SUMMARY OF SIGNIFICANT IFRS TO U.S. GAAP DIFFERENCES
The financial information of TransGlobe incorporated by reference into this proxy statement has been prepared and presented in accordance with IFRS. Certain differences exist between IFRS and U.S. GAAP, which might be material to the financial information incorporated by reference into this proxy statement.
The principal differences between U.S. GAAP and IFRS which might be material in the preparation of TransGlobe’s consolidated financial statements are described below. The following summary does not include all differences that exist between IFRS and U.S. GAAP and is not intended to provide a comprehensive listing of all such differences specifically related to VAALCO, TransGlobe or the industry in which VAALCO and TransGlobe operate.
The differences described below reflect only those differences in accounting policies in force at the time of the preparation of the historical financial information of TransGlobe. There has been no attempt to identify future differences between IFRS and U.S. GAAP as the result of prescribed changes in accounting standards, transactions or events that may occur in the future.
Impairment of Long-Lived Assets
Under both U.S. GAAP and IFRS, long-lived assets are tested for impairment when events or changes in circumstances indicate that the carrying amounts may be impaired. Under U.S. GAAP, the asset group is first tested for recoverability by determining if its carrying amount exceeds the expected future cash flows from the asset group on an undiscounted basis. If the asset group is determined to not be recoverable, an impairment expense is recorded for the excess of the asset group’s carrying amount over its fair value. Further, future reversal of a previously recognized impairment loss is prohibited.
Under IFRS, when an impairment indicator is determined to exist, an impairment expense is recorded for the excess of the cash generating unit carrying amount over its recoverable amount, determined as the greater of its fair value less costs of disposal and its value in use. Impairment expense previously recorded is reversible in subsequent periods under certain conditions.
Exploration and Evaluation Costs
Under both U.S. GAAP and IFRS, there are two broad methods typically used to account for exploration and evaluation costs, namely, successful efforts and full cost. However, there are further variations of these two approaches in practice and accordingly differences may exist in the accounting for exploration and evaluation costs, depending on the policy elected by the entity and any variation applied. In particular, under IFRS, an accounting policy is determined for each type of exploration and evaluation expenditure and such policy is applied consistently, of either immediate expense or capitalization as an asset.
Under the successful efforts method, certain costs incurred during exploration and costs incurred in finding, acquiring and developing reserves are typically capitalized on a field-by-field basis. Capitalized costs are allocated to commercially viable hydrocarbon reserves and depleted as production occurs. U.S. GAAP contains more prescriptive guidance on the types of exploration costs that can be capitalized – in particular, geological and geophysical activities, costs of carrying and retaining undeveloped properties and costs associated with exploratory-type test wells are capitalized pending determination of whether such well can produce proved reserves.
Under the full cost method, all costs incurred in searching for, acquiring and developing the reserves in a large geographic cost center or pool, such as a country, are capitalized. The cost pools are then depleted on a country basis as production occurs. If exploration efforts in the country or the geological formation are wholly unsuccessful, the costs are expensed. This method generally results in deferral of costs during the exploration and development phase, and greater subsequent depletion charges, compared to the successful efforts method.
Under U.S. GAAP, the testing for impairment of exploration and evaluation assets recognized under the successful efforts methods are typically performed on a field by field. Under U.S. GAAP, impairment tests of exploration and evaluation asset are recognized under the full cost methods are typically performed at a geographical level. Under IFRS, the entity is permitted to elect to group exploration and evaluation assets with producing assets for purposes of testing impairment.
Further, U.S. GAAP generally applies the same accounting principles for testing impairment of exploration and evaluation assets recognized under the successful method as those applied to other long-lived assets. However, under IFRS, specific requirements exist for exploration and evaluation assets in which an entity is not required to assess