NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  NOTE 1 - STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES continued  e) Financial Instruments  Derivative Financial Instruments  Recognition and Initial Measurement  i) Financial assets at fair value through profit or loss  Financial assets are classified at fair value through profit or loss when they are held for trading for the purpose of  short term profit taking, when they are derivatives not held for hedging purposes, or designated as such to avoid an  accounting mismatch or to enable performance evaluation where a group of financial assets is managed by key  management personnel on a fair value basis in accordance with a documented risk management or investment  strategy. Realised and unrealised gains and losses arising from changes in fair value are included in profit or loss in  the period in which they arise.  Derivative financial instruments are recognised at fair value. Subsequent to initial recognition, derivative financial  instruments are recognised at fair value. The fair value of these derivative financial instruments is the estimated  amount that the Group would receive or pay to terminate the contracts at the reporting date, taking into account  current market prices and the current creditworthiness of the contract counterparties. The derivatives are valued  on a mark to market valuation and the gain or loss on re-measurement to fair value is recognised through the  statement of profit or loss and other comprehensive income. The Group uses derivative financial instruments to economically hedge its exposure to changes in commodity prices  arising in the normal course of business. The principal derivatives that may be used are commodity crude oil price  swap, option and costless collar contracts and interest rate swaps. Their use is subject to policies and procedures as  approved by the Board of Directors. The Group does not trade in derivative financial instruments for speculative  purposes. Financial instruments are initially measured at fair value plus transactions costs where the instrument is not classified  at fair value through profit or loss. Transaction costs related to instruments classified at fair value through profit or  loss are expensed to profit or loss immediately. Financial instruments are classified and measured as set out below.  Financial instruments, incorporating financial assets and financial liabilities, are recognised when the entity becomes  a party to the contractual provisions of the instrument. Trade date accounting is adopted for financial assets that  are delivered within timeframes established by marketplace convention.  Lease incentives under operating leases are recognised as a liability and amortised on a straight-line basis over the  life of the lease term. Assets under financing leases are depreciated on a straight-line basis over the shorter of their estimated useful lives  or the lease term. Lease payments for operating leases, where substantially all the risks and benefits remain with  the lessor, are charged as expenses in the periods in which they are incurred.  Finance leases are capitalised by recording an asset and a liability at the lower of the amounts equal to the fair value  of the leased property or the present value of the minimum lease payments, including any guaranteed residual  values. Lease payments are allocated between the reduction of the lease liability and the lease interest expense for  the period. - 63 - 