Full Year Results 2018 (Part 2)

Company SEPLAT Petroleum Development Company Ltd 
Tags Reserve Update, Strategy - Upstream, Capital Spending, Guidance, Strategy - Corporate, Financial & Operating Data
Date March 06, 2019

41.2  IFRS 9 Financial instruments - Impact of adoption

The new financial instruments standard, IFRS 9 replaces the provisions of IAS 39. The new standard presents a new model for classification and measurement of assets and liabilities, a new impairment model which replaces the incurred credit loss approach with an expected credit loss approach, and new hedgingrequirements.

The adoption of IFRS 9 Financial Instruments from 1 January 2018 resulted in changes in accounting policies and adjustments to the amounts recognised in the financial statements. The new accounting policies are set out in the notes below. In accordance with the transitional provisions in IFRS 9, comparative figures have not been restated but the impact of adoption has been adjusted through opening retained earnings for the current reporting period.

41.2.1 Classification and measurement

a)  Financial assets

On 1 January 2018 (the date of initial application of IFRS 9), the Group's management assessed the classification of its financial assets which is driven by the cash flow characteristics of the instrument and the business model in which the asset is held.

The Group's financial assets include cash and bank balances and trade and other receivables. The Group's business model is to hold these financial assets to collect contractual cash flows and to earn contractual interest. For cash and bank balances, interest is based on prevailing market rates of the respective bank accounts in which the cash and bank balances are domiciled. Interest on trade and other receivables is earned on defaulted payments in accordance with the Joint operating agreement (JOA). The contractual cash flows arising from these assets represent solely payments of principal and interest (SPPI).

Cash and bank balances and trade and other receivables that were previously classified as loans and receivables (L and R) are now classified as financial assets at amortised cost.

Since there was no change in the measurement basis except for nomenclature change, opening retained earnings was not impacted (no difference between the previous carrying amount and the revised carrying amount of these assets at 1 January 2018).

b)  Financial liabilities

The adoption of IFRS 9 eliminates the policy choice on the treatment of gain or loss from the refinancing of a borrowing. Day one gain or loss can no longer be deferred over the remaining life of the borrowing but must now be recognised at once. No retrospective adjustments have been made in relation to this change as at 1 January 2018.

On the date of initial application, 1 January 2018, the financial instruments of the Group were classified as follows:

             Classification & Measurement category                   Carrying amount 
  Original  New  Original  New 
  IAS 39  IFRS 9  ₦ million  ₦ million 
Current financial assets         
Trade and other receivables:       
Trade receivables  L and R  Amortised cost  33,236  33,236 
NPDC receivables  L and R  Amortised cost  34,453  34,453 
NAPIMS receivables  L and R  Amortised cost  3,824  3,824 
Other receivables*  L and R  Amortised cost 
Cash and bank balances  L and R  Amortised cost  133,699  133,699 
Non-current financial liabilities       
Interest bearing loans and borrowings  Amortised cost  Amortised cost  93,170  93,170 
Current financial liabilities       
Interest bearing loans and borrowings  Amortised cost  Amortised cost  81,159  81,159 
Trade and other payables**  Amortised cost  Amortised cost  38,876  38,876 
             Classification & Measurement category                   Carrying amount 
  Original  New  Original  New 
  IAS 39  IFRS 9  $'000  $'000 
Current financial assets         
Trade and other receivables:       
Trade receivables  L and R  Amortised cost  108,685  108,685 
NPDC receivables  L and R  Amortised cost  112,664  112,664 
NAPIMS receivables  L and R  Amortised cost  12,506  12,506 
Other receivables*  L and R  Amortised cost  23  23 
Cash and bank balances  L and R  Amortised cost  437,212  437,212 
Non-current financial liabilities       
Interest bearing loans and borrowings  Amortised cost  Amortised cost  304,677  304,677 
Current financial liabilities       
Interest bearing loans and borrowings  Amortised cost  Amortised cost  265,400  265,400 
Trade and other payables**  Amortised cost  Amortised cost  127,128  127,128 

*Other receivables exclude NGMC VAT receivables, cash advance and advance payments.

** Trade and other payables exclude provisions (including provisions for bonus and royalties), VAT, Withholding tax, deferred revenue and royalties.

The new carrying amounts in the table above have been determined based on the measurement criteria specified in IFRS 9. However, the impact of IFRS 9 expected credit loss impairment and IFRS 15 reclassifications has also not been considered here. See the subsequent pages for the impacts.

41.2.2  Impairment of financial assets

The Group has five types of financial assets that are subject to IFRS 9's new expected credit loss model. Contract assets are also subject to the new expected credit loss model, even though they are not financial assets, as they have substantially the same credit risk characteristics as trade receivables. Under IFRS 9, the Group is required to revise its previous impairment methodology under IAS 39 for each of these classes of assets. The impact of the change in impairment methodology on the Group's retained earnings is disclosed in the table below.

▪   Nigerian Petroleum Development Company (NPDC) receivables

▪   National Petroleum Investment Management Services (NAPIMS)

▪   Trade receivables

▪   Contract assets

▪   Other receivables and;

▪   Cash and bank balances

The total impact on the Group's retained earnings as at 1 January 2018 is as follows:

  Notes  ₦'million  $'000 
Closing retained earnings as at 31 December 2017- IAS 39    166,149  944,108 
Increase in provision for Nigerian Petroleum Development Company (NPDC) receivables  (a)  (1,698)  (5,553) 
Increase in provision for National Petroleum Investment Management Services (NAPIMS) receivables  (b)   (64)   (213) 
Increase in provision for Nigerian Gas Marketing Company (NGMC) receivables  (c)  (468)  (1,535) 
Increase in provision for Pillar Limited receivables  (c)  (31)  (101) 
Increase in provision for fixed deposits  (e)  (103)  (335) 
Exchange difference    (4) 
Total transition adjustments    (2,368)  (7,737) 
Deferred tax impact on transition adjustments    2,013  6,577 
Opening retained earnings as at 1 January 2018 on adoption of IFRS 9    165,794  942,948 

The parameters used to determine impairment for NPDC receivables, NAPIMS receivables, other receivables and fixed deposits are shown below. For all receivables presented in the table, the respective 12-month Probability of Default (PD) equate the Lifetime PD for stage 2 as the maximum contractual period over which the Group is exposed to credit risk arising from the receivables is less than 12 months.

    Nigerian Petroleum Development Company (NPDC) receivables      National Petroleum Investment Management Services (NAPIMS) receivables    Other receivables    Fixed deposits 
Probability of Default (PD)    The 12 month PD and lifetime PD for stage 1 and stage 2 is 3.9%. The PD for stage 3 is 99%.      The 12 month PD and lifetime PD for stage 1 and stage 2 is 3.9%. The PD for stage 3 is 99%.    The 12 month PD and lifetime PD for stage 1 and stage 2 is 0.05%. The PD for stage 3 is 99%.    The 12 month PD and lifetime PD for stage 1 and stage 2 is 0.09%. The PD for stage 3 is 99%. 
Loss Given Default (LGD)    The 12-month LGD and lifetime LGD were determined using average recovery rate for Moody's senior unsecured corporate bonds for emerging economies.      The 12-month LGD and lifetime LGD were determined using average recovery rate for Moody's senior unsecured corporate bonds for emerging economies.    The 12-month LGD and lifetime LGD were determined using average recovery rate for Moody's senior unsecured corporate bonds for emerging economies.    The 12-month LGD and lifetime LGD were determined using the average recovery rate for Moody's senior unsecured corporate bonds for emerging economies. 
Exposure at default (EAD)    The EAD is the maximum exposure of the receivable to credit risk.      The EAD is the maximum exposure of the receivable to credit risk.    The EAD is the maximum exposure of the receivable to credit risk.    The EAD is the maximum exposure of the fixed deposits to credit risk. 
Macroeconomic indicators    The historical gross domestic product (GDP) growth rate in Nigeria and crude oil price were used.      The historical gross domestic product (GDP) growth rate in Nigeria and crude oil price were used    The historical gross domestic product (GDP) growth rate in Nigeria and crude oil price were used.    The historical gross domestic product (GDP) growth rate in Nigeria and crude oil price were used. 
Probability weightings    75%, 8% and 17% of historical GDP growth rate observations fall within acceptable bounds, periods of boom and periods of downturn respectively.      75%, 8% and 17% of historical GDP growth rate observations fall within acceptable bounds, periods of boom and periods of downturn respectively.    89%, 2% and 9% of historical GDP growth rate observations fall within acceptable bounds, periods of boom and periods of downturn respectively.    78%, 12% and 10% of historical GDP growth rate observations fall within acceptable bounds, periods of boom and periods of downturn respectively. 

The Group considers both quantitative and qualitative indicators in classifying its receivables into the relevant stages for impairment calculation as shown below:

▪  Stage 1: This stage includes financial assets that are less than 30 days past due (Performing). 
▪  Stage 2: This stage includes financial assets that have been assessed to have experienced a significant increase in credit risk using the days past due criteria (i.e. the outstanding receivables amounts are more than 30 days past due but less than 90 days past due) and other qualitative indicators such as the increase in political risk concerns or other micro-economic factors and the risk of legal action, sanction or other regulatory penalties that may impair future financial performance. 
▪  Stage 3: This stage includes financial assets that have been assessed as being in default (i.e. receivables that are more than 90 days past due) or that have a clear indication that the imposition of financial or legal penalties and/or sanctions will make the full recovery of indebtedness highly improbable. 

a)    Nigerian Petroleum Development Company (NPDC) receivables

NPDC receivables represent the outstanding cash calls due to Seplat from its Joint Arrangement partner, Nigerian Petroleum Development Company. The Group applies the IFRS 9 general model for measuring expected credit losses (ECL). This requires a three-stage approach in recognising the expected loss allowance for NPDC receivables.

The ECL recognised for the period is a probability-weighted estimate of credit losses discounted at the effective interest rate of the financial asset. Credit losses are measured as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the Group in accordance with the contract and the cash flows that the Group expects to receive).

The ECL was calculated based on actual credit loss experience from 2014, which is the date the Group initially became a party to the contract. The following analysis provides further detail about the calculation of ECLs related to these assets. The Group considers the model and the assumptions used in calculating these ECLs as key sources of estimation uncertainty. See notes 11, 23 and 34 for further details.

                                                                                                                                                                                          1 January 2018

  Stage 1  Stage 2  Stage 3  Total 
  12-month ECL  Lifetime ECL  Lifetime ECL   
  ₦'million  ₦'million  ₦'million  ₦'million 
Gross EAD*  11,369  23,084  34,453 
Loss allowance as at 1 January 2018  (32)  (1,666)  (1,698) 
Net EAD  11,337  21,418  32,755 

                                                                                                                                                                                          31 December 2018

  Stage 1  Stage 2  Stage 3  Total 
  12-month ECL  Lifetime ECL  Lifetime ECL   
  ₦'million  ₦'million  ₦'million  ₦'million 
Gross EAD*   -   -   14,871   14,871 
Loss allowance as at 31 December 2018   -   -   (2,475)   (2,475) 
Net EAD   -      -      12,396   12,396 

* Exposure at default

                                                                                                                                                                                          1 January 2018

  Stage 1  Stage 2  Stage 3  Total 
  12-month ECL  Lifetime ECL  Lifetime ECL   
  $'000  $'000  $'000  $'000 
Gross EAD*  37,179  75,485  112,664 
Loss allowance as at 1 January 2018  (105)  (5,448)  (5,553) 
Net EAD  37,074  70,037  107,111 

                                                                                                                                                                                          31 December 2018

  Stage 1  Stage 2  Stage 3  Total 
  12-month ECL  Lifetime ECL  Lifetime ECL   
  $'000  $'000  $'000  $'000 
Gross EAD*   -   -   48,439   48,439 
Loss allowance as at 31 December 2018   -   -   (8,086)   (8,086) 
Net EAD   -      -      40,353   40,353 

* Exposure at default

The reconciliation of loss allowances for Nigerian Petroleum Development Company receivables as at 31 December 2017 and 31 December 2018 is as follows:

  ₦'million  $'000 
Loss allowance as at 31 December 2017 - calculated under IAS 39 
Amounts adjusted through opening retained earnings  1,698  5,553 
Loss allowance as at 1 January 2018 - calculated under IFRS 9  1,698  5,553 
Unwinding of discount  19  62 
Increase in provision for impairment loss on NPDC receivables  756   2,471 
Exchange difference 
Loss allowance as at 31 December 2018 - Under IFRS 9  2,475   8,086 

b)    National Petroleum Investment Management services (NAPIMS) receivables

NAPIMS receivables represent the outstanding cash calls due to Seplat from its Joint Operating Arrangement (JOA) partner, National Petroleum Investment Management Services. The Group applies the IFRS 9 general model for measuring expected credit losses (ECL) which uses a three-stage approach in recognising the expected loss allowance for NAPIMS receivables.

The ECL was calculated based on actual credit loss experience from 2016, which is the date the Group initially became a party to the contract. The following analysis provides further detail about the calculation of ECLs related to these assets. The Group considers the model and the assumptions used in calculating these ECLs as key sources of estimation uncertainty. The explanation of inputs, assumptions and estimation techniques used are consistent with those for NPDC receivables.

On initial application of IFRS 9, an impairment loss of ₦80 million, ($263,000) was recognised for NAPIMS receivables. This loss allowance was calculated on a total exposure of ₦3.8 billion, ($12.5 million). During the reporting period, the outstanding receivable was settled. This resulted in a reversal of the previously recognised impairment loss. See notes 11, 23 and 34 for further details.

                                                                                                                                                                                          1 January 2018

  Stage 1  Stage 2  Stage 3  Total 
  12-month ECL  Lifetime ECL  Lifetime ECL   
  ₦'million  ₦'million  ₦'million  ₦'million 
Gross EAD*  1,306  2,518  3,824 
Loss allowance as at 1 January 2018  (2)  (62)  (64) 
Net EAD  1,304  2,456  3,760 

                                                                                                                                                                                          1 January 2018

  Stage 1  Stage 2  Stage 3  Total 
  12-month ECL  Lifetime ECL  Lifetime ECL   
  $'000  $'000  $'000  $'000 
Gross EAD*  4,274  8,232  12,506 
Loss allowance as at 1 January 2018  (5)  (208)  (213) 
Net EAD  4,269  8,024  12,293 

The reconciliation of gross carrying amount for National Petroleum Investment Management Services receivables is as follows:

  ₦'million  $'000 
Gross carrying amount as at 1 January  3,824  12,506 
Receipts for the year  (3,824)  (12,506) 
Exchange differences 
Gross carrying amount as at 31 December   -   - 

The reconciliation of loss allowances for National Petroleum Investment Management Services receivables as at 31 December 2017 and 31 December 2018 is as follows:

  ₦'million  $'000 
Loss allowance as at 31 December 2017 - calculated under IAS 39 
Amounts restated through opening retained earnings  64  213 
Loss allowance as at 1 January 2018 - calculated under IFRS 9  64  213 
Unwinding of discount 
Reversal of impairment loss on NAPIMS receivables   (65)   (215) 
Exchange difference 
Loss allowance as at 31 December 2018 - Under IFRS 9   -      -    

c)     Trade receivables and contract assets

The Group applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables and contract assets.

To measure the expected credit losses, trade receivables and contract assets have been grouped based on shared credit risk characteristics and the days past due criterion. Contract assets relate to unbilled amounts for the delivery of gas supplies in which NGMC has taken delivery of but has not been invoiced as at the end of the reporting period. These assets have substantially the same risk characteristics as the trade receivables for the same types of contracts. The Group has therefore concluded that the expected loss rates for trade receivables are a reasonable approximation of the loss rates for the contract assets.

Trade receivables and contract assets include amounts receivable from Nigerian Gas Marketing Company (NGMC), Mercuria Energy Group and Pillar Limited. See notes 11 and 23 for further details.

i.              Nigerian Gas Marketing Company (NGMC) receivables

NGMC receivables represents the amount receivable from NGMC for gas sales. The expected credit loss rate for this receivable is determined using a provision matrix. The provision matrix used is based on the Group's historical default rates observed over the expected life of the receivable and is adjusted for forward-looking estimates. An expected loss rate was calculated as the percentage of the receivable that is deemed uncollectible during a particular period. The expected loss rates as at 1 January 2018 and 31 December 2018 are as follows:

                                                                                                                                                                                          1 January 2018

  Current  1-30 days past due  31-60 days past due  61-90 days past due  91 and 120 days past due  More than 120 days past due 
  ₦'million  ₦'million  ₦'million  ₦'million  ₦'million  ₦'million 
Gross carrying amount  3,328  5,168  6,103  3,404 
Expected loss rate  1.43%  1.56%  1.60%  7.13% 
Lifetime ECL  (47)  (81)  (98)  (242) 
Total  3,281  5,087  6,005  3,162 

                                                                                                                                                                                          31 December 2018

  Current  1-30 days past due  31-60 days past due  61-90 days past due  91 and 120 days past due  More than 120 days past due 
  ₦'million  ₦'million  ₦'million  ₦'million  ₦'million  ₦'million 
Gross carrying amount  4,639  2,392  4,035  3,080 
Expected loss rate  0.53%  0.53%  0.53%  2.04% 
Lifetime ECL  (25)  (13)  (21)  (63) 
Total  4,614  2,379  4,014  3,017 

                                                                                                                                                                                              1 January 2018

  Current  1-30 days past due  31-60 days past due  61-90 days past due  91 and 120 days past due  More than 120 days past due 
  $'000  $'000  $'000  $'000  $'000  $'000 
Gross carrying amount  10,877  16,888  19,944  11,128 
Expected loss rate  1.43%  1.56%  1.60%  7.13% 
Lifetime ECL  (155)  (265)  (320)  (794) 
Total  10,722  16,623  19,624  10,334 

                                                                                                                                                                                              31 December 2018

  Current  1-30 days past due  31-60 days past due  61-90 days past due  91 and 120 days past due  More than 120 days past due 
  $'000  $'000  $'000  $'000  $'000  $'000 
Gross carrying amount  15,111  7,792  13,142  10,033 
Expected loss rate  0.53%  0.53%  0.53%  2.04% 
Lifetime ECL  (80)  (41)  (70)  (205) 
Total  15,031  7,751  13,072  9,828 

The reconciliation of gross carrying amount for NGMC is as follows:

  ₦'million  $'000 
Gross carrying amount as at 1 January  18,003  58,837 
Receipts for the year  (3,903)  (12,750) 
Exchange differences  46 
Gross carrying amount as at 31 December   14,146  46,077 

The reconciliation of loss allowances for Nigerian Gas Marketing Company receivables as 31 December 2018 is as follows:

  ₦'million  $'000 
Loss allowance as at 31 December 2017 - calculated under IAS 39 
Amounts restated through opening retained earnings  468  1,535 
Loss allowance as at 1 January 2018 - calculated under IFRS 9  468  1,535 
Reversal of impairment loss on NGMC receivables  (347)  (1,139) 
Exchange difference 
Loss allowance as at 31 December 2018 - Under IFRS 9  122  396 

ii.            Pillar Limited receivables

These amounts represent cash calls receivables from Pillar Limited. The expected cash calls was assessed to be repayable within the next 12 months after adjusting for possible cash shortfalls and macroeconomic indicators. Based on this, possible loss rates were determined for each aging bucket.

                                                                                                                                                                                          1 January 2018

  Current  1-30 days past due  31-60 days past due  61-90 days past due  91 and 120 days past due  More than 120 days past due 
  ₦'million  ₦'million  ₦'million  ₦'million  ₦'million  ₦'million 
Gross carrying amount  1,273 
Expected loss rate  2.46% 
Lifetime ECL  (31) 
Total  1,242 

                                                                                                                                                                                          31 December 2018

  Current  1-30 days past due  31-60 days past due  61-90 days past due  91 and 120 days past due  More than 120 days past due 
  ₦'million  ₦'million  ₦'million  ₦'million  ₦'million  ₦'million 
Gross carrying amount  164 
Expected loss rate  2.26% 
Lifetime ECL  (4) 
Total  160 

                                                                                                                                                                                          1 January 2018

  Current  1-30 days past due  31-60 days past due  61-90 days past due  91 and 120 days past due  More than 120 days past due 
  $'000  $'000  $'000  $'000  $'000  $'000 
Gross carrying amount  4,160 
Expected loss rate  2.46% 
Lifetime ECL  (101) 
Total  4,059 

                                                                                                                                                              31 December 2018

  Current  1-30 days past due  31-60 days past due  61-90 days past due  91 and 120 days past due  More than 120 days past due 
  $'000  $'000  $'000  $'000  $'000  $'000 
Gross carrying amount  535 
Expected loss rate  2.26% 
Lifetime ECL  (12) 
Total  523 

The reconciliation of gross carrying amount for Pillars Limited receivables is as follows:

  ₦'million  $'000 
Gross carrying amount as at 1 January  1,273  4,160 
Receipts for the year  (1,110)  (3,625) 
Exchange differences 
Gross carrying amount as at 31 December   164  535 

The reconciliation of loss allowances for Pillars Limited receivables as 31 December 2018 is as follows:

  ₦'million  $'000 
Loss allowance as at 31 December 2017 - calculated under IAS 39 
Amounts restated through opening retained earnings  31  101 
Loss allowance as at 1 January 2018 - calculated under IFRS 9  31  101 
Reversal of impairment loss on Pillars Limited receivables  (27)  (89) 
Exchange difference 
Loss allowance as at 31 December 2018 - Under IFRS 9  12 

iii.           Mercuria Energy Group

Mercuria Energy Group receivables represents the amount receivable from oil sales. The expected credit loss rate was determined using provision matrix. The loss rate was calculated to be 0.05% for both 1 January 2018 and 31 December 2018 reporting periods. The impairment calculated was therefore assessed to be insignificant. These assets are classified as less than 30 days past due.

iv.            Contract assets

The Contract assets comprises majorly of unbilled gas invoices from the Group's sale of gas to NGMC. In determining the expected credit losses using a provision matrix, contract assets were grouped in the current 'aging' bucket i.e. less than 30 days. This is based on the premise that the period between the delivery of gas and the date an invoice is raised is usually 30 days.

The estimated loss was calculated using the applicable loss rate of current NGMC receivables of 0.53% as the Group's exposure to credit risk on contract asset is similar to that of NGMC receivables. The loss was calculated for both 1 January 2018 and 31 December 2018 reporting periods. The impairment calculated was assessed as insignificant. See note 24.1 for reconciliation of gross carrying amounts.

d)    Other receivables

The Group applies the IFRS 9 general approach to measuring expected credit losses (ECL) which uses a three-stage approach in recognising the expected loss allowance for all financial assets that are classified within other receivables.

i)       Other receivables

These receivables represent the outstanding payments due to Seplat from an investment no longer being pursued. This amount was previously presented as advances on investment but is now included in other receivables. See notes 11 and 23 for further details.

                                                                                                                                                                                          31 December 2018

  Stage 1  Stage 2  Stage 3  Total 
  12-month ECL  Lifetime ECL  Lifetime ECL   
  ₦'million  ₦'million  ₦'million  ₦'million 
Gross EAD*   -   10,770  3,070   13,840 
Loss allowance as at 31 December 2018   -   (1,186)   (3,029)   (4,215) 
Net EAD   -      9,584  41     9,625 

                                                                                                                                                                                          31 December 2018

  Stage 1  Stage 2  Stage 3  Total 
  12-month ECL  Lifetime ECL  Lifetime ECL   
  $'000  $'000  $'000  $'000 
Gross EAD*   -   35,121  10,000   45,121 
Loss allowance as at 31 December 2018   -   (3,875)  (9,895)   (13,770) 
Net EAD   -      31,246  105     31,351 

The reconciliation of gross carrying amount for other receivables is as follows:

  ₦'million  $'000 
Gross carrying amount as at 1 January 
Additions during the year  13,840  45,121 
Gross carrying amount as at 31 December    13,840  45,121 

The reconciliation of loss allowances for these receivables as 31 December 2018 is as follows:

  ₦'million  $'000 
Loss allowance as at 1 January 2018 - calculated under IFRS 9 
Increase in provision for impairment loss on other receivables   4,215   13,770 
Loss allowance as at 31 December 2018 - Under IFRS 9   4,215   13,770 

ii)            Staff receivables

These receivables relate to staff receivables. For impairment assessment, the Group uses the only borrower specific information available (days past due information and employment status) to assess whether credit risk has increased significantly since initial recognition. These assets are classified as less than 30 days past due (stage 1).

Impairment allowance on receivable amounts was assessed to be insignificant. This was on the basis that there has been no history of default on these asset as repayments are deducted directly from the staff's monthly salary. In addition, the outstanding balance as at 31 December 2018 and 31 December 2017 was deemed to be insignificant (₦218 million, 2017: ₦7.1 million) ($0.7 million, 2017: $23,288). The impairment loss was nil under the incurred loss model of IAS 39.

e)    Cash and bank balances

i)             Fixed deposits

The Group applies the IFRS 9 general model for measuring expected credit losses (ECL) which uses a three-stage approach in recognising the expected loss allowance for cash and bank balances. The ECL was calculated as the probability weighted estimate of the credit losses expected to occur over the contractual period of the facility after considering macroeconomic indicators. See notes 11 and 26 for further details.

                                                                                                                                                                                          1 January 2018

  Stage 1  Stage 2  Stage 3  Total 
  12-month ECL  Lifetime ECL  Lifetime ECL   
  ₦'million  ₦'million  ₦'million  ₦'million 
Gross EAD*  30,191  30,191 
Loss allowance as at 31 December 2018  (103)  (103) 
Net EAD  30,088  30,088 

                                                                                                                                                                                          31 December 2018

  Stage 1  Stage 2  Stage 3  Total 
  12-month ECL  Lifetime ECL  Lifetime ECL   
  ₦'million  ₦'million  ₦'million  ₦'million 
Gross EAD*  33,272  33,272 
Loss allowance as at 1 January 2018  (36)  (36) 
Net EAD  33,236  33,236 

* Exposure at default

                                                                                                                                                                                                   1 January 2018

  Stage 1  Stage 2  Stage 3  Total 
  12-month ECL  Lifetime ECL  Lifetime ECL   
  $'000  $'000  $'000  $'000 
Gross EAD*  98,343  98,343 
Loss allowance as at 31 December 2018  (335)  (335) 
Net EAD  98,008  98,008 

                                                                                                                                                                                          31 December 2018

  Stage 1  Stage 2  Stage 3  Total 
  12-month ECL  Lifetime ECL  Lifetime ECL   
  $'000  $'000  $'000  $'000 
Gross EAD*  108,732  108,732 
Loss allowance as at 1 January 2018  (118)  (118) 
Net EAD  108,614  108,614 

* Exposure at default

The reconciliation of gross carrying amount for fixed deposits is as follows:

  ₦'million  $'000 
Gross carrying amount as at 1 January  30,191  98,343 
Additions during the year  3,180  10,389 
Exchange differences  135 
Gross carrying amount as at 31 December   33,506  108,732 

The reconciliation of loss allowances for fixed deposits as at 31 December 2017 and 31 December 2018 is as follows:

  ₦'million  $'000 
Loss allowance as at 31 December 2017 - calculated under IAS 39 
Amounts adjusted through opening retained earnings  103  335 
Loss allowance as at 1 January 2018 - calculated under IFRS 9  103  335 
Reversal of impairment loss on fixed deposits  (67)  (217) 
Exchange difference 
Loss allowance as at 31 December 2018 - Under IFRS 9  36  118 

The impact of unwinding of discount on impairments of fixed deposits is rounded up to zero.

ii.            Other cash and bank balances

The Group also assessed the other cash and bank balances to determine their expected credit losses. Based on this assessment, they identified the expected losses as at 1 January 2018 and 31 December 2018 to be insignificant. The assets are assessed to be in stage 1.

iii.           Credit quality of cash and bank balances

The credit quality of the Group's other cash and bank balances is assessed on the basis of external credit ratings (Fitch national long term rating) as shown below:

  2018  2017  2018  2017 
  ₦ million  ₦ million  $'000  $'000 
Non-rated   4  62,937   12  205,811 
B-   -     24,978   -     81,681 
 -     16,589   -     54,247 
B+   -     4,308   -     14,090 
BB+   -   - 
BBB+   36   117 
BBB   619   2,015 
A+  94,128    24,331  306,608    79,564 
AA   47,920   156,090 
AA-   28,688  556   93,451  1,819 
AAA  8,150  26,548 
   179,545  133,699    584,841  437,212 
Allowance for impairment recognised during the year  (36)  (118) 
Net cash and cash bank balances  179,509  133,699  584,723  437,212 

f)     Deferred tax impact on transition adjustment.

The deferred tax assets recognised were as a result of the expected credit losses recognised on initial adoption of IFRS 9.

g)     Reconciliation of impairment loss on financial assets

Movements in the provision for impairment of financial assets that are assessed are as follows:

  2018  2017  2018  2017 
  ₦ million  ₦ million  $'000  $'000 
At 1 January  3,129  10,260 
Impact on initial application of IFRS 9  2,369  7,737 
Adjusted balance at 1 January 2018  2,369    7,737   
Allowance for impairment recognised during the year  4,990  16,303 
Reversal of previously recognised impairment losses  (505)  (3,138)  (1,660)  (10,260) 
Exchange rate differences  (2) 
At 31 December  6,852  22,380 

41.2.3. Hedge accounting

The Group entered agreements to sell put options for crude oil in Brent at a strike price of ₦12,280 ($40) per barrel to Ned Bank Limited for 600,000 barrels within a period of 6 months from 1 January 2018 to 30 June 2018.

It also entered into agreements to sell put options for crude oil in Brent at a strike price of ₦15,350 ($50) per barrel to Natixis for 500,000 barrels within a period of 6 months from 1 July 2018 to 31 December 2018.

The purpose of these is to hedge its cash flows against oil price risk. The contracts provide for a no loss position for Seplat, in that Seplat makes a gain if the price of oil falls below the strike price; and if the price of oil is above the strike price, there is no loss i.e. no payment is made by Seplat except for the mutually agreed monthly premium which is paid in arrears and is settled net of any gain on settlement date.

As at the reporting periods ended 31 December 2017 and 31 December 2018, the Group had derivative assets and no derivative liabilities. The derivative assets are measured and recognised at fair value. The Group has not formally designated any of these instruments for hedge accounting.

41.3 IFRS 15 Revenue from Contracts with Customers - Impact of adoption

The Group has adopted IFRS 15 Revenue from Contracts with Customers from 1 January 2018 which resulted in changes in accounting policies and adjustments to the amounts recognised in the financial statements. In accordance with the transition provisions in IFRS 15, the Group has adopted the new rules using the modified retrospective approach and has not restated comparatives for the 2017 financial year. There was no impact on the Group's retained earnings at the date of initial application (i.e. 1 January 2018). The reclassification adjustments resulting from the adoption of IFRS 15 is shown in note 41.3 and detailed below:

41.3.1 Impact on statement of financial position

a)    Trade and other receivables

The Group introduced the presentation of contract assets in the balance sheet to reflect the guidance of IFRS 15. Contract assets of ₦4.3 billion, 1 January 2018: ₦4.2 billion ($14.1 million, 1 January 2018: $13.8 million) recognised in relation to unbilled amounts from Nigerian Gas Marketing Company (NGMC) were previously presented as part of trade and other receivables. See notes 23 and 24 for further details.

41.3.1.1 Impact on statement of profit or loss and other comprehensive income

a)    Reclassification of underlifts to other income

In some instances, Joint Operating arrangement (JOA) partners lift the share of production of other partners. Under IAS 18, over lifts and underlifts were recognised net in revenue using entitlement accounting. They are settled at a later period through future liftings and not in cash (non-monetary settlements). This is referred to as the entitlement method. IFRS 15 excludes transactions arising from arrangements where the parties are participating in an activity together and share the risks and benefits of that activity as the counterparty is not a customer. To reflect the change in policy, the Group has reclassified underlifts to other income. Revenue has therefore been recognised net of underlifts of ₦4.2 billion ($13.7 million) for the reporting period. Under IAS 18, revenue recognized without reclassifying underlifts to other income would have been ₦232.6 billion ($759.8 million). See note 9 for other details.

b)     Reclassification of demurrage from costs of sales

Seplat pays demurrage to Mercuria for delays caused by incomplete cargoes delivered at the port. These are referred to as price adjustments and Seplat is billed subsequently by Mercuria. Under IFRS 15, these are considerations payable to customers and should be recognised net of revenue. Revenue has therefore been recognised net of demurrage costs of ₦64.6 million ($211,160) for the reporting period. This had no tax impact. In the current period, there was a refund of demurrage which has been added to revenue. In prior reporting periods, demurrage costs were included as part of operations and maintenance costs. Under IAS 18, revenue recognized without reclassifying demurrage costs to revenue would have been ₦228.3 billion ($745.9 million). See note 8 for further details.

Statement of value added
For the year ended 31 December 2018

  2018    2017    2018    2017   
  ₦million  ₦million  $'000  $'000 
Revenue  228,391     138,281    746,140    452,179   
Other income  4,618    209     15,085       
Finance income  3,032     1,326     9,905    4,335   
Cost of goods and other services:                 
Local   (54,041)     (41,757)     (176,546)     (136,543)   
Foreign   (36,028)     (27,838)     (117,697)     (91,028)   
Valued added   145,972     70,012  100%   476,887     228,943  100% 

Applied as follows:

  2018    2017    2018    2017   
  ₦million  ₦million  $'000  $'000 
To employees: - as salaries and labour related expenses  10,604  7,925  11  34,648  25,917  11 
To external providers of capital: - as interest   17,292  12  22,248  32  56,492  12  72,752  32 
To Government: - as Group taxes  7,693  687  25,134  2,248 
Retained for the Group's future: - For asset replacement, depreciation, depletion & amortisation  37,461  26   26,385  38  122,383  26  86,277  38 
Deferred tax (charges)/credit   28,055  19   (68,344)  (98)   91,654  19   (223,481)  (98) 
Profit for the year   44,867  31   81,111  116   146,576  31   265,230  116 
Valued added   145,972  100%   70,012  100%   476,887  100%   228,943  100% 

The value added represents the additional wealth which the Group has been able to create by its own and its employees' efforts. This statement shows the allocation of that wealth to employees, providers of finance, shareholders, government and that retained for the creation of future wealth.

Five year financial summary

As at 31 December 2018

  2018  2017  2016  2015  2014 
₦ million  ₦ million  ₦ million  ₦ million  ₦ million 
Revenue   228,391   138,281   63,384   112,972   124,377 
Profit/(loss) before taxation   80,615    13,454   (47,419)   17,243   40,481 
Income tax (expense)/credit   (35,748)   67,657   2,035   (4,252)   -    
Profit/(loss) for the year   44,867    81,111   (45,384)   12,991   40,481 
  2018  2017  2016  2015  2014 
₦ million  ₦ million  ₦ million  ₦ million  ₦ million 
Capital employed:           
Issued share capital   286   283   283   282   277 
Share premium   82,080   82,080   82,080   82,080   82,080 
Share based payment reserve   7,298   4,332   2,597   1,729   -    
Capital contribution   5,932   5,932   5,932   5,932   5,932 
Retained earnings   192,723   166,149   85,052   134,919   135,727 
Foreign translation reserve   203,153   200,870   200,429   56,182   35,642 
Non-controlling interest   -      -      -      (148)   -    
Total equity  491,472   459,646   376,373   280,976   259,658 
Represented by:           
Non-current assets  512,219   539,672   462,402   295,735   182,162 
Current assets   263,437   259,881   202,274   249,462   261,864 
Non-current liabilities   (184,808)   (131,925)   (141,473)   (131,786)   (48,247) 
Current liabilities   (99,376)   (207,982)   (146,830)   (132,435)   (136,121) 
Net assets   491,472   459,646   376,373   280,976   259,658 

Five year financial summary

As at 31 December 2018

  2018  2017  2016  2015  2014   
$'000  $'000  $'000  $'000  $'000   
Revenue    746,140   452,179   254,217   570,477   775,019   
Profit/(loss) before taxation    263,364   43,997   (172,766)   87,079   252,253   
Income tax (expense)/credit   (116,788)   221,233   6,672   (21,472)   -      
Profit/(loss) for the year   146,576   265,230   (166,094)   65,607   252,253   
  2018  2017  2016  2015  2014 
$'000  $'000  $'000  $'000  $'000 
Capital employed:           
Issued share capital   1,834   1,826   1,826  1,821  1,798 
Share premium   497,457   497,457   497,457  497,457  497,457 
Share based payment reserve   27,499   17,809   12,135   8,734   -    
Capital contribution   40,000   40,000   40,000  40,000  40,000 
Retained earnings   1,030,954   944,108   678,922  865,483  869,861 
Foreign currency translation reserve   3,141   1,897   3,675  325  26 
Non-controlling interest   -      -      -      (745)   -    
Total equity  1,600,885   1,503,097   1,234,015   1,413,075   1,409,142 
Represented by:           
Non-current assets  1,668,466   1,764,789   1,516,073   1,487,307   988,576 
Current assets   858,099   849,841   663,200   1,254,583   1,421,114 
Non-current liabilities   (601,976)   (431,407)   (463,847)   (662,774)   (261,834) 
Current liabilities    (323,704)   (680,126)   (481,411)   (666,041)   (738,714) 
Net assets    1,600,885  1,503,097    1,234,015   1,413,075   1,409,142 
                       

Supplementary financial information (unaudited)

For the year ended 31 December 2018

42 Estimated quantities of proved plus probable reserves

  Oil & NGLs MMbbls  Natural Gas Bscf  Oil Equivalent MMboe 
At 1 January 2018  226.2  1,455.8  477.2 
Revisions  10.7  70.2  22.8 
Discoveries and extensions 
Acquisitions 
Production  (10.3)  (53.0)  (19.4) 
At 1 January 2019  226.6  1,473.0  480.6 

Reserves are those quantities of crude oil, natural gas and natural gas liquid that, upon analysis of geological and engineering data, appear with reasonable certainty to be recoverable in the future from known reservoirs under existing economic and operating conditions.

As additional information becomes available or conditions change, estimates are revised.

43.  Capitalised costs related to oil producing activities

  2018  2017  2018  2017 
  ₦ million  ₦ million  $'000  $'000 
Capitalised costs:         
Unproved properties 
Proved properties  551,540   508,314  1,796,547   1,662,243 
Total capitalised costs  551,540   508,314  1,796,547   1,662,243 
Accumulated depreciation  (152,065)  (114,937)  (495,327)  (375,856) 
Net capitalised costs  399,475  393,377  1,301,220  1,286,387 

Capitalised costs include the cost of equipment and facilities for oil producing activities. Unproved properties include capitalised costs for oil leaseholds under exploration, and uncompleted exploratory well costs, including exploratory wells under evaluation. Proved properties include capitalised costs for oil leaseholds holding proved reserves, development wells and related equipment and facilities (including uncompleted development well costs) and support equipment.

44.Concessions

The expiry dates of concessions granted to the Group are:

  Expiry  date 
Seplat  OML 4, 38 & 41    October 2038 
Newton  OPL 283    October 2028 
Seplat East Swamp  OML 53    June 2027 
Seplat Swamp  OML 55    June 2027 

On 15 November 2018 Seplat announced the President and Honourable Minister of Petroleum Resources had given consent for the renewal of OMLs 4, 38 and 41 to a new expiry date of 21 October 2038.  Seplat holds a 45% working interest in OMLs 4, 38 and 41.  In connection with the license renewal Seplat has paid in full a Renewal Bonus of ₦7.8 billion, 2017: nil ($25.9 million, 2017: nil), thus ensuring all conditions for license renewal have been met.  The Company is working with the Department of Petroleum Resources to obtain the updated title deeds in connection with the renewal.

45.  Results of operations for oil producing activities

  2018  2017  2018  2017 
  ₦ million  ₦ million  $'000  $'000 
Revenue   180,751   100,369   590,503   328,206 
Other income - net  4,618  209  15,085  682 
Production and administrative expenses  (105,111)  (86,792)  (343,396)  (283,800) 
Depreciation & amortisation  (36,073)   (22,691)  (117,842)   (74,198) 
Profit/(loss) before taxation   44,185   (8,905)   144,350   (29,110) 
Taxation   (35,748)   67,657   (116,788)   221,233 
Profit/(loss) after taxation   8,437   58,752   27,562   192,123 

46.  Reclassification

Certain comparative figures have been reclassified in line with the current year's presentation.

47.  Exchange rates used in translating the accounts to Naira

The table below shows the exchange rates used in translating the accounts into Naira

  Basis  31 December 2018  31 December 2017 
    N/$  N/$ 
Fixed assets - opening balances  Historical rate  Historical  Historical 
Fixed assets - additions  Average rate  306.10  305.80 
Fixed assets - closing balances  Closing rate  307.00  305.81 
Current assets  Closing rate  307.00  305.81 
Current liabilities  Closing rate  307.00  305.81 
Equity  Historical rate  Historical  Historical 
Income and Expenses:  Overall Average rate  306.10  305.81 

Separate financial statements

Statement of profit or loss and other comprehensive income

For the year ended 31 December 2018

    31 Dec 2018  31 Dec 2017  31 Dec 2018  31 Dec 2017 
  Notes  ₦ million  ₦ million  $'000  $'000 
           
Revenue   217,174   127,655   709,493   417,428 
Cost of sales   (103,086)   (67,666)   (336,777)   (221,258) 
Gross profit     114,088   59,989   372,716   196,170 
Other income - net   1,757   334   5,739  1,092 
General and administrative expenses  10   (19,752)   (18,459)   (64,520)   (60,355) 
(Impairment)/reversal of losses on financial assets - net  11   (69)   3,138   (227)   10,260 
Fair value gain/(loss) - net  12   1,319   (5,931)   4,308   (19,393) 
Operating profit     97,343   39,071   318,016   127,774 
Finance income  13   2,874   11,924   9,388   38,992 
Finance cost  13   (14,788)   (22,236)   (48,311)   (72,710) 
Profit before taxation     85,429   28,759   279,093   94,056 
Income tax (expense)/credit  14   (35,748)   67,657   (116,788)   221,233 
Profit for the year     49,681   96,416   162,305   315,289 
Other comprehensive income:           
Items that may be reclassified to profit or loss:           
Foreign currency translation difference     2,026   1,027   -      -    
Items that will not be reclassified to profit or loss:           
Remeasurement of post-employment benefit obligations  31   178   (90)   579   (294) 
Deferred tax (expense)/credit on remeasurement (gains)/losses  14   (80)   76   (261)  250 
     98   (14)   318  (44) 
Other comprehensive income/(loss) for the year (net of tax)     2,124   1,013   318   (44) 
           
Total comprehensive income for the year (net of tax)     51,805   97,429   162,623   315,245 
           
Basic earnings per share ₦/($)  33   87.52   171.12   0.29   0.56 
Diluted earnings per share ₦/($)  33   85.66   168.66   0.28   0.55 

*There is no revenue other than revenue from contracts with customers in 2018.

Notes 1 to 39 further on are an integral part of these financial statements.

Separate financial statements

Statement of financial position

As at 31 December 2018

    31 Dec 2018  31 Dec 2017  31 Dec 2018  31 Dec 2017 
  Notes  ₦ million  ₦ million  $'000  $'000 
ASSETS           
Non-current assets           
Oil & gas properties  17   275,085   278,841   896,040   911,839 
Other property, plant and equipment  17   1,285   1,537   4,183   5,025 
Tax paid in advance  18   9,708   9,670   31,623  31,623 
Prepayments  19   7,871   287   25,635  939 
Deferred tax  15   44,284   68,417   144,246   223,731 
Investment in subsidiaries  20   345   345   1,129   1,129 
Total non-current assets     338,578   359,097  1,102,856   1,174,286 
           
Current assets           
Inventories  21   30,400   29,576   99,022   96,719 
Trade and other receivables  22   318,997   327,528   1,039,074   1,071,044 
Prepayments  19   3,456   513   11,258   1,674 
Contract assets  23   4,327   -      14,096 
Derivative financial instruments  24   2,693   -      8,772 
Cash and bank balances  25   153,535   117,220   500,116   383,321 
Total current assets     513,408   474,837   1,672,338   1,552,758 
Total assets     851,986   833,934  2,775,194   2,727,044 
           
EQUITY AND LIABILITIES           
Equity           
Issued share capital  26   286   283   1,834   1,826 
Share premium  26   82,080   82,080   497,457   497,457 
Share based payment reserve  26   7,298   4,332   27,499   17,809 
Capital contribution  27   5,932   5,932   40,000   40,000 
Retained earnings    234,148   203,072  1,147,526   1,045,985 
Foreign currency translation reserve  28   196,542   194,526   -      -    
Total shareholders' equity     526,296   490,225   1,714,316   1,603,077 
           
Non-current liabilities           
Interest bearing loans and borrowings  29   133,799   93,170   435,827   304,677 
Provision for decommissioning obligation  30   37,658   30,716   122,666   100,447 
Defined benefit plan  31   1,819   1,994   5,923  6,518 
Total non-current liabilities     173,276   125,880   564,416   411,642 
           
Current liabilities           
Interest bearing loans and borrowings  29   3,031   81,159   9,872   265,400 
Trade and other payables  32   140,398   135,406   457,323   442,792 
Current tax liabilities  14   8,985   1,264   29,267   4,133 
Total current liabilities     152,414   217,829   496,462   712,325 
Total liabilities     325,690   343,709   1,060,878   1,123,967 
Total shareholders' equity and liabilities     851,986   833,934   2,775,194   2,727,044 

Notes 1 to 39 further on are an integral part of these financial statements.

The financial statements of Seplat Development Company Plc for the year ended 31 December 2018 were authorised for issue in accordance with a resolution of the Directors on 6 March 2019 and were signed on its behalf by:

A. B. C. Orjiako  A. O. Avuru  R.T. Brown  
FRC/2013/IODN/00000003161  FRC/2013/IODN/00000003100  FRC/2014/ANAN/00000017939 
Chairman  Chief Executive Officer  Chief Financial Officer 
6 March 2019  6 March 2019  6 March 2019 

Separate financial statements

Statement of changes in equity

For the year ended 31 December 2018

  Issued
share
capital 
Share
premium 
Share
based payment reserve 
Capital
contribution 
Retained earnings  Foreign currency translation reserve  Total equity 
  ₦million  ₦ million  ₦million  ₦ million  ₦ million  ₦ million  ₦ million 
At 1 January 2017  283   82,080   2,597   5,932   106,670   193,499   391,061 
Profit for the year   -      -      -      96,416   -      96,416 
Other comprehensive (loss)/income   -      -      -      (14)   1,027   1,013 
Total comprehensive income for the year   -      -      -      96,402   1,027   97,429 
Transactions with owners in their capacity as owners:               
Share based payments (Note 26)   -      1,735   -        -      1,735 
Total   -      1,735   -        -      1,735 
At 31 December 2017 as originally presented  283   82,080   4,332   5,932   203,072   194,526  490,255 
Impact of change in accounting policy:               
Adjustment on initial application of IFRS 9 - net of tax (Note 39.1)   -      -      -      -       (667)    (667) 
At 1 January 2018 - Restated  283   82,080   4,332   5,932    202,405   194,526    489,558 
Profit for the year   -      -      -      -       49,681   -       49,681 
Other comprehensive income   -      -      -      -      98   2,026   2,124 
Total comprehensive income for the year   49,779   2,026   51,805 
Transactions with owners in their capacity as owners:               
Dividends paid   -      -      -      -     (18,036)   -      (18,036) 
Share based payments (Note 26)   -      -       2,969   -      -      -     2,969 
Vested shares (Note 26)  3     -      (3)   -      -      -      -    
Total  2,966  (18,036)   -     (15,067) 
At 31 December 2018  286  82,080  7,298  5,932  234,148   196,552   526,296 

Notes 1 to 39 further on are an integral part of these financial statements.

  Issued
share
capital 
Share
premium 
Share
based payment reserve 
Capital
contribution 
Retained earnings  Total equity 
  $'000  $'000  $'000  $'000  $'000  $'000 
At 1 January 2017   1,826  497,457  12,135  40,000  730,740  1,282,158 
Profit for the year   -      -      -      -      315,289   315,289 
Other comprehensive loss   -      -      -      -      (44)   (44) 
Total comprehensive income for the year   -      -      -      -      315,245   315,245 
Transactions with owners in their capacity as owners:             
Share based payments (Note 26)   -      -     5,674     -     5,674   
Total   -      5,674   -      -  5,674   
At 31 December 2017 as originally presented   1,826   497,457   17,809   40,000   1,045,985   1,603,077 
Impact of change in accounting policy:             
Adjustment on initial application of IFRS 9 - net of tax (Note 39.1)   -      -      -      -       (2,194)    (2,194) 
At 1 January 2018 - Restated   1,826   497,457   17,809   40,000   1,043,791   1,600,883 
Profit for the year   -   -   -   -   162,305   162,305 
Other comprehensive income   -   -   -   -   318   318 
Total comprehensive income for the year   -   -   -   -   162,623   162,623 
Transactions with owners in their capacity as owners:             
Dividends paid   -   -   -   -   (58,888)   (58,888) 
Share based payments (Note 26)   -   -    9,698   -   -  9,698 
Vested shares (Note 26)   8   -   (8)   -   -   -    
Total   8   -     9,690   -      (58,888)  (49,190) 
At 31 December 2018   1,834   497,457    27,499   40,000    1,147,526    1,714,316 

Notes 1 to 39 further on are an integral part of these financial statements.

Separate statement of cash flows

For the year ended 31 December 2018

    31 Dec 2018  31 Dec 2017  31 Dec 2018  31 Dec 2017 
  Notes  ₦ million  ₦ million  $'000  $'000 
Cash flows from operating activities           
Cash generated from operations  16    151,582   118,577    495,074   387,760 
Defined benefit paid     (63)  (163)        (206)  (532)   
Net cash inflows from operating activities      151,519   118,414    494,868   387,228 
Cash flows from investing activities           
Investment in oil and gas properties  17   (20,128)   (4,818)   (65,757)   (15,756) 
Investment in other property, plant and equipment  17   (698)   (441)   (2,281)   (1,442) 
Investment in subsidiary  20   -      (20)   -      (65) 
Proceeds from disposal of other property plant and equipment  17   73   50   239   162 
Payments for plan assets  31b   (502)   -      (1,635)   
Interest received  13   2,874   11,924   9,388   38,992 
Net cash (outflows/inflows) from investing activities    (18,389)   6,695   (60,046)   21,891 
Cash flows from financing activities           
Repayments of loans  29   (207,532)   (29,970)   (678,000)   (98,000) 
Proceeds from loans  29   163,775   -      535,045   - 
Dividends paid  34   (18,036)   -      (58,888)   -    
Principal repayments on crude oil advance  32a   (23,193)   -      (75,769)   - 
Interest repayments on crude oil advance  32a   (530)   (1,770)   (1,730)  (5,789) 
Payments for other financing charges  29   (1,802)   -      (5,885) 
Interest paid on bank financing  29   (10,890)   (21,213)   (35,471)   (69,366) 
Net cash outflows from financing activities     (98,208)   (52,953)   (320,698)   (173,155) 
Net increase in cash and cash equivalents     35,980   72,156   117,541   235,964 
Cash and cash equivalents at beginning of the year     117,220   44,950   383,321   147,377 
Effects of exchange rate changes on cash and cash equivalents    344   114    (747)   (20) 
Cash and cash equivalents at end of the year  25   152,486   117,220   496,698   383,321 
                   

Notes 1 to 39 further on are an integral part of these financial statements.  

Notes to the separate financial statements

1.    Corporate information and business

Seplat Petroleum Development Company Plc ('Seplat' or the 'Company') was incorporated on 17 June 2009 as a private limited liability company and re-registered as a public company on 3 October 2014, under the Companies and Allied Matters Act, CAP C20, Laws of the Federation of Nigeria 2004. The Company commenced operations on 1 August 2010. The Company is principally engaged in oil and gas exploration.

The Company's registered address is: 25a Lugard Avenue, Ikoyi, Lagos, Nigeria.

The Company acquired, pursuant to an agreement for assignment dated 31 January 2010 between the Company, SPDC, TOTAL and AGIP, a 45% participating interest in the following producing assets:

OML 4, OML 38 and OML 41 located in Nigeria. The total purchase price for these assets was ₦50.4 billion ($340 million) paid at the completion of the acquisition on 31 July 2010 and a contingent payment of ₦4.8 billion ($33 million) payable 30 days after the second anniversary, 31 July 2012, if the average price per barrel of Brent Crude oil over the period from acquisition up to 31 July 2012 exceeds ₦11,850 ($80) per barrel. ₦53.1 billion ($358.6 million) was allocated to the producing assets including ₦2.8 billion ($18.6 million) as the fair value of the contingent consideration as calculated on acquisition date. The contingent consideration of ₦5.1 billion ($33 million) was paid on 22 October 2012.

2.    Significant changes in the current accounting period

The following significant changes occurred during the reporting year ended 31 December 2018:

▪  The offering of 9.25% senior notes with an aggregate principal amount of ₦107 billion ($350 million) due in April 2023. The notes were issued by the Company in March 2018 and guaranteed by some of its subsidiaries. The proceeds of the notes are being used to refinance existing indebtedness and for general corporate purposes. 
▪  In March 2018, the Company obtained a ₦92 billion ($300 million) revolving facility to refinance an existing ₦92 billion ($300 million) revolving credit facility due in December 2018. The facility has a tenor of 4 years (due in June 2022) with an initial interest rate of the 6% +Libor. Interest is payable semi-annually and principal repayable annually. ₦61 billion ($200 million) was drawn down in March 2018. The proceeds from the notes are being used to repay existing indebtedness. In October 2018, the Company made a principal repayment of ₦30.7 billion ($100 million) out of its existing cash surplus. 
▪  25,000,000 additional shares were issued in furtherance of the Company's Long Term Incentive Plan, in February 2018. The additional issued shares, less 5,052,464 shares which vested in April 2018, are held by Stanbic IBTC Trustees Limited as Custodian. The Company's share capital as at the reporting date consists of 568,497,025 ordinary shares (excluding the additional shares held in trust) of ₦0.50k each, all with voting rights. 

3.    Summary of significant accounting policies

3.1.         Introduction to summary of significant accounting policies

This note provides a list of the significant accounting policies adopted in the preparation of these financial statements. These accounting policies have been applied to all the years presented, unless otherwise stated.

3.2.         Basis of preparation          

h)    Compliance with IFRS

The financial statements for the year ended 31 December 2018 have been prepared in accordance with International Financial Reporting Standards ("IFRS") and interpretations issued by the IFRS Interpretations Committee (IFRS IC). The financial statements comply with IFRS as issued by the International Accounting Standards Board (IASB). Additional information required by National regulations is included where appropriate.

The financial statements comprise the statement of profit or loss and other comprehensive income, the statement of financial position, the statement of changes in equity, the statement of cash flows and the notes to the financial statements.

ii)            Historical cost convention

The financial information has been prepared under the going concern assumption and historical cost convention, except for derivate financial instruments measured at fair value through profit or loss on initial recognition. The financial statements are presented in Nigerian Naira and United States Dollars, and all values are rounded to the nearest million (₦'million) and thousand ($'000) respectively, except when otherwise indicated.

iii)           Going concern

Nothing has come to the attention of the directors to indicate that the Company will not remain a going concern for at least twelve months from the date of this statement.

iv)            New and amended standards adopted by the Company

The Company has applied the following standards and amendments for the first time in the annual reporting period commencing 1 January 2018.

·      IFRS 9 Financial instruments, and

·      IFRS 15 Revenue from contracts with customers

·      Amendments to IFRS 15 Revenue from contracts with customers

The impact of the adoption of these standards and the new accounting policies are disclosed in note 39. Other new accounting standards effective for reporting periods beginning on or after 1 January 2018 did not have any impact on the Company's accounting policies and did not require retrospective adjustments to the financial statements.

v)             New standards, amendments and interpretations not yet adopted 

Certain new accounting standards and interpretations have been published that are not mandatory for 31 December 2018 reporting periods and have not been early adopted by the Company. The Company's assessment of the impact of these new standards and interpretations is set out below.

a.      IFRS 16 Leases

Title of standard  IFRS 16 Leases 
Nature of change  IFRS 16 was issued in January 2016. It will result in almost all leases being recognised on the statement of financial position, as the distinction between operating and finance leases is removed. Under the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals are recognised. The only exceptions are short-term and low-value leases. The accounting for lessors will not significantly change. 
Impact  Operating leases: The standard will affect primarily the accounting for the Company's operating leases which include leases of drilling rigs, buildings and land. As at the reporting date, the Company had non-cancellable operating lease commitments (₦8 billion, $26 million). Short term leases & low value leases: The Company's one-year contracts with no planned extension commitments mostly applicable to leased staff flats will be covered by the exception for short-term leases. Of these non-cancellable lease commitments, approximately ₦190.8 million ($0.6 million) relate to short-term leases. None of the Company's other leases will be covered by the exception for low value leases. Short term leases will be recognised on a straight line basis as an expense in profit or loss. Service contracts: Some commitments such as contracts for the provision of drilling, cleaning and community services were identified as service contracts as they did not contain an identifiable asset which the Company had a right to control. It therefore did not qualify as leases under IFRS 16. Right of use assets and lease liabilities: As at January 1 2019, the Company expects to recognise right-of-use assets and lease liabilities of approximately ₦6.8 billion, $22.2 million and ₦5.6 billion, $18.4 million respectively. The overall net current assets will be lower by approximately ₦141.4 million, $0.5 million due to the presentation of a portion of the liability as current liability. Cash flows from principal repayments would be recognised in financing activities while cash flows from interest repayments and short term lease payments would be recognised in operating activities. The Company does not have arrangements where they are lessors. 
Date of adoption  The standard for leases is mandatory for financial years commencing on or after 1 January 2019. The Company does not intend to adopt the standard before its effective date. The Company intends to apply the modified retrospective approach and will not restate comparative amounts for the year prior to first adoption. 

b.      Amendments to IAS 19 Employee benefits

These amendments were issued in February 2018. The amendments issued require an entity to use updated assumptions to determine current service cost and net interest for the remainder of the period after a plan amendment, curtailment or settlement. They also require an entity to recognise in profit or loss as part of past service cost or as a gain or loss on settlement, any reduction in a surplus, even if that surplus was not previously recognised because of the impact of the asset ceiling.

These amendments are mandatory for annual periods beginning on or after 1 January 2019. The Company does not intend to adopt the amendments before its effective date and does not expect it to have a material impact on its current or future reporting periods.

c.       IFRIC 23 Uncertainty over income tax treatment           

These amendments were issued in June 2017. IAS 12 Income taxes specifies requirements for current and deferred tax assets and liabilities. An entity applies the requirements in IAS 12 based on applicable tax laws. It may be unclear how tax law applies to a particular transaction or circumstance. The acceptability of a particular tax treatment under tax law may not be known until the relevant taxation authority or a court takes a decision in the future. Consequently, a dispute or examination of a particular tax treatment by the tax authority may affect an entity's accounting for a current or deferred tax asset or liability.

This Interpretation clarifies how to apply the recognition and measurement requirements in IAS 12 when there is uncertainty over income tax treatments. In such a circumstance, an entity shall recognise and measure its current or deferred tax asset or liability applying the requirements in IAS 12 based on taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates determined applying this Interpretation.

These amendments are mandatory for annual periods beginning on or after 1 January 2019. The Company does not intend to adopt the amendments before its effective date and does not expect it to have a material impact on its current or future reporting periods.

d.      Conceptual framework for financial reporting - Revised

These amendments were issued in March 2018. Included in the revised conceptual framework are revised definitions of an asset and a liability as well as new guidance on measurement and derecognition, presentation and disclosure. The amendments focused on areas not yet covered and areas that had shortcomings.

These amendments are mandatory for annual periods beginning on or after 1 January 2020. The Company does not intend to adopt the amendments before its effective date and does not expect it to have a material impact on its current or future reporting periods.

e.      Amendments to IAS 23 Borrowing costs

These amendments were issued in December 2017. The amendments clarify that if any specific borrowing remains outstanding after the related asset is ready for its intended use or sale, that borrowing becomes part of the funds that an entity borrows generally when calculating the capitalisation rate on general borrowings.

These amendments are mandatory for annual periods beginning on or after 1 January 2019. The Company does not intend to adopt the amendments before its effective date and does not expect it to have a material impact on its current or future reporting periods.

f.        Amendments to IAS 12 Income taxes

These amendments were issued in December 2017. These amendments clarify that all income tax consequences of dividends (including payments on financial instruments classified as equity) are recognised consistently with the transactions that generated the distributable profits. In effect, the income tax consequences of dividends are linked more directly to past transactions or events that generated distributable profits than to distributions to owners. Therefore, an entity shall recognise the income tax consequences of dividends in profit or loss, other comprehensive income or equity according to where the entity originally recognised those past transactions or events.

These amendments are mandatory for annual periods beginning on or after 1 January 2019. The Company does not intend to adopt the amendments before its effective date and does not expect it to have a material impact on its current or future reporting periods.

g.       Amendments to IFRS 11 Joint arrangements

These amendments were issued in December 2017. These amendments clarify how a company accounts for increasing its interest in a joint operation that meets the definition of a business. If a party maintains (or obtains) joint control, then the previously held interest is not remeasured. If a party obtains control, then the transaction is a business combination achieved in stages and the acquiring party remeasures the previously held interest at fair value. In addition to clarifying when a previously held interest in a joint operation is remeasured, the amendments also provide further guidance on what constitutes the previously held interest. This is the entire previously held interest in the joint operation.

These amendments are mandatory for annual periods beginning on or after 1 January 2019. The Company does not intend to adopt the amendments before its effective date and does not expect it to have a material impact on its current or future reporting periods.

3.3.         Functional and presentation currency

Items included in the financial statements are measured using the currency of the primary economic environment in which the company operates ('the functional currency'), which is the US dollar. The financial statements are presented in Nigerian Naira and the US Dollars.

The Company has chosen to show both presentation currencies and this is allowable by the regulator.

i)     Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies at year end are generally recognised in profit or loss.

Foreign exchange gains and losses that relate to borrowings are presented in the statement of profit or loss, within finance costs. All other foreign exchange gains and losses are presented in the statement of profit or loss on a net basis within other income or other expenses.

Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Translation differences on assets and liabilities carried at fair value are reported as part of the fair value gain or loss or other comprehensive income depending on where fair value gain or loss is reported.

3.4 Oil and gas accounting          

i) Pre-license costs

Pre-license costs are expensed in the period in which they are incurred.

ii)            Exploration license cost

Exploration license costs are capitalised within oil and gas properties. License costs paid in connection with a right to explore in an existing exploration area are capitalised and amortised on a straight-line basis over the life of the permit.

License costs are reviewed at each reporting date to confirm that there is no indication that the carrying amount exceeds the recoverable amount. This review includes confirming that exploration drilling is still under way or firmly planned, or that it has been determined, or work is under way to determine that the discovery is economically viable based on a range of technical and commercial considerations and sufficient progress is being made to establish development plans and timing. If no future activity is planned or the license has been relinquished or has expired, the carrying value of the license is written off through profit or loss.

iii)           Acquisition of producing assets

Upon acquisition of producing assets which do not constitute a business combination, the Company identifies and recognises the individual identifiable assets acquired (including those assets that meet the definition of, and recognition criteria for, intangible assets in IAS 38 Intangible Assets) and liabilities assumed. The purchase price paid for the group of assets is allocated to the individual identifiable assets and liabilities on the basis of their relative fair values at the date of purchase.

iv)            Exploration and evaluation expenditures

Geological and geophysical exploration costs are charged to profit or loss as incurred.

Exploration and evaluation expenditures incurred by the entity are accumulated separately for each area of interest. Such expenditures comprise net direct costs and an appropriate portion of related overhead expenditure, but do not include general overheads or administrative expenditure that is not directly related to a particular area of interest. Each area of interest is limited to a size related to a known or probable hydrocarbon resource capable of supporting an oil operation.

Costs directly associated with an exploration well, exploratory stratigraphic test well and delineation wells are temporarily suspended (capitalised) until the drillingof the well is complete and the results have been evaluated. These costs include employee remuneration, materials and fuel used, rig costs, delay rentals and payments made to contractors. If hydrocarbons ('proved reserves') are not found, the exploration expenditure is written off as a dry hole and charged to profit or loss. If hydrocarbons are found, the costs continue to be capitalised.

Suspended exploration and evaluation expenditure in relation to each area of interest is carried forward as an asset provided that one of the following conditions is met:

▪  the costs are expected to be recouped through successful development and exploitation of the area of interest or alternatively, by its sale; 
▪  exploration and/or evaluation activities in the area of interest have not, at the reporting date, reached a stage which permits a reasonable assessment of the existence or otherwise of economically recoverable reserves; and 
▪  active and significant operations in, or in relation to, the area of interest are continuing. 

Exploration and/or evaluation expenditures which fail to meet at least one of the conditions outlined above are written off. In the event that an area is subsequently abandoned or exploration activities do not lead to the discovery of proved or probable reserves, or if the Directors consider the expenditure to be of no value, any accumulated costs carried forward relating to the specified areas of interest are written off in the year in which the decision is made. While an area of interest is in the development phase, amortisation of development costs is not charged pending the commencement of production. Exploration and evaluation costs are transferred from the exploration and/or evaluation phase to the development phase upon commitment to a commercial development.

v)             Development expenditures

Development expenditure incurred by the entity is accumulated separately for each area of interest in which economically recoverable reserves have been identified to the satisfaction of the Directors. Such expenditure comprises net direct costs and, in the same manner as for exploration and evaluation expenditure, an appropriate portion of related overhead expenditure directly related to the development property. All expenditure incurred prior to the commencement of commercial levels of production from each development property is carried forward to the extent to which recoupment is expected to be derived from the sale of production from the relevant development property.

3.5 Revenue recognition

3.5.1 Revenue recognition (policy from 1 January 2018)

The Company has adopted IFRS 15 as issued in May 2014 which has resulted in changes in accounting policy of the Company. IFRS 15 replaces IAS 18 which covers revenue arising from the sale of goods and the rendering of services, IAS 11 which covers construction contracts, and related interpretations. In accordance with the transitional provisions in IFRS 15, comparative figures have not been restated as the Company has applied the modified retrospective approach in adopting this standard.

IFRS 15 introduces a five-step model for recognising revenue to depict transfer of goods or services. The model distinguishes between promises to a customer that are satisfied at a point in time and those that are satisfied over time.

It is the Company's policy to recognise revenue from a contract when it has been approved by both parties, rights have been clearly identified, payment terms have been defined, the contract has commercial substance, and collectability has been ascertained as probable. Collectability of customer's payments is ascertained based on the customer's historical records, guarantees provided, the customer's industry and advance payments made if any.

Revenue is recognised when control of goods sold has been transferred. Control of an asset refers to the ability to direct the use of and obtain substantially all of the remaining benefits (potential cash inflows or savings in cash outflows) associated with the asset. Seplat has two promises to its customers which is the sale of crude oil and gas. For crude oil, this occurs when the crude products are lifted by the customer (buyer) Free on Board at the Company's loading facility. Revenue from the sale of oil is recognised at a point in time when performance obligation is satisfied. For gas, revenue is recognised when the product passes through the custody transfer point to the customer. Revenue from the sale of gas is recognised over time using the practical expedient of the right to invoice.

The surplus or deficit of the product sold during the period over the Company's share of production in line with entitlement method is termed as an overlift or underlift. With regard to underlifts, if the over-lifter does not meet the definition of a customer or the settlement of the transaction is non-monetary, a receivable and other income is recognised. Conversely, when an overlift occurs, cost of sale is debited and a corresponding liability is accrued. Overlifts and underlifts are initially measured at the market price of oil at the date of lifting, consistent with the measurement of the sale and purchase. Subsequently, they are remeasured at the current market value. The change arising from this remeasurement is included in the profit or loss as other income/expenses-net.

Definition of a customer

A customer is a party that has contracted with the Company to obtain crude oil or gas products in exchange for a consideration, rather than to share in the risks and benefits that result from sale. The Company has entered into collaborative arrangements with its Joint arrangement partners to share in the production of oil. Collaborative arrangements with its Joint arrangement partners to share in the production of oil are accounted for differently from arrangements with customers as collaborators share in the risks and benefits of the transaction, and therefore, do not meet the definition of customers. Revenue arising from these arrangements are recognised separately in other income.

Contract enforceability and termination clauses

It is the Company's policy to assess that the defined criteria for establishing contracts that entail enforceable rights and obligations are met. The criteria provides that the contract has been approved by both parties, rights have been clearly identified, payment terms have been defined, the contract has commercial substance, and collectability has-been ascertained as probable. Revenue is not recognised for contracts that do not create enforceable rights and obligations to parties in a contract. The Company also does not recognise revenue for contracts that do not meet the revenue recognition criteria. In such cases where consideration is received it recognises a contract liability and only recognises revenue when the contract is terminated. For crude oil and gas sales, contract is enforceable at the inception of the contract.

The Company may also have the unilateral rights to terminate an unperformed contract without compensating the other party. This could occur where the Companyhas not yet transferred any promised goods or services to the customer and the Company has not yet received, and is not yet entitled to receive, any consideration in exchange for promised goods or services.

Identification of performance obligation

At inception, the Company assesses the goods or services promised in the contract with a customer to identify as a performance obligation, each promise to transfer to the customer either a distinct good or series of distinct goods. The number of identified performance obligations in a contract will depend on the number of promises made to the customer. The delivery of barrels of crude oil or units of gas are usually the only performance obligation included in oil and gas contract with no additional contractual promises. Additional performance obligations may arise from future contracts with the Company and its customers.

The identification of performance obligations is a crucial part in determining the amount of consideration recognised as revenue. This is due to the fact that revenue is only recognised at the point where the performance obligation is fulfilled. Management has therefore developed adequate measures to ensure that all contractual promises are appropriately considered and accounted for accordingly.

Transaction price

Transaction price is the amount allocated to the performance obligations identified in the contract. It represents the amount of revenue recognised as those performance obligations are satisfied. Complexities may arise where a contract includes variable consideration, significant financing component or consideration payable to a customer.

Variable consideration not within the Company's control is estimated at the point of revenue recognition and reassessed periodically. The estimated amount is included in the transaction price to the extent that it is highly probable that a significant reversal of the amount of cumulative revenue recognised will not occur when the uncertainty associated with the variable consideration is subsequently resolved. As a practical expedient, where the Company has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the Company's performance completed to date, the Company may recognise revenue in the amount to which it has a right to invoice.

Sales contracts for crude oil and gas often incorporates provisional pricing - at the date of delivery of the oil or gas, a provisional price is recognised as revenue. The amount of revenue to be recognised is estimated based on the market price of the commodity being sold at the delivery date. The final price is based on agreements between the Company and counterparty with any adjustments recognised within revenue. The existence of provisionally priced arrangements may result in variable consideration. The Company applies judgement to determine if there is an amount that is variable consideration and, if so, whether it is subject to a significant reversal. Such a reversal would occur if there were a significant downward adjustment of the cumulative amount of revenue recognised for that performance obligation.

Although variable considerations are subject to a constraint, revenue recognised as the performance obligation is satisfied is not subject to a significant reversal in future periods.

For crude oil contracts, revenue recognition is delayed until the invoice date. As a result, crude contracts are not categorised as provisionally pricing contracts. However for gas contracts, revenue is recognised on the date of delivery at a provisional price. At the invoice date, revenue is marked to market with any adjustments being recognised in revenue. A lag period exists between the delivery of the gas and the date gas volumes are agreed. As a result of the differences in gas volumes that may give rise to variable quantities, the Company recognizes the corresponding transaction as contract assets until the point at which the variable consideration becomes unconditional, and is then considered a financial asset within the scope of IFRS 9.

Significant financing component (SFC) assessment is carried out (using a discount rate that reflects the amount charged in a separate financing transaction with the customer and also considering the Company's incremental borrowing rate) on contracts that have a repayment period of more than 12 months.

As a practical expedient, the Company does not adjust the promised amount of consideration for the effects of a significant financing component if it expects, at contract inception, that the period between when it transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.

Instances when SFC assessment may be carried out include where the Company receives advance payment for agreed volumes of crude oil or receives take or pay deficiency payment on gas sales. Take or pay gas sales contract ideally provides that the customer must sometimes pay for gas even when not delivered to the customer. The customer, in future contract years, takes delivery of the product without further payment. The portion of advance payments that represents significant financing component will be recognised as interest expense.

Consideration payable to a customer is accounted for as a reduction of the transaction price and, therefore, of revenue unless the payment to the customer is in exchange for a distinct good or service that the customer transfers to the Company. Examples include barging costs incurred, demurrage and freight costs. These do not represent a distinct service transferred and is therefore recognised as a direct deduction from revenue.

Breakage

The Company enters into take or pay contracts for sale of gas where the buyer may not ultimately exercise all of their rights to the gas. The take or pay quantity not taken is paid for by buyer called take or pay deficiency payment. The Company assesses if there is a reasonable assurance that it will be entitled to a breakage amount. Where it establishes that a reasonable assurance exists, it recognises the expected breakage amount as revenue in proportion to the pattern of rights exercised by the customer. However, where the Company is not reasonably assured of a breakage amount, it would only recognise the expected breakage amount as revenue when the likelihood of the customer exercising its remaining rights becomes remote.

Contract modification and contract combination

Contract modifications relate to a change in the price and/or scope of an approved contract. Where there is a contract modification, the Company assesses if the modification will create a new contract or change the existing enforceable rights and obligations of the parties to the original contract.

Contract modifications are treated as new contracts when the performance obligations are separately identifiable and transaction price reflects the standalone selling price of the crude oil or the gas to be sold. Revenue is adjusted prospectively when the crude oil or gas transferred is separately identifiable and the price does not reflect the standalone selling price.

The Company enters into new contracts with its customers only on the expiry of the old contract. In the new contracts, prices and scope may be based on terms in the old contract. In gas contracts, prices change over the course of time. Even though gas prices change over time, the changes are based on agreed terms in the initial contract i.e. price change due to consumer price index. The change in price is therefore not a contract modifications. Any other change expected to arise from the modification of a contract is implemented in the new contracts.

The Company combines contracts entered into at near the same time (less than 12 months) as one contract if they are entered into with the same or related party customer, the performance obligations are the same for the contracts and the price of one contract depends on the other contract.

Portfolio expedients

As a practical expedient, the Company may apply the requirements of IFRS 15 to a portfolio of contracts (or performance obligations) with similar characteristics if it expects that the effect on the financial statements would not be materially different from applying IFRS to individual contracts within that portfolio.

Contract assets and liabilities

The Company recognises contract assets for unbilled amounts from crude oil and gas sales. Contract liability is recognised for consideration received for which performance obligation has not been met.

Disaggregation of revenue from contract with customers

The Company derives revenue from two types of products, oil and gas. The Company has determined that the disaggregation of revenue based on the criteria of type of products meets the disaggregation of revenue disclosure requirement of IFRS 15. It depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. See further details in note 6.

3.5.2 Revenue recognition (policy prior to 1 January 2018)

Revenue arises from the sale of crude oil and gas. Revenue comprises the realised value of crude oil lifted by customers. Revenue is recognised when crude products are lifted by a third party (buyer) Free on Board ('FOB') at the Company's designated loading facility or lifting terminals. At the point of lifting, all risks and rewards are transferred to the buyer. Gas revenue is recognised when gas passes through the custody transfer point.

Overlift and underlift

The excess of the product sold during the period over the Company's ownership share of production is termed as an overlift and is accrued for as a liability and not as revenue. Conversely, an underlift is recognised as an asset and the corresponding revenue is also reported.

Overlifts and underlifts are initially measured at the market price of oil at the date of lifting, consistent with the measurement of the sale and purchase.

Subsequently, they are remeasured at the current market value. The change arising from this remeasurement is included in the profit or loss as revenue or cost of sales.

3.6 Property, plant and equipment

Oil and gas properties and other plant and equipment are stated at cost, less accumulated depreciation and accumulated impairment losses.

The initial cost of an asset comprises its purchase price or construction cost, any costs directly attributable to bringing the asset into operation, the initial estimate of any decommissioning obligation and, for qualifying assets, borrowing costs. The purchase price or construction cost is the aggregate amount paid and the fair value of any other consideration given to acquire the asset. Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment.

Expenditure on major maintenance refits or repairs comprises the cost of replacement assets or parts of assets, inspection costs and overhaul costs. Where an asset or part of an asset that was separately depreciated and is now written off is replaced and it is probable that future economic benefits associated with the item will flow to the entity, the expenditure is capitalised. Inspection costs associated with major maintenance programmes are capitalised and amortised over the period to the next inspection. Overhaul costs for major maintenance programmes are capitalised as incurred as long as these costs increase the efficiency of the unit or extend the useful life of the asset. All other maintenance costs are expensed as incurred.

Depreciation

Production and field facilities are depreciated on a unit-of-production basis over the estimated proved developed reserves. Assets under construction are not depreciated. Other property, plant and equipment are depreciated on a straight-line basis over their estimated useful lives. Depreciation commences when an asset is available for use. The depreciation rate for each class is as follows:

Plant and machinery  20% 
Motor vehicles  25% 
Office furniture and IT equipment  33.33% 
Leasehold improvements  Over the unexpired portion of the lease 

The expected useful lives and residual values of property, plant and equipment are reviewed on an annual basis and, if necessary, changes in useful lives are accounted for prospectively.

Gains or losses on disposal of property, plant and equipment are determined as the difference between disposal proceeds and carrying amount of the disposed assets. These gains or losses are included in profit or loss.

3.7.         Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale.

Borrowing costs consist of interest and other costs incurred in connection with the borrowing of funds. These costs may arise from; specific borrowings used for the purpose of financing the construction of a qualifying asset, and those that arise from general borrowings that would have been avoided if the expenditure on the qualifying asset had not been made. The general borrowing costs attributable to an asset's construction is calculated by reference to the weighted average cost of general borrowings that are outstanding during the period.

Investment income earned on the temporary investment of specific borrowings pending their expenditure on the qualifying assets is deducted from the borrowing costs eligible for capitalisation. All other borrowing costs are recognised in profit or loss in the period in which they are incurred.

3.8.         Finance income and costs

Finance income

Finance income is recognised in the statement of profit or loss as it accrues using the effective interest rate (EIR), which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the amortised cost of the financial instrument. The determination of finance income takes into account all contractual terms of the financial instrument as well as any fees or incremental costs that are directly attributable to the instrument and are an integral part of the effective interest rate (EIR), but not future credit losses.

Finance cost

Finance costs includes borrowing costs, interest expense calculated using the effective interest rate method, finance charges in respect of lease liabilities, the unwinding of the effect of discounting provisions, and the amortisation of discounts and premiums on debt instruments that are liabilities.

3.9.         Impairment of non-financial 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. Other non -financial assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Individual assets are grouped for impairment assessment purposes at the lowest level at which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. This should be at a level not higher than an operating segment.

If any such indication of impairment exists or when annual impairment testing for an asset group is required, the entity makes an estimate of its recoverable amount. Such indicators include changes in the Company's business plans, changes in commodity prices, evidence of physical damage and, for oil and gas properties, significant downward revisions of estimated recoverable volumes or increases in estimated future development expenditure.

The recoverable amount is the higher of an asset's fair value less costs of disposal ('FVLCD') and value in use ('VIU'). The recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or group of assets, in which case, the asset is tested as part of a larger cash generating unit to which it belongs. Where the carrying amount of an asset group exceeds its recoverable amount, the asset group is considered impaired and is written down to its recoverable amount.

Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at the end of each reporting period.

In calculating VIU, 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/CGU. In determining FVLCD, recent market transactions are taken into account. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded companies or other available fair value indicators.

Impairment - exploration and evaluation assets

Exploration and evaluation assets are tested for impairment once commercial reserves are found before they are transferred to oil and gas assets, or whenever facts and circumstances indicate impairment. An impairment loss is recognised for the amount by which the exploration and evaluation assets' carrying amount exceeds their recoverable amount. The recoverable amount is the higher of the exploration and evaluation assets' fair value less costs to sell and their value in use.

Impairment - proved oil and gas production properties

Proven oil and gas properties 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 recoverable amount is the higher of an asset's fair value less costs of disposal and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows.

3.10.      Cash and bank balances

Cash and bank balances in the statement of cash flows comprise cash at banks and at hand and short-term deposits with an original maturity of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. Please see note 3.13.1(b) for accounting policies on impairment of cash and bank balances.

3.11.      Inventories

Inventories represent the value of tubulars, casings and wellheads. These are stated at the lower of cost and net realisable value. Cost is determined using the invoice value and all other directly attributable costs to bringing the inventory to the point of use determined on a first in first out basis. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated cost necessary to make the sale.

3.12.      Segment reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker.

The Board of directors has appointed a steering committee which assesses the financial performance and position of the Company, and makes strategic decisions. The steering committee, which has been identified as the chief operating decision maker, consists of the chief financial officer, the general manager (Finance), the general manager (Gas) and the financial reporting manager. See further details in note 6.

3.13.      Financial instruments

3.13.1.   Financial instruments (policy from 1 January 2018)

The Company's accounting policies were changed to comply with IFRS 9. IFRS 9 replaces the provisions of IAS 39 that relate to the recognition, classification and measurement of financial assets and financial liabilities; derecognition of financial instruments; impairment of financial assets and hedge accounting. IFRS 9 also significantly amends other standards dealing with financial instruments such as IFRS 7 Financial Instruments: Disclosures.

j)      Classification and measurement

Financial assets

It is the Company's policy to initially recognise financial assets at fair value plus transaction costs, except in the case of financial assets recorded at fair value through profit or loss which are expensed in profit or loss.

Classification and subsequent measurement is dependent on the Company's business model for managing the asset and the cashflow characteristics of the asset. On this basis, the Company may classify its financial instruments at amortised cost, fair value through profit or loss and at fair value through other comprehensive income.

All the Company's financial assets as at 31 December 2018 satisfy the conditions for classification at amortised cost under IFRS 9 except derivative financial instruments which is measured at fair value through profit or loss.

The Company's financial assets include trade receivables, NPDC receivables, intercompany receivables, other receivables, derivative financial instruments and cash and bank balances. They are included in current assets, except for maturities greater than 12 months after the reporting date. Interest income from these assets is included in finance income using the effective interest rate method. Any gain or loss arising on derecognition is recognised directly in profit or loss and presented in finance income/cost.

Financial liabilities

Financial liabilities of the Company are classified and measured at fair value on initial recognition and subsequently at amortised cost net of directly attributable transaction costs, except for derivatives which are classified and subsequently recognised at fair value through profit or loss.

Fair value gains or losses for financial liabilities designated at fair value through profit or loss are accounted for in profit or loss except for the amount of change that is attributable to changes in the Company's own credit risk which is presented in other comprehensive income. The remaining amount of change in the fair value of the liability is presented in profit or loss. The Company's financial liabilities include trade and other payables and interest bearing loans and borrowings.

k)     Impairment of financial assets

Recognition of impairment provisions under IFRS 9 is based on the expected credit loss (ECL) model. The ECL model is applicable to financial assets classified at amortised cost and contract assets under IFRS 15: Revenue from Contracts with Customers. The measurement of ECL reflects an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes, time value of money and reasonable and supportable information that is available without undue cost or effort at the reporting date, about past events, current conditions and forecasts of future economic conditions.

The simplified approach is applied for trade receivables and contract assets while the general approach is applied to NPDC receivables, cash and bank balances, and other receivables.

The simplified approach requires expected lifetime losses to be recognised from initial recognition of the receivables. This involves determining the expected loss rates using a provision matrix that is based on the Company's historical default rates observed over the expected life of the receivable and adjusted forward-looking estimates. This is then applied to the gross carrying amount of the receivable to arrive at the loss allowance for the period.

The three-stage approach assesses impairment based on changes in credit risk since initial recognition using the past due criterion and other qualitative indicators such as increase in political concerns or other macroeconomic factors and the risk of legal action, sanction or other regulatory penalties that may impair future financial performance. Financial assets classified as stage 1 have their ECL measured as a proportion of their lifetime ECL that results from possible default events that can occur within one year, while assets in stage 2 or 3 have their ECL measured on a lifetime basis.

Under the three-stage approach, the ECL is determined by projecting the probability of default (PD), loss given default (LGD) and exposure at default (EAD) for each ageing bucket and for each individual exposure. The PD is based on default rates determined by external rating agencies for the counterparties. The LGD is determined based on management's estimate of expected cash recoveries after considering the historical pattern of the receivable, assesses the portion of the outstanding receivable that is deemed to be irrecoverable at the reporting period. The EAD is the total amount of outstanding receivable at the reporting period. These three components are multiplied together and adjusted for forward looking information, such as the gross domestic product (GDP) in Nigeria and crude oil prices, to arrive at an ECL which is then discounted back to the reporting date and summed. The discount rate used in the ECL calculation is the original effective interest rate or an approximation thereof.

Loss allowances for financial assets measured at amortised cost are deducted from the gross carrying amount of the related financial assets and the amount of the loss is recognised in profit or loss.

l)     Significant increase in credit risk and default definition

The Company assesses the credit risk of its financial assets based on the information obtained during periodic review of publicly available information, industry trends and payment records. Based on the analysis of the information provided, the Company identifies the assets that require close monitoring.

Furthermore, financial assets that have been identified to be more than 30 days past due on contractual payments are assessed to have experienced significant increase in credit risk. These assets are grouped as part of Stage 2 financial assets where the three-stage approach is applied.

In line with the Company's credit risk management practices, a financial asset is defined to be in default when contractual payments have not been received at least 90 days after the contractual payment period. Subsequent to default, the Company carries out active recovery strategies to recover all outstanding payments due on receivables. Where the Company determines that there are no realistic prospects of recovery, the financial asset and any related loss allowance is written off either partially or in full.

m)   Derecognition

Financial assets

The Company derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire or when it transfers the financial asset and the transfer qualifies for derecognition. Gains or losses on derecognition of financial assets are recognised as finance income/cost.

Financial liabilities

The Company derecognises a financial liability when it is extinguished i.e. when the obligation specified in the contract is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised immediately in the statement of profit or loss.

n)    Modification

When the contractual cash flows of a financial instrument are renegotiated or otherwise modified and the renegotiation or modification does not result in the derecognition of that financial instrument, the Company recalculates the gross carrying amount of the financial instrument and recognises a modification gain or loss immediately within finance income/(cost)-net at the date of the modification. The gross carrying amount of the financial instrument is recalculated as the present value of the renegotiated or modified contractual cash flows that are discounted at the financial instrument's original effective interest rate.

o)    Offsetting of financial assets and financial liabilities

Financial assets and liabilities are offset and the net amount is reported in the statement of financial position. Offsetting can be applied when there is a legally enforceable right to offset the recognised amounts, and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously.

The legally enforceable right is not contingent on future events and is enforceable in the normal course of business, and in the event of default, insolvency or bankruptcy of the Company or the counterparty.

p)    Derivatives

The Company uses derivative financial instruments such as forward exchange contracts to hedge its foreign exchange, risks as well as put options to hedge against its oil price risk. However, such contracts are not accounted for as designated hedges. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and subsequently remeasured to their fair value at the end of each reporting period. Any gains or losses arising from changes in the fair value of derivatives are recognised within operating profit in profit or loss for the period. An analysis of the fair value of derivatives is provided in Note 5, Financial risk Management.

The Company accounts for financial assets with embedded derivatives (hybrid instruments) in their entirety on the basis of its contractual cash flow features and the business model within which they are held, thereby eliminating the complexity of bifurcation for financial assets. For financial liabilities, hybrid instruments are bifurcated into hosts and embedded features. In these cases, the Company measures the host contract at amortised cost and the embedded features is measured at fair value through profit or loss.

For the purpose of the maturity analysis, embedded derivatives included in hybrid financial instruments are not separated. The hybrid instrument, in its entirety, is included in the maturity analysis for non-derivative financial liabilities.

q)    Fair value of financial instruments

The Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When available, the Company measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily available and represent actual and regularly occurring market transactions on an arm's length basis.

If a market for a financial instrument is not active, the Company establishes fair value using valuation techniques. Valuation techniques include using recent arm's length transactions between knowledgeable, willing parties (if available), reference to the current fair value of other instruments that are substantially the same, and discounted cash flow analysis. The chosen valuation technique makes maximum use of market inputs, relies as little as possible on estimates specific to the Company, incorporates all factors that market participants would consider in setting a price, and is consistent with accepted economic methodologies for pricing financial instruments.

Inputs to valuation techniques reasonably represent market expectations and measure the risk-return factors inherent in the financial instrument. The Company calibrates valuation techniques and tests them for validity using prices from observable current market transactions in the same instrument or based on other available observable market data.

The best evidence of the fair value of a financial instrument at initial recognition is the transaction price - i.e. the fair value of the consideration given or received. However, in some cases, the fair value of a financial instrument on initial recognition may be different to its transaction price. If such fair value is evidenced by comparison with other observable current market transactions in the same instrument (without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets, then the difference is recognised in the income statement on initial recognition of the instrument. In other cases, the difference is not recognised in the income statement immediately but is recognised over the life of the instrument on an appropriate basis or when the instrument is redeemed, transferred or sold, or the fair value becomes observable.

3.13.2.   Financial instruments (Policy prior to 1 January 2018)

e)    Financial assets

i)     Financial assets initial recognition and measurement 

The Company determines the classification of its financial assets at initial recognition.

All financial assets are recognised initially at fair value plus transaction costs, except in the case of financial assets recorded at fair value through profit or loss which do not include transaction costs. The Company's financial assets include cash and short-term deposits, trade and other receivables, favourable derivatives, intercompany receivables and other receivables.

ii )  Subsequent measurement

The subsequent measurement of financial assets depends on their classification, as follows:

Trade and other receivables

Trade and other receivables, which are non-derivative financial assets that have fixed or determinable payments that are not quoted in an active market, are classified as loans and receivables. They are included in the current assets, except for maturities greater than 12 months after the reporting date. The Company's receivables comprised of trade and other receivables in the historical financial information.

Loans and receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest rate method net of any impairment.

A provision for impairment of trade receivables is established when there is objective evidence that the Company will not be able to collect all the amounts due according to the original terms of the receivable.

Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation and default or delinquency in payments are considered as indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate.

The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in profit or loss. When a trade is uncollectable, it is written off against the allowance account for trade receivables.

iii)           Impairment of financial assets

The Company assesses at each reporting date whether there is objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if there is objective evidence of impairment as a result of one or more events that has occurred since the initial recognition of the asset (an incurred loss event) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtor or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation and observable data indicating that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

iv)            Derecognition of financial assets

A financial asset is derecognised when the contractual rights to the cash flows from the financial asset expire. When an existing financial assets is transferred, the transfer qualifies for derecognition if the Company transfers the contractual rights to receive the cash flows of the financial asset or retains the contractual rights to receive the cash flows of the financial asset, but assumes a contractual obligation to pay the cash flows to one or more recipients in an arrangement.

f)     Financial liabilities

Financial liabilities in the scope of IAS 39 are classified as financial liabilities at fair value through profit or loss, and financial liabilities at amortised cost as appropriate. The Company determines the classification of its financial liabilities at initial recognition.

iii)            Financial liabilities initial recognition and measurement 

All financial liabilities are recognised initially at fair value and, in the case of loans and borrowings, net of directly attributable transaction costs.

The Company's financial liabilities include trade and other payables, and interest bearing loans and borrowings.

iv)            Subsequent measurement

The measurement of financial liabilities depends on their classification as described below:

Trade payables

Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Trade payables are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities.

Trade payables are recognised initially at fair value and subsequently measured at amortised cost using effective interest method.

Interest bearing loans and borrowings

Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently carried at amortised cost while any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the statement of profit or loss over the period of borrowings using the effective interest method.

Fees paid on establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw down occurs. To the extent that there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a pre-payment for liquidity services and amortised over the period of the facility to which it relates.

v)             Derecognition of financial liabilities 

A financial liability is derecognised when the associated obligation is discharged or cancelled or expired. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the statement of profit or loss.

g)     Derivative financial instruments

The Company uses derivative financial instruments, such as forward exchange contracts, to hedge its foreign exchange risks as well as put options to hedge against its oil price risk. However, such contracts are not accounted for as designated hedges. Derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative. Any gains or losses arising from changes in the fair value of derivatives are taken directly to profit or loss and presented within operating profit.

Commodity contracts that were entered into and continue to be held for the purpose of the receipt or delivery of a non-financial item in accordance with the Company's expected purchase, sale or usage requirements fall within the exemption from IAS 32 and IAS 39, which is known as the 'normal purchase or sale exemption'. For these contracts and the host part of the contracts containing embedded derivatives, they are accounted for as executory contracts. The Company recognises such contracts in its statement of financial position only when one of the parties meets its obligation under the contract to deliver either cash or a non-financial asset. An analysis of fair values of financial instruments and further details as to how they are measured are provided in Note 5 financial risk management.

h)    Fair value of financial instruments

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When available, the Company measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily available and represent actual and regularly occurring market transactions on an arm's length basis.

If a market for a financial instrument is not active, the Company establishes fair value using valuation techniques. Valuation techniques include using recent arm's length transactions between knowledgeable, willing parties (if available), reference to the current fair value of other instruments that are substantially the same, and discounted cash flow analysis. The chosen valuation technique makes maximum use of market inputs, relies as little as possible on estimates specific to the Company, incorporates all factors that market participants would consider in setting a price, and is consistent with accepted economic methodologies for pricing financial instruments.

Inputs to valuation techniques reasonably represent market expectations and measures of the risk-return factors inherent in the financial instrument. The Company calibrates valuation techniques and tests them for validity using prices from observable current market transactions in the same instrument or based on other available observable market data.

The best evidence of the fair value of a financial instrument at initial recognition is the transaction price - i.e. the fair value of the consideration given or received. However, in some cases, the fair value of a financial instrument on initial recognition may be different to its transaction price. If such fair value is evidenced by comparison with other observable current market transactions in the same instrument (without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets, then the difference is recognised in the income statement on initial recognition of the instrument. In other cases, the difference is not recognised in the income statement immediately but is recognised over the life of the instrument on an appropriate basis or when the instrument is redeemed, transferred or sold, or the fair value becomes observable.

3.14.      Share capital

On issue of ordinary, shares any consideration received net of any directly attributable transaction costs is included in equity. Shares held by the Company are disclosed as treasury shares and deducted from equity. Issued share capital has been translated at the exchange rate prevailing at the date of the transaction and is not retranslated subsequent to initial recognition.

3.15.      Earnings and dividends per share

Basic EPS

Basic earnings per share is calculated on the Company's profit or loss after taxation attributable to the company and on the basis of weighted average of issued and fully paid ordinary shares at the end of the year.

Diluted EPS

Diluted EPS is calculated by dividing the profit or loss after taxation attributable to the company by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on conversion of all the dilutive potential ordinary shares (after adjusting for outstanding share options arising from the share based payment scheme) into ordinary shares.

Dividend

Dividends on ordinary shares are recognised as a liability in the period in which they are approved.

3.16.      Post-employment benefits

Defined contribution scheme

The Company contributes to a defined contribution scheme for its employees in compliance with the provisions of the Pension Reform Act 2014. The scheme is fully funded and is managed by licensed Pension Fund Administrators. Membership of the scheme is automatic upon commencement of duties at the Company. The Company's contributions to the defined contribution scheme are charged to the profit and loss account in the year to which they relate.

Employee benefits are all forms of consideration given by an entity in exchange for service rendered by employees or for the termination of employment. The Company operates a defined contribution plan and it is accounted for based on IAS 19 Employee benefits.

Defined contribution plans are post-employment benefit plans under which an entity pays fixed contributions into a separate entity (a fund) and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods. Under defined contribution plans the entity's legal or constructive obligation is limited to the amount that it agrees to contribute to the fund.

Thus, the amount of the post-employment benefits received by the employee is determined by the amount of contributions paid by an entity (and perhaps also the employee) to a post-employment benefit plan or to an insurance company, together with investment returns arising from the contributions. In consequence, actuarial risk (that benefits will be less than expected) and investment risk (that assets invested will be insufficient to meet expected benefits) fall, in substance, on the employee.

Defined benefit scheme

The Company operates a defined benefit gratuity plan, which requires contributions to be made to a separately administered fund. The Company also provides certain additional post-employment benefits to employees. These benefits are unfunded.

The cost of providing benefits under the defined benefit plan is determined using the projected unit credit method and calculated annually by independent actuaries. The liability or asset recognised in the balance sheet in respect of the defined benefit plan is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets (if any). The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using government bonds.

Remeasurements gains and losses, arising from changes in financial and demographic assumptions and experience adjustments, are recognised immediately in the statement of financial position with a corresponding debit or credit to retained earnings through OCI in the period in which they occur. Remeasurements are not reclassified to profit or loss in subsequent periods.

Past service costs are recognised in profit or loss on the earlier of:

·      The date of the plan amendment or curtailment; and

·      The date that the Company recognises related restructuring costs.

Net interest is calculated by applying the discount rate to the net defined benefit obligation and the fair value of the plan assets.

The Company recognises the following changes in the net defined benefit obligation under employee benefit expenses in general and administrative expenses.

·      Service costs comprises current service costs, past-service costs, gains and losses on curtailments and non-routine settlements.

·      Net interest cost

3.17.      Provisions

Provisions are recognised when (i) the Company has a present legal or constructive obligation as a result of past events; (ii) it is probable that an outflow of economic resources will be required to settle the obligation as a whole; and (iii) the amount can be reliably estimated. Provisions are not recognised for future operating losses.

In measuring the provision:

▪  risks and uncertainties are taken into account; 
▪  the provisions are discounted (where the effects of the time value of money is considered to be material) using a pretax rate that is reflective of current market assessments of the time value of money and the risk specific to the liability; 
▪  when discounting is used, the increase of the provision over time is recognised as interest expense; 
▪  future events such as changes in law and technology, are taken into account where there is subjective audit evidence that they will occur; and 
▪  gains from expected disposal of assets are not taken into account, even if the expected disposal is closely linked to the event giving rise to the provision. 

Decommissioning        

Liabilities for decommissioning costs are recognised as a result of the constructive obligation of past practice in the oil and gas industry, when it is probable that an outflow of economic resources will be required to settle the liability and a reliable estimate can be made. The estimated costs, based on current requirements, technology and price levels, prevailing at the reporting date, are computed based on the latest assumptions as to the scope and method of abandonment.

Provisions are measured at the present value of management's best estimates of the expenditure required to settle the present obligation at the end of the reporting period. The discount rate used to determine the present value is a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The increase in the provision due to the passage of time is recognised as a finance cost. The corresponding amount is capitalised as part of the oil and gas properties and is amortised on a unit-of-production basis as part of the depreciation, depletion and amortisation charge. Any adjustment arising from the estimated cost of the restoration and abandonment cost is capitalised, while the charge arising from the accretion of the discount applied to the expected expenditure is treated as a component of finance costs.

If the change in estimate results in an increase in the decommissioning provision and, therefore, an addition to the carrying value of the asset, the Company considers whether this is an indication of impairment of the asset as a whole, and if so, tests for impairment in accordance with IAS 36. If, for mature fields, the revised oil and gas assets net of decommissioning provisions exceed the recoverable value, that portion of the increase is charged directly to expense.

3.18.      Contingencies

A contingent asset or contingent liability is a possible asset or obligation that arises from past events and whose existence will be confirmed by the occurrence or non-occurrence of uncertain future events. The assessment of the existence of the contingencies will involve management judgement regarding the outcome of future events.

3.19.      Income taxation

i)     Current income tax

The tax expense for the period comprises current and deferred tax. Tax is recognised in the statement of profit or loss and other comprehensive income, 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.

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the country where Company operates and generates taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulations are subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.

Taxation on crude oil activities is provided in accordance with the Petroleum Profits Tax Act ('PPTA') CAP. P13 Vol. 13 LFN 2004 and on gas operations in accordance with the Companies Income Tax Act ('CITA') CAP. C21 Vol. 3 LFN 2004. Education tax is assessed at 2% of the assessable profits.

ii) Deferred tax

Deferred tax is recognised, using the liability method, on temporary differences arising between the carrying amounts of assets and liabilities in the historical financial information and the corresponding tax bases used in the computation of taxable profit.

A deferred income tax charge is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet 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 liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such deferred tax assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. 

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.

iii)           New tax regime

During the year 2013, applications were made by Seplat for the tax incentives available under the provisions of the Industrial Development (Income Tax Relief) Act. In February 2014, Seplat was granted the incentives in respect of the tax treatment of OMLs 4, 38 and 41. Under these incentives, the Company's profits were subject to a tax rate of 0% with effect from 1 January 2013 to 31 December 2015 in the first instance and then for an additional two years if certain conditions included in the Nigerian Investment Promotion Commission (NIPC) pioneer status award document were met. After the expiration of the initial three years, the company considered the extension and concluded that it would be of no benefit to the business.

In May 2015, in line with Sections of the Companies Income Tax Act which provides incentives to companies that deliver gas utilisation projects, Seplat was granted a tax holiday for three years with a possible extension of two years. In 2018, on review of the performance of the business, the Company provided a notification to the Federal Inland Revenue Service (FIRS) for the extension of claim for the additional two years tax holiday.

3.20.      Leases

The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at the inception date. The arrangement is assessed for whether fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset or assets, even if that right is not explicitly specified in an arrangement.

Leases in which a significant portion of the risks and rewards of ownership are not transferred to the Company as lessee are classified as operating leases. 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.

3.21.      Share based payments

Employees (including senior executives) of the Company receive remuneration in the form of share-based payments, whereby employees render services as consideration for equity instruments (equity-settled transactions).

i)             Equity-settled transactions

The cost of equity-settled transactions is determined by the fair value at the date when the grant is made using an appropriate valuation model.

That cost is recognised in employee benefits expense together with a corresponding increase in equity (share based payment reserve), over the period in which the service and, where applicable, the performance conditions are fulfilled (the vesting period). The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Company's best estimate of the number of equity instruments that will ultimately vest. The expense or credit in profit or loss for a period represents the movement in cumulative expense recognised as at the beginning and end of that period.

Service and non-market performance conditions are not taken into account when determining the grant date and for fair value of awards, but the likelihood of the conditions being met is assessed as part of the Company's best estimate of the number of equity instruments that will ultimately vest. Market performance conditions are reflected within the grant date fair value. Any other conditions attached to an award, but without an associated service requirement, are considered to be non-vesting conditions. Non-vesting conditions are reflected in the fair value of an award and lead to an immediate expensing of an award unless there are also service and/or performance conditions.

No expense is recognised for awards that do not ultimately vest because non-market performance and/or service conditions have not been met. Where awards include a market or non-vesting condition, the transactions are treated as vested irrespective of whether the market or non-vesting condition is satisfied, provided that all other performance and/or service conditions are satisfied. When the terms of an equity-settled award are modified, the minimum expense recognised is the grant date fair value of the unmodified award, provided the original terms of the award are met. An additional expense, measured as at the date of modification, is recognised for any modification that increases the total fair value of the share-based payment transaction, or is otherwise beneficial to the employee. Where an award is cancelled by the entity or by the counterparty, any remaining element of the fair value of the award is expensed immediately through profit or loss. The dilutive effect of outstanding awards is reflected as additional share dilution in the computation of diluted earnings per share.

4.    Significant accounting judgements, estimates and assumptions

The preparation of the Company's historical financial information requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the accompanying disclosures, and the disclosure of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods.

4.1. Judgements

In the process of applying the Company's accounting policies, management has made the following judgements, which have the most significant effect on the amounts recognised in the historical financial information:

i)             OMLs 4, 38 and 41

OMLs 4, 38, 41 are grouped together as a cash generating unit for the purpose of impairment testing. These three OMLs are grouped together because they each cannot independently generate cash flows. They currently operate as a single block sharing resources for the purpose of generating cash flows. Crude oil and gas sold to third parties from these OMLs are invoiced when the company has an unconditional right to receive payment.

ii)            New tax regime

Effective 1 January 2013, the Company was granted the inter tax status incentive by the Nigerian Investment Promotion Commission for an initial three-year period and a further two-year period on approval. For the period the incentive applies, the Company was exempted from paying petroleum profits tax on crude oil profits (at 85%), corporate income tax on natural gas profits (currently taxed at 30%) and education tax of 2%. After the expiration of the initial three years, the company considered the extension and concluded that it would be of no benefit to the business.

In May 2015, in line with Sections of the Companies Income Tax Act which provides incentives to companies that deliver gas utilisation projects, Seplat was granted a tax holiday for three years with a possible extension of two years. In 2018, on review of the performance of the business, the Company provided a notification to the Federal Inland Revenue Service (FIRS) for the extension of claim for the additional two years tax holiday.

The impact of the tax holiday has been considered in calculating the current income tax and deferred tax asset recognised in the financial statements.

iii)           Deferred tax asset

Deferred tax assets are recognised for tax losses carried forward to the extent that the realisation of the related tax benefit through future taxable profits is probable. See further details in note 15.

iv)            Foreign currency translation reserve

The Company has used the CBN rate to translate its Dollar currency to its Naira presentation currency. Management has determined that this rate is available for immediate delivery. If the rate used was 10% higher or lower, revenue in Naira would have increased/decreased by ₦21.7 billion (2017: ₦12.8 billion). See note 45 for the applicable translation rate.

v)             Revenue recognition

Definition of contracts

The Company has entered into a non-contractual promise with PanOcean where it allows Panocean to pass crude oil through its pipelines from a field just above Seplat's to the terminal for loading. Management has determined that the non-existence of an enforceable contract with Panocean means that it may not be viewed as a valid contract with a customer. As a result, income from this activity is recognised as other income when earned.

Performance obligations

The judgments applied in determining what constitutes a performance obligation will impact when control is likely to pass and therefore when revenue is recognised i.e. over time or at a point in time. The Company has determined that only one performance obligation exists in oil contracts which is the delivery of crude oil to specified ports. Revenue is therefore recognised at a point in time.

For gas contracts, the performance obligation is satisfied through the delivery of a series of distinct goods. Revenue is recognised over time in this situation as the customer simultaneously receives and consumes the benefits provided by the Company's performance. The Company has elected to apply the 'right to invoice' practical expedient in determining revenue from its gas contracts. The right to invoice is a measure of progress that allows the Company to recognise revenue based on amounts invoiced to the customer. Judgement has been applied in evaluating that the Company's right to consideration corresponds directly with the value transferred to the customer and is therefore eligible to apply this practical expedient.

Significant financing component

The Company has entered into an advance payment contract with Mercuria for future crude oil to be delivered. The Company has considered whether the contract contains a financing component and whether that financing component is significant to the contract, including both of the following;

(a) The difference, if any, between the amount of promised consideration and cash selling price and;

(b) The combined effect of both the following:

·      The expected length of time between when the Company transfers the crude to Mecuria and when payment for the crude is received and;

·      The prevailing interest rate in the relevant market.

The advance period is greater than 12 months. In addition, the interest expense accrued on the advance is based on a comparable market rate. Interest expense has therefore been included as part of finance cost.

Transactions with Joint Arrangement (JOA) partners

The treatment of underlift and overlift transactions is judgmental and requires a consideration of all the facts and circumstances including the purpose of the arrangement and transaction. The transaction between the Company and its JOA partners involves sharing in the production of crude oil, and for which the settlement of the transaction is non-monetary. The JOA partners have been assessed to be partners not customers. Therefore, shortfalls or excesses below or above the Company's share of production are recognised in other income/ (expenses) - net.

Barging costs

The Company refunds to Mercuria barging costs incurred on crude oil barrels delivered. The Company does not enjoy a separate service which it could have paid another party for. The barging costs is therefore determined to be a consideration payable to customer as there is no distinct goods or service being enjoyed by the Company. Since no distinct good or service is transferred, barging costs is accounted for as a direct deduction from revenue i.e. revenue is recognised net of barging costs.

vi)            Segment reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker.

The Board of directors has appointed a steering committee which assesses the financial performance and position of the Company, and makes strategic decisions. The steering committee, which has been identified as being the chief operating decision maker, consists of the chief financial officer, the general manager (Finance), the general manager (Gas) and the financial reporting manager. See further details in note 6.

4.2. Estimates and assumptions

The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are described below. The Company based its assumptions and estimates on parameters available when the financial statements were prepared. Existing circumstances and assumptions about future developments may change due to market changes or circumstances arising that are beyond the control of the Company. Such changes are reflected in the assumptions when they occur.

j)      Defined benefit plans (pension benefits)

The cost of the defined benefit retirement plan and the present value of the retirement obligation are determined using actuarial valuations. An actuarial valuation involves making various assumptions that may differ from actual developments in the future. These include the determination of the discount rate, future salary increases, mortality rates and changes in inflation rates.

Due to the complexities involved in the valuation and its long-term nature, a defined benefit obligation is highly sensitive to changes in these assumptions. The parameter most subject to change is the discount rate. In determining the appropriate discount rate, management considers market yield on federal government bonds in currencies consistent with the currencies of the post-employment benefit obligation and extrapolated as needed along the yield curve to correspond with the expected term of the defined benefit obligation.

The rates of mortality assumed for employees are the rates published in 67/70 ultimate tables, published jointly by the Institute and Faculty of Actuaries in the UK.   

ii)            Oil and gas reserves

Proved oil and gas reserves are used in the units of production calculation for depletion as well as the determination of the timing of well closure for estimating decommissioning liabilities and impairment analysis. There are numerous uncertainties inherent in estimating oil and gas reserves. Assumptions that are valid at the time of estimation may change significantly when new information becomes available. Changes in the forecast prices of commodities, exchange rates, productioncosts or recovery rates may change the economic status of reserves and may ultimately result in the reserves being restated.

iii)           Share-based payment reserve

Estimating fair value for share-based payment transactions requires determination of the most appropriate valuation model, which depends on the terms and conditions of the grant. This estimate also requires determination of the most appropriate inputs to the valuation model including the expected life of the share award or appreciation right, volatility and dividend yield and making assumptions about them. The Company measures the fair value of equity-settled transactions with employees at the grant date. The assumptions and models used for estimating fair value for share-based payment transactions are disclosed in Note 26.

The Company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. Such estimates and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

iv)            Provision for decommissioning obligations

Provisions for environmental clean-up and remediation costs associated with the Company's drilling operations are based on current constructions, technology, price levels and expected plans for remediation. Actual costs and cash outflows can differ from estimates because of changes in public expectations, prices, discovery and analysis of site conditions and changes in clean-up technology.

v)             Property, plant and equipment

The Company assesses its property, plant and equipment, including exploration and evaluation assets, for possible impairment if there are events or changes in circumstances that indicate that carrying values of the assets may not be recoverable, or at least at every reporting date.

If there are low oil prices or natural gas prices during an extended period the Company may need to recognise significant impairment charges. The assessment for impairment entails comparing the carrying value of the cash-generating unit with its recoverable amount, that is, value in use. Value in use is usually determined on the basis of discounted estimated future net cash flows. Determination as to whether and how much an asset is impaired involves management estimates on highly uncertain matters such as future commodity prices, the effects of inflation on operating expenses, discount rates, production profiles and the outlook for regional market supply-and-demand conditions for crude oil and natural gas.

During the year, the Company carried out an impairment assessment on OML 4, 38 and 48. The Company used the value in use in determining the recoverable amount of the cash-generating unit. In determining the value, the Company used a forecast of the annual net cashflows over the estimated life of proved plus probable reserves, production rates, oil and gas prices, future cost and other relevant assumptions based on 2018 year end CPR report.

The pre-tax future cashflow were adjusted for risk specific to the forecast and discounted using a pre-tax discount rate of 10% which reflects both current market assessment of the time value of money and risk specific to the assets. The impairment test did not result in an impairment charge for both 2018 and 2017 reporting periods.

Management has considered whether a reasonable possible change in one of the main assumptions will cause an impairment and believes otherwise.

vi)            Useful life of other property, plant and equipment

The Company recognises depreciation on other property, plant and equipment on a straight line basis in order to write-off the cost of the asset over its expected useful life. The economic life of an asset is determined based on existing wear and tear, economic and technical ageing, legal and other limits on the use of the asset, and obsolescence. If some of these factors were to deteriorate materially, impairing the ability of the asset to generate future cash flow, the Company may accelerate depreciation charges to reflect the remaining useful life of the asset or record an impairment loss.

vii)          Contingencies

By their nature, contingencies will only be resolved when one or more uncertain future events occur or fail to occur. The assessment of the existence, and potential quantum, of contingencies inherently involves the exercise of significant judgement and the use of estimates regarding the outcome of future events.

viii)         Income taxes

The Company is subject to income taxes by the Nigerian tax authority, which does not require significant judgement in terms of provision for income taxes, but a certain level of judgement is required for recognition of deferred tax assets. Management is required to assess the ability of the Company to generate future taxable economic earnings that will be used to recover all deferred tax assets. Assumptions about the generation of future taxable profits depend on management's estimates of future cash flows. The estimates are based on the future cash flow from operations taking into consideration the oil and gas prices, volumes produced, operational and capital expenditure.

ix)            Impairment of financial assets

The loss allowances for financial assets are based on assumptions about risk of default, expected loss rates and maximum contractual period. The Company uses judgement in making these assumptions and selecting the inputs to the impairment calculation, based on the Company's past history, existing market conditions as well as forward looking estimates at the end of each reporting period. Details of the key assumptions and inputs used are disclosed note 39.2.2.

5.    Financial risk management

5.1. Financial risk factors

The Company's activities expose it to a variety of financial risks such as market risk (including foreign exchange risk, interest rate risk and commodity price risk), credit risk and liquidity risk. The Company's risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Company's financial performance.

Risk management is carried out by the treasury department under policies approved by the Board of Directors. The Board provides written principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk and investment of excess liquidity.

Risk  Exposure arising from  Measurement  Management 
Market risk - foreign exchange  Future commercial transactions Recognised financial assets and liabilities not denominated in US dollars.  Cash flow forecasting Sensitivity analysis  Match and settle foreign denominated cash inflows with foreign denominated cash outflows. 
Market risk - interest rate  Interest bearing loans and borrowings at variable rate  Sensitivity analysis  Review refinancing opportunities 
Market risk - commodity  prices  Future sales transactions   Sensitivity analysis  Oil price hedges 
Credit risk  Cash and bank balances, trade and other receivables, contract assets and derivative financial instruments.  Aging analysis Credit ratings  Diversification of bank deposits. 
Liquidity risk  Borrowings and other liabilities  Rolling cash flow forecasts  Availability of committed credit lines and borrowing facilities 

5.1.1. Market Risk

Market risk is the risk of loss that may arise from changes in market factors such as commodity prices, interest rates and foreign exchange rates.

i)             Commodity price risk

The Company is exposed to the risk of fluctuations on crude oil prices. The uncertainty around the rate at which oil prices increase or decline led to the Company's decision to enter into an option contract to insure the Company's revenue against adverse oil price movements.

On 17 December 2018, the Company entered economic crude oil hedge contracts with a strike price of ₦15,350 ($50/bbl) to ₦16,885 ($55/bbl) for 4 million barrels at an average premium price of ₦399 ($1.3/bbl) on 19 December 2018. These contracts, which will commence in 1 January 2019, are expected to reduce the volatility attributable to price fluctuations of oil. The Company has pre-paid a premium of ₦1.6 billion, 2017: nil ($5.2 million; 2017: nil) and has recognised an unrealised fair value gain of ₦2.7 billion, 2017: nil ($8.8 million; 2017: nil) for these hedges. The termination date is 31 December 2019. Hedging the price volatility of forecast oil sales is in accordance with the risk management strategy of the Company. The Company has not made a formal designation to apply hedge accounting principles in accounting for the economic hedge.

The maturity of the commodity options the Company holds is shown in the table below:

  Less than 6 months Volume (bbls)  6 to 9 months Volume (bbls)  9 to 12 months Volume (bbls)  Total Volume (bbls)  Fair value ₦ million  Fair value $'000 
As at 31 December 2018             
             
Crude oil hedges  2,500,000  750,000  750,000  4,000,000  2,693  8,772 

The following table summarises the impact of a 10 % change in crude oil prices, with all other variables held constant:

Increase/decrease in crude oil prices  Effect on profit  before tax 2018 ₦ million  Effect on other components of equity before tax 2018 ₦ million  Effect on profit  before tax 2018 $'000  Effect on other components of equity before tax 2018  $'000 
+10%   111   -      363   -    
-10%   (136)   -      (443)   -    

The Company may be exposed to business risks from fluctuations in the future prices of crude oil and gas. The following table summarises the impact of a 10 % change in crude oil prices, with all other variables held constant:

Increase/decrease in Commodity Price  Effect on profit  before tax 2018 ₦ million  Effect on other components of equity before tax 2018 ₦ million  Effect on profit  before tax  2017 ₦ million  Effect on other components of equity before tax 2017 ₦ million 
+10%   16,953   -      8,974 
-10%   (16,953)   -      (8,974) 
Increase/decrease in Commodity Price  Effect on profit  before tax 2018 $'000  Effect on other components of equity before tax 2018  $'000  Effect on profit  before tax  2017 $'000  Effect on other components of equity before tax 2017  $'000 
+10%  55,386   -      29,346 
-10%  (55,386)   -      (29,346) 

The following table summarises the impact of a 10% change in gas prices, with all other variables held constant:

Increase/decrease in Commodity Price  Effect on profit  before tax 2018 ₦ million  Effect on other components of equity before tax 2018 ₦ million  Effect on profit  before  tax  2017 ₦ million  Effect on other components of equity before tax 2017 ₦ million 
+10%   4,764   -      3,791 
-10%   (4,764)   -      (3,791) 
Increase/decrease in Commodity Price  Effect on profit  before tax 2018 $'000  Effect on other components of equity before tax 2018  $'000  Effect on profit  before tax  2017   $'000  Effect on other components of equity before tax 2017  $'000 
+10%   15,564   -      12,397 
-10%   (15,564)   -      (12,397) 

ii)            Cash flow and fair value interest rate risk

The Company's exposure to interest rate risk relates primarily to interest bearing loans and borrowings. The Company has both variable and fixed borrowings and deposits. Borrowings issued at variable rates expose the Company to cash flow interest rate risk which is partially offset by cash held at variable rates. Fixed rate borrowings and deposits only give rise to interest rate risk if measured at fair value. The Company's borrowings and fixed deposits are not measured at fair value and are denominated in US dollars.

The contractual re-pricing date of the interest bearing loans and borrowings is three (3) months. The exposure of the Company's interest bearing loans and borrowings at the end of the reporting period is shown below.

  2018  2017  2018  2017 
  ₦ million  ₦ million  $'000  $'000 
Corporate loan  29,558  174,329  96,282  570,077 

The following table demonstrates the sensitivity to changes in LIBOR rate, with all other variables held constant.

Increase/decrease in interest rate    Effect on profit  before tax 2018 ₦ million  Effect on other components of equity before tax 2018 ₦ million  Effect on profit  before tax  2017 ₦ million  Effect on other components of equity before tax 2017 ₦ million 
+1%     (296)   -      (1,743) 
-1%     296   -      1,743 
Increase/decrease in interest rate    Effect on profit  before tax 2018 $'000  Effect on other components of equity before tax 2018  $'000  Effect on profit  before tax  2017   $'000  Effect on other components of equity before tax 2017  $'000 
+1%     (963)   -      (5,701) 
-1%     963   -      5,701 

iii)           Foreign exchange risk

The Company has transactional currency exposures that arise from sales or purchases in currencies other than the respective functional currency. The Company is exposed to exchange rate risk to the extent that balances and transactions are denominated in a currency other than the US dollar.

The Company holds the majority of its bank balances equivalents in US dollar. However, the Company does maintain deposits in Naira in order to fund ongoing general and administrative activities and other expenditure incurred in this currency. Other monetary assets and liabilities which give rise to foreign exchange risk include trade and other receivables, and trade and other payables.

The following table demonstrates the carrying value of monetary assets and liabilities exposed to foreign exchange risks at the reporting date:

  2018  2017  2018  2017 
  ₦ million  ₦ million  $'000  $'000 
Financial assets         
Trade and other receivables    13,567   22,699    44,191   74,229 
Contract assets   4,327   -      14,096   -    
Cash and bank balances   56,026   26,565   182,496   86,869 
  73,920   49,264  240,783   161,098 
Financial liabilities         
Trade and other payables   (24,647)   (23,335)   (82,284)   (76,307) 
Net exposure to foreign exchange risk  49,273   25,929  158,499  84,791 
Increase/decrease in foreign exchange risk  Effect on profit before tax 2018 ₦ million  Effect on other components of equity before tax 2018 ₦ million  Effect on profit  before tax  2017 ₦ million  Effect on other components of equity before tax 2017 ₦ million 
+5%  (2,346)   -      (1,235) 
-5%  2,593   -      1,365 

Sensitivity to foreign exchange risk is based on the Company's net exposure to foreign exchange risk due to Naira denominated balances. If the Naira strengthens or weakens by the following thresholds, the impact is as shown in the table below:

Increase/decrease in foreign exchange risk  Effect on profit before tax 2018 $'000  Effect on other components of equity before tax 2018  $'000  Effect on profit  before tax  2017 $'000  Effect on other components of equity before tax 2017  $'000 
+5%   (7,643)   -      (4,038) 
-5%   8,447   -      4,463 
         

5.1.2. Credit risk

Credit risk refers to the risk of a counterparty defaulting on its contractual obligations resulting in financial loss to the Company. Credit risk arises from cash and bank balances, derivative assets, deposits with banks and financial institutions as well as credit exposures to customers (i.e. Mercuria, Pillar and NGMC receivables), and other parties (i.e. NPDC receivables and other receivables).

i)             Risk management

The Company is exposed to credit risk from its sale of crude oil to Mecuria. The off-take agreement with Mercuria also runs for five years until 31 July 2020 with a 30 day payment term.

In addition, the Company is exposed to credit risk in relation to its sale of gas to its customers. This risk is managed by the treasury and credit department approved by the Board of Directors through policies that ensure collectability of receivable amounts.

The credit risk on cash and bank balances is managed through the diversification of banks in which cash and bank balances are held. This risk on cash is limited because the majority of deposits are with banks that have an acceptable credit rating assigned by an international credit agency. The Company's maximum exposure to credit risk due to default of the counterparty is equal to the carrying value of its financial assets.

The maximum exposure to credit risk as at the reporting date is:

  2018  2017  2018  2017 
  ₦ million  ₦ million  $'000  $'000 
Trade and other receivables (Gross)  322,020   324,552   1,048,785   1,061,321 
Contract assets   4,327     14,096   
Cash and bank balances   153,563   117,220   500,207   383,321 
Gross amount   479,910   441,772   1,563,088   1,444,642 
Impairment of receivables   (4,541)   -      (14,650)   -    
Net amount   475,369   441,772   1,548,438   1,444,642 

Trade and other receivables (excluding prepayments), contract assets and cash and bank balances are financial instruments whose carrying amounts as per the financial statements approximate their fair values.

The gross carrying amount of the Company's financial assets have been disclosed using the days past due criteria and other borrower specific information. The details of the credit quality of each financial asset is shown in note 39.2.2.

ii)            Estimation uncertainty in measuring impairment loss

The table below shows information on the sensitivity of the carrying amounts of the Company's financial assets to the methods, assumptions and estimates used in calculating impairment losses on those financial assets at the end of the reporting period. These methods, assumptions and estimates have a significant risk of causing material adjustments to the carrying amounts of the Company's financial assets.

a)    Expected cashflow recoverable

The table below demonstrates the sensitivity to a 20% change in the expected cashflows from financial assets, with all other variables held constant:

  Effect on profit before tax 2018  Effect on other components of profit before tax 2018  Effect on profit before tax 2018  Effect on other components of profit before tax 2018 
  ₦ million  ₦ million  $'000  $'000 
Increase/decrease in estimated cash flows         
+20%  24  79 
-20%  (24)  (79) 
             

Significant unobservable inputs

The table below demonstrates the sensitivity to movements in the probability of default (PD) and loss given default (LGD) for financial assets, with all other variables held constant:

  Effect on profit before tax 2018  Effect on other components of profit before tax 2018  Effect on profit before tax 2018  Effect on other components of profit before tax 2018 
  ₦ million  ₦ million  $'000  $'000 
Increase/decrease in loss given default         
+10%  (538)  (1,759) 
-10%  538  1,759 
             


The table below demonstrates the sensitivity to movements in the probability of default (PD) for financial assets (intercompany receivables) classified as stage 1 and stage 2 financial assets, with all other variables held constant:

  Effect on profit before tax 2018  Effect on other components of profit before tax 2018  Effect on profit before tax 2018  Effect on other components of profit before tax 2018 
  ₦ million  ₦ million  $'000  $'000 
Increase/decrease in probability of default         
+10%  (193)  (632) 
-10%  193  630 
             


The table below demonstrates the sensitivity to movements in the forward looking macroeconomic indicators, with all other variables held constant:

  Effect on profit before tax 2018  Effect on other components of profit before tax 2018  Effect on profit before tax 2018  Effect on other components of profit before tax 2018 
  ₦ million  ₦ million  $'000  $'000 
Increase/decrease in forward looking macroeconomic indicators         
+10%  165  540 
-10%  (164)  (540) 
             

5.1.3. Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due.

The Company manages liquidity risk by ensuring that sufficient funds are available to meet its commitments as they fall due.

The Company uses both long-term and short-term cash flow projections to monitor funding requirements for activities and to ensure there are sufficient cash resources to meet operational needs. Cash flow projections take into consideration the Company's debt financing plans and covenant compliance.

Surplus cash held is transferred to the treasury department which invests in deposit bearing current accounts, time deposits and money market deposits.

i.              Financing arrangements

The Company had access to the undrawn loan facility at the end of the reporting period:

  2018  2017  2018  2017 
Floating rate  ₦'million  ₦'million  $'000  $'000 
Expiring within one year (bank loans)  61,400  200,000 


The outstanding amount on the loan facility may be drawn at any time up to the total commitment balance available at each commitment period. The available commitment balance as at the year end was ₦92.1billion ($300 million). This amount reduces by ₦11.5 billion ($37.5 million) at each subsequent reporting period, that is, every 6 months. There are no restrictions to the amounts available for drawdown

ii.            Maturities of financial liabilities

The following table details the Company's remaining contractual maturity for its non-derivative financial liabilities with agreed maturity periods. The table has been drawn based on the undiscounted cash flows of the financial liabilities based on the earliest date on which the Company can be required to pay.

  Effective interest rate  Less than
1 year 
1 - 2
year 
2 - 3
years 
3 - 5
years 
Total 
  ₦ million  ₦ million  ₦ million  ₦ million  ₦ million 
31 December 2018             
Non - derivatives             
Fixed interest rate borrowings             
Senior notes  9.25%   10,130   10,075   10,048   122,220   152,473 
Variable interest rate borrowings             
Stanbic IBTC Bank Plc  6.0% +LIBOR   312   313   312   3,789   4,726 
The Standard Bank of South Africa L  6.0% +LIBOR   208   209   208   2,526   3,151 
Nedbank Limited, London Branch  6.0% +LIBOR   434   434   434   5,263   6,565 
Standard Chartered Bank  6.0% +LIBOR   390   391   390   4,736   5,907 
Natixis  6.0% +LIBOR   304   304   304   3,684   4,596 
FirstRand Bank Limited Acting  6.0% +LIBOR   304   304   304   3,684   4,596 
Citibank N.A. London  6.0% +LIBOR   260   261   260   3,158   3,939 
The Mauritius Commercial Bank Plc  6.0% +LIBOR   260   261   260   3,158   3,939 
Nomura International Plc  6.0% +LIBOR   130   130   130   1,579   1,969 
    2,602   2,607  2,602  31,577  39,388 
Other non - derivatives             
Trade and other payables**     109,902   -      -      -      109,902 
     122,634   12,682   12,650   153,797   301,763 

** Trade and other payables (excludes non-financial liabilities such as provisions, taxes, pension and other non-contractual payables).

  Effective interest rate  Less than
1 year 
1 - 2
year 
2 - 3
years 
3 - 5
years 
Total 
  ₦ million  ₦ million  ₦ million  ₦ million  ₦ million 
31 December 2017             
Non - derivatives             
Variable interest rate borrowings (bank loans):             
Allan Gray  8.5% + LIBOR   1,696   1,564   1,124   538   4,922 
Zenith Bank Plc  8.5% + LIBOR   23,243   21,439   15,404   7,371   67,457 
First Bank of Nigeria Limited  8.5% + LIBOR   12,830   11,835   8,503   4,069   37,237 
United Bank for Africa Plc  8.5% + LIBOR   14,527   13,400   9,628   4,607   42,162 
Stanbic IBTC Bank Plc  8.5% + LIBOR   2,177   2,008   1,443   690   6,318 
Standard Bank Plc  8.5% + LIBOR   2,177   2,008   1,443   690   6,318 
Standard Chartered Bank  6.0% + LIBOR   5,747   -      -      -      5,747 
Natixis  6.0% + LIBOR   5,747   -      -      -      5,747 
Citibank Nigeria Ltd and Citibank NA  6.0% + LIBOR   4,470   -      -      -      4,470 
FirstRand Bank Limited Acting  6.0% + LIBOR   3,831   -      -      -      3,831 
Nomura Bank Plc*  6.0% + LIBOR   3,831   -      -      -      3,831 
NedBank Ltd, London Branch  6.0% + LIBOR   3,831   -      -      -      3,831 
The Mauritius Commercial Bank Plc*  6.0% + LIBOR   3,831   -      -      -      3,831 
Stanbic IBTC Bank Plc  6.0% + LIBOR   2,874   -      -      -      2,874 
    90,812   52,254   37,545   17,965  198,576 
Other non - derivatives             
Trade and other payables**  59,351   -      -      -     59,351   
     150,163   52,254   37,545   17,965   257,927 

*Nomura and The Mauritius Commercial Bank replace JP Morgan and Bank of America

** Trade and other payables (excludes non-financial liabilities such as provisions, taxes, pension and other non-contractual payables).

  Effective interest rate  Less than
1 year 
1 - 2
year 
2 - 3
years 
3 - 5
years 
Total 
  $'000  $'000  $'000  $'000  $'000 
31 December 2018             
Non - derivatives             
Fixed interest rate borrowings             
Senior notes  9.25%   33,094   32,915   32,825   399,282   498,116 
Variable interest rate borrowings              
Stanbic IBTC Bank Plc  6.0% +LIBOR   1,020   1,023   1,020   12,378   15,441 
The Standard Bank of South Africa L  6.0% +LIBOR   680   682   680   8,252   10,294 
Nedbank Limited, London Branch  6.0% +LIBOR   1,417   1,421   1,417   17,192   21,447 
Standard Chartered Bank  6.0% +LIBOR   1,275   1,279   1,275   15,473   19,302 
Natixis  6.0% +LIBOR   992   995   992   12,035   15,014 
FirstRand Bank Limited Acting  6.0% +LIBOR   992   995   992   12,035   15,014 
Citibank N.A. London  6.0% +LIBOR   850   853   850   10,315   12,868 
The Mauritius Commercial Bank Plc  6.0% +LIBOR   850   853   850   10,315   12,868 
Nomura International Plc  6.0% +LIBOR   425   426   425   5,158   6,434 
    8,501  8,527  8,501  103,153  128,682 
Other non - derivatives             
Trade and other payables**     357,988   -      -      -      357,988 
     399,583   41,442   41,326   502,435   984,786 

** Trade and other payables (excludes non-financial liabilities such as provisions, taxes, pension and other non-contractual payables).

  Effective interest rate  Less than
1 year 
1 - 2
year 
2 - 3
years 
3 - 5
years 
Total 
  $'000  $'000  $'000  $'000  $'000 
31 December 2017             
Non - derivatives             
Variable interest rate borrowings (bank loans):             
Allan Gray  8.5% + LIBOR   5,546   5,116   3,676   1,759   16,097 
Zenith Bank Plc  8.5% + LIBOR   76,006   70,109   50,373   24,104   220,592 
First Bank of Nigeria Limited  8.5% + LIBOR   41,957   38,702   27,807   13,306   121,772 
United Bank for Africa Plc  8.5% + LIBOR   47,504   43,818   31,483   15,065   137,870 
Stanbic IBTC Bank Plc  8.5% + LIBOR   7,119   6,567   4,718   2,258   20,662 
Standard Bank Plc  8.5% + LIBOR   7,119   6,567   4,718   2,258   20,662 
Standard Chartered Bank  6.0% + LIBOR   18,794   -      -      -      18,794 
Natixis  6.0% + LIBOR   18,794   -      -      -      18,794 
Citibank Nigeria Ltd and Citibank NA  6.0% + LIBOR   14,617   -      -      -      14,617 
Bank of America Merrill Lynch Int'l Ltd  6.0% + LIBOR   12,529   -      -      -      12,529 
FirstRand Bank Limited Acting  6.0% + LIBOR   12,529   -      -      -      12,529 
Nomura Bank Plc*  6.0% + LIBOR   12,529   -      -      -      12,529 
NedBank Ltd, London Branch  6.0% + LIBOR   12,529   -      -      -      12,529 
The Mauritius Commercial Bank Plc*  6.0% + LIBOR   9,399   -      -      -      9,399 
Stanbic IBTC Bank Plc  6.0% + LIBOR   13,576   -      -      -      13,576 
    310,547   170,879   122,775   58,750  662,951 
Other non - derivatives             
Trade and other payables**  194,084     -      -      -     194,084   
     504,631   170,879   122,775   58,750   857,035 

*Nomura and The Mauritius Commercial Bank replace JP Morgan and Bank of America

*Trade and other payables (excludes non-financial liabilities such as provisions, taxes, pension and other non-contractual payables).

5.2. Fair value measurements

Set out below is a comparison by category of carrying amounts and fair value of all financial instruments:

  Carrying amount  Fair value   
  2018  2017  2018  2017   
  ₦ million  ₦ million  ₦ million  ₦ million   
Financial assets at amortised cost           
Trade and other receivables*  317,507   324,552  317,507   324,552   
Contract assets   4,327   4,327   
Cash and  bank balances   153,535   117,220   153,535   117,220   
  475,369  441,772  475,369  441,772   
Financial assets at fair value           
Derivative financial instruments   2,693   2,693   
   2,693   2,693   
Financial liabilities at amortised cost         
Interest bearing loans and borrowings   136,830   174,329   143,158   174,329 
Trade and other payables   109,902   59,351   109,902   59,351 
   246,732   233,680   253,060   233,680 
                   

* Trade and other receivables exclude NGMC VAT receivables, cash advances and advance payments.

  Carrying amount  Fair value 
  2018  2017  2018  2017 
  $'000  $'000  $'000  $'000 
Financial assets at amortised cost         
Trade and other receivables    1,034,226   1,061,321    1,034,226   1,061,321 
Contract assets   14,096   14,096 
Cash and bank balances   500,116   383,321   500,116   383,321 
  1,548,438  1,444,642  1,548,438  1,444,642 
Financial assets at fair value         
Derivative financial instruments   8,772   8,772 
   8,772   8,772 
Financial liabilities at amortised cost         
Interest bearing loans and borrowings  445,699  570,077   466,314  570,077 
Trade and other payables   357,988   194,084   357,988   194,084 
   803,687   764,161   824,302  764,161 

* Trade and other receivables exclude NGMC receivables, VAT receivables, cash advances and advance payments.

In determining the fair value of the interest bearing loans and borrowings, non-performance risks of the company as at year-end were assessed to be insignificant.

Trade and other payables (excludes non-financial liabilities such as provisions, accruals, taxes, pension and other non-contractual payables), trade and other receivables and contract assets (excluding prepayments) and cash and bank balances are financial instruments whose carrying amounts as per the financial statements approximate their fair values. This is mainly due to their short term nature.

5.2.1. Fair Value Hierarchy

As at the reporting period, the Company had classified its financial instruments into the three levels prescribed under the accounting standards. These are all recurring fair value measurements. There were no transfers of financial instruments between fair value hierarchy levels during the year.

                                                                                                                                                                                              Financial Assets

31 Dec 2018  Level 1 ₦ million  Level 2 ₦ million  Level 3 ₦ million  Level 1 $'000  Level 2 $'000  Level 3 $'000 
Financial assets:             
Derivative financial instruments  2,693    -    -     8,772   -    
  2,693    -    -     8,772   -    

                                                                                                                                                                                          Financial liabilities

31 Dec 2018  Level 1 ₦ million  Level 2 ₦ million    Level 3 ₦million  Level 1 $'000  Level 2 $'000  Level 3 $'000 
Financial liabilities:               
Interest bearing loans and borrowings   -      136,830     -      -      445,699   -    
   136,830     -      -      445,699   -    
31 Dec 2017               
Financial liabilities:               
Interest bearing loans and borrowings   -      174,329     -     570,077     - 
   -      174,329    -     570,077   - 
▪  Level 1 - Quoted (unadjusted) market prices in active markets for identical assets or liabilities. 
▪  Level 2 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable. 
▪  Level 3 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable. 

The fair value of the financial instruments is included at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The fair value of the Company's derivative financial instruments has been determined using a proprietary pricing model that uses marked to market valuation. The valuation represents the mid-market value and the actual close-out costs of trades involved. The market inputs to the model are derived from observable sources. Other inputs are unobservable but are estimated based on the market inputs or by using other pricing models.

5.3. Capital management

5.3.1. Risk management

The Company's objective when managing capital is to safeguard the Company's ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders, to maintain optimal capital structure and reduce cost of capital. Consistent with others in the industry, the Company monitors capital on the basis of the following gearing ratio, net debt divided by total capital. Net debt is calculated as total borrowings less cash and bank balances.

  2018  2017  2018  2017 
  ₦ million  ₦ million  $'000  $'000 
Interest bearing loans and borrowings   136,830   174,329   445,699   570,077 
Less: cash and bank balances   (153,535)   (117,220)   (500,116)   (383,321) 
Net debt   (16,705)   57,109   (54,417)   186,756 
Total equity   526,296   490,225   1,714,316   1,603,077 
Total capital   509,591   547,334   1,659,899   1,789,833   
Net debt (net debt/total capital) ratio  (3%)  10%  (3%)  10% 

During the year, the Company's strategy which was unchanged from 2017, was to maintain a gearing ratio of 20% to 40%. Capital includes share capital, share premium, treasury shares, capital contribution and all other equity reserves.

5.3.2. Loan covenant

Under the terms of the major borrowing facilities, the Company is required to comply with the following financial covenants:

·      Total net financial indebtedness to annualised EBITDA is not to be greater than 3:1.

·      The sources of funds exceed the relevant expenditures in each semi-annual period within the 18 months shown in the Company's liquidity plan.

·      The minimum production levels stipulated for each 6 month period must be achieved.

The Company has complied with these covenants throughout the reporting periods presented.

6.    Segment reporting

Business segments are based on Seplat's internal organisation and management reporting structure. Seplat's business segments are the two core businesses: Oil and Gas. The Oil segment deals with the exploration, development and production of crude oil while the Gas segment deals with the production and processing of gas. These two reportable segments make up the total operations of the Company.

For the year ended 31 December 2018, revenue from the gas segment of the business constituted 22% of the Company's revenue. Management believes that the gas segment of the business will continue to generate higher profits in the foreseeable future. It also decided that more investments will be made toward building the gas arm of the business. This investment will be used in establishing more offices, creating a separate operational management and procuring the required infrastructure for this segment of the business. The gas business is positioned separately within the Company and reports directly to the ('chief operating decision maker'). As this business segment's revenues and results, and also its cash flows, will be largely independent of other business units within Seplat, it is regarded as a separate segment.

The result is two reporting segments, Oil and Gas. There were no intersegment sales during the reporting periods under consideration, therefore all revenue was from external customers.

Amounts relating to the gas segment are determined using the gas cost centres, with the exception of depreciation. Depreciation relating to the gas segment is determined by applying a percentage which reflects the proportion of the Net Book Value of oil and gas properties that relates to gas investment costs (i.e. cost for the gas processing facilities).

Where applicable, the comparative figures for 2017 have been reclassified to match the new structure for the year ended 31 December 2018.

The Company accounting policies are also applied in the segment reports.

47.1.      Segment profit disclosure

  2018  2017  2018  2017 
  ₦'million  ₦'million  $'000  $'000 
Oil    13,251   74,057    43,291   242,182 
Gas   36,430   22,359   119,014   73,107 
Total profit for the year   49,681   96,416   162,305   315,289 

                                                                                                                                                                                                          Oil

  2018  2017  2018  2017 
  ₦'million  ₦'million  $'000  $'000 
Revenue         
Crude oil sales   169,534   89,742   553,856   293,455 
Operating profit before depreciation, amortisation and impairment   87,523   38,334   300,092   125,372 
Depreciation, amortisation and impairment   (26,610)   (21,622)   (101,090)   (70,705) 
Operating profit   60,913   16,712   199,002   54,667 
Finance income   2,874   11,924   9,388   38,992 
Finance cost   (14,788)   (22,236)   (48,311)   (72,710) 
Profit before taxation   48,999   6,400   160,079   20,949 
Taxation   (35,748)   67,657   (116,788)   221,233 
Profit for the year   13,251   74,057   43,291   242,182 

                                                                                                                                                                                                          Gas

  2018  2017  2018  2017 
  ₦'million  ₦'million  $'000  $'000 
Revenue         
Crude oil sales   47,640   37,913   155,637   123,973 
Operating profit before depreciation, amortisation and impairment   40,762   25,879   138,161   84,617 
Depreciation, amortisation and impairment   (4,332)   (3,520)   (19,147)   (11,510) 
Operating profit   36,430   22,359   119,014   73,107 
Finance income   -      -      -      -    
Finance cost   -      -      -      -    
Profit before taxation   36,430   22,359   119,014   73,107 
Taxation   -      -    
Profit for the year   36,430   22,359   119,014   73,107 

During the reporting period, impairment losses recognised in the gas segment related to NGMC. Impairment losses recognised in the oil segment relate to receivables from NPDC. See note 39.2.2 and note 11 for further details.

47.1.1 Disaggregation of revenue

The Company derives revenue from the transfer of commodities at a point in time or over time and from different geographical regions. The Company has not disclosed disaggregated revenue and contract asset for the comparative periods, as the effect of IFRS 15 adjustments have been treated retrospectively using the modified retrospective approach. The modified approach does not require a restatement of comparatives.

  2018  2018  2018  2018  2018  2018 
  Oil  Gas  Total  Oil  Gas  Total 
  ₦'million  ₦'million  ₦'million  $'000  $'000  $'000 
Geographical markets             
Nigeria  47,640  47,640  155,637  155,637 
Switzerland  169,534  169,534  553,856  553,856 
Revenue  169,534  47,640  217,174  553,856  155,637  709,493 
Timing of revenue recognition             
At a point in time  169,534  169,534  553,856  553,856 
Over time  47,640  47,640  155,637  155,637 
Revenue  169,534  47,640  217,174  553,856  155,637  709,493 

The Company's transactions with its major customer, Mercuria, constitutes more than 10% (₦169 billion, $554 million) of the total revenue from the oil segment and the Company as a whole. Also, the Company's transactions with NGMC (₦48 billion, $156 million) accounted for more than 10% of the total revenue from the gas segment and the Company as a whole.

Impairment/(reversal of) losses by reportable segment

  2018  2018  2018  2017  2017  2017 
  Oil  Gas  Total  Oil  Gas  Total 
  ₦'million  ₦'million  ₦'million  ₦'million  ₦'million  ₦'million 
Impairment losses recognised during the period  775  775 
Reversal of previously recognised impairment losses  (356)  (347)  (703)  (3,129)  (3,129) 
Exchange differences  (4)  (3)  (9)  (9) 
Total  415  (346)  69  (3,138)  (3,138) 
  2018  2018  2018  2017  2017  2017 
  Oil  Gas  Total  Oil  Gas  Total 
  $'000  $'000  $'000  $'000  $'000  $'000 
Impairment losses recognised during the period  2,533  2,533 
Reversal of previously recognised impairment losses  (1,167)   (1,138)  (2,305)  (10,260)  (10,260) 
Total  1,366  (1,138)  228  (10,260)  (10,260) 

Segment assets

Segment assets are measured in a manner consistent with that of the financial statements. These assets are allocated based on the operations of the reporting segment and the physical location of the asset. The Company had no non-current assets domiciled outside Nigeria.

  Oil  Gas   Total  Oil  Gas   Total 
Total segment assets           ₦'million  ₦'million  ₦'million  $'000  $'000  $'000 
31 December 2018  699,347  152,639  851,986  2,278,003  497,191  2,775,194 
31 December 2017  751,038  82,896  833,934  2,455,967  271,077  2,727,044 
               

Segment liabilities

Segment liabilities are measured in a manner consistent with that of the financial statements. These liabilities are allocated based on the operations of the segment.

  Oil  Gas   Total  Oil  Gas   Total 
Total segment liabilities    ₦'million  ₦'million  ₦'million  $'000  $'000  $'000 
31 December 2018  299,070  26,620  325,690  974,169  86,709  1,060,878 
31 December 2017  329,769  13,940  343,709  1,078,384  45,583  1,123,967 

Revenue

  2018  2017  2018  2017 
  ₦ million  ₦ million  $'000  $'000 
Crude oil sales    169,534   97,313   553,856   318,210 
Gas sales   47,640   37,913   155,637   123,973 
   217,174   135,226   709,493   442,183 
(Overlift)/ Underlift   (7,571)   -   (24,755) 
   217,174   127,655   709,493   417,428 

*There is no revenue other than revenue from contracts with customers in 2018.

The major off-taker for crude oil is Mercuria. The major off-taker for gas is the Nigerian Gas Marketing Company.

Cost of sales 

  2018  2017  2018  2017 
  ₦ million  ₦ million  $'000  $'000 
Royalties   36,691   20,963   119,867   68,546 
Depletion, depreciation and amortisation (Note 17a)   35,851   23,877   117,126   78,078 
Crude handling fees   19,331   8,556   63,154   27,976 
Nigeria Export Supervision Scheme (NESS) fee    217   104   708   340 
Barging costs   -      2,787   -      9,113 
Niger Delta Development Commission Levy   1,364   1,061   4,456   3,469 
Rig related costs   12   985   39   3,220 
Operational & maintenance expenses   9,620   9,333   31,427   30,516 
   103,086   67,666   336,777   221,258 


Rig related costs for 2017 mostly relate to work-overs which form part of expenses for the relevant reporting period. During the year ended 2018, activities carried out on the site were majorly drilling activities for which the related costs have been capitalised within oil and gas properties (note 17).

Operational & maintenance expenses mainly relates to maintenance costs, warehouse operations expenses, security expenses, community expenses, cleanup costs, fuel supplies and catering services.

Other income - net

  2018  2017  2018  2017 
  ₦ million  ₦'million            $'000  $'000 
Underlift   1,462   -      4,776 
Gains on foreign exchange   295   334   963  1,092 
   1,757   334   5,739  1,092 

Shortfalls may exist between the crude oil lifted and sold to customers during the period and the participant's ownership share of production. The shortfall is initially measured at the market price of oil at the date of lifting and recognised as other income. At each reporting period, the shortfall is remeasured at the current market value. The resulting change, as a result of the remeasurement, is also recognised in profit or loss as other income.

Gains on foreign exchange are principally as a result of translation of naira denominated monetary assets and liabilities.

General and administrative expenses    

  2018  2017  2018  2017 
  ₦ million  ₦'million            $'000  $'000 
Depreciation (Note 17b)   883   1,265   2,884   4,137 
Auditor's remuneration   141   136   458   444 
Professional and consulting fees   2,661   1,832   8,693   5,990 
Directors' emoluments (executive)   617   711   2,014   2,322 
Directors' emoluments (non-executive)   1,053   933   3,439   3,051 
Donations   118   102   386   333 
Employee benefits (Note10a)   8,618   6,407   28,154   20,951 
Flights and other travel costs   2,101   2,036   6,863   6,657 
Rentals              532   509   1,738   1,664 
Loss on disposal of plant & equipment   -      10   -      32 
Other general expenses   3,028   4,518   9,891  14,774 
   19,752   18,459   64,520   60,355 


Directors' emoluments have been split between executive & non-executive directors. There were no non-audit services rendered by the Company's auditors during the period (2017: nil).

Other general expenses relate to costs such as office maintenance costs, rentals, telecommunication costs, logistics costs and others. Share based payment expenses are included in employee benefits expense.

Reversal of impairment loss on NPDC receivables was reclassified from other general expenses to (impairment)/reversal of losses on financial assets in note 11.

10a.   Salaries and employee related costs include the following:

  2018  2017  2018  2017 
  ₦ million  ₦'million            $'000  $'000 
Short term employee benefits:         
Basic salary   4,001   2,761   13,071   9,028 
Housing allowances   14   421   45   1,376 
Other allowances   855   685   2,794   2,241 
Post-employment benefits:         
Defined contribution expenses   439   303   1,435   991 
Defined benefit expenses (Note 31b)   340   502   1,111   1,641 
         
Share-based benefits (Note 26d)   2,969   1,735   9,698   5,674 
   8,618   6,407   28,154   20,951 

Other allowances mainly relates to staff bonus, car allowances and relocation expenses.

(Impairment)/reversal of losses on financial assets - net

  2018  2017  2018  2017 
  ₦ million  ₦ million  $'000  $'000 
Impairment loss on NPDC receivables  (775)  (2,533) 
  (775)  (2,533) 
Reversal of impairment losses:         
Reversal of impairment on NPDC receivables  3,129  10,260 
Reversal of impairment loss on intercompany receivables  309  1,014 
Reversal of impairment loss on NGMC receivables  347  1,139 
Reversal of impairment loss on fixed deposits  47  153 
  703  3,129  2,306  10,260 
Exchange difference 
Total (impairment)/reversal of loss allowance  (69)  3,138  (227)  10,260 


The trade receivables balances included in Note 22 includes NGMC receivables

Reversal of impairment loss on NPDC receivables was reclassified from other general expenses within general and admninistrave expenses in note 10.

The impairment losses in 2018 relate to the expected credit losses (ECL) computed on these financial assets on adoption of IFRS 9. For some trade receivables and contract assets, impairment was assessed to be immaterial and therefore has not been recognised in 2018. The reversals of impairment losses are as a result of decreases in the outstanding balances of trade receivables and fixed deposits. See note 39.2.2 for further details.

Fair value gain/(loss) - net

  2018  2017  2018  2017 
  ₦ million  ₦ million  $'000  $'000 
Realised fair value (loss) on derivatives  (1,374)   (5,931)  (4,464)  (19,393) 
Unrealised fair value gain on derivatives (Note 24)  2,693   8,772 
   1,319   (5,931)   4,308   (19,393) 

Fair value gain/(loss) on derivatives represents changes arising from the valuation of the crude oil economic hedge contracts charged to profit or loss.

Finance income/(cost)

  2018  2017  2018  2017 
  ₦ million  ₦ million  $'000  $'000 
Finance income         
Interest income  2,874   11,924  9,388   38,992 
Finance cost         
Interest on advance payments for crude oil sales   (530)   (1,770)   (1,730)  (5,789) 
Interest on bank loans  (13,415)   (20,449)   (43,828)  (66,867) 
Unwinding of discount on provision for decommissioning (Note 30)   (843)   (17)   (2,753)   (54) 
   (14,788)   (22,236)   (48,311)   (72,710) 
Finance income/(cost) - net   (11,914)   (10,312)   (38,923)   (33,718) 

Finance income represents interest on fixed deposits for the Company.

The capitalisation rate used to determine the amount of borrowing costs to be capitalised is the weighted average interest rate applicable to the Company's general borrowings denominated in dollars during the year, in this case 13.1% (2017: 9.41%).

Taxation

The major components of income tax expense for the years ended 31 December 2018 and 2017 are:

14a.   Income tax (expense)/credit

  2018  2017  2018  2017 
  ₦ million  ₦ million  $'000  $'000 
Current tax:         
Current tax on profit for the year  (6,651)   -      (21,726)   -    
Education tax   (1,042)   (687)   (3,408)   (2,248) 
Total current tax   (7,693)   (687)   (25,134)   (2,248) 
Deferred tax:         
Deferred tax (expense)/credit in profit or loss  (28,055)   68,344  (91,654)   223,481 
Total tax (expense)/credit in statement of profit or loss  (35,748)   67,657  (116,788)   221,233 
Deferred tax recognised in other comprehensive income  (80)   76   (261)   250 
Total tax charge/credit for the period   (35,828)   67,733   (117,049)   221,483 
Effective tax rate  (42%)  236%  (42%)  235% 

14b.  Reconciliation of effective tax rate

The estimated applicable average annual tax rates used for the year ended 31 December 2018 were 85%  for crude oil activities and 30% for gas activities. A tax rate of 85% applies to Seplat for petroleum profit tax and 30% is the company income tax rate for the gas business. These rates remained unchanged from the year ended 31 December 2017.

In May 2015, in line with Sections of the Companies Income Tax Act which provides incentives to companies that deliver gas utilisation projects, Seplat was granted a tax holiday for three years with a possible extension of two years. In 2018, on review of the performance of the business, the Company provided a notification to the Federal Inland Revenue Service (FIRS) for the extension of claim for the additional two years tax holiday.

The financial statements have been prepared taking into consideration the impact of the additional tax holiday relating to gas sales and this forms the basis for the Company's current income taxation and deferred taxation for the year ended 31 December 2018.

A reconciliation between income tax expense and accounting profit before income tax multiplied by the applicable statutory tax rate is as follows:

  2018  2017  2018  2017 
  ₦ million  ₦ million  $'000  $'000 
Profit before taxation   85,429   28,759   279,093   94,056 
Tax rate of 85% and 30%                  72,615   24,445   237,229   79,948 
Tax effect of amounts which are not deductible (taxable) in calculating taxable income:         
Income not subject to tax             (24,827)   (25,578)  (81,108)   (83,644) 
Expenses not deductible for tax purposes     27,305   89,290 
Recognition of previously unrecognised deductible temporary difference   (64,335)   (210,380) 
Impact of tax incentive   (13,083)   (29,227)   (42,741)   (95,577) 
Education tax    1,043   687   3,408   2,248 
Tax loss utilised   (954)   (3,118) 
Total tax credit in statement of profit or loss  35,748   (67,657)  116,788   (221,233) 

14c.  Current tax liabilities

The movement in the current tax liabilities is as follows:

  2018  2017  2018  2017 
  ₦ million  ₦ million  $'000  $'000 
As at 1 January   1,264   575   4,133   1,885 
Tax charge   7,693   687   25,134   2,248 
Exchange difference   28   2   -    
As 31 December   8,985   1,264   29,267  4,133 

Deferred tax

The analysis of deferred tax assets and deferred tax liabilities is as follows:

  2018  2017  2018  2017 
Deferred tax assets  ₦ million  ₦ million  $'000  $'000 
Deferred tax asset to be recovered in less than 12 months   -      -    
Deferred tax asset to be recovered after more than 12 months   132,263   158,381   431,984   517,924 
   132,263   158,381   431,984   517,924 
  2018  2017  2018  2017 
Deferred tax liabilities  ₦ million  ₦ million  $'000  $'000 
Deferred tax liabilities to be recovered in less than 12 months   -      -      -      -    
Deferred tax liabilities  to be recovered after more than 12 months   (87,979)   (89,964)   (287,738)   (294,193) 
   (87,979)   (89,964)   (287,738)   (294,193) 
Net deferred tax assets  44,284  68,417  144,246  223,731 

15a. Deferred tax assets

Deferred tax assets are recognised for tax losses carried forward to the extent that the realisation of the related tax benefit through future taxable profits is probable.

  Balance at 1 January 2018  Impact on initial application of IFRS 9  Charged/credited to profit or loss  Credited to other comprehensive income  Balance at 31 December 2018 
  ₦ million  ₦ million  ₦ million  ₦ million  ₦ million 
Tax losses  12,392   (12,404)   (12) 
Other cumulative timing differences:     -        -    
Unutilised capital allowance  127,499   (11,431)   116,068 
Provision for decommissioning obligation  102   716   818 
Defined benefit plan  1,250   370  (80)   1,540 
Share based payment reserve  4,629   (1,335)   3,294 
Unrealised foreign exchange (gain)/loss on trade and other receivables   4,209   (2,951)   1,258 
Other income  6,489   (1,243)   5,246 
Impairment provision on trade and other receivables  1,811  3,805   (1,753)   3,863 
  158,381  3,805   (30,031)  (80)   132,075 
Effect of exchange difference  11  177  188 
  158,381  3,8i6  (29,854)  (80)  132,263 
  Balance at 1 January 2018  Impact on initial application of IFRS 9  Charged/credited to profit or loss  Credited to other comprehensive income  Balance at 31 December 2018 
  $'000    $'000  $'000  $'000 
Tax losses   40,523  (40,523) 
Other cumulative timing differences:           
Unutilised capital allowance   416,935   (37,343)   379,592 
Provision for decommissioning obligation   334   2,340   2,674 
Defined benefit plan   4,087   1,209  (261)   5,035 
Share based payment reserve   15,138   (4,360)   10,778 
Unrealised foreign exchange (gain)/loss on trade and other receivables   13,765   (9,642)   4,123 
Other income   21,219   (4,060)   17,159 
Impairment provision on trade and other receivables   5,923  12,430   (5,730)  12,623 
   517,924  12,430   (98,109)  (261)    431,984 


Following a significant improvement in the financial position of the Company in 2017, the Company conducted an assessment of the its assessable profit based on a five (5) year business plan in order to determine the possibility of future profit making prospects for 2018 to 2022. The Company reviewed previously unrecognised tax losses and determined that it was now probable that taxable profits will be available against which the tax losses can be utilised. As a result, net deferred tax assets of ₦44 billion, 2017: ₦68 billion ($144 million, 2017: $224 million) were recognised for those losses.

15b. Deferred tax liabilities

Deferred tax liabilities are recognised for amounts of income taxes payable in future periods in respect of taxable temporary differences.

  Balance at 1 January 2018  Impact on initial application of IFRS 9  Charged/credited to profit or loss  Credited to other comprehensive income  Balance at 31 December 2018 
  ₦ million  ₦ million  ₦ million  ₦ million  ₦ million 
Other cumulative timing differences:     -        -    
Fixed assets  (89,964)   4,258   (85,706) 
Derivative financial instruments  (2,282)    (2,282) 
  (89,964)   1,976   (87,988) 
Effect of exchange difference 
  (89,964)  1,976  (87,979) 
  Balance at 1 January 2018  Impact on initial application of IFRS 9  Charged/credited to profit or loss  Credited to other comprehensive income  Balance at 31 December 2018 
  $'000    $'000  $'000  $'000 
Other cumulative timing differences:           
Fixed assets   (294,193)   13,911   (280,282) 
Derivative financial instruments  (7,456)    (7,456) 
   294,193   6,455   (287,738) 

Computation of cash generated from operations

    2018  2017  2018  2017 
  Notes  ₦ million  ₦ million  $'000  $'000 
Profit before tax     85,429   28,759   279,093   94,056 
Adjusted for:           
Depletion, depreciation and amortization  17   36,734   25,142   120,010   82,215 
Impairment/(reversal) of losses on financial assets  11   69   (3,138)   227   (10,260) 
Interest income  13   (2,874)   (11,924)   (9,388)   (38,992) 
Interest on advance payments for crude oil sales  13   530   1,770   1,730   5,789 
Interest expense on bank loans  13   13,415   20,449   43,828  66,867 
Unwinding of discount on provision for decommissioning  13   843   17   2,753   54 
Unrealised fair value gain on derivative financial instruments  12   (2,693)   -      (8,772) 
Unrealised foreign exchange gain   (295)   (334)   (963)   (1,092) 
Share based payment expenses  10a   2,969   1,735   9,698   5,674 
Defined benefit expenses  10a   340   502   1,111   1,641 
Loss on disposal of other property, plant and equipment  17   -      10   -      32 
Changes in working capital: (excluding the effects of exchange differences)           
Trade and other receivables     6,689   3,989   21,787   13,045 
Prepayments     (10,521)   322   (34,271)   1,054 
Contract assets     (4,327)   -      (14,096)   -    
Trade and other payables     27,030   49,477   88,048   161,788 
Restricted cash    (1,049)    (3,418)   
Inventories     (707)   1,801   (2,303)   5,889 
Net cash from operating activities      151,582   118,577  495,074   387,760 

Property, plant and equipment

17a. Oil and gas properties

  Productionand
field facilities 
Assets under construction  Total  Productionand
field facilities 
Assets under construction  Total 
Cost  ₦ million  ₦ million  ₦ million  $'000  $'000  $'000 
At 1 January 2017    314,270   37,178   351,448   1,030,395   121,895   1,152,290 
Additions   4,818   -      4,818   15,756   -      15,756 
Changes in decommissioning    30,596   -       30,596   100,054   -      100,054 
Transfer from asset under construction   10,305   (10,305)   -      33,698   (33,698)   -    
Interest capitalised  1,982  1,982  6,480  6,480   
Exchange differences   825   97   922 
At 31 December 2017    360,814   28,952    389,766    1,179,903   94,677    1,274,580 
Depreciation             
At 1 January 2017   86,822   -      86,822   284,663   -      284,663 
Charge for the year   23,877   -      23,877   78,078   -      78,078 
Exchange differences   226   -      226 
At 31 December 2017   110,925   -      110,925   362,741   -      362,741 
NBV             
At 31 December 2017    249,889   28,952    278,841  817,162   94,677  911,839 
Cost             
At 1 January 2018     360,814   28,952    389,766    1,179,903   94,677    1,274,580 
Additions   1,979   18,149   20,128   6,481   59,276   65,757 
Changes in decommissioning   6,099   6,099   19,466   -      19,466 
Transfer from asset under construction  1,526  (1,526)  4,970  (4,970) 
Interest capitalized   -      4,929   4,929   -      16,104   16,104 
Exchange differences   1,304   178   1,482 
At 31 December 2018   371,722   50,682   422,404   1,210,820   165,087   1,375,907 
Depreciation             
At 1 January 2018   110,925   -      110,925   362,741   -      362,741 
Charge for the year   35,851   -      35,851   117,126   -      117,126 
Exchange differences   543   -      543 
At 31 December 2018   147,319   -      147,319   479,867   -      479,867 
NBV             
At 31 December 2018   224,403   50,682   275,085   730,953   165,087   896,040 

Assets under construction represent costs capitalised in connection with the development of the Company's oil fields and other property, plant and equipment not yet ready for their intended use. Some of which are qualifying assets which take a substantial period of time to get ready for their intended use. A capitalisation rate of 13.1% (2017: 9.41%) has been determined and applied to the Company's general borrowing to determine the borrowing cost capitalised as part of the qualifying assets. Borrowing costs capitalised during the year amounted to ₦4.93 billion, 2017: ₦1.98 billion ($16.1 million, 2017: $6.48 million). There was no oil and gas property pledged as security during the reporting period.

17b. Other property, plant and equipment

  Plant & machinery  Motor
vehicle 
Office Furniture
& IT equipment 
Leasehold improvements  Total 
Cost  ₦ million  ₦ million  ₦ million  ₦ million  ₦ million 
At 1 January 2017   1,462   2,180   4,106   864   8,612 
Additions   122   169   136   13   441 
Disposals   -      (141)   -      -      (141) 
Exchange differences   4   5   12   3   23 
At 31 December 2017   1,588   2,213   4,254   880   8,935 
Depreciation           
At 1 January 2017   777   1,409   3,412   600   6,198 
Disposals   -      (82)   -      -      (82) 
Charge for the year   267   364   515   119   1,265 
Exchange differences   2   4   9   2   17 
At 31 December 2017   1,046   1,695   3,936   721   7,398 
NBV           
At 31 December 2017   542   518   318   159   1,537 
Cost           
At 1 January 2018   1,588   2,213   4,254   880   8,935 
Addition   -      469   199   30   698 
Disposal   (104)   (82)   -      -      (186) 
Exchange differences   6   10   17   3   36 
At 31 December 2018   1,490   2,610   4,470   913   9,483 
Depreciation           
At 1 January 2018   1,046   1,695   3,936   721   7,398 
Disposals   (31)   (82)   -      -      (113) 
Charge for the year   223   331   268   61   883 
Exchange differences   5   7   16   2   30 
At 31 December 2018   1,243   1,951   4,220   784   8,198 
NBV           
At 31 December 2018   247   659   250   129   1,285 
  Plant & machinery  Motor
vehicle 
Office Furniture
& IT equipment 
Leasehold improvements  Total 
Cost  $'000  $'000  $'000  $'000  $'000 
At 1 January 2017   4,793   7,146   13,463   2,833   28,235 
Additions   399   554   446   43   1,442 
Disposals   -      (462)   -      -      (462) 
At 31 December 2017   5,192   7,238   13,909   2,876   29,215 
Depreciation           
At 1 January 2017   2,546   4,621   11,187   1,967   20,321 
Disposals   -      (268)   -      -      (268) 
Charge for the year   876   1,189   1,683   389   4,137 
At 31 December 2017   3,422   5,542   12,870   2,356   24,190 
NBV           
At 31 December 2017   1,770   1,696   1,039   520   5,025 
Cost           
At 1 January 2018   5,192   7,238   13,909   2,876   29,215 
Addition   -      1,533   651   97   2,281 
Disposal   (340)   (268)   -      -      (608) 
At 31 December 2018   4,852   8,503   14,560   2,973   30,888 
Depreciation           
At 1 January 2018   3,422   5,542   12,870   2,356   24,190 
Disposal   (101)   (268)   -      -      (369) 
Charge for the year   727   1,082   875   200   2,884 
At 31 December 2018   4,048   6,356   13,745   2,556   26,705 
NBV           
At 31 December 2018   804   2,147   815   417   4,183 

17c.   Depletion, depreciation and amortisation

   2018  2017   2018  2017 
  ₦ million  ₦ million  $'000  $'000 
Oil and gas properties  35,851  23,877  117,126  78,078 
Other property, plant and equipment  883  1,265  2,884  4,137 
Total depletion, depreciation and amortisation  36,734  25,142  120,010  82,215 

17d.   Gain/(loss) on disposal of other property, plant and equipment

   2018  2017   2018  2017 
  ₦ million  ₦ million  $'000  $'000 
Proceeds from disposal of assets  73   50  239   162 
Less net book value of disposed assets  (73)  (59)  (239)  (194) 
Exchange difference  (1) 
  (10)  (32) 

Tax paid in advance

   2018  2017   2018  2017 
  ₦ million  ₦ million  $'000  $'000 
Tax paid in advance  9,708  9,670   31,623   31,623 

In 2013 and 2014, Petroleum Profit Tax payments (2013: ₦9 billion and 2014: ₦0.9 billion) (2013: $28.7 million and 2014: $2.9 million) were made by the Companyprior to obtaining a pioneer status. This was accounted for as a tax credit under non-current prepayments until a future date when the Company will be expected to offset it against its tax liability.

Prepayments

   2018  2017   2018  2017 
Non-current  ₦ million  ₦ million  $'000  $'000 
Rent   196   287   635   939 
Advances to suppliers   7,675   25,000 
   7,871   287   25,635  939 
Current         
Rent   1,182   173   3,850   565 
Crude oil hedge   1,584   -      5,159 
Other prepayments   690   340   2,249   1,109 
   3,456   513   11,258   1,674 
   11,327   800   36,893  2,613 

19a. Rent

In 2014, the Company entered into three new commercial leases in relation to three buildings that it occupies with two in Lagos state and one in Delta state. The non-cancellable leases which relate to buildings in Lagos expire in 2018 and 2019 respectively. The rent on the expired lease agreement was not renewed.  The rent on the building in Delta state has been renewed and now expires in 2021. The Company has prepaid these rents. The long-term portion as at 31 December 2018 is ₦0.2 billion, 2017: ₦0.3 billion ($0.6 million, 2017: $0.9 million).

In 2018, the Company entered into a lease agreement for an office building in Lagos. The non-cancellable period of the lease is 5 years commencing on 1 January 2019 and ending on 31 December 2023. However, the company has an option of either extending the lease period on terms to be mutually agreed by parties to the lease on the expiration of the current term, or purchase the property.

19b. Advances to suppliers

Advances to suppliers relate to a milestone payment made to Fenog to finance the construction of the Amukpe Escravos Pipeline Project and other related facilities. At the end of the reporting period, the total prepaid amount is ₦7.7 billion, 2017: Nil ($25 million, 2017: nil)

19c.   Other prepayments

Included in other prepayment are prepaid service charge expenses for office buildings, health insurance, software license maintenance, motor insurance premium and crude oil handling fees. 

19d. Crude oil hedge

In 2018, the Company commenced a crude oil hedge of ₦15,350 ($50/bbl) for 4 million barrels at a cost of ₦1.6 billion ($5.2 million). The contract will commence on 1 January 2019. A premium of ₦1.6 billion ($5.2 million) has been pre-paid and has been recognised as a prepayment as at 31 December 2018.

Investment in subsidiaries

   2018  2017   2018  2017 
  ₦ million  ₦ million  $'000  $'000 
Newton Energy Limited   290   290   950   950 
Seplat Petroleum Development Company UK Limited   15   15   50   50 
Seplat East Onshore Limited   10   10   32   32 
Seplat East Swamp Company Limited   10   10   32   32 
Seplat Gas Company Limited   10   10   32   32 
ANOH Gas Processing Company Limited   10   10   33   33 
   345   345   1,129   1,129 

Inventories

   2018  2017   2018  2017 
  ₦ million  ₦ million  $'000  $'000 
Tubulars, casings and wellheads    30,400   29,576   99,022  96,719  

Inventory represents the value of tubulars, casings and wellheads. The inventory is carried at the lower of cost and net realisable value. There was no inventory charged to profit or loss and included in cost of sales during the year (2017: ₦1.3 billion, $4.3 million). There was no write down or reversal of previously recognised write down of inventory for the year ended 31 December 2018.

Trade and other receivables

   2018  2017   2018  2017 
  ₦million  ₦ million  $'000  $'000 
Trade receivables   27,203   30,890   88,608   101,011 
Nigerian Petroleum Development Company (NPDC) receivables   -      34,453   -      112,664 
Intercompany receivables   256,874   231,348   836,723   756,532 
Advances on investments   20   188   65   613 
Advances to related parties   33,086   27,854   107,773   91,086 
Advances to suppliers   1,689   1,929   5,499   6,307 
Other receivables   125   866   406   2,831 
   318,997   327,528   1,039,074   1,071,044 

22a.  Trade receivables

Included in trade receivables is an amount due from Nigerian Gas Company (NGMC) and Central Bank of Nigeria (CBN) totalling ₦14 billion, 2017: ₦22 billion ($46 million, 2017: $72 million) with respect to the sale of gas. Also included in trade receivables is an amount of ₦13 billion, 2017: ₦13 billion ($43 million, 2017: $43 million) due from Mecuria for sale of crude.

22b.  NPDC receivables

The outstanding cash calls due to Seplat from its JOA partner, NPDC is ₦ nil, 2017: ₦34 billion ($ nil, 2017: $113 million). The outstanding NPDC receivables at the end of the reporting period has been netted against the gas receipts payable to NPDC as Seplat has a legally enforceable right to settle outstanding amounts on a net basis.

  2018  2018  2018  2018 
  ₦'million  ₦'million  ₦'000  ₦'000 
  Gross amounts  Loss allowance  Gross amounts offset in the balance sheet  Net amounts presented  in the balance sheet 
Financial assets         
Trade receivables  14,871  (2,475)  12,396 
Financial liabilities         
Payable to NPDC  (22,418)  (12,396)  (10,022) 
  2018  2018  2018  2018 
  $'million  $'million  $'000  $'000 
  Gross amounts  Loss allowance  Gross amounts offset  in the balance sheet  Net amounts presented  in the balance sheet 
Financial assets         
Trade receivables  48,439  (8,086)  40,353 
Financial liabilities         
Payable to NPDC  (72,996)  (40,353)  (32,643) 

22c.  Other receivables

Other receivables are amounts that arise as a result of activities outside the operating activities of the Company.

Reconciliation of trade receivables

  2018  2017  2018  2017 
  ₦'million  ₦'million  $'000  $'000 
Balance as at 1 January  30,890  21,061  101,011  69,052 
Additions during the year  192,567  9,829  629,098  31,959 
Receipts for the year  (196,242)  (641,105) 
Exchange differences  110 
Gross carrying amount   27,325   30,890   89,004   101,011 
Less: impairment allowance (note 39.2.2)  (122)  (396) 
Balance as at 31 December   27,203   30,890   88,608   101,011 

Contract assets

  2018  2017  2018  2017 
  ₦'million  ₦'million  $'000  $'000 
Revenue on gas sales  4,327  14,096 


A contract asset is an entity's right to consideration in exchange for goods or services that the entity has transferred to a customer. The Company has recognised an asset in relation to a contract with NGMC for the delivery of Gas supplies which NGMC has received but which has not been invoiced as at the end of the reporting period.

The terms of payments relating to the contract is between 30 - 45 days from the invoice date. However, invoices are raised after delivery between 14-21 days when the receivable amount has been established and the right to the receivables crytallises. The right to the unbilled receivables is recognised as a contract asset.

At the point where the final billing certificate is obtained from NGMC authorising the quantities, this will be reclassified from the contract assets to trade receivables.

Reconciliation of contract assets

The movement in the Company's contract assets is as detailed below:

  2018  2017  2018  2017 
  ₦'million  ₦'million  $'000  $'000 
Impact on initial application of IFRS 15  4,217            13,790 
Additions during the year  39,120  127,803 
Receipts for the year  (39,027)  (127,497) 
Exchange difference  17 
Gross carrying amount  4,327  14,096 
Less: impairment allowance 
  4,327  14,096 

Derivative financial instruments

The Company uses its derivatives for economic hedging purposes and not as speculative investments. However, where derivatives do not meet the hedge accounting criteria, they are accounted for at fair value through profit or loss. They are presented as current assets.

The derivative financial instrument of ₦2.7 billion, 2017: nil ($8.8 million, 2017: $ nil) as at 31 December 2018 is as a result of a fair value gain on crude oil hedges. The fair value has been determined using a proprietary pricing model which generates results from inputs. The market inputs to the model are derived from observable sources. Other inputs are unobservable but are estimated based on the market inputs or by using other pricing models.

  2018  2017  2018  2017 
  ₦'million  ₦'million  $'000  $'000 
Foreign currency option - crude oil hedges   2,693   8,772 

Cash and bank balances

Cash and bank balances in the statement of financial position comprise of cash at bank and on hand, fixed deposits with a maturity of three months or less and restricted cash balances.

  2018  2017  2018  2017 
  ₦'million  ₦'million  $'000  $'000 
Cash on hand   2   3   6   9 
Restricted cash   1,049   19,166   3,418   62,674 
Cash at bank  152,512  98,051  496,783   320,638 
  153,563  117,220  500,207  383,321 
Less: impairment allowance (note 39.2.2)  (28)  (91) 
   153,535   117,220   500,116  383,321 

For the purpose of the statement of cash flows, cash and cash equivalents comprise the following at 31 December:

  2018  2017  2018  2017 
  ₦'million  ₦'million  $'000  $'000 
Cash on hand   2   3   6   9 
Fixed deposits   31,663   29,658   103,138   96,984 
Restricted cash   -      19,166   -      62,674 
Cash at bank   120,821   68,393   393,554   223,654 
   152,486  117,220   496,698   383,321 

In 2017, the restricted cash balance comprised amounts relating to debt reserve account and stamping reserve account. The amount was subject to capitalrestrictions relating to the borrowings in that period and was therefore not available for general use by the Company. During the reporting period, a portion of the restricted cash was used to settle the outstanding borrowing facility, resulting in a reduction in the restricted cash balance as at 31 December 2018.

In 2018, the restricted cash balance relates to amounts set aside in the Stamping Reserve account for the revolving credit facility (RCF). The amount is to be used for the settlement of all fees and costs payable for the purposes of stamping and registering the Security Documents at the stamp duties office and at the Corporate Affairs Commission (CAC). The amounts are restricted for a period five (5) years, which is the contractual period of the RCF. These amounts are subject to legal restrictions and are therefore not available for general use by the Company. These amounts have therefore been excluded from cash and bank balances for the purposes of cash flow.

Share capital

26a.   Authorised and issued share capital

  2018  2017  2018  2017 
  ₦'million  ₦'million  $'000  $'000 
Authorised ordinary share capital         
1,000,000,000 ordinary shares denominated in Naira of 50 kobo per share  500  500  3,335  3,335 
Issued and fully paid         
568,497,025 (2017: 563,444,561) issued shares denominated in Naira of 50 kobo per share  286  283  1,834  1,826 

The Company's issued and fully paid as at the reporting date consists of 568,497,025 ordinary shares (excluding the additional shares held in trust) of ₦0.50k each, all with voting rights. Fully paid ordinary shares carry one vote per share and the right to dividends. There were no restrictions on the Company's share capital.

26b.   Movement in share related reserves

  Number of shares  Issued share capital  Share based payment reserve  Total 
  Shares  ₦'million  ₦'million  ₦'million 
Opening balance as at 1 January 2018  563,444,561  283  4,332  4,615 
Share based payments (note 26d)  2,969  2,969 
Vested shares (note 26d)  5,052,464  (3) 
Closing balance as at 31 December 2018  568,497,025  286  7,298  7,584 
  Number of  shares  Issued share capital  Share based payment reserve  Total 
  Shares  $'000  $'000  $'000 
Opening balance as at 1 January 2018  563,444,561  1,826  17,809  19,635 
Share based payments (note 26d)  9,698  9,698 
Vested shares (note 26d)  5,052,464  (8) 
Closing balance as at 31 December 2018  568,497,025  1,834  27,499  29,333 

25,000,000 additional shares were issued in furtherance of the Company's Long Term Incentive Plan, in February 2018. The additional issued shares, less 5,052,464 shares which vested in April 2018, are held by Stanbic IBTC Trustees Limited.

  Number of  shares  2018  2018 
  Shares  ₦'million  $'000 
Opening balance as at 1 January 2018 
Issue of shares  25,000,000  13  41 
Vested shares (note 26d)  (5,052,464)  (3)  (8) 
Closing balance as at 31 December 2018  19,947,736  10  (33) 

26c.   Share Premium 

  2018  2017  2018  2017 
  ₦ million  ₦ million  $'000  $'000 
Share premium  82,080   82,080  497,457  497,457 

Section 120.2 of Companies and Allied Matters Act, CAP C20, Laws of the Federation of Nigeria 2004 requires that where a Company issues shares at premium (i.e. above the par value), the value of the premium should be transferred to share premium.

26d.  Employee share based payment scheme

As at 31 December 2018, the Company had awarded 40,410,644 shares (2017: 33,697,792 shares) to certain employees and senior executives in line with its share based incentive scheme. Included in the share based incentive schemes are two additional schemes (2017 Deferred Bonus Scheme and 2018 LTIP Scheme) awarded during the reporting period. During the year ended 31 December 2018, 5,052,464 shares were vested under the 2015 LTIP and 2015 Deferred Bonus schemes (31 December 2017: No shares had vested).

The Company has made a number of share-based awards under incentive plans since its IPO in 2014: IPO-related grants to Executive and Non-Executive Directors, 2014/2015/2016 deferred bonus awards and 2014/2015/2016/2017/2018 Long-term Incentive plan ('LTIP') awards.  Shares under these incentive plans were awarded at the IPO in April 2014, 2015, 2016, 2017 and 2018 conditional on the Nigerian Stock Exchange ('NSE') approving the share delivery mechanism proposed by the Company.

Description of the awards valued

Seplat Deferred Bonus Award   

25% of each Executive Director's 2014, 2015, 2016 and 2017 bonus (paid in 2015, 2016, 2017 and 2018 respectively) has been deferred into shares and released on 1 June 2017, 1 June 2018 20 April 2019 and 31 December 2019 respectively subject to continued employment over the vesting period. No performance criteria are attached to this award. As a result the fair value of these awards is the share price at the actual date of grant.

Long Term Incentive Plan (LTIP) awards

Under the LTIP Plan, shares are granted to management staff of the organisation at the end of every year. The shares were granted to the employees at no cost. The shares vest (after 3 years) based on the following conditions.

25% award vesting where the reserves growth was more than a 10% decrease.

Straight line basis between 25% and 100% where reserves growth was between a 10% decrease and a 10% increase.

100% award vesting where the reserves growth is equal to or greater than a 10% increase.

If the Company outperforms the median TSR performance level with the LTIP exploration and production comparator group.

The LTIP awards have been approved by the NSE.

Share based payment expenses

The expense recognised for employee services received during the year is shown in the following table:

  2018  2017  2018  2017 
  ₦'million  ₦'million  $'000  $'000 
Expense arising from equity-settled share-based payment transactions   2,969   1,735   9,698  5,674 


There were no cancellations to the awards in 2018 or 2017. The share awards granted to Executive Directors and confirmed employees are summarised below:

Scheme  Deemed grant date  Start of Service Period  End of service period  Number of awards 
Global Bonus Offer  4 November 2015  9 April 2014  9 April 2015  6,472,138 
Non- Executive Shares  4 November 2015  9 April 2014  9 April 2015  793,650 
2014 Deferred Bonus  14 December 2015  14 December 2015  21 April 2017  212,701 
2014 Long term incentive Plan  14 December 2015  14 December 2015  09 April 2017  2,173,259 
2015 Long term incentive Plan  31 December 2015  14 December 2015  21 April 2018  5,287,354 
2015 Deferred Bonus  21 April 2016  21 April 2016  20 April 2018  247,610 
2016 Long term incentive Plan  22 December 2016  22 December 2016  21 December 2019  10,294,300 
2016 Deferred Bonus  24 November 2017  24 November 2017  20 April 2019  278,191 
2017 Long term incentive Plan  24 November 2017  24 November 2017  20 April 2020  7,938,589 
2017 Deferred Bonus  29 December 2017  29 December 2017  31 December 2019  193,830 
2018 Long term incentive Plan  2 May 2018  2 May 2018  1 May 2021  6,519,022 
        40,410,644 

Determination of diluted EPS

Share awards used in the calculation of diluted earnings per shares are based on the outstanding shares as at 31 December 2018.

Share award scheme (all awards)  2018 Number  2018 WAEP ₦  2017 Number  2017 WAEP ₦ 
Outstanding at 1 January   8,205,773   251.64  1,540,024  205.87 
Granted during the year   9,197,562   362.26  6,665,749  262.45 
Exercised during the year   (5,052,464) 
Outstanding at 31 December   12,350,871   435.94  8,205,773  251.64 
Exercisable at 31 December   -      -    
               
Share award scheme (all awards)  2018 Number  2018 WAEP $  2017 Number  2017 WAEP $ 
Outstanding at 1 January   8,205,773   0.82  1,540,024  0.67 
Granted during the year   9,197,562   1.18  6,665,749  0.86 
Exercised during the year   (5,052,464)   - 
Outstanding at 31 December   12,350,871   1.42  8,205,773  0.82 
Exercisable at 31 December   -      -    

Movements during the year

The following table illustrates the number and weighted average exercise prices ('WAEP') of and movements in deferred bonus scheme and long term incentive plan during the year for each available scheme.

Deferred Bonus Scheme  2018 Number  2018 WAEP ₦  2017 Number  2017 WAEP ₦ 
Outstanding at 1 January   738,502   412.05  427,370   399.55 
Granted during the year   193,830   589.04   311,132   428.69 
Exercised during the year   (247,610)   -   -      -    
Outstanding at 31 December   684,722   614.00   738,502   412.05 
Exercisable at 31 December   -    
Deferred Bonus Scheme  2018 Number  2018 WAEP $  2017 Number  2017 WAEP $ 
Outstanding at 1 January   738,502   1.35  427,370  1.31 
Granted during the year   193,830   1.92   311,132   1.40 
Exercised during the year   (247,610)   -      -    
Outstanding at 31 December   684,722   2.00   738,502   1.35 
Exercisable at 31 December   -      -    

In 2017, the Company increased the number of shares attributable to the 2015 Deferred Bonus scheme by 32,914 shares following a revaluation of the total number of share awards applicable to the scheme. The fair value per share of the additional shares at the date of the modification was determined to be N 457.43 ($1.49). There were no incremental changes in the fair value per share and the vesting period did not change as the additional shares were assumed to have been issued in the same period and with the same terms as the original shares granted. The fair value of the modified options was determined using the same models and principles as described in the table below on the inputs to the models used for the scheme.

The 2015 LTIP and the deferred bonus scheme that have vested in the year have conditions of release attached and this represents the basis of transfer of the shares to the staff.

Long term incentive Plan (LTIP)  2018 Number  2018 WAEP ₦  2017 Number  2017 WAEP ₦ 
Outstanding at 1 January   22,825,042   292.30  14,886,453  253.2 
Granted during the year   6,519,022   593.27   7,938,589   367.45 
Exercised during the year   (4,804,854)   -      -    
Outstanding at 31 December   24,539,210  414.45   22,825,042  292.25  
Exercisable at 31 December   -      -      -      -    
Long term incentive Plan (LTIP)  2018 Number  2018 WAEP $  2017 Number  2017 WAEP $ 
Outstanding at 1 January   22,825,042   0.96  14,886,453  0.83 
Granted during the year   6,519,022   1.93   7,938,589   1.20 
Exercised during the year   (4,804,854)   -   -      -    
Outstanding at 31 December   24,539,210   1.35   22,825,042   0.96 
Exercisable at 31 December   -      -      -      -    

The shares are granted to the employees at no cost. The weighted average remaining contractual life for the share awards outstanding as at 31 December 2018 range from 0.3 to 1.3 years (2017: 0.3 to 2.3 years).

The weighted average fair value of awards granted during the year range from ₦459.15 to ₦590.77, 2017: ₦366.9 to ₦428.1 ($1.50 to $1.93, 2017: $1.20 to $1.40). There was no exercise prices for options outstanding at the end of the year. (2017: Nil).            

The fair value at grant date is independently determined using the Monte Carlo Model which takes into account the exercise price, the term of the option, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield, the risk free interest rate for the term of the option and the correlations and volatilities of the peer group companies. 

The expected price volatility is based on the historic volatility (based on the remaining life of the options), adjusted for any expected changes to future volatility due to publicly available information.

Inputs to the models

The following table lists the inputs to the models used for the two plans for the year ended 31 December 2018:

  2017 Deferred bonus  2017 LTIP  2018 LTIP 
Weighted average fair values at the measurement date       
Dividend yield (%)  0.00%  0.00%  0.00% 
Expected volatility (%)  n/a  43%  41% 
Risk-free interest rate (%)  n/a  0.44%  0.83% 
Expected life of share options  1.66  2.40  3.00 
Weighted average share price ($)  1.93  1.40  1.93 
Weighted average share price (₦)  589.90  428.12  589.90 
Model used  Black Scholes  Monte Carlo  Monte Carlo 

Capital contribution

This represents M&P additional cash contribution to the Company. In accordance with the Shareholders' Agreement, the amount was used by the Company for working capital as was required at the commencement of operations.

  2018  2017  2018  2017 
  ₦ million  ₦ million  $'000  $'000 
Capital contribution    5,932  5,932  40,000  40,000 

Foreign currency translation reserve

Cumulative foreign exchange differences arising from translation of the Company's results and financial position into the presentation currency and from the translation of foreign subsidiary is recognized in foreign currency translation reserve.

Interest bearing loans and borrowings

29a.   Net debt reconciliation

Below is the net debt reconciliation on non-current and current interest bearing loans and borrowings:

  Borrowings due within
1 year 
Borrowings due above
1 year 
 Total  Borrowings due within
1 year 
Borrowings due above
1 year 
 Total 
  ₦ million  ₦ million  ₦ million  $'000  $'000  $'000 
Balance as at 1 January 2018   81,159   93,170   174,329   265,400   304,677   570,077 
Principal repayment   (81,237)   (126,295)   (207,532)   (265,400)   (412,600)   (678,000) 
Interest repayment   (10,890)   -      (10,890)   (35,471)     (35,471) 
Interest accrued   15,680   239   15,919   51,228   782   52,010 
Effect of loan restructuring   -      2,425   2,425   -      7,923   7,923 
Other financing charges   (1,802)   -      (1,802)   (5,885)     (5,885) 
Proceeds from loan financing   -      163,775   163,775   -      535,045   535,045 
Exchange differences   121   485   606   -      -      -    
Carrying amount as at 31 December 2018   3,031   133,799   136,830   9,872   435,827   445,699 

Interest bearing loans and borrowings include a revolving loan facility and senior notes. In the reporting period, the Company repaid its outstanding principal amount of ₦140 billion ($458 million) on its ₦215 billion ($700 million) seven year term loan and ₦37 billion ($120 million) on its ₦92 billion ($300 million) four year revolving loan facility. The amount recognised as effect of loan restructuring represents the transaction costs related to these facilities.

In the reporting period, the Company also issued ₦107 billion ($350million) senior notes at a contractual interest rate of 9.25% with interest payable on 1 April and 1 October, and principal repayable at maturity. The notes are expected to mature in April 2023. The interest accrued at the reporting date is ₦8 billion ($27 million) using an effective interest rate of 10.4%. Transaction costs of ₦2.1 billion, 2017: nil ($7 million, 2017: nil) have been included in the amortised cost balance at the end of the reporting period.

An agreement for another four year revolving loan facility was entered into by the Company to refinance its old four year revolving loan facility with interest payable semi-annually and principal repayable on 31 December of each year. The new revolving loan has an initial contractual interest rate of 6% +Libor (7.7%) and a settlement date of June 2022.

The interest rate of the facility is variable. The Company made a drawdown of ₦61 billion ($200 million) in March 2018. The interest accrued at the reporting period is ₦8 billion ($25 million) using an effective interest rate of 9.77%.  The interest paid was determined using 3-month LIBOR rate + 6 % on the last business day of the reporting period. The amortised cost for the senior notes and the borrowings at the reporting period is ₦107 billion ($349 million) and ₦30 billion ($96 million) respectively.

In October 2018, the Company made principal repayments on the four-year revolving facility for a lump sum of ₦30.7 billion ($100 million). The repayment was accounted for as a prepayment of the outstanding loan facility. The gross carrying amount of the facility was recalculated as the present value of the estimated future contractual cash flows that are discounted using the effective interest rate at the last reporting period. Gain or loss at modification are recognised immediately as part of interest accrued on the facility. Transaction costs of ₦1.4 billion, 2017: nil ($4.5 million, 2017: nil) have been included in the amortised cost balance at the end of the reporting period.

The proceeds from the notes issue and new revolving loan facility were used to repay and cancel existing indebtedness, and for general corporate purposes. `

29b.   Outstanding principal exposures

The following is the analysis of the principal outstanding showing the lenders of the facility as at the year end:

31 December 2018    Current  Non-Current  Total  Current  Non-Current  Total 
  Interest  ₦ million  ₦ million  ₦ million  $'000  $'000  $'000 
Senior notes  9.25%  107,450  107,450   350,000   350,000 
Corporate loan:               
Stanbic IBTC Bank Plc  6.0% +LIBOR   -   3,684  3,684            12,000            12,000 
The Standard Bank of South Africa  6.0% +LIBOR   2,456  2,456               8,000               8,000 
Nedbank Limited, London Branch  6.0% +LIBOR   5,117  5,117  16,666  16,666 
Standard Chartered Bank  6.0% +LIBOR   4,605  4,605   15,000   15,000 
Natixis  6.0% +LIBOR   3,582  3,582   11,667   11,667 
FirstRand Bank Limited Acting  6.0% +LIBOR   3,582  3,582  11,667  11,667 
Citibank N.A. London  6.0% +LIBOR   3,070  3,070    10,000    10,000 
The Mauritius Commercial Bank Plc  6.0% +LIBOR   3,070  3,070    10,000    10,000 
Nomura International Plc  6.0% +LIBOR   1,535  1,535    5,000    5,000 
     30,701  30,701  100,000  100,000 
    138,151  138,151  450,000  450,000 
31 December 2017    Current  Non-Current  Total  Current  Non-Current  Total 
  Interest  ₦ million  ₦ million  ₦ million  $'000  $'000  $'000 
Term Loan:               
 SBSA  8.5% + LIBOR   1,709   3,673   5,382   5,588   12,012   17,600 
 Stanbic  8.5% + LIBOR   1,709   3,673   5,382   5,588   12,012   17,600 
 FBN  8.5% + LIBOR   10,070   21,651   31,721   32,931   70,800   103,731 
 UBA  8.5% + LIBOR   11,402   24,513   35,915   37,285   80,160   117,445 
 Zenith Bank  8.5% + LIBOR   18,243   39,221   57,464   59,656   128,256   187,912 
 Allan Gray  8.5% + LIBOR   1,331   2,862   4,193   4,353   9,359   13,712 
     44,464   95,593   140,057   145,401   312,599   458,000 
Corporate loan:               
Citibank Nigeria Limited  6% + LIBOR   4,280   -      4,280   14,000   -      14,000 
FirstRand Bank Limited Acting  6% + LIBOR   3,668   -      3,668   12,000   -      12,000 
JPMorgan Chase Bank N A London  6% + LIBOR   3,668   -      3,668   12,000   -      12,000 
Nedbank Limited, London Branch  6% + LIBOR   3,668   -      3,668   12,000   -      12,000 
The Mauritius Commercial Bank Plc  6% + LIBOR   3,668   -      3,668   12,000   -      12,000 
Standard Chartered Bank  6% + LIBOR   5,503   -      5,503   18,000   -      18,000 
Natixis  6% + LIBOR   5,503   -      5,503   18,000   -      18,000 
Stanbic Ibtc Bank Plc  6% + LIBOR   2,751   -      2,751   9,000   -      9,000 
The Standard Bank Of South Africa  6% + LIBOR   3,974   -      3,974   13,000   -      13,000 
     36,683   -      36,683   120,000   -      120,000 
     81,147  95,593   176,740   265,401   312,599      578,000 

Provision for decommissioning obligation

  ₦ million  $ '000 
At 1 January 2017  103  339 
Unwinding of discount due to passage of time   17  54 
Change in estimate   30,596  100,054 
At 31 December 2017  30,716  100,447 
At 1 January 2018  30,716  100,447 
Unwinding of discount due to passage of time   843   2,753 
Change in estimate   6,099   19,466 
At 31 December 2018   37,658   122,666 

The Company makes full provision for the future cost of decommissioning oil production facilities on a discounted basis at the commencement of production. This relates to the removal of assets as well as their associated restoration costs. This obligation is recorded in the period in which the liability meets the definition of a "probable future sacrifice of economic benefits arising from a present obligation", and in which it can be reasonably measured.

The provision represents the present value of estimated future expenditure to be incurred from 2027 to 2037 which is the current expectation as to when the producing facilities are expected to cease operations. Management engaged a third party to assist with an estimate of the expenditure to be incurred from 2027 to 2037. These provisions were based on estimations carried out by Ryder Scott based on current assumptions on the economic environment which management believes to be a reasonable basis upon which to estimate the future liability. These estimates are reviewed regularly to take into account any material changes to the assumptions. However, actual decommissioning costs will ultimately depend upon future market prices for necessary decommissioning works required that will reflect market conditions at the relevant time. Furthermore, the timing of decommissioning is likely to depend on when the fields cease to produce at economically viable rates.

Following the review of the current assumptions for the year ended 31 December 2018, the future value of the decommissioning liability was adjusted to reflect economic reality in the primary economic environment in which the Company operates.

As a result, the change in estimate in the current year for the Company amounted to ₦6.1 billion, 2017: ₦30.6 billion (US$19.5 million, 2017: US$100.1 million).

  Current estimated life span of reserves 
  2018  2017 
  In years  In years 
     
Seplat Petroleum Development Company:  2027  2027 
OML 4  2037  2034 
OML 38  2027 - 2037  2027 - 2034 
OML 41  2037  2034 

Employee benefit obligation

31a.   Defined contribution plan

The Company contributes to a funded defined contribution retirement benefit scheme for its employees in compliance with the provisions of the Pension Reform Act 2014. A defined contribution plan is a pension plan under which the Company pays fixed contributions to an approved Pension Fund Administrator ('PFA') - a separate entity. The assets of the scheme are managed by various Pension Fund Administrators patronised by employees of the Company. The Company's contributions are charged to the profit and loss account in the year to which they relate. The amount payable as at 31 December 2018 was ₦106 million, 2017: ₦59 million ($0.3 million, 2017: $0.2 million).

31b.   Defined benefit plan

Investment management strategy and policy

The Company operates a funded defined benefit pension plan in Nigeria under the regulation of National Pension Commission. The plan provides benefits to all the employees (excluding Directors holding salaried employment in the Company) who have been employed by the Company for a continuous period of five years and whose employment have been confirmed. The employee's entitlement to the accrued benefits occurs on retirement from the Company. The level of benefits provided on severance depends on members' length of service and salary at retirement age.

The overall investment philosophy of the defined benefit plan fund is to ensure safety, optimum returns and liquidity in line with the regulation and guidelines of the Pension Reform Act 2014 or guidelines that may be issued from time to time by National Pension Commission.

Plan assets are held in trust. Responsibility for supervision of the plan assets (including investment decisions and contributions schedules) lies jointly with the trustees and the pension fund managers. The trustees are made up of members of the Company's senior management appointed by Company's board of directors. The Company does not have an investment strategy of matching plan assets with the defined obligations as they fall due, however, the Company has an obligation to settle shortfalls in the plan assets upon annual actuarial valuations.

The provision for gratuity is based on an independent actuarial valuation performed by Logic Professional Services ("LPS") using the projected unit credit method. The provision is adjusted for inflation, interest rate risks, changes in salary and changes in the life expectancy for the beneficiaries.

The following tables summarise the components of net benefit expense recognised in the statement of profit or loss and other comprehensive income and in the statement of financial position for the respective plans:

Liability recognised in the financial position

  2018  2017  2018  2017 
  ₦ million  ₦ million  $'000  $'000 
Defined benefit obligation   2,324   1,994   7,568  6,518 
Fair value of plan assets   (505)   -      (1,645)   -    
   1,819   1,994   5,923   6,518 

Amount recognised in profit or loss

  2018  2017  2018  2017 
  ₦ million  ₦ million  $'000  $'000 
Present value of obligation         
Current service cost   500   444   1,633   1,451 
Past service cost due to curtailment   -      (180)   -      (589) 
Interest cost on benefit obligation   285   238   931   779 
   785   502   2,564   1,641 
Interest income on plan assets  (3)  (10) 
Balance as at 31 December   782   502   2,554  1,641 

The Company recognises a part of its defined benefit expenses in profit or loss and recharges the other part to its joint operations partners, this is recognised as a receivable from the partners. Below is the breakdown:

  2018  2017  2018  2017 
  ₦ million  ₦ million  $'000  $'000 
Balance as at 31 December   782   502   2,554  1,641 
Charged to receivables  (442)   -     (1,443)   - 
Charged to profit or loss  340   502   1,111   1,641 

Re-measurement (gains)/losses in other comprehensive income

  2018  2017  2018  2017 
  ₦ million  ₦ million  $'000  $'000 
         
Remeasurement (gains)/losses due to changes in financial assumptions   408   (172)   1,331   (561) 
Remeasurement losses/(gains) due to experience adjustment   (14)   82  (46)   267 
Credited to other comprehensive income as at 31 December   394   (90)   1,285   (294) 

The Company recognises a part of the remeasurement losses in other comprehensive income and credits the other part to its joint operations partners. Below is the breakdown:

  2018  2017  2018    2017 
  ₦ million  ₦ million  $'000    $'000 
Credited to other comprehensive income as at 31 December   394   (90)   1,285     (294) 
Charged to receivables                             (216)   -      (706)   
Credited to comprehensive income                            178   (90)   579    (294) 

Deferred tax (expense)/credit on re- measurement (gains)/losses

The Company recognises deferred tax (expense)/credit on a part of the remeasurement losses in other comprehensive income. Below is the breakdown:

  2018  2017  2018  2017 
  ₦ million  ₦ million  $'000  $'000 
Deferred tax on remeasurement losses   (335)   76   (1,094)  250 
Credited to receivables                             255   -      833 
Charged to comprehensive income                            (80)   76   (261)  250 

Changes in the present value of the defined benefit obligation are as follows:

  2018  2017  2018  2017 
  ₦ million  ₦ million  $'000  $'000 
Defined benefit obligation as at 1 January   1,994   1,559   6,518   5,112 
Current service cost   500   444   1,635   1,451 
Past service cost due to curtailment   -      (180)   -      (589) 
Interest cost on benefit obligation   285   238   931   779 
Remeasurement losses   (394)   90   (1,285)   294 
Contributions paid by the employer   (63)   (163)   (206)   (532) 
Exchange differences     2   6   (25)   3 
Defined benefit obligation at 31 December   2,324   1,994   7,568   6,518 

The changes in the fair value of plan assets are as follows:

  2018  2017  2018  2017 
  ₦ million  ₦ million  $'000  $'000 
Balance as at 1 January 
Employer contributions  502  1,635 
Contributions paid by the employer  63     -   206   - 
Benefits paid by the employer  (63)  (206) 
Interest income on plan assets    10   
Balance as at 31 December  505  1,645 

The net liability disclosed above relates to funded plans as follows:

  2018  2017  2018  2017 
  ₦ million  ₦ million  $'000  $'000 
Present value of funded obligations   2,324   1,994   7,568   6,518 
Fair value of plan assets   (505)   -      (1,645)   -    
Deficit of funded plans   1,819   1,994   5,923   6,518 

The fair value of the plan asset of the Company at the end of the reporting period was determined using the market values of the comprising assets as shown below:

  Quoted  Not quoted  2018  Quoted  Not quoted  2018 
  ₦ million  ₦ million  ₦ million  ₦ million  ₦ million  $'000 
Money market  125  125  407  407 
Treasury bills  379  379  1,234  1,234 
Cash at bank 
Total plan asset as at 31 December  379  126  505  1,234  411  1,645 

The principal assumptions used in determining defined benefit obligations for the Company's plans are shown below:

  2018 %  2017 % 
Discount rate   15.50   14.00 
Average future pay increase   12.00   12.00 
Average future rate of inflation   12.00   

Mortality in service

  Number of deaths in year out of 10,000 lives 
Sample age  2018  2017 
     
25   7 
30   7 
35   9 
40   14  14 
45   26  26 

Withdrawal from service

  Rates 
Age band  2018  2017 
Less than or equal to 30  1.0%  1.0% 
31 - 39  1.5%  1.5% 
40 - 44  1.5%  1.5% 
45 - 55  1.0%  1.0% 
56 - 60  0.0%  0.0% 

A quantitative sensitivity analysis for significant assumption as at 31 December 2017 is as shown below:

    Discount Rate  Salary  increases  Mortality 
Assumptions  Base  1% increase ₦ million  1% decrease ₦ million  1% increase ₦ million  1% decrease ₦ million  1% increase ₦ million  1% decrease ₦ million 
Sensitivity Level: Impact on
the net defined benefit obligation 
             
31 December 2018   2,324   (225)   262   280   (243)   3   (3) 
31 December 2017   1,994   (215)   253   266   (229)   27   (28) 
                 
    Discount Rate  Salary  increases  Mortality 
Assumptions  Base  1% increase $'000  1% decrease $'000  1% increase $'000  1% decrease $'000  1% increase $'000  1% decrease $'000 
Sensitivity Level: Impact on
the net defined benefit obligation 
             
31 December 2018   7,569   (735)   856   915   (794)   10   (10) 
31 December 2017   6,518   (704)   828   869   (749)   88   (91) 
                   


The sensitivity analyses above have been determined based on a method that extrapolates the impact on net defined benefit obligation as a result of reasonable changes in key assumptions occurring at the end of the reporting period. The methods and assumptions used in preparing the sensitivity analysis did not change compared to prior period.

The sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur and changes in some of the assumptions may be correlated.

The expected maturity analysis of the undiscounted defined benefit plan obligation is as follows:

  2018  2017  2018  2017 
  ₦ million  ₦ million  $'000  $'000 
Within the next 12 months (next annual reporting period)   57   70   186   228 
Between 2 and 5 years   1,335   926   4,361   3,028 
Between 5 and 10 years   131,806   3,796   430,604   12,412 
   133,198   4,792   435,151   15,668 

The weighted average liability duration for the Plan is 11.95 years. The longest weighted duration for Nigerian Government bond as at 31st December 2018 was about 5.96 years with a gross redemption yield of about 15.29%.

Risk exposure

Through its defined benefit pension plans, the Company is exposed to a number of risks, the most significant of which are detailed below:

 Liquidity risk

The plan liabilities are not fully funded and as a result, there is a risk of the Company not having the required cash flow to fund future defined benefit obligations as they fall due.

Inflation risk 

This is the risk of an unexpected significant rise/fall of market interest rates. A rise leads to a fall in long term asset values and a rise in liability values.

Life expectancy

The majority of the plans' obligations are to provide benefits for the life of the member, so increases in life expectancy will result in an increase in the plans' liabilities. This is particularly significant, where inflationary increases result in higher sensitivity to changes in life expectancy.

Asset volatility

The plan liabilities are calculated using a discount rate set with reference to federal government bond yields. Majority of the plan assets are invesments in fixed income securities. If plan assets underperform the federal government bond yields, it will result in a deficit in the plan assets.          

Trade and other payables

  2018  2017  2018  2017 
  ₦ million  ₦ million  $'000  $'000 
Trade payable   11,058   15,119   36,021   49,440 
Accruals and other payables   44,884   30,758   146,202   100,580 
Nigerian Petroleum Development Company (NPDC)   10,022   32,643 
Pension payable   106   59   345   195 
NDDC levy   7   2,364   22   7,728 
Deferred revenue   -      41,970   -      137,248 
Royalties   7,402   14,364   24,111   46,971 
Intercompany payable   66,919   30,772   217,979   100,630 
   140,398   135,406   457,323   442,792 

Included in accruals and other payables are field-related accruals of ₦21 billion, 2017: ₦12 billion ($67 million, 2017: $38 million) and other vendor payables of ₦24 billion, 2017: ₦19 billion ($79 million, 2017: $63 million). Royalties include accruals in respect of crude and gas proodcution for which payment is outstanding at the end of the year.

NPDC payables relate to cash calls paid in advance in line with the Company's Joint operating agreement (JOA) on OML 4, OML 38 and OML 41.

The outstanding NPDC receivables at the end of the reporting period was used to calculate the impairment losses for the year. The impairment losses was then netted against the outstanding receivables to arrive at a net receivables amount. At the end of the reporting period, this net receivables amount has been netted against payables to NPDC as the Company has a right to offset.

32a. Net debt reconciliation

Included in accruals and other payables is advance payment on crude oil sales. Below is the net debt reconciliation on this amount.

  2018  2018 
  ₦ million  $'000 
Balance as at 1 January 2018   23,723   77,499 
Principal repayment   (23,193)   (75,769) 
Interest repayment   (530)   (1,730) 
Carrying amount as at 31 December 2018   -   - 

Earnings per share (EPS)

Basic EPS

Basic EPS is calculated on the Company's profit or loss after taxation attributable to the company and on the basis of weighted average number of issued and fully paid ordinary shares at the end of the year.

Diluted EPS

Diluted EPS is calculated by dividing the profit after taxation attributable to the company by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on conversion of all the dilutive potential ordinary shares (arising from outstanding share awards in the share based payment scheme) into ordinary shares.

  2018  2017  2018  2017 
  ₦ million  ₦ million  $'000  $'000 
Profit for the year   49,681   96,416   162,305    315,289 
  Shares '000  Shares '000  Shares '000  Shares '000 
Weighted average number of ordinary shares in issue   567,555   563,445  567,555  563,445 
Outstanding share-based payment (shares)   12,351   8,206   12,351   8,206 
Weighted average number of ordinary shares adjusted for the effect of dilution  580,006   571,651   580,006  571,651 
  ₦  ₦ 
Basic earnings per share   87.52   171.12   0.29   0.56 
Diluted earnings per share   85.66   168.66   0.28   0.55 
  ₦ million  ₦ million  $'000  $'000 
Profit used in determining basic/diluted earnings per share   49,681   96,416   162,305   315,289 

The shares were weighted for the proportion of the number of months they were in issue during the reporting period.

Dividends paid and proposed

  2018  2017  2018  2017 
  ₦ million  ₦ million  $'000  $'000 
Cash dividends on ordinary shares declared and paid:         
Interim dividend for 2018: ₦30.7 ($0.10) per share, 568,497,025  shares in issue (2017: ₦ Nil, $Nil per share, 563,444,561 shares in issue)  18,036  58,888 
Proposed dividend on ordinary shares:         
Final proposed dividend for the year: ₦15.35 ($0.05) per share   9,033  29,422 

₦9 billion ($29.4 million) of the interim dividend was paid at ₦15.35 ($0.05) per share  as at 31 March 2018 and the remaining dividend ($29.4 million, ₦9 billion)was paid at ₦15.35 ($0.05)  as at 31 December 2018.

Related party relationships and transactions

The Company is owned 7.81% either directly or by entities controlled by A.B.C Orjiako (SPDCL(BVI)) and members of his family and 12.04% either directly or by entities controlled by Austin Avuru (Professional Support Limited and Platform Petroleum Limited). The remaining shares in the parent Company are widely held.

35a.  Related party relationships

The services provided by the related parties:

Abbeycourt Trading Company Limited: the Chairman of Seplat is a director and shareholder. The company provides diesel supplies to Seplat in respect of Seplat's rig operations.

Cardinal Drilling Services Limited (formerly Caroil Drilling Nigeria Limited): Is owned by common shareholders with the parent company. The company provides drilling rigs and drilling services to Seplat.

Charismond Nigeria Limited: The sister to the CEO works as a General Manager. The company provides administrative services including stationary and other general supplies to the field locations.

Helko Nigeria Limited: The chairman of Seplat is shareholder and director. The company owns the lease to Seplat's main office at 25A Lugard Avenue, Lagos, Nigeria.

Keco Nigeria Enterprises: The Chief Executive Officer's sister is shareholder and director. The company provides diesel supplies to Seplat in respect of its rig operations.

Montego Upstream Services Limited: The chairman's nephew is shareholder and director. The company provides drilling and engineering services to Seplat.

Stage leasing (Ndosumili Ventures Limited): is a subsidiary of Platform Petroleum Limited. The company provides transportation services to Seplat.

Neimeth International Pharmaceutical Plc: The chairman of Seplat is also the chairman of this company. The company provides medical supplies and drugs to Seplat, which are used in connection with Seplat's corporate social responsibility and community healthcare programmes.

Nerine Support Services Limited: Is owned by common shareholders with the parent company. Seplat leases a warehouse from Nerine and the Company provides agency and contract workers to Seplat.

Oriental Catering Services Limited: The Chief Executive Officer of Seplat's spouse is shareholder and director. The company provides catering services to Seplat at the staff canteen.

ResourcePro Inter Solutions Limited: The Chief Executive Officer of Seplat's in-law is its UK representative. The company supplies furniture to Seplat.

Shebah Petroleum Development Company Limited ('BVI'): The Chairman of Seplat is a director and shareholder of SPDCL (BVI). The company provided consulting services to Seplat.

The following transactions were carried by Seplat with related parties:

35b.  Related party transactions

Year-end balances arising from related party transactions

Purchases of goods and services

2018  2017  2018  2017 
  ₦million  ₦million  $'000  $'000 
Shareholders of the parent company         
SPDCL (BVI)   333  413   1,088  1,350 
 Total   333  413   1,088  1,350 
Entities controlled by key management personnel:         
Contracts > $1million in 2018         
Nerine Support Services Limited*   2,335  2,161   7,627