96Group financial statementsNotes to the financial statements continuedSegmental reporting Operating segments are reported in a manner consistent with the internal reporting provided to the Chief Operating Decision Maker. The Chief Operating Decision Maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Executive and Non-Executive Directors of the Group that make the strategic decisions. Share optionsThe Group issues equity-settled share-based payments to the Executive Directors and Senior Management. Equity-settled share-based payments are measured at fair value at the date of grant. The fair value of the employee services received in exchange for the grant of options is expensed on a straight-line basis over the vesting period, based on the Group's estimate of shares that will eventually vest. At each subsequent reporting date the Group calculates the estimated cumulative charge for each award having regard to any change in the number of options that are expected to vest and the expired portion of the vesting period. The change in this cumulative charge since the last reporting date is expensed. Once an option vests, no further adjustment is made to the aggregate amount expensed. The expected life of the options depends on the behaviour of the option holders, which is incorporated into the option model consistent with historic data. The fair values calculated are inherently subjective and uncertain due to the assumptions made and the limitations of the model used.The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value of 10p per share) and share premium when the options are exercised.The rules regarding the scheme are described in the Remuneration Report on pages 74 and 83 and in note 24 on share based payments.Bonus schemeThe Group operates a bonus scheme for its Directors and employees. The scheme has four performance conditions: 1. financial objectives; 2. increase in share price; 3. key strategic objectives and 4. safety performance conditions. The bonus payments are made annually, normally in January of each year and the costs are accrued in the period to which they relate.Pension costsThe Group contributes to the individual pension scheme of the qualifying employees' choice. Contri-butions are charged to the income statement as they become payable. The Group has no further payment obligations once the contributions have been paid.DecommissioningProvision is made for the cost of decommissioning assets at the time when the obligation to decommission arises. Such provision represents the estimated discounted liability (the discount rate used currently being at 10%, (2010: 10%)) for costs which are expected to be incurred in removing production facilities and site restoration at the end of the producing life of each field. A corresponding item of property plant and equipment is also created at an amount equal to the provision. This is subsequently depreciated as part of the capital costs of the production facilities. Any change in the present value of the estimated expenditure attributable to changes in the estimates of the cash flow or the current estimate of the discount rate used are reflected as an adjustment to the provision and the property plant and equipment. The unwinding of the discount is recognised as a finance cost.Revenue recognitionSales of oil and gas products are recognised when the significant risks and rewards of ownership have passed to the buyer and it can be reliably measured. This generally occurs when the product is physically transferred into a vessel, pipe or other delivery mechanism. Revenue from other services are recognised when the services have been performed. Revenue is measured at the fair value of the consideration received, excluding discounts, rebates, value added tax ('VAT') and other sales taxes or duty.Revenue resulting from the production of oil and natural gas from properties in which the Group has an interest with other producers is recognised on the basis of the Group's working interest (entitlement method). Gains and losses on derivative contracts are reported on a net basis in the consolidated income statement. Interest income is recognised as the interest accrues, by reference to the net carrying amount at the effective interest rate applicable.Share capitalOrdinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognised as a deduction from share premium, net of any tax effects. When share capital recognised as equity is repurchased, the amount of the consideration paid, which includes directly attributable costs, net of any tax effects, is recognised as a deduction from share premium. Repurchased shares are classified as treasury shares and are presented in the reserve for own shares. When treasury shares are sold or reissued subsequently, the amount received is recognised as an increase in equity, and the resulting surplus or deficit on the transaction is presented in share premium.

JKX Oil & Gas plc Annual Report 201197At a glance01-17Board statements18-23Operational review24-36Financial review37-47CSR review48-61Directors' reports62-83Financial statements84-136LeasingRentals payable under operating leases are charged to the income statement on a straight-line basis over the term of the relevant lease. The Group has no finance leases.DividendsInterim dividends are recognised when they are paid to the Company's shareholders. Final dividends are recognised when they are approved by shareholders. Exceptional item Exceptional items comprise items of income and expense, including tax items, that are material in amount and unlikely to recur and which merit separate disclosure in order to provide an understanding of the Group's underlying financial performance. Examples of events giving rise to the disclosure of material items of income and expense as exceptional items include, but are not limited to, impairment events, disposals of operations or individual assets, litigation claims by or against the Group and the restructuring of components of the Group's operations. See note 5(d) for further details.Critical accounting estimates and assumptionsThe Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a risk of causing material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.(a) Recoverability of oil and gas assets and intangible oil and gas costs (Note 5)Costs capitalised as oil and gas assets in property, plant and equipment, and intangible assets are assessed for impairment when circumstances suggest that the carrying value may exceed its recoverable value. As part of this assessment, management has carried out an impairment test (ceiling test) on the oil and gas assets classified as property, plant and equipment. This test compares the carrying value of the assets at the reporting date with the expected discounted cash flows from each project. For the discounted cash flows to be calculated, management has used a production profile based on its best estimate of proven and probable reserves of the assets and a range of assumptions, including an internal oil and gas price profile benchmarked to mean analysts' consensus and a discount rate which, taking into account other assumptions used in the calculation, management considers to be reflective of the risks. This assessment involves judgement as to (i) the likely commerciality of the asset, (ii) proven and probable reserves which are estimated using standard recognised evaluation techniques (iii) future revenues and estimated development costs pertaining to the asset, (iv) the discount rate to be applied for the purposes of deriving a recoverable value and (v) the value ascribed to contingent resources associated with the asset. (b) Carrying value of intangible exploration and evaluation expenditure (Note 5 (b))The amounts for intangible exploration and evaluation assets represent the costs of active exploration projects the commerciality of which is unevaluated until reserves can be appraised. Where a project is sufficiently advanced the recoverability of intangible exploration assets is assessed by comparing the carrying value to estimates of the present value of projects. The present values of intangible exploration assets are inherently judgemental. Exploration and evaluation costs will be written off to the income statement unless commercial reserves are established or the determination process is not completed and there are no indications of impairment. The outcome of ongoing exploration, and therefore whether the carrying value of exploration and evaluation assets will ultimately be recovered, is inherently uncertain. (c) Depreciation of oil and gas assets (Note 5)Oil and gas assets held in property, plant and equipment are mainly depreciated on a unit of production basis at a rate calculated by reference to proved plus probable reserves and incorporating the estimated future cost of developing and extracting those reserves. Future development costs are estimated using assumptions as to the numbers of wells required to produce those reserves, the cost of the wells, future production facilities and operating costs; together with assumptions on oil and gas realisations.(d) Decommissioning (Note 17)The Group has decommissioning obligations in respect of its interests in Ukraine, Russia and Hungary. The full extent to which the provision is required depends on the legal requirements at the time of decommissioning, the costs and timing of any decommissioning works and the discount rate applied to such costs. The decommissioning provision is updated each year to reflect management's best estimates based on the current economic environment of the key assumptions used. Actual decommissioning costs will ultimately depend upon future market prices for the necessary decommissioning works required, which 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. This in turn will depend upon future oil and gas prices, which are inherently uncertain.