Table of Contents

Cover Page

1

Chairman's Letter

4

Managing Director's Report

6

Operations Review

8

Petroleum Permit Interest Schedule

12

Directors' Report

14

Auditor's Independence Declaration

28

Corporate Governance Statement

29

Directors' Declaration

31

Consolidated Income Statement

32

Consolidated Balance Sheet

33

Consolidated Cash Flow Statement

34

Consolidated Statement of Changes in Equity

35

Notes to the Consolidated Financial Statements

36

Independent Audit Report

81

Additional Stock Exchange Information

83

Corporate Directory

86

FULL ANNUAL REPORT

6783-Nido_AR_Internals.pdf

Website

http://www.nido.com.au

Notes to the Consolidated Financial Statements

Pages
| 36-37 | 38-39 | 40-41 | 42-43 | 44-45 | 46-47 | 48-49 | 50-51 | 52-53 | 54-55 | 56-57 |
| 58-59 | 60-61 | 62-63 | 64-65 | 66-67 | 68-69 | 70-71 | 72-73 | 74-75 | 76-77 | 78-79 | 80 |

1. Summary of Significant Accounting Policies

• Basis of Preparation

  The financial report is a general purpose financial report which has been prepared in accordance with the requirements of the Corporations Act 2001, Australian Accounting Standards and authoritative pronouncements of the Australian Accounting Standards Board.  The financial report has also been prepared on a historical cost basis, with the exception of derivative financial instruments which have been measured at fair value.

  The financial report is presented in Australian dollars and all values are rounded to the nearest thousand dollars ($’000) unless otherwise stated.

• Statement of Compliance and New Accounting Standards

  The financial report complies with Australian Accounting Standards and International Financial Reporting Standards (IFRS).

  Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet effective and have not been adopted by the Group for the annual reporting period ending 31 December 2007.

  

  1. Summary of Significant Accounting Policies - continued

  

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  Page 38-39

  1. Summary of Significant Accounting Policies - continued

  

  1. Summary of Significant Accounting Policies - continued

• Statement of Compliance and New Accounting Standards - continued

  Adoption of new accounting standard

  AASB 7

  The Group has adopted AASB 7 Financial Instruments; Disclosures and all consequential amendments which became applicable on 1 January 2007. The adoption of this standard has only affected the disclosure in these financial statements. There has been no affect on profit and loss or the financial position of the entity.

• Basis of Consolidation

  The consolidated financial statements comprise the financial statements of Nido Petroleum Limited and its subsidiaries as at 31 December each year (the Group or Consolidated Entity).

  The financial statements of subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies.

  All intercompany balances and transactions have been eliminated in full.

  Subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group.

   

  Where there is a loss of control of a subsidiary, the consolidated financial statements include the results of the part of the reporting period during which Nido Petroleum Limited has control.

• Significant Accounting Judgments, Estimates and Assumptions
  Significant accounting judgments

  In the process of applying the Group’s accounting policies, management has made the following judgments, apart from those involving estimations, which have the most significant effect on the amounts recognised in the financial statements.

  • Exploration and evaluation assets
    The Group’s accounting policy for exploration and evaluation expenditure is set out at Note 1(k).  The application of this policy necessarily requires management to make certain estimates and assumptions as to future events and circumstances, in particular, the assessment of whether economic quantities of reserves have been found.  Any such estimates and assumptions may change as new information becomes available.  If, after having capitalised expenditure under the policy, it is concluded that the expenditures are unlikely to be recovered by future exploitation or sale, then the relevant capitalised amount will be written off to the income statement.
  • Recovery of deferred tax assets
    Deferred tax assets are recognised for deductible temporary differences as management considers that it is probable that future taxable profits will be available to utilise those temporary differences.

  Significant accounting estimates and assumptions

  The carrying amounts of certain assets and liabilities are often determined based on estimates and assumptions of future events.  The key estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of certain assets and liabilities within the next annual reporting period are:

   

  • Impairment of assets
    In determining the recoverable amount of assets, in the absence of quoted market prices, estimations are made regarding the present value of future cash flows using asset-specific discount rates.  For oil and gas properties, expected future cash flow estimation is based on reserves, future production profiles, commodity prices and costs.
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  Page 40-41

  1. Summary of Significant Accounting Policies - continued

  • Significant accounting estimates and assumptions - continued

  • Restoration obligations
    Where a restoration obligation exists, the Group estimates the future removal costs of offshore oil and gas platforms, production facilities, wells and pipelines at the time of installation of the assets. In most instances, removal of assets occurs many years into the future. This requires judgmental assumptions regarding removal date, future environmental legislation, the extent of reclamation activities required, the engineering methodology for estimating cost, future removal technologies in determining the removal cost and asset specific discount rates to determine the present value of these cash flows. For more detail regarding the policy in respect of the provision for restoration refer to Note 1(p).
  • Share-based payment transactions
    The Group measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined using a Black Scholes model.
  • Commitments - Exploration
    The Group has certain minimum exploration commitments to maintain its right of tenure to exploration permits. These commitments require estimates of the cost to perform exploration work required under these permits.
  • Valuation of assets held for sale
    The Group’s accounting policy for assets held for sale and discontinued operations is set out in Note 1(aa), and requires assets held for sale, if their carrying amount will be recovered principally through a sale transaction, not through continuing use, to be recognised at the lower carrying amount at the date of classification and fair value less cost to sell. Any impairment losses arising are recognised in the income statement.
  • Valuation of embedded derivative
    The Group issued a convertible Note during the year, which contains a holder call option embedded derivative. The fair value of the call option embedded derivative in the convertible Note has been determined by an external valuer, using the Black Scholes model taking into account the terms and conditions of the option.

• Foreign Currency Translation

  Both the functional and presentation currency of Nido Petroleum Limited and its Australian subsidiaries is Australian Dollars, while for the subsidiaries with operations overseas, namely Nido Petroleum Philippines Pty Ltd and Nido Petroleum (UK) Limited, it is United States Dollars.

  Transactions in foreign currencies are initially recorded in the functional currency at the exchange rates ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are converted at the rate of exchange ruling at the balance sheet date.

  As at the reporting date the assets and liabilities of the subsidiaries operating overseas are translated into the presentation currency of Nido Petroleum Limited at the rate of exchange ruling at the balance sheet date and the income statements are translated at the weighted average exchange rates for the period.

  The exchange differences arising on the retranslation are taken directly to a separate component of equity. On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in the Income Statement.

• Interest in Joint Venture Assets

  Interests in jointly controlled assets and operations are reported in the financial statements by including the consolidated entity’s share of assets employed in the joint ventures, the share of liabilities incurred in relation to the joint ventures and the share of any expenses and revenues in relation to the joint ventures in their respective categories.

• Cash and Cash Equivalents

  Cash and short-term deposits in the balance sheet comprise cash at bank and in hand, short-term deposits with an original maturity of three months or less and money market investments readily convertible to cash within two working days.

  1. Summary of Significant Accounting Policies - continued

  • Cash and Cash Equivalents - continued

  For the purposes of the cash flow statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts.

• Trade and Other Receivables

  Trade receivables are carried at the amounts due. Specific provision is made for any amounts when collection is considered doubtful. Bad debts are written off when identified.

  Receivables from related parties are recognised and carried at amortised cost.

  Collectability of trade and other receivables is reviewed on an ongoing basis. Individual debts that are known to be uncollectible are written off when identified. An impairment provision is recognised when there is objective evidence that the Group will not be able to collect the receivable. Financial difficulties of the debtor, default payments or debts more than 90 days overdue are considered objective evidence of impairment. The amount of impairment loss is the receivable carrying amount compared to the present value of estimated cash flow, discounted at the original effective interest rate.

• Plant and Equipment

  Plant and equipment are stated at cost less accumulated depreciation and any impairment in value.

  Depreciation of plant and equipment is calculated on a straight line basis over the expected useful life to estimated residual value. The estimated useful lives, residual values and depreciation method are reviewed at the end of each annual reporting period.

  The following estimated useful lives are used in the calculation of depreciation.

  Plant and Equipment

  2 – 3 years

  Disposal
  Any item of property, plant and equipment is derecognised upon disposal or when no further economic benefits are expected from its use or disposal.

  Any gain or loss arising on derecognising of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the income statement in the year the asset is derecognised.

• Oil and Gas Properties

  Assets in Development
  When the technical and commercial feasibility of an undeveloped oil or gas field has been demonstrated the field enters its development phase. The costs of oil and gas assets are transferred from exploration and evaluation expenditure and reclassified into development phase and include past exploration and evaluation costs, development drilling and other subsurface expenditure, surface plant and equipment, and any associated land and buildings.

  Producing assets
  The costs of oil and gas assets in production are separately accounted for as tangible assets, and include past exploration and evaluation costs, pre-production development costs and the ongoing costs of continuing to develop reserves for production and to expand or replace plant and equipment and any associated land and buildings.

  Depletion charges are calculated using a unit of production method which will amortise the cost of carried forward exploration, evaluation and development expenditure over the life of the estimated Proved plus Probable reserves (2P), in a cash generating unit, together with the development expenditure necessary to develop the hydrocarbon reserves in the respective cash-generating units.

  Provisions for future restoration are made where there is a present obligation as a result of development or production activity, and is capitalised as a component of the cost of those activities. The provision for restoration policy is discussed in full at Note 1(p).

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Page 42-43

1. Summary of Significant Accounting Policies - continued

• Exploration and Evaluation Expenditure

  Expenditure Expensed Immediately
  Expenditure on exploration and evaluation expenditure is expensed as incurred. Costs related to the acquisition of properties that contain resources are allocated separately to specific areas of interest. These costs are capitalised until the viability of the area of interest is determined. See below.

  Deferred Expenditure
  Exploration and evaluation expenditure is stated at cost and is accumulated in respect of each identifiable area of interest.

  Such costs are only carried forward to the extent that they are expected to be recouped through the successful development of the area of interest (or alternatively by its sale), or where activities in the area have not yet reached a stage which permits a reasonable assessment of the existence or otherwise of economically recoverable reserves, and active operations are continuing.

  Accumulated costs in relation to an abandoned area are written off to the income statement in the period in which the decision to abandon the area is made.

  The Directors review the carrying value of each area of interest as at the balance date and any exploration expenditure which no longer satisfies the above policy is written off.

  Once an area of interest enters the development phase, all capitalised acquisition, exploration and evaluation expenditures are transferred to oil and gas properties.

• Impairment of Non-Financial Assets

  On each reporting date, the Group assesses whether there is any indication that an asset may be impaired. Where an indicator of impairment exists, the Group makes a formal estimate of recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount the asset is considered impaired and is written down to its recoverable amount.

  Recoverable amount is the greater of fair value less costs to sell and value in use. It is determined for an individual asset, unless the asset’s value in use cannot be estimated to be close to its fair value less costs to sell and it does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

  In assessing value in use, the estimated future cash flows are discounted to their present value using a pre tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

  Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but only to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years.

• Investment in Subsidiaries

  Investment in subsidiaries in the Company accounts are recognised at cost, being the fair value of the consideration given and including acquisition costs associated with the investment. Subsequent to initial measurement, investments in subsidiaries are carried at cost less accumulated impairment, if any.

• Investment in Associate

  The Group’s investment in its associate is accounted for under the equity method of accounting in the consolidated financial statements. This is an entity in which the Group has significant influence and which is neither a subsidiary nor a joint venture.

  The financial year of the associate differs from that of the Group. However, both use consistent accounting policies and financial information of the same reporting date has been used by the Group in applying the equity method.

  1. Summary of Significant Accounting Policies - continued

  • Investment in Associate - continued

  Under the equity method, the investment in the associate is carried in the consolidated balance sheet at cost plus post acquisition changes in the Group’s share of net assets of the associate, less any impairment in value. The consolidated income statement reflects the Group’s share of the results of operations of the associate.

  Where there has been a change recognised directly in the associate’s equity, the Group recognises its share of any changes and discloses this, when applicable, in the consolidated statement of changes in equity.

• Investments and Other Financial Assets

  Investments and financial assets in the scope of AASB 139 Financial Instruments: Recognition and Measurement are categorised as either financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, or available-for-sale financial assets. The classification depends on the purpose for which the investments were acquired. Designation is re-evaluated at each financial year end, but there are restrictions on reclassifying to other categories.

  When financial assets are recognised initially, they are measured at fair value plus, in the case of assets not at fair value through profit or loss, directly attributable transaction costs.

  Recognition and De-recognition
  All regular way purchases and sales of financial assets are recognised on the trade date, i.e. the date that the Group commits to purchase the asset. Regular way purchases or sales are purchases or sales of financial assets under contracts that require delivery of the assets within the period established generally by regulation or convention in the market place. Financial assets are derecognised when the right to receive cash flows from the financial assets have expired or have been transferred.

  Available for sale investments
  Available-for-sale investments are those non-derivative financial assets, principally equity securities, that are designated as available-for-sale or are not classified as any of the other categories of financial assets as set out in AASB 139 Financial Instruments Recognition & Measurement. After initial recognition available-for sale securities are measured at fair value with gains or losses being recognised as a separate component of equity until the investment is de-recognised or until the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is recognised in profit or loss.

  The fair values of investments that are actively traded in organised financial markets are determined by reference to quoted market bid prices at the close of business on the balance sheet date. For investments with no active market, fair values are determined using valuation techniques. Such techniques include: using recent arm’s length market transactions; reference to the current market value of another instrument that is substantially the same; discounted cash flow analysis and option pricing models making as much use of available and supportable market data as possible and keeping judgmental inputs to a minimum.

• Trade and Other Payables

  Trade and other payables are carried at amortised cost and represent liabilities for goods and services provided to the Group prior to the end of the financial year that are unpaid and arise when the Group becomes obliged to make future payments in respect of the purchase of these goods and services.

• Provisions

  Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event; it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reasonable estimate can be made of the amount of the obligation.

  When the Group expects some or all of a provision to be reimbursed, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the income statement net of any reimbursement.

  The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at reporting date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows.

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  Page 44-45

  1. Summary of Significant Accounting Policies - continued

  • Provisions - continued

  Restoration Provisions
  The Group recognises any legal or constructive restoration obligation as a liability at its present value at the time a legal liability or constructive obligation exists and when a reliable estimate of the amount of the obligation can be made. The carrying amount of the long lived assets to which the obligation relates is increased by the asset retirement obligation costs and amortised over the producing life of the asset. Restoration provisions are based on the estimated cost of restoration work required at the end of the useful life of the producing fields, including removal of facilities and equipment required or intended to be removed, together with abandonment of producing wells. These estimates of the asset retirement obligations are based on current technology, legal requirements and future costs, which have been discounted to their present value. In determining the asset retirement obligations, the Company has assumed no significant changes will occur in the relevant legislation in relation to restoration of sites in the future.

  Where a restoration obligation is assumed as part of the acquisition of an asset or obligation, the liability is initially measured at the present value of the future cash flows to settle the present obligation as at the acquisition date.

  Over time, the liability is accreted to its present value each period based on a risk adjusted pre-tax discount rate appropriate to the risks inherent in the liability. The unwinding of the discount is recorded within finance costs. Upon settlement of the liability, the Company either settles the obligation for its recorded amount or incurs a gain or loss upon settlement.

• Share Based Payment Transactions

  The Group provides benefits to employees (including Directors) of the Group in the form of share based payment transactions, whereby employees render services in exchange for shares or rights over shares ("equity-settled transactions").

  There are currently two Employee Share Option Plans (ESOP) providing these benefits to employees, the first (2005 ESOP) being applicable to option grants prior to 7 December 2007, and the second being applicable to option grants on and from 7 December 2007 (2007 ESOP). In addition to the ESOP, options are issued to Directors with terms and conditions which vary from the ESOP.

  The cost of these equity-settled transactions is measured by reference to the fair value at the date at which they are granted. The fair value is determined using a Black Scholes model.

  The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance conditions are fulfilled, ending on the date on which the relevant employee becomes fully entitled to the award (vesting date).

  The cumulative expense recognised for equity-settled transactions at each reporting date until vesting date reflects:

  • the grant date fair value of the award;
  • the extent to which the vesting period has expired; and
  • the number of awards that, in the opinion of the Directors of the Group, will ultimately vest taking into account such factors as the likelihood of non-market performance conditions being met.

  This opinion is formed based on the best available information at balance date.

  No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition. The dilutive effect, if any, of outstanding options is reflected as additional share dilution in the computation of earnings per share.

  If the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not been modified. An additional expense is recognised for any modification that increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee, as measured at the date of modification. AASB 2.27

  If an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award and designated as a replacement award on the date that it is granted, the cancelled and new award are treated as if they were a modification of the original award, as described in the previous paragraph.

1. Summary of Significant Accounting Policies - continued

• Employee Benefits

  Provision is made for employee annual leaves accumulated as a result of employee services up to the reporting date. These employee benefits include wages, salaries, annual leave and related on-costs such as superannuation and payroll tax.

  Provision for annual leave together with the associated employment on-costs are measured at their nominal amounts based on remuneration rates expected to be paid when the liability is settled. No provision is made for non-vesting sick leaves, as the anticipated pattern of future sick leave taken indicates that accumulated non-vesting sick leave will never be paid.

  Long service leave entitlements are not recognised until the service period of an employee extends beyond four years.

  Contributions to employee superannuation funds, being defined contribution plans of choice, are expensed as incurred.

• Leases

  The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset.

  Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the inception of the lease at the fair value of the leased asset or, if lower, at the present value of the minimum lease payments.

  Operating lease payments are recognised as an expense in the income statement on a straight-line basis over the lease term. Operating lease incentives are recognised as a liability when received and subsequently reduced by allocating lease payments between rental expense and reduction of the liability.

• Revenue

  Revenue is recognised to the extent that it is probable that economic benefits will flow to the Group and the revenue can be reliably measured.

  Sale of Goods: Revenue from the sale of oil is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer and can be measured reliably. For the sale of oil, risks and rewards are said to have passed to the buyer upon the delivery to the buyer.

  Interest: Revenue is recognised as interest accrues using the effective interest method.

• Borrowing Costs

  Borrowing costs are recognised in the period in which they are incurred except borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset that necessarily takes a substantial period to get ready for its intended use or sale. In this case, borrowing costs are capitalised as part of the cost of such a qualifying asset.

  Borrowing costs are amortised over the life of the borrowing facility to which they relate.

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Page 46-47

1. Summary of Significant Accounting Policies - continued

• Income Tax

  Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities based on the current period’s taxable income. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the balance sheet date.

  Deferred income tax is provided on all temporary differences at the balance date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

  Deferred income tax liabilities are recognised for all taxable temporary differences except:

  • When the deferred income tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
  • When the taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, except where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

  Deferred income tax assets are recognised for all deductible temporary differences, carry-forward or unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax assets and unused tax losses, can be utilised except:

  • When the deferred income tax asset relating to the deductible temporary differences arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit not taxable profit or loss; and
  • When the deductible temporary differences are associated with investments in subsidiaries, associates and interests in joint ventures, in which case deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.

  The carrying amounts of deferred income tax assets are reviewed at each balance date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax assets to be utilised.

  Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date.

  Income taxes relating to items recognised directly in equity are recognised in equity and not in the income statement.

  Deferred tax assets and deferred tax liabilities are offset only if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred tax assets and liabilities relate to the same taxable entity and the same taxation authority.

  Unrecognised deferred income tax assets are reassessed at each balance sheet date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.

1. Summary of Significant Accounting Policies - continued

• Other Taxes

  Revenues, expenses and assets are recognised net of the amount of GST except:

  • Where the amount of the GST incurred is not recoverable from the taxation authority. In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of the expense; and
  • Receivables and payables are stated with the amount of GST included.

  The net amount of GST recoverable from, or payable to, the taxation authority in included as a current asset or liability in the balance sheet.

  Cash flows are included in the cash flow statement on a gross basis. The GST components of each cash flow arising from investing activities which are recoverable from, or payable to, the taxation authority are classed as operating cash flows.

  Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority.

• Contributed Equity

  Contributed equity 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 proceeds received.

• Earnings per Share

  Basic EPS is calculated as net loss attributable to members, adjusted to include costs of servicing equity other than dividends, divided by the weighted average number of ordinary shares, adjusted for any bonus element.

  Diluted EPS is calculated as net loss attributable to members, adjusted for:

  • costs of servicing equity (other than dividends);
  • the after tax effect of dividends and interest associated with the dilutive potential ordinary shares that have been recognised as expenses; and
  • other non-discretionary changes in revenues or expenses during the period that would result from the dilution of potential ordinary shares,

  divided by the weighted average number of ordinary shares and dilutive potential ordinary shares, adjusted for any bonus element.

• Financial Instruments Issued by the Company

  Debt and equity instruments are classified as either liabilities or as equity in accordance with the substance of the contractual arrangement.

  Transaction costs arising on the issue of equity instruments, net of associated tax, are recognised directly in equity as a reduction of the proceeds of the equity instrument to which the costs relate. Transaction costs are the costs that are incurred directly in connection with the issue of those equity instruments and which would not have been incurred had those instruments not been issued.

  Convertible Note
  The Convertible Note is split into two components: a debt component and a component representing the embedded derivatives in the Convertible Note. The debt component represents the Group’s liability for future interest coupon payments and the redemption amount. The embedded derivatives represent the value of the option that Note holders have to convert into ordinary shares in the Company.

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  Page 48-49

  1. Summary of Significant Accounting Policies - continued

  • Financial Instruments Issued by the Company - contiued

  The debt component of the convertible Note is measured at amortised cost and therefore increases as the present value of the interest coupon payments and redemption amount increases, with a corresponding charge to finance cost. The debt component decreases by the cash interest coupon payments made. The embedded derivative is measured at fair value at each balance sheet date, and the change in the fair value is recognised in the income statement.

  Interest and dividends
  Interest and dividends are classified as expenses or as distributions of profit consistent with the balance sheet classification of the related debt or equity instrument or component parts of compound instruments.

• Non-current Assets and Disposal Groups Held for Sale and Discontinued Operations

   

  Non-current assets and disposal groups are classified as held for sale and measured at the lower of their carrying amount and fair value less costs to sell if their carrying amount will be recovered principally through a sale transaction. They are not depreciated or amortised. For an asset or disposal group to be classified as held for sale, it must be available for immediate sale in its present condition and its sale must be highly probable.

  An impairment loss is recognised for any initial or subsequent write-down of the asset (or disposal group) to fair value less costs to sell. A gain is recognised for any subsequent increase in fair value costs to sell of an asset (or disposal group), but not in excess of any cumulative impairment loss previously recognised. A gain or loss not previously recognised by the date of the sale of the non-current asset (or disposal group) is recognised at the date of de-recognition.

  A discontinued operation is a component of the entity that has been disposed of or is classified as held for sale and that represents a separate major line of business or geographical area of operations, is part of a single coordinated plan to dispose of such line of business or area of operations, or is a subsidiary acquired exclusively with a view to resale. The results of discontinued operations are presented separately on the face of the income statement.

• Segment Reporting

  A business segment is a distinguishable component that the entity undertakes. Management has determined that the Nido group has a single industry segment being petroleum production, exploration and development. A geographical segment is a distinguishable component of the entity that is engaged in providing products or services within a particular economic environment and is subject to risks and returns that are different from those of segments operating in other economic environments. Geographically, the group currently operates in the Philippines and Australia.

2. Earnings

3. Revenues

4. Expenses

5. Income Tax

6. Cash and Cash Equivalents

7. Trade and Other Receivables - Current

8. Other Financial Assets

9. Non-Current Receivables

10. Plant and Equipment

11. Oil and Gas Properties

12. Exploration and Evaluation Expenditure

13. Investments in Subsidiaries

14. Investment in Associate

15. Trade and Other Payables

16. Current Provisions

17. Non-Current Provisions

18. Convertible Note

19. Contributed Equity

20. Reserves

21. Earnings Per Share

22. Dividends paid and proposed

No dividend has been paid or declared during the 2007 and 2006 financial years.

23. Segment Information

The consolidated entity operates in a single business segment which is petroleum production, exploration and development. Geographically, the consolidated entity operates in the Philippines and Australia.

\

23. Segment Information - continued

24. Discontinued Operations

25. Share-based Payments

26. Auditor’s Remuneration

27. Notes to the Cash Flow Statement

28. Key Management Personnel Disclosures

Nido Petroleum Limited applied the option under Corporations Amendments Regulation 2006 to transfer key management personnel remuneration disclosures required by AASB 124 Related Party Disclosures paragraphs Aus 25.4 to Aus 25.7.2 to the Remuneration Report section of the Directors’ Report. These transferred disclosures have been audited.

• Details of Key Management Personnel

  (i)	Directors
  	G Dixon	Chairman (Non-Executive)
  	D Whitby	Managing Director
  	J Brown	Director (Non-Executive)
  	V Pérez	Director (Non-Executive)

  (ii)	Executives
  	J Williams	Deputy Managing Director
  	J Pattillo	Head of Exploration (appointed 29 January 2007)
  	J de Dios	President of Nido Petroleum Philippines (appointed 6 July 2007)
  	A Francis	Head of Commercial (appointed 1 November 2007)
  	A Gilbert	Chief Financial Officer (appointed 1 October 2007)
  	M Lamattina	Company Secretary
  	P Quaife	Previous Head of Exploration (replaced 29 January 2007)
  	B Martin	Previous President of Philippines Operations (resigned 31 August 2007)
  	G Evans	Previous Chief Financial Officer (stepped down as Chief Financial Officer 1 October 2007 and resigned effective 15 November 2007)

• Compensation of Key Management Personnel



28. Key Management Personnel Disclosures - continued

• Option Holdings of Key Management Personnel



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Page 70-71

28. Key Management Personnel Disclosures - continued

• Shareholdings of Key Management Personnel



All equity transactions with Key Management Personnel other than those arising from the exercise of remuneration options have been entered into under terms and conditions no more favourable than those the entity would have adopted if dealing at arm’s-length.

28. Key Management Personnel Disclosures - continued

• Other transactions and balances with Directors and Executives

  Transactions between related parties are on normal commercial terms and conditions no more favourable than those available to other parties:

  • GDEX Consulting Pty Ltd, an entity controlled by G Dixon, has been paid $33,750 (2006:$94,500) in consulting fees and directors fees. At the end of the financial year nil (2006:nil) was payable.
  • Seaspin Pty Ltd, an entity controlled by C Morgan, was paid nil in 2007 (2006:$25,000). At the end of the financial year nil was payable (2006:$21,312).
  • Merritt Partners Pte Ltd, an entity in which V Pérez is a non-executive director, was paid $105,000 (2006:$nil) in consultancy fees and directors fees. At the end of the financial year nil was payable (2006:$nil).
  • Merritt Advisory Partners, Inc. an entity in which V Pérez is a non-executive director, was paid $200,514 (2006:$nil). At the end of the financial year nil was payable (2006:$nil).

  Where applicable these amounts have been disclosed in the Remuneration Report as part of the Directors’ remuneration.

29. Expenditure Commitments

• Exploration Commitments

  In order to maintain current rights of tenure to exploration permits, the consolidated entity has certain obligations to perform minimum exploration work and expend minimum amounts of money. These commitments may be varied as a result of renegotiations, relinquishments, farm-outs, sales or carrying out work in excess of the permit obligations. The following exploration expenditure requirements have not been provided for in the financial report and are payable:



• Joint Venture Capital Commitments

  All of the consolidated entity’s capital commitments arise from its interest in joint ventures. The consolidated entity’s share of capital expenditures contracted for at the balance date for which no amounts have been provided for in the financial statements are payable:



• Non-cancellable Operating Lease Commitments



• Remuneration Commitments

  Commitments for the payment of salaries and other remuneration under long-term employment contracts in existence at the reporting date but not recognised as liabilities, payable:

30. Interest in Joint Venture Operations

• Joint venture details

  The consolidated entity has the following joint venture interests in both the Philippines and the United Kingdom:



• Assets utilised in the joint venture

  The following amounts represent the consolidated entity’s interests in the assets employed in joint ventures. These amounts are included in the consolidated financial statements under their respective categories as follows:



• Share of joint venture operation’s profit or loss



• Commitments relating to joint venture

  Capital expenditure commitments and contingent liabilities in respect of the joint venture are disclosed in Notes 29 and 32, respectively

31. Related Party Disclosure

The consolidated financial statements include the financial statements of Nido Petroleum Limited and the subsidiaries listed in the following table. The following were controlled entities during the financial year, and have been included in the consolidated financial statements. The financial years of all controlled entities are the same as that of the parent entity.

During the year, two subsidiaries, Nido Production (Galoc) Pty Ltd and Nido Production (Holding) Pty Ltd were incorporated. The sale of Nido Petroleum (UK) Limited is disclosed in Note 4(c).

Subsidiaries

The only transaction between the parent entity and its subsidiaries was the provision of loan funds during the financial year. Further information is disclosed in Note 9.

Associate

The parent entity had a 25.7% (2006: 25.7%) interest in Cool Energy Limited at the end of the financial year. Further information is disclosed in Note 14.

32. Contingent Liabilities

• Restoration

  Nido is party to Service Contracts covering areas located in the Republic of the Philippines. Nido considers that it has no liability for restoration other than for that currently recognised in these financial statements (refer Note 17). It should be Noted that there are risks inherent in conducting business in the Republic of the Philippines which include, but are not limited to, uncertainties over the development of laws relevant to restoration governing the oil and gas industry as well as difficulties associated with the consistent application of current laws and regulations.

• Guarantees

  Nido Petroleum Limited has provided a letter of undertaking to the Department of Energy in the Philippines to provide technical and financial support to Nido Petroleum Philippines Pty Ltd pursuant to work obligations set out in the terms and conditions of the Farm-In Agreement to SC 58 which was executed between PNOC Exploration Corporation and Nido Petroleum Philippines Pty Ltd on 17 July 2006.

  Nido Petroleum Limited has provided a parent company guarantee to the Department of Energy in respect of the obligations of Nido Production (Holding) Pty Ltd and Nido Production (Galoc) Pty Ltd under SC 14, to provide technical and financial support to these entities. Nido Petroleum Philippines Pty Ltd has also provided a letter of undertaking to the joint venture partners of SC 14 to guarantee the work obligations of Nido Production (Galoc) Pty Ltd under SC 14.

  Nido Petroleum Philippines Pty Ltd has entered into a Performance Bond with First Integrated Bonding and Insurance Company Inc, in favour of the Department of Energy, in respect of the minimum expenditure commitment of the current sub-phase of SC 54.

• Employment Contracts – Change of Control

  Pursuant to employment contracts entered into with all employees of the Company, in the event of a Change of Control, the employee has the option to terminate his employment. In this case, the employee will be paid a portion of his remuneration package, varying between six months and one year. As at 31 December 2007, the total amount that would be payable was $3,033,000 (2006: $2,485,000).

  Other than the above, as at the date of this report there were no contingent liabilities.

33. Financial Risk Management Objectives and Policies

The Group's principal financial instruments comprise cash and short-term deposits and a convertible Note.

The main purpose of these financial instruments is to provide working capital for the Group’s operations.

The Group has various other financial instruments such as trade debtors and trade creditors, which arise directly from its operations.

It is, and has been throughout the period under review, the Group’s policy that no trading in financial instruments shall be undertaken.

The main risks arising from the Group’s financial instruments are interest rate risk, liquidity risk, foreign currency, commodity risk and credit risk. The Board reviews and agrees on policies for managing each of these risks and they are summarised below.

Interest Rate Risk

At balance date the Group’s exposure to market risk for changes in interest rates relates primarily to the Company’s short-term cash deposits. The Group is not exposed cash flow volatility from interest rate changes on borrowings as the convertible Note carries a fixed rate of interest of 8.5% per annum, though it is acknowledged that there is an interest rate risk exposure that is a by-product of the calculation of the fair value of the fixed rate liability.

The Group constantly analyses its exposure to interest rates, with consideration given to potential renewal of existing positions, the mix of fixed and variable interest rates and the period to which deposits may be fixed.

The Group currently manages its finance costs using only fixed rate debt, which removes cash flow volatility from interest rate changes. The Group’s policy is to select the most cost efficient mix of fixed and variable rate debt.

At balance date, the Group had the following financial assets exposed to variable interest rates that are not designated in cash flow hedges:

The following sensitivity analysis is based on the interest rate risk exposures in existence at the balance sheet date. The 0.5% sensitivity is based on reasonably possible changes, over a financial year, using an observed range of historical LIBOR movements over the last 3 years.

33. Financial Risk Management Objectives and Policies - continued

At 31 December 2007, if interest rates had moved, as illustrated in the table below, with all other variables held constant, post tax profit and equity relating to financial assets of the Group would have been affected as follows:

The sensitivity in 2007 is larger than in 2006, due to a higher average cash balance during the year.

At 31 December 2007, if the interest rate applied to the fair value calculation of the convertible Note had moved, as illustrated in the table below, with all other variables held constant, post tax profit and equity of the Group would have been affected as follows:

Foreign Currency Risk

As a result of oil and gas exploration, development and production operations in the Philippines, being denominated in US$, the Group’s balance sheet can be affected significantly by movements in the US$/A$ exchange rates. The Company does not hedge this exposure.

The Group also has transactional currency exposures. Such exposure arises from sales or purchases by an operating unit in currencies other than the unit’s measurement currency.

The Group manages its foreign exchange risk by constantly reviewing its exposure to commitments payable in foreign currency and ensuring appropriate cash balances are maintained in both Philippine Peso and United States Dollars, to meet current operational commitments.

The Group has entered into a US$ convertible Note that can be affected by movements in the US$/A$ exchange rates, and ultimately affect the value of the convertible Note reported in the balance sheet and give rise to foreign exchange gains or losses in the income statement.

The US$ convertible Note debt has been used to meet foreign currency commitments, primarily in relation to the Galoc Oil Field development, which limits any cash flow volatility from foreign exchange rate changes to the cost of the development.

At 31 December 2007, the Group had the following exposures to US$ foreign currency that is not designated in cash flow hedges:

The following sensitivity analysis is based on the foreign currency risk exposures in existence at the balance sheet date. The 5% sensitivity is based on reasonably possible changes, over a financial year, using an observed range of actual historical rates, for the Australian dollar to the US dollar, for the preceding 5 years.

At 31 December 2007, if the Australian Dollar had moved, as illustrated in the table below, with all other variables held constant, post tax profit and equity would have been affected as follows:

The movements in 2007 profit and equity due to the increased exposure to US$ foreign currency through increased activity levels.

Management believes the balance date risk exposures are representative of the risk exposure inherent in financial instruments.

Commodity Price Risk

The Group’s exposure to price risk is minimal given the nominal production volumes from the Nido and Matinloc producing fields. The prise risk is based on the market price of oil sold from its share of production at spot rates.

Credit Risk

Credit risk arises from the financial assets of the Group, which comprise cash and cash equivalents, trade and other receivables and other financial assets and guarantees and undertakings. The Group’s exposure to credit risk arises from potential default of the counter party, with a maximum exposure equal to the carrying amount of these instruments. Exposure at balance date is addressed in each applicable Note. The Group has also provided guarantees and undertakings, as described in Note 32(b), to which it has a maximum credit risk exposure of AUD$15.9 million.

The Group trades only with recognised, creditworthy third parties and has adopted a policy of dealing with creditworthy counterparts and obtaining sufficient collateral or other security where appropriate, as a means of mitigating the risk of financial loss from defaults.

Receivable balances are monitored on an ongoing basis with the result that the Group’s exposure to bad debts is not significant.

Specific concentration of credit risk exists primarily within trade debtors in respect of the sale of oil, as well as cash held by non-operator joint venture partners as well as receivables due from joint venture partners.

33. Financial Risk Management Objectives and Policies - continued

Credit Risk - continued

As at 31 December 2007 100% (2006: 100%) of the consolidated entity’s crude oil receivable was owed by Pilipinas Shell Petroleum Corporation to the joint venture operated by The Philodrill Corporation ("Philodrill") with respect to the purchase of oil derived from the Nido and Matinloc oil fields. Philodrill also holds cash balances due to the Group and other joint venture participants as to 31 December 2007 who have no history of credit default with the Group, and no provision is considered necessary for potential default.

The Group has balances due from joint venture partner Yilgarn, which has no history of credit default with the Group and no provision is considered necessary for credit loss.

Other than the concentration of credit risk described above, the consolidated entity does not have any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics. The carrying amount of financial assets recorded in the financial statements, net of any provisions for losses, represents the consolidated entity’s maximum exposure to credit risk.

 

Liquidity Risk

 

The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of its cash and funding requirements.

The table below reflects all contractually fixed pay-offs and receivables for settlement, repayment and interest resulting from recognised financial assets and liabilities as of 31 December 2007. Cash flows for financial assets and liabilities without fixed amount or timing are based on conditions existing at 31 December 2007.

The remaining contractual maturities of the Group’s and parent entities financial liabilities are:

Maturity analysis of financial asset and liability based on management’s expectation.

The risk implied from the values shown in the table below, reflects a balanced view of cash inflows and outflows.

Consolidated - Year Ended 31 December 2007

 

33. Financial Risk Management Objectives and Policies - continued

Liquidity Risk - continued

Company - Year Ended 31 December 2007

Other Price Risk

Other price risk arises from the Group’s convertible Note, as the fair value reported in the balance sheet is impacted by the Group’s share price on the Australian Stock Exchange. In addition to this, a conversion price reset mechanism exists whereby the conversion price can be reset downwards if the volume weighted average share price is below the conversion price on the reset date. The reset date occurs every six months. The reset is restricted to 114,307,091 shares.

As at 31 December 2007 the conversion price was $0.23 per share, with the Notes now convertible into a maximum of 114,307,091 shares.

Over the term of the Note, the call option will be fair valued at each balance date and the movement in fair value recorded through the income statement. For example, if the share price in the Company increases, the value of the call option will increase, resulting in an increase to the liability reported in the balance sheet and an expense in the income statement.

The table below discloses the sensitivities in relation to the impact of a share price movement on the valuation of the convertible Note call option. The 5 cent sensitivity is based on reasonably possible changes, over a financial year, using an observed range of actual historical share prices, for the preceding 4 years.

The movements in 2007 profit and equity are higher due to the impact of the reset of the share price in March 2006 from $0.26 to $0.23.

The table below discloses the sensitivities in relation to the impact of a reset in the conversion price on the valuation of the convertible Note call option. The 3 cent sensitivity is based on reasonably possible changes, observed since the Note was entered into.

33. Financial Risk Management Objectives and Policies - continued

Other Price Risk - continued

The movements in 2007 profit and equity are higher due primarily to the impact of the increase in the number of shares convertible to 114,307,091.

Fair Value

The methods of estimating fair value are outlined in the relevant Notes to the financial statements.

34. Subsequent Events

Nido has identified the following as events occurring after balance sheet date:

• Retirement of Mr Gregor Dixon and appointment of Mr David Whitby as Chairman of the Board and Non-Executive Director on 6 February 2008.
• Retirement of Mr David Whitby as Managing Director on 6 February 2008.
• Appointment of Mr Jocot de Dios as President and Chief Executive Officer on 6 February 2008.
• Appointment of Mr William Bloking as Non Executive Director on 6 February 2008.