NOTES TO THE FINANCIAL STA TEMENTS for the year ended 31 December 2004 1. Statement of Accounting Policies (continued) (g) Revenue (j) Receivables (m)Borrowings (n) Leases (k) Inventories (h) Goods and services tax (o) Capitalisation of borrowing costs (p) Deferred income (q) Depreciation and depletion (i) Cash (l) Exploration and de velopment expenditure The gross proceeds of non-current asset sales are included as revenue at the date control of the asset passes to the buyer, usually when an unconditional contract of sale is signed. The gain or loss on disposal is calculated as the difference between the carrying amount of the asset at the time of disposal and the net proceeds on disposal. Product sales, equipment rentals and pipeline tariffs, overriding royalties and other income are recognised when the goods and services are provided and the Santos Group has a legally enforceable entitlement to the proceeds. Interest revenue is recognised as it accrues. Dividend income from controlled entities is recognised as revenue as dividends are declared and from other parties as dividends are received. Trade debtors an other receivables are recorded at amounts due. A provision is made for any d oubtful d ebts based on a review of collectability of outstanding amounts at balance d ate. Bad debts are written off in th period they are identified. Borrowings are carried on the statements of financial position at their principal amount. Interest is accrued at the contracted rate. Operating lease payments, where the lessor effectively retains substantially all the risks and benefits of ownership of the leased items, are expensed on a straight line basis over the term of the lease. Borrowing costs, including interest, finance charges and foreign currency exchange gains and losses relating to major plant and equipment projects under development and construction up to the date of commencement of commercial operations, are capitalised and amortised over the expected useful lives of the facilities. Where funds are borrowed specifically for qualifying projects the actual borrowing costs incurred are capitalised. Where the projects are funded through general borrowings the borrowing costs are capitalised based on the weighted average borrowing rate, which for the year ended 31 December 2004 was 5.09% (2003: 4.91%). Borrowing costs incurred in respect of completed projects are expensed. Revenues, expenses and assets are recognised net of the amount of goods and services tax (“GST”), except where the amount of GST incurred is not recoverable from the Australian Tax Office (“ATO”). In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the ATO is included as a current asset or liability in the statements of financial position. Cash flows are included in the statements of cash flows on a gross basis. The GST components of cash flows arising from investing and financing activities which are recoverable from, or payable to, the ATO are classified as operating cash flows. For the purposes of the statements of cash flows, cash includes cash on hand, cash at bank and short-term deposits at call. When either an area of interest is abandoned or th Directors consider the expenditure to be of  reduced or no further value, accumulated e xploration expenditur is written down or off in the period in which such a decision is made. Exploration and d evelopm ent expenditures in respect of each area of interest are accumulated an carried forward if either: (i) such expenditur e is expected to be recouped thr ough successful development an d commercial exploitation of the area of interest; or (ii) the exploration activities in the area of interest have n ot yet reached a stage which permits r easonable assessment of the existence of economically recoverable r eserves and active and significant oper ations in, or in relation to, the area of interest are continuing. A liability is recorded for obligations under sales contracts to deliver natural gas in future periods for which payment has already been received. Depreciation charges are calculated to write-off the carrying value of buildings, plant and equipment over their estimated useful lives to the entity. Depreciation of onshore buildings, plant and equipment assets is calculated using the straight line method of depreciation. The estimated useful lives to the entity will vary for each asset depending on projected average rate  (ii) petroleum produ cts, which comprise extracted crude  oil, liquefied petroleum gas, condensate and naphtha stored in tanks an pipeline systems and processed sales gas and ethane stored in subsurface r eservoirs, are valued using th absorption cost method. (i) drilling and m ain tenance stocks, which include plant spares, maintenance an d drilling tools used for ongoin operations, are valued at averag cost; and Inventories ar valued at the lower of cost and net realisable value after provision is made for obsolescen ce. Cost is determined as follows: 54 Annual Report 2004