Notes to the Accounts
3. Exceptional Items
2010 Exceptional Items
At an extraordinary general meeting (EGM) held on 21 December 2009, Cairn's shareholders approved the conversion of 'phantom options' awarded in 2007 and 2008 based on notional 'Units' in the Group into Cairn Energy PLC Share options and Long Term Incentive Plan ('LTIP'). In accordance with IFRS 2, the incremental fair value of the modified awards, calculated at the date of modification, is charged over the remaining vesting period. A net charge of $29.5m is therefore recognised in the Income Statement for the six months ended 30 June 2010 as a result of this modification. A charge of $29.9m was recognised in the year ended 31 December 2009 which also related to this modification. Given the size and expected infrequent nature of this or similar modifications, these charges have been disclosed as exceptional items.
2009 Exceptional Items
Impairment of intangible exploration/appraisal assets
On 30 November 2009, Cairn announced the acquisition of the 9.99% non-controlling interest held by Dyas in Capricorn Oil Limited. Total consideration for the purchase of the Capricorn shares was $102.5m payable in $91.3m PLC shares, $3.7m cash and the transfer of 15% of Capricorn's working interests in the Tunisian and Albanian licences. Prior to the transfer, an impairment test was performed based on fair value less cost to sell resulting in an impairment charge of $135.6m with an associated tax credit of $33.6m.
The calculation of the GoI's share of petroleum produced from the Ravva field has been the subject of differing interpretations for some years and an arbitration to settle the matter was launched in 2003. The biggest single issue, the treatment of an item known as the ONGC carry, was found in Cairn's favour by the arbitration panel in 2004. This was subsequently appealed by the GoI, following which it had been disclosed as a contingent liability in the notes to the financial statements. Cairn India's share of this liability was $64.0m principal, plus interest of $31.6m.
Following the procedure laid out in the Ravva PSC, the GoI's appeal was made to the Malaysian courts and in January 2009 they decided to set aside the arbitration award made in favour of Cairn India. Although not the final step in the legal process, the GoI then instructed the buyers of the Ravva crude not to pass over the revenues to Cairn until such time as they believed that the liability had been settled in full.
A further judgement was delivered by the Malaysian Court of Appeal in September 2009 which reversed the Malaysian Court's January 2009 ruling and had the effect of re-instating the original award in favour of Cairn India. The GoI have won the right to appeal this judgment to the Federal Court of Malaysia and a date for the appeal is awaited. Despite the September judgement re-instating the original arbitration award, the GoI continued to prevent the buyers passing revenues to Cairn throughout the remainder of the 2009 and into January 2010.
Consequently, on a conservative basis, Cairn has provided for the full $95.6m liability as an exceptional item in 2009. The disputed share of profit petroleum of $64.0m has been charged against revenue and the potential interest charge of $31.6m has been recognised as a finance cost. An associated deferred tax credit of $40.4m has also been recognised, making a net impact on profit after tax of $55.2m.