IMPACT ON ACCOUNTING PRINCIPLES BY TRANSITION TO IFRS Norwegian companies listed at Oslo Stock Exchange are obliged to prepare reportings in accordance with International Financial Reporting Standards (IFRS) as from 2005. By year end 2005 Ganger Rolf ASA Group’s first consolidated financial statements in accordance with (IFRS) will be issued. In connection with this transition both the 2004 quarterly accounts and the 2004 annual accounts will be converted to IFRS in order to have comparable figures. This document is prepared to explain the accounting principles and the effects of the transition to IFRS. We also refer to our reporting for the fourth quarter of 2004 for information on the transition. IFRS 1, First time adoption of International Financial Reporting Standards, has been applied. The key principle in IFRS 1 is full retrospective application of all IFRSs in force at the reporting date (31 December 2005), as if IFRS had always been applied. IFRS 1 contains both mandatory and voluntary exceptions from this principle. Ganger Rolf has applied the following exceptions, in accordance with IFRS 1: To measure fixed assets at the date of transition to IFRSs at its fair value and use that fair value as its deemed cost at that date. The book values under Norwegian GAAP (NGAAP) are thereby replaced by fair values. This alternative has been applied to the drilling rig Bulford Dolphin and the cruise vessel Braemar. The remaining fixed assets are reported at existing book values. IAS 39 is implemented as at 1 January 2004. Financial assets are either classified as held for trading, held to maturity or as being available-for-sale. Ganger Rolf has classified all bonds and shares in other companies as available for sale, and hence stated them at fair value as from 1 January 2004, with any resultant gain or loss being recognised directly in equity, except for impairment losses. Derivative financial instruments are recognised initially at cost. Subsequent to initial recognition, derivative financial instruments are stated at fair value. Gains or losses are recognised immediately in the income statement. Embedded derivatives are separated from the host contract, and accounted for as a derivative if the economic characteristics are not closely related, and the combined instrument is not measured at fair value. See also stated principles. The exception that is available for pensions, allowing all unrecognized actuarial gains and losses to be charged against equity as per 1 January 2004 is applied. IFRS 3 “Business combinations” is not applied retrospectively to past business combinations (business combinations that occurred before the date of transition to IFRSs). Cumulative translation differences that existed at the date of transition to IFRSs for all foreign operations are deemed to be zero at the date of transition to IFRS, and recognised against retained earnings. Any gain or loss on a subsequent disposal of any foreign operation shall exclude translation differences that arose before the date of transition to IFRSs but shall include later translation differences. Statement of compliance The condensed consolidated interim financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) for interim financial statements. These are the Group’s first IFRS condensed consolidated interim financial statements for part of the period covered by the first IFRS annual financial statements as per 31 December 2005, and IFRS 1 First-time adoption of International Financial Reporting Standards has been applied. The condensed consolidated interim financial statements do not include all of the information required for full annual financial statements. An explanation of how the transition to IFRSs has affected the reported financial position, financial performance and cash flows of the Group is provided herein, and includes reconciliations of equity and profit or loss for comparative periods reported under Norwegian GAAP (previous GAAP) to those reported for those periods under IFRSs. Basis of preparation The financial statements are presented in Norwegian Kroner. They are prepared on historical cost basis except that the following assets and liabilities are stated at their fair value: derivative financial instruments, financial instruments held for trading and financial instruments classified as available for sale. The preparation of interim financial statements in conformity with IAS 34 Interim Financial Reporting requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. Actual results may differ from these estimates. These condensed consolidated interim financial statements have been prepared on the basis of IFRSs that are effective or available for early adoption at the Group’s first IFRS annual reporting date, 31 December 2005. Based on these IFRSs, the Board of Directors have made assumptions about the accounting policies expected to be adopted when the first IFRS annual financial statements are prepared for the year ended 31 December 2005. The IFRSs that will be effective or available for voluntary early adoption in the annual financial statements for the period ended 31 December 2005 are still subject to change and to the issue of additional interpretation and therefore cannot be determined with certainty. Accordingly, the accounting policies for that annual period that are relevant to this interim financial information will be determined only when the first IFRS financial statements are prepared as of 31 December 2005. The preparation of the condensed consolidated interim financial statements resulted in changes to the accounting policies as compared with the most recent annual financial statements prepared under Norwegian GAAP (N-GAAP). The accounting policies set out below have been applied consistently to all periods in these condensed consolidated interim financial statements. They also have been applied in preparing an opening IFRS balance sheet at 1 January 2004 for the purpose of the transition to IFRS, as required by IFRS 1. The impact of the transition from N-GAAP to IFRS is explained in this document. The transition principles from N-GAAP to IFRS have already been described in the annual report for 2004. By the transition to IFRS the Group has considered the accounting principles applied for the 19,43 % ownership in Bonheur ASA. Under N-GAAP the investment was accounted for at cost. After careful considerations of the accounting principles under IFRS, the company has chosen to apply the equity method on the investment in Bonheur ASA, as the criterias for significant influence can be demonstrated. This method of consolidation represents a change compared to the previous report on the effects of the IFRS transition, presented in the fourth quarter 2004 interim report. In the previous report on the transition effects the Group’s investment in Bonheur ASA was accounted for using fair value, in accordance with IAS 39. The effect of consolidating Bonheur using the equity method is estimated at a positive effect on the opening balance as of 1 January 2004 of NOK 322,6 million (including Ganger Rolf’ share of Bonheur’s IFRS adjustments). Net change compared to previous reported effects are negative with approximately NOK 35 million. Consolidation policies Subsidiaries, associated companies and joint ventures The Ganger Rolf ASA Group’s consolidated financial statements include subsidiaries, associates and joint ventures. Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable or convertible are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. The consolidated financial statements include the Group’s share of the total recognised gains and losses of associates on an equity accounted basis, from the date that significant influence commences until the date that significant influence ceases. When the Group’s share of losses exceeds its interest in an associate, the Group’s carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of an associate. Joint ventures are those entities over whose activities the Group has joint control, established by contractual agreement. The consolidated financial statements include the Group’s proportionate share of the entities’ assets, liabilities, revenue and expenses with items of a similar nature on a line by line basis, from the date that joint control commences until the date that joint control ceases. Intercompany transactions Intercompany transactions and balances and resulting unrealised profits are eliminated in full. Unrealised profits and losses with associates and jointly controlled entities are eliminated to the extent of the group’s interest in the relevant associate. Unrealised losses are eliminated only to the extent that the transaction provides no evidence of impairment. Financial statements of foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on consolidation, are translated to Norwegian Kroner (NOK) at foreign exchange rates ruling at the balance sheet date. The revenues and expenses of foreign operations are translated to NOK at rates approximating to the foreign exchange rates ruling at the dates of the transactions. Foreign exchange differences arising on retranslation are recognised directly in a separate component of equity. Net investment in foreign operations Exchange differences arising from the translation of the net investment in foreign operations, and of related hedges are taken to translation reserve. They are released into the income statement upon disposal. In respect of all foreign operations, any differences that have arisen before 1 January 2004, the date of transition to IFRS, are deemed to be zero and recognised against retained earnings. Recognition principles for income and expense Income Income is defined as increases in economic benefits during the accounting period in the form of an increase in an asset or decrease in a liability other than those relating to contributions from equity participants. Income encompasses both revenues and gains. Revenues generally arise from the ordinary activities of the enterprise. Gains include those arising from the disposal of property, plant and equipment as well as unrealised gains on revaluation of marketable securities and foreign currency translations. Income is recognised when it can be measured reliably. Revenue is measured at the fair value of the consideration received or receivable, taking into account the amount of any trade discount and volume rebates allowed by the enterprise. Expense Expense is defined as decreases in economic benefits during the accounting period in the form of cash outflows, decrease of an asset or increase of a liability. Expense is recognised when it can be measured reliably. Generally costs are matched with income involving the simultaneous recognition of revenues and expenses that result directly and jointly from the same transactions. Balance sheet takes precedence The matching concept explained above specifically does not allow recognition of items in the balance sheet which do not meet the definition of assets and liabilities. Assets and liabilities An asset is a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise. Liabilities are present obligations of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. Derivative financial instruments The group uses derivative financial instruments to hedge its exposure to foreign exchange and interest rate risks arising form operational, financing and investment activities. In accordance with its treasury policy, the Group does not hold or issue derivative financial instruments for trading purposes. However, derivatives that do not qualify for hedge accounting are accounted for as trading instruments. Derivative financial instruments are recognised initially at cost. Subsequent to initial recognition, derivative financial instruments are stated at fair value. The gain or loss on remeasurement to fair value is recognised immediately in profit or loss. However, where derivatives qualify for hedge accounting, recognition of any resultant gain or loss depends on the nature of the item being hedged. The fair value of interest rate swaps is the estimated amount that the Group would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates and the current creditworthiness of the swap counterparties. The fair value of forward exchange contracts is their quoted market price at the balance sheet date, being the present value of the quoted forward price. Pension benefits The Group’s net obligation in respect of defined benefit pension plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value, and the fair value of any plan assets is deducted. The discount rate is the yield at the balance sheet date on Government bonds, with maturity dates approximating the group’s pension obligations. The calculation is performed by a qualified actuary using the projected unit credit method. When the benefits of a plan are improved, the portion of the increased benefit relating to past service by employees is recognised as an expense in the income statement on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits vest immediately, the expense is recognised immediately in the income statement. All actuarial gains and losses as at 1 January 2004, the date of transition to IFRSs, were charged against equity. In respect of actuarial gains and losses that arise subsequent to 1 January 2004 in calculating the Group’s obligation in respect of a plan, to the extent that any cumulative unrecognised actuarial gain or loss exceeds 10 per cent of the greater of the present value of the defined benefit obligation and the fair value of plan assets. That portion is recognised in the income statement over the expected average remaining working lives of the employees participating in the plan. Where the calculation results in a benefit to the Group, the recognised asset is limited to the net total of any unrecognised actuarial losses and past service costs and the present value of any future refunds from the plan or reductions in future contributions to the plan. Investments Financial assets held for trading are classified as current assets and are stated at fair value, with any resultant gain or loss recognised in the income statement. Ganger Rolf has classified all investments in other shares and bonds as available for sale and they are stated at fair value, with any resultant gain or loss being recognised directly in equity, except for impairment losses and, in the case of monetary items such as debt securities, foreign exchange gains and losses. When these investments are derecognised, the cumulative gain or loss previously charged directly against equity is recognised in the income statement. Where these investments are interest-bearing, interest calculated using the effective interest method is recognised in profit or loss. The fair value of financial assets classified as held for trading and available-for-sale is their quoted bid price at the balance sheet date. If such a quoted bid price does not exist at the balance sheet date, the latest known trading price is used as an estimate of the fair value, unless other reliable information is available. An embedded derivative is separated from the host contract and accounted for as a derivative if: the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract; a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and the combined instrument is not measured at fair value with changes in fair value recognised in profit or loss. After separation the derivative and the host contract are measured in accordance with their respective principles of valuation. Property plant and equipment Items of property plant and equipment are stated at cost or deemed cost less accumulated depreciation and impairment losses. The cost of self-constructed assets includes the cost of materials, direct labour, the initial estimate, where relevant, of the costs of dismantling and removing the items and restoring the site on which they are located, and an appropriate proportion of production overheads. Bulford Dolphin, the drilling rig, and Braemar, the cruiseship, have been revalued to fair value as at 1 January 2004, the date of transition to IFRSs, using this value as their deemed costs. When parts of an item of property, plant and equipment have different useful lives, those components are accounted for as separate items of property, plant and equipment. Subsequent costs, as docking- and maintenance expenses, are recognized in the carrying amount of an item when that cost is incurred, if it is probable that the future economic benefits embodied within the item will flow to the Group and the cost of the item can be measured reliably. Other costs are expensed when incurred. Depreciation is charged to profit or loss on a straight-line basis over the estimated useful lives of each part of an item. Land is not depreciated. All business combinations are accounted for by applying the purchase method. Goodwill has been recognised in acquisitions of subsidiaries, associated and joint ventures. In respect of business acquisitions that have occurred since 1 January 2004, goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired. In respect of acquisitions prior to this date, goodwill is included on the basis of its deemed cost, which represents the amount recorded under N-GAAP. The classification and accounting treatment of business combinations that occurred prior to 1 January 2004 has not been reconsidered in preparing the Group’s opening IFRS balance sheet at 1 January 2004. Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is no longer amortised but is tested annually for impairment. In respect of associates, the carrying amount of goodwill is included in the carrying amount of the investment in the associate. Negative goodwill arising on an acquisition is recognised directly in profit or loss. Development costs Expenditure on development activities is capitalised if the project is commercially feasible and the Group has sufficient resources to complete development. The expenditure capitalised includes the cost of materials, direct labour and an appropriate proportion of overheads. Other development expenditure is recognised in the income statement as an expense as incurred. Impairment The carrying amounts of the Group’s assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. The recoverable amount for goodwill is estimated on a yearly basis. An impairment loss is recognised whenever the carrying amount of an asset or its cash- generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement. Goodwill and indefinite-lived intangible assets were tested for impairment at 1 January 2004, the date of transition to IFRSs, even though no indication of impairment existed. The recoverable amount of other assets is the greater of their net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. When a decline in the fair value of an available-for-sale financial asset has been recognised directly in equity and there is objective evidence that the asset is impaired, the cumulative loss that had been recognised directly in equity is recognised in profit or loss even though the financial asset has not been derecognised. The amount of the cumulative loss that is recognised in profit or loss is the difference between the acquisition cost and current fair value, less any impairment loss on that financial asset previously recognised in profit or loss. An impairment loss in respect of goodwill is not reversed. In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. Income tax Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Additional income taxes that arise from the distribution of dividends are recognised at the same time as the liability to pay the related dividend. Deferred tax related to the obligations for companies within in the Norwegian tonnage tax regime become due for payment either by the company withdraws from the tonnage tax regime, or when paying dividend. The holding companies will, due to their financial strengths, not claim dividend from their tonnage tax companies in the foreseeable future. Furthermore the companies have no plans of leaving the tax regime. Under N-GAAP the deferred tax on these temporary differences were calculated at a net present value using a 5% tax rate. According to the present IFRS rules, the company will apply a zero rate for deferred tax obligations related to the tax obligations for operations in the Norwegian tonnage tax regime. A zero tax rate is chosen as IFRS does not allow a net present value calculation for taxes, and dividends or withdrawals from the tax regime are not considered likely. Business combinations involving entities under common control A business combination involving entities or businesses under common control is a business combination in which all of the combining entities or businesses are ultimately controlled by the same party or parties both before and after the business combination, and that control is not transitory. In the absence of more specific guidance, the Group consistently applied the book value measurement method to all common control transactions. Cash flow statement The cash flow statement describes the movement of cash and cash equivalents during the period. The cash flow statement reports cash flows during the period classified by operating, investing and financing activities and the Group uses the indirect method to present the cash flow statement. Cash and cash equivalents comprise cash balances and call deposits.
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