(MTA.L) Matra Petroleum PLC Buy/Sell

Basis of consolidation

Where the company has the power, either directly or indirectly, to govern the financial and operating policies of another entity or business so as to obtain benefits from its activities, it is classified as a subsidiary. The consolidated financial statements present the results of the company and its subsidiaries ("the Group") as if they formed a single entity. Intercompany transactions and balances between Group companies are therefore eliminated in full.

Associates are accounted for using the equity accounting method. If the Group has significant influence but not control over another entity then it is initially accounted for at cost. The Group's share of the post acquisition results of the associate is recognised in the income statement. The Group's investment in the associate is recognised at cost plus the Group's share of the post acquisition profits or losses. Where the Group's share of cumulative losses exceeds the cost of the original investment the excess reduces any other amounts owing to the Group from the associate. However, any cumulative losses in excess of the original cost and other balances combined is not recognised unless the Group has a legal obligation to make good those losses.

Segmental 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 has been identified as the Managing Director, Finance Manager and the other executive and non-executive Board Members.

Business combinations

The consolidated financial statements incorporate the results of business combinations using the purchase method. In the consolidated balance sheet, the acquiree's identifiable assets, liabilities and contingent liabilities are initially recognised at their fair values at the acquisition date. The results of acquired operations are included in the consolidated income statement from the date on which control is obtained.

Foreign currency translation

Transactions entered into by group entities in a currency other than the currency of the primary economic environment in which they operate (their "functional currency") are recorded at the rates ruling when the transactions occur. Foreign currency monetary assets and liabilities are translated at the rates ruling at the balance sheet date. Exchange differences arising on the retranslation of unsettled monetary assets and liabilities are recognised immediately in the consolidated income statement.

On consolidation, the results of overseas operations are translated into Euro at rates approximating to those ruling when the transactions took place. All assets and liabilities of overseas operations, including goodwill arising on the acquisition of those operations, are translated at the rate ruling at the balance sheet date. Differences arising on retranslating the opening net assets and the results of operations are recognised directly in equity (the "foreign currency translation reserve").

The income statement of individual Group companies with functional currencies other than Euro are translated into Euro at the rate ruling at the date of the transaction and the balance sheet translated at the rate of exchange ruling on the balance sheet date. Exchange differences which arise from translation of the opening net assets and results of such subsidiary operations are taken to reserves.

Exchange differences recognised in the income statement of Group entities' separate financial statements on the translation of long-term monetary items forming part of the Group's net investment in the overseas operation concerned are reclassified to the foreign currency translation reserve on consolidation.

On disposal of a foreign operation, the cumulative exchange differences recognised in the foreign currency translation reserve relating to that operation up to the date of disposal are transferred to the consolidated income statement as part of the profit or loss on disposal.

Profit from operations

Profit from operations is defined as the profit on all continuing activities before Finance income, Finance costs, Share of profit / (loss) of Associates and Taxation.

Tangible non-current assets

Tangible non-current assets are stated at cost less depreciation. Depreciation is provided at rates calculated to write off the cost of assets, less their estimated residual value, over their expected useful economic lives on the following basis:

Property, plant and equipment 25% per annum straight line.

The useful lives and residual values of tangible non-current assets are re-assessed annually and any revisions taken to the income statement in the current period.

Intangible non-current exploration assets

The Group applies the successful efforts method of accounting for exploration and appraisal costs. Under the successful efforts method of accounting, all licence acquisition, exploration and appraisal costs are initially capitalised in well, field or specific exploration well cost centres as appropriate, pending determination. Costs are capitalised until commercial reserves are established or the exploration site is deemed to have no commercial value. Costs are then amortised over the production life of the well or written-off immediately.

Pre-licence costs: costs incurred prior to having obtained the legal rights to explore an area are expensed directly to the income statement as they are incurred.

Exploration and appraisal costs are initially capitalised as an intangible asset. Intangible assets are not amortised prior to the conclusion of appraisal activities and determination of commercial reserves.

All intangible assets are reviewed for impairment on an annual basis. Any impairment is immediately written off to the Income Statement.

Investments

In its separate financial statements the Company recognises its investments in subsidiaries and associates at cost less allowances for impairments in value.

Inventories

Inventories are stated at the lower of cost and net realisable value.

Trade and other receivables

Trade and other receivables are stated at amortised cost less allowance for impairment in value.

Cash and cash equivalents

The Company considers all highly liquid investments, with an original maturity of 90 days or less, to be cash or cash equivalents.

Trade and other payables

Trade and other payables are stated initially at fair value and subsequently at amortised cost.

Tax

Income tax on the profit or loss from ordinary activities includes current and deferred tax.

Current tax is based on the profit or loss from ordinary activities adjusted for items that are non-assessable or disallowed and is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Income tax is charged or credited to the income statement, except when the tax relates to items credited or charged directly to equity, in which case the tax is also dealt with in equity.

Deferred taxation

Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: the initial recognition of assets or liabilities that affect neither accounting nor taxable profit other than in a business combination, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.

Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets and current tax losses have not been recognised since it is uncertain that taxable profits will be available against which deductible temporary differences can be utilised.

Deferred tax assets and liabilities are offset when the Group has a legally enforceable right to offset current tax assets and liabilities and the deferred tax assets and liabilities relate to taxes levied by the same tax authority on either the same taxable Group company or different Group Entities which intend either to settle current tax assets and liabilities on a net basis or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax assets or liabilities are expected to be settled or recovered.

Contributed equity

Issued and paid up share capital is recognised at the fair value of the consideration received by the Company. Any transaction costs arising on the issue of ordinary shares are recognised directly in equity as a reduction of the share proceeds received.

Share Based Payments

Where equity settled share options are awarded to employees, the fair value of the options at the date of grant is charged to the consolidated income statement over the vesting period. Non-market vesting conditions are taken into account by adjusting the number of equity instruments expected to vest at each balance sheet date so that, ultimately, the cumulative amount recognised over the vesting period is based on the number of options that eventually vest. Market vesting conditions are factored into the fair value of the options granted. As long as all other vesting conditions are satisfied, a charge is made irrespective of whether the market vesting conditions are satisfied. The cumulative expense is not adjusted for failure to achieve a market vesting condition.

Where the terms and conditions of options are modified before they vest, the increase in the fair value of the options, measured immediately before and after the modification, is also charged to the consolidated income statement over the remaining vesting period.

Where equity instruments are granted to persons other than employees, the consolidated income statement is charged with the fair value of goods and services received.

Revenue

Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for oil & gas products provided in the normal course of business, net of discounts, VAT and other sales related taxes to third party customers.

Interest income is accrued on a time basis, by reference to the principal outstanding at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset's net carrying amount

Significant accounting judgements and key sources of estimation uncertainty

The Group makes estimates and assumptions regarding the future. Estimates and judgements are continually evaluated based on historical experiences and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may deviate from these estimates and assumptions. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are as follows:

Exploration and evaluation costs: are capitalised as intangible assets (note 10) and are assessed for impairment when circumstances suggest that the carrying amount may exceed the recoverable value thereof. This assessment involves judgement as to the likely future commerciality of the asset and when such commerciality should be determined as well as future revenues and costs pertaining to the utilisation of the exploration and production rights to which such capitalised costs relate and the discount rate to be applied to such future revenues and costs in order to determine a recoverable value.

Carrying value of assets: while conducting an impairment review of its assets, the Group exercises judgement in making assumptions about future oil & gas prices and future development and production costs. Changes in the estimates used can result in significant charges to the income statement.

Share based payments: employee services received, and the corresponding increase in equity, are measured by reference to the fair value of the equity instruments at the date of grant, excluding the impact of any non-market vesting conditions. The fair value of share options is estimated by using the Black Scholes valuation model, on the date of grant based on certain assumptions. Those assumptions are described in note 16 and include, among others, the dividend growth rate, expected volatility, expected life of the options and number of options expected to vest. More details including carrying values are disclosed in note 16.

2. Loss per share

Loss per share of EUR0.00328 (2008: EUR0.01919) is calculated by dividing the loss attributable to equity shareholders for the year by the weighted average number of ordinary shares outstanding during the year of 708,399,007 (2008: 458,162,810). The loss per share is EUR0.00328 (2008: EUR0.01919).

The effect of all potential ordinary shares arising from the exercise of options going forward is considered to be anti-dilutive and therefore diluted earnings per share has not been calculated. At the balance sheet date there were 52,000,000 (2008: 57,570,000) potentially dilutive ordinary shares.

3. Parent company's income statement

The company has taken advantage of section 408 of the Companies Act 2006 and has not included its own income statement account in these financial statements. The company loss for the year after taxation was EUR3,504,300 (2008: EUR8,876,959).

4. Expenses by nature

Loss from operations is stated after charging:

Auditors remuneration

Total staff costs (including Directors and key management personnel) comprise:
Group Company

Employee salaries and benefits 825,745 1,322,210 597,049 1,017,059
Share based payment expense 377,517 123,281 377,517 123,281
1,203,262 1,445,491 974,566 1,140,340

Directors emoluments comprise:
Group Company

Employee salaries and benefits 519,324 779,554 519,324 779,554
Gains on exercising options - 156,000 - 156,000
519,324 935,554 519,324 935,554

Key management personnel:
Group Company

Employee salaries and benefits 675,007 1,108,536 597,049 994,355
Share based payment expense 377,517 123,281 377,517 123,281
1,052,524 1,231,817 974,566 1,117,636

Key management personnel include all parent company directors and senior management in the UK, Russia and Cyprus. Average number of employees (including directors):
Group Company

Technical 6 5 1 2
Corporate & administrative 13 15 2 3

The highest paid director was paid EUR202,135 (2008: EUR352,710).

Included in the above were pension contributions totalling EURnil (2008: EUR125,968).

6. Taxation

Below is a reconciliation of the theoretical income tax rate to the actual effective tax rate in the Group's income statement:

Group

Loss before taxation (2,325,053) (8,689,405)
Taxation at the UK corporation tax rate of 28.5% (662,640) (2,476,480)

(2008: 28.5%)
Effect of lower tax rate in Russia 20% (2008: 24%) 56,518 131,712
Expenses disallowed for tax 279,709 1,474,893
Temporary differences on non-current assets not (528,460) 641,413

recognised
Utilisation of previously unrecognised tax losses - -
Tax losses not recognised carried forward 854,872 329,763
Tax charge for the year - 101,300

The tax charge for the year ended 31 December 2008 relates solely to current tax on the results of the Russian Subsidiary.

Factors that may affect future tax charges

No deferred tax asset has been recognised on accumulated tax losses as the recoverability of any such assets is not probable in the foreseeable future (see note 19).

7. Segmental reporting

The Group has two reportable segments:

· Arkhangelovskoe: this segment is involved in the exploration of oil within the Arkhangelovskoe licence area in Russia; and

· Head Office Operations: this segment is the head office of the Group.

The operating results of each of these segments are regularly reviewed by the Group's chief operating decision makers in order to make decisions about the allocation of resources and assess their performance.

The accounting policies of these segments are in line with those described in note 1.

Reportable segments as at 31 December 2009
Head Arkhangelovskoe Total
Office

Revenue - - -
Cost of sales - - -
Other income - - -
Administration expenses (1,673,631) (642,071) (2,315,702)
Impairment of exploration - - -

expenditure
Loss on disposal of associate - - -
Finance income 16,785 1,171 17,956
Financing costs (3,285) (24,022) (27,307)
Share of profit / loss of associates - - -
Taxation - - -
Loss for the year after taxation (1,660,131) (664,922) (2,325,053)
Non current assets 7,377 8,395,762 8,403,139
Inventories - 163,745 163,745
Trade and other receivables 14,342 210,304 224,646
Cash and cash equivalents 3,839,039 2,888,269 6,727,308
Segment assets 3,860,758 11,658,080 15,518,838
Trade and other payables (115,653) (39,957) (155,610)
Segment liabilities (115,653) (39,957) (155,610)
Segment net assets 3,745,105 11,618,123 15,363,228

Reportable segments as at 31 December 2008
Head Arkhangelovskoe Total
Office

Revenue - 1,077,388 1,077,388
Cost of sales - (883,990) (883,990)
Other income - - -
Administration expenses (2,195,533) (430,193) (2,625,726)
Impairment of exploration - (2,672,555) (2,672,555)

expenditure
Loss on disposal of associate (1,316,533) - (1,316,533)
Finance income 105,631 1,443 107,074
Financing costs (2,513) (19,024) (21,537)
Share of profit / loss of associates (2,353,526) - (2,353,526)
Taxation - (101,300) (101,300)
Loss for the year after taxation (5,762,474) (3,028,231) (8,790,705)
Non current assets 13,886 7,803,865 7,817,751
Inventories - 167,040 167,040
Trade and other receivables 17,589 1,248,112 1,265,701
Cash and cash equivalents 509,914 20,351 530,265
Segment assets 541,389 9,239,368 9,780,757
Trade and other payables (143,251) (34,216) (177,467)
Segment liabilities (143,251) (34,216) (177,467)
Segment net assets 398,138 9,205,152 9,603,290

During the year revenue of EURnil (2008: EUR937,236) was received from oil sales to customers representing 10% or more of the Group's total revenue for the year.

The finance income, finance costs and taxation have been analysed above in line with the way the Group's business is structured.

All material non-current assets other than financial instruments are owned by the Russian subsidiary and are located in Russia.

Share based payments of EUR377,517 (2008: EUR123,281) relate solely to Head Office.

All material capital expenditure in the current and previous year relate to the Arkhangelovskoe segment.

8. Finance costs
Group

Bank interest - 802
Bank charges 27,307 20,735
27,307 21,537
9. Property, plant and equipment
Group Company

Cost
At 1stJanuary 99,645 104,478 29,888 39,503
Additions 2,842 13,964 1,529 655
Disposals - (667) - (667)
Currency translation adjustments (503) (18,130) 2,447 (9,603)
At 31stDecember 101,984 99,645 33,864 29,888

Depreciation
At 1st January (39,143) (17,974) (16,002) (11,411)
Charge for year (25,220) (24,804) (9,174) (7,365)
Currency translation adjustments (331) 3,635 (1,311) 2,774
At 31st December (64,694) (39,143) (26,487) (16,002)
Carrying value as at 31st December 37,290 60,502 7,377 13,886

Property, plant and equipment is comprised of office and computer equipment.

10. Intangible assets

Intangible assets as at 31 December 2009 were:

License acquisition costs Exploration and appraisal costs Total

Cost
At 1 January 3,322,575 4,434,674 7,757,249
Additions - 1,135,293 1,135,293
Currency translation (146,714) (379,979) (526,693)

adjustments
Carrying value at 31 December 3,175,861 5,189,988 8,365,849

Intangible assets as at 31 December 2008 were:

License acquisition costs Exploration and appraisal costs Total

Cost
At 1 January 3,913,376 6,085,666 9,999,042
Additions - 1,700,684 1,700,684
Impairment - (2,672,555) (2,672,555)
Currency translation (590,801) (679,121) (1,269,922)

adjustments
Carrying value at 31 December 3,322,575 4,434,674 7,757,249

11. Investment in subsidiaries

The principal subsidiaries of Matra Petroleum plc, all of which have been included in these consolidated financial statements, are as follows:

Name Country of Proportion of Nature of business
incorporation ownership
Matra Cyprus Petroleum Limited Cyprus 100% Holding company
Matra Cyprus Petroleum (Alpha) Cyprus 100% Holding company

Limited
OOO Arkhangelovskoe Russian Federation 100% Oil & gas exploration and production company

Matra Cyprus Petroleum Limited owns 100% of the shares in OOO Arkhangelovskoe.

12. Disposal of associate

On 19 December 2008 the Company disposed of it's 40% holding in Gemstone Properties Limited. Details of the disposal are as follows:

Total assets -
Total liabilities -
Revenues -
Profit / (loss) (2,353,526)

Proceeds: 633,204
Less: share of net assets / liabilities in -

associate
Less: write-off of loan to associate (1,949,737)
Loss on disposal of associate (1,316,533)
13. Inventories
Group Company

Drilling and other supplies 163,745 167,040 - -
14. Receivables
Group Company

Trade receivables - 164,009 - -
Prepayments and other receivables 224,646 1,101,692 14,342 17,589
Intercompany loans - - 11,656,531 9,203,721
224,646 1,265,701 11,670,873 9,221,310

The fair value of receivables is not significantly different from the carrying value.

The Intercompany loans are shown net of a provision of EUR5,157,533 (2008: EUR2,584,156).

The Intercompany loans are repayable on demand and bear interest at the rate of 2% above the Russian Base Rate (2008: 2% above the Russian Base Rate).

15. Payables
Group Company

Trade payables 63,258 82,216 43,211 67,923
Accruals and other payables 92,352 95,251 66,458 75,328
155,610 177,467 109,669 143,251

16. Share based payments
Exercise price (p) Grant date Outstanding at start Granted during the Exercised during the Lapsed during the Outstanding at end Final exercise date
of year year year year of year

2 17/03/2005 10,000,000 - (10,000,000) - - 30/06/2008
2.5 17/05/2005 1,000,000 - (1,000,000) - - 30/06/2008
0.1 11/04/2006 5,000,000 - - - 5,000,000 11/04/2011
5 11/04/2006 10,000,000 - - - 10,000,000 11/04/2011
6.3 11/04/2006 2,620,000 - - - 2,620,000 11/03/2009
0.1 23/05/2006 1,200,000 - - - 1,200,000 23/05/2011
5 23/05/2006 6,000,000 - - - 6,000,000 23/05/2011
8 20/04/2007 24,000,000 - - - 24,000,000 15/02/2009
4.5 23/04/2007 8,000,000 - - - 8,000,000 22/04/2012
4.5 31/03/2007 500,000 - - - 500,000 31/03/2012
7.5 25/09/2007 250,000 - - - 250,000 25/09/2012
Total 68,570,000 - (11,000,000) - 57,570,000

0.1 11/04/2006 5,000,000 - - - 5,000,000 11/04/2011
5 11/04/2006 10,000,000 - - - 10,000,000 11/04/2011
6.3 11/04/2006 2,620,000 - - (2,620,000) - 11/03/2009
0.1 23/05/2006 1,200,000 - - - 1,200,000 23/05/2011
5 23/05/2006 6,000,000 - - - 6,000,000 23/05/2011
8 20/04/2007 24,000,000 - - (24,000,000) - 15/02/2009
4.5 23/04/2007 8,000,000 - - - 8,000,000 22/04/2012
4.5 31/03/2007 500,000 - - - 500,000 31/03/2012
7.5 25/09/2007 250,000 - - - 250,000 25/09/2012
3.65 20/10/2009 - 21,250,000 - - 21,250,000 19/10/2014
Total 57,570,000 21,250,000 - (26,620,000) 52,200,000

The fair value of equity-settled share options granted is estimated as at the date of grant using the Black Scholes model, taking into account the terms and conditions upon which the options were granted. The table below lists the inputs to the model used for options granted during the year ended 31 December 2009:

Share price at the date of grant (pence) 3.65 -
Dividend yield (%) - -
Volatility (%) 55 -
Expected life (years) 5 -
Risk free interest rate (%) 0.5 -
Weighted average option price (pence) 1.58 -

The total fair value of the options issued is spread over the vesting period of the options. The share-based payment charge for the year was EUR377,517 (2008: EUR123,281).

The expected life of the options is based on academic research and is not necessarily indicative of exercise patterns that may occur. Volatility is calculated with reference to comparative entities share price volatility and reflects the assumption that the comparator's volatility is indicative of future trends, which may also not necessarily be the actual outcome. No other features of options granted were incorporated into the measurement of fair value.

17. Share capital

Authorised:
10,000,000,000 ordinary shares of 0.1p each 13,571,000 13,571,000

Allotted, called-up and fully paid:
1,064,917,872 (December 2008: 463,251,205) ordinary 1,355,222 661,127

shares of 0.1p each

Reserve Description and purpose The following describes the nature and purpose of each reserve within owners' equity:

· Share capital: Amount subscribed for share capital at nominal value.

· Share premium: Amount subscribed for share capital in excess of nominal value.

· Foreign currency translation reserve: Exchange gains/losses arising on retranslating the net assets of operations into the presentation currency.

· Retained earnings: Cumulative net gains and losses recognised in the consolidated income statement.

The following issues of new shares in the Company took place in the period:

· On 8 July 2009 the Company issued 123,050,000 shares in a private placement for cash at a share price of 1 penny per share.
· On 24 July 2009 the Company issued 411,950,000 shares in a private placement for cash at a share price of 1 penny per share.
· On 27 November 2009 the Company issued 66,666,667 shares in a private placement for cash at a share price of 3 pence per share.

The Group considers its capital to comprise entirely of equity. The Group's primary objective is to ensure its continued ability to provide a consistent return for its equity shareholders through capital growth.

In order to achieve this objective, the Group seeks to maintain a gearing ratio that balances risks and returns at an acceptable level wherever such a choice between the raising of debt, equity or a combination of the two exists.

Overriding the above is the need for the Group to maintain a sufficient funding base to enable it to meet its working capital and strategic investment needs.

In making decisions to adjust its capital structure to achieve these aims the Group considers not only its short-term position but also its long-term operational and strategic objectives.

18. Financial instrument risk exposure and management

In common with all other businesses, the Group and Company are exposed to risks that arise from its use of financial instruments. This note describes the Group and Company's objectives, policies and processes for managing those risks and the methods used to measure them. Further quantitative information in respect of these risks is presented throughout these financial statements.

There have been no substantive changes in the Group or Company's exposure to financial instrument risks, its objectives, policies and processes for managing those risks or the methods used to measure them from previous periods unless otherwise stated in this note.

Principle financial instruments

The principle financial instruments used by the Group, from which financial instrument risk arises, are as follows:

Financial assets Group Company

Loans and receivables Loans and receivables

Trade receivables - 164,009 - -
Cash and cash equivalents 6,727,308 530,265 3,839,039 509,914
Inter-company loans - - 11,656,531 9,203,721
6,727,308 694,274 15,495,570 9,713,635
Financial liabilities Group Company

Financial liabilities at amortised cost Financial liabilities at amortised cost

Trade and other payables 155,610 177,467 109,669 143,251
155,610 177,467 109,669 143,251

Fair value of financial assets and liabilities

At 31 December 2009 and 2008, the fair value and the book value of the Group and Company's financial assets and liabilities were materially the same.

Principal financial instruments

The principal financial instruments used by the Group and Company, from which financial instrument risk arises, are as follows:

General objectives, policies and processes

The Board has overall responsibility for the determination of the Group and Company's risk management objectives and polices and, whilst retaining ultimate responsibility for them, it has delegated the authority for designing and operating processes that ensure the effective implementation of the objectives and policies to the Group and Company's finance function. The overall objective of the Board is to set polices that seek to reduce risk as far as possible without unduly affecting the Group and Company's competitiveness and flexibility. Further details regarding these policies are set out below:

Credit risk

Credit risk arises principally from the Group's other receivables. It is the risk that the counterparty fails to discharge its obligation in respect of the instrument. The maximum exposure to credit risk equals the carrying value of these items in the financial statements.

When commercial exploitation commences sales will only be made to customers with appropriate credit rating.

Existing trade receivables relate to sales of oil from test drilling, and these are not considered to be material.

Credit risk with cash and cash equivalents is reduced by placing funds with banks with high credit ratings.

Hedging policy

It is the Company and Group policy not to actively hedge against foreign currency transactions and balances. However, this policy is kept under constant review.

Capital

The Company and Group define capital as ordinary shares, share premium and retained earnings.

To date the company has not included long-term borrowings in its definition of capital, because it does not have any.

Liquidity risk

Liquidity risk arises from the Group and Company's management of working capital. It is the risk that the Group or Company will encounter difficulty in meeting its financial obligations as they fall due.

The Group and Company's policy is to ensure that it will always have sufficient cash to allow it to meet its liabilities when they become due. To achieve this aim, it seeks to maintain cash balances (or agreed facilities) to meet expected requirements for a period of at least 30 days. The Group and Company also seeks to reduce liquidity risk by maximising interest rates (and hence cash flows) on its cash deposits, this is further discussed in the 'interest rate risk' section below.

The Board receives rolling 12 month cash flow projections on a periodic basis as well as information regarding cash balances and (as noted above).

Trade and other payables are due on demand.

Interest rate risk

The Group has no interest bearing borrowings and so there is no interest rate risk.

There is no significant interest rate risk in respect of temporary surplus funds invested in deposits and other interest bearing accounts with financial institutions as the operations of the Group are not dependent on the finance received. However, it is the Group's policy to manage the interest rate risk over the cash flows on its invested surplus funds by using only substantial financial institutions when such funds are invested.

A 1% change in interest rates would have increased or decreased profit after tax by approximately EUR36,287 (2008: EUR40,385).

At the year end, the Group had a cash balance of EUR6,727,308 (2008: EUR530,265) and the Company had a cash balance of EUR3,839,039 (2008: EUR509,914) which was made up as follows:

Group Company

Great British pound 3,845,715 514,392 3,839,039 509,914
Euro - - - -
Russian rouble 2,881,593 15,873 - -
6,727,308 530,265 3,839,039 509,914

Included in the Group and Company totals above are amounts of EUR5,451,694 (2008: EURnil) held within deposit accounts.

Currency risk

The Group and Company's policy is, where possible, to allow group entities to settle liabilities denominated in their functional currency (primarily Euro, Russian Roubles or Great British Pounds) in that currency. Where Group or Company entities have liabilities denominated in a currency other than their functional currency (and have insufficient reserves of that currency to settle them) cash already denominated in that currency will, where possible, be transferred from elsewhere within the Group.

In order to monitor the continuing effectiveness of this policy, the Board receives a periodic forecast, analysed by the major currencies held by the Group and Company.

The Group and Company is primarily exposed to currency risk on purchases made from suppliers in Orenburg, Southern Russia in Russian Roubles. As it is not possible for the Group or Company to transact in Russian Roubles outside of Russia, a Sterling account is maintained in Orenburg and all funding is transferred to its Russian subsidiary in this currency. Once the funding has been received, the local finance team negotiates a favourable spot rate with its Russian bank for transferring Sterling to Russian Roubles. The UK finance team, along with its advisors, carefully monitors movements in the Sterling / Russian Rouble rate and chooses the most beneficial times for transferring monies to its subsidiary, whilst ensuring that it has sufficient funds to continue its operations.

A movement in the Russian Rouble of 15% would result in the expenditure in the year increasing or decreasing by EUR96,311 (2008: EUR534,909).

A movement in the Great British pound of 25% would result in the expenditure in the year increasing or decreasing by EUR418,408 (2008: EUR1,114,677).

A movement in the Great British pound of 25% would result in the average cash and cash equivalents increasing or decreasing by EUR961,429 (2008: EUR813,240).

19. Deferred tax
Group Company

A deferred tax assets has not been recognised on the following:

No deferred tax asset has been recognised as the recovery of such assets is not probable in the foreseeable future.

20. Commitments

The Company has no operating or finance lease commitments.

In order to maintain the current rights of tenure to licenses, the group has the following exploration expenditure commitments. These obligations are not provided for in the financial statements and are:

Group Company

Within one year 5,722,573 7,210,265 - -
5,722,573 7,210,265 - -

The commitments for 2009 exclude VAT further to the recovery of all historic VAT during the year ended 31 December 2009. The commitments for 2008 included VAT at the rate ruling in the Russian Federation for the year ended 31 December 2008 of 18%.

21. Related party transactions

The Group had the following transactions with related parties during the year ended 31 December 2009:

Group Company

During the year the parent entity provided the following management and consulting fees to its associate:

Key management remuneration is disclosed in note 5.

22. Post balance sheet events

There were no significant post balance sheet events.

23. Going concern

The Group currently has sufficient cash resources to fund the committed work programme and overheads for the next twelve months. Upon completion of the A-13 well the Group will seek to raise funds to finance the full development of the Sokolovskoe field. The Directors are confident, based upon preliminary discussions with potential investors and lenders that sufficient funds either in equity or debt could be raised when required.

This information is provided by RNS The company news service from the London Stock Exchange

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