210,000 2,800,000 2,700,000 2,256,746 2,018,000 2,000,000 2,000,000 97,027,301 Percentage of ordinary shares 6.48 4.44 3.36 3.05 2.78 2.60 2.45 2.41 2.34 2.08 1.85 1.62 1.59 1.49 1.30 1.25 1.04 0.93 0.93 0.93 44.91 55 Key Petroleum Limited ASX Additional Information continued (c) Twenty largest option holders The names of the twenty largest holders of quoted options are: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Campestre Enterprises Pty Ltd HSBC Custody Nominees (Australia) Limited HSBC Custody Nominees (Australia) Limited Mr Paul Jennings & Mrs Jackie Jennings Mr Allen King & Mrs Jolanka King & Mr John King Melbourne Business Construction Group Pty Ltd Pursuit Capital Pty Ltd Mr Nicolas Moutis Citicorp Nominees Pty Limited Mr Barry Emidio De Jong Fiske Nominees Limited HSBC Custody Nominees (Australia) Limited Rivermore Pty Limited Mr Matthew David Burford Mrs Denise Margaret McAleer Mr Jia Jian Chen & Mrs Zhang Ping Kurraba Investments Pty Ltd Mr Gordon Richard Lehmensich & Mr Robin Gordon Lehmensich Mr Lasarus Phillipiah Shayden Nominees Pty Ltd Listed options Number of options 4,000,000 3,750,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 1,900,000 1,672,944 1,000,000 750,000 657,045 571,250 550,000 508,500 500,000 500,000 500,000 500,000 500,000 27,859,739 Percentage of total options 9.71 9.11 4.86 4.86 4.86 4.86 4.86 4.61 4.06 2.43 1.82 1.60 1.39 1.34 1.23 1.21 1.21 1.21 1.21 1.21 67.66 (d) Substantial shareholders The names of substantial shareholders who have notified the Company in accordance with section 671B of the Corporations Act 2001 are: Copulos Group (e) Voting rights All ordinary shares (whether fully paid or not) carry one vote per share without restriction. Number of Shares 14,000,000 (f) Schedule of interests in petroleum blocks Location Tanzania – Offshore Tanzania – Offshore Suriname – Onshore Suriname – Onshore Italy – Offshore Italy – Offshore (Application) Italy – Offshore (Application) Italy – Po Valley Australia – Onshore Block Nyuni West Songo Songo Uitjik Coronie West Sardinia Lampedusa Elba South Borsano EP 437 Percentage held / earning 20 50 1.75 (indirect) 1.75 (indirect) 100 100 100 100 45 56