NOTES TO THE FINANCIAL STA TEMENTS for the year ended 31 December 2004 1. Statement of Accounting Policies (d) Acquisition of assets (f) Derivative financial instruments (a) Basis of preparation (e) Foreign currency (b) Principles of consolidation (c) Non-current assets Annual Report 2004 53 Exchange differences relating to amounts payable in foreign currencies designated as a hedge of a self-sustaining foreign operation, together with any related income tax expense/benefit, are transferred on consolidation to the foreign currency translation reserve. Assets and liabilities of self-sustaining foreign operation are translated at the exchange rate e xistin g at balance date. Equity items are tr anslated at historical rates. The statemen ts of financial performance are tr anslated at a weighted average rate for th year. Exchange differences arisin on translation are taken directly to th e foreign currency translation reserve. In assessing recoverable amounts, the relevant cash flows have not been discounted to their present value. With the exception of exploration expenditure carried forward pertaining to areas of interest in the exploration stage (refer note 1(l)), the carrying amounts of non-current assets are reviewed to determine whether they are in excess of their estimated recoverable amount at balance date. If the carrying amount of a non-current asset exceeds the estimated recoverable amount, the asset is written down to the lower value. The write-down is expensed in the reporting period in which it occurs. Monetary assets an d liabilities of integrated foreign operations are translated at the ex change rate existing at balance date while non-monetary items and revenue and e xpen se items are translated at ex chan ge rates current when the transaction occurred. Exchange differences arisin on the translation of monetary assets an d liabilities are brought to account in th statement of financial performance. Where hedge transactions are designated as a hedge of an anticipated specific purchase or sale, the gains or losses on the hedge arising up to the date of the anticipated transaction, together with any costs or gains arising at the time of entering into the hedge, are deferred and included in the measurement of the anticipated transaction when the transaction has occurred as designated. Any gains or losses on the hedge transaction after that date are included in the statements of financial performance. The net amounts receivable or payable under forward foreign exchange contracts and the associated deferred gains or losses are recorded on the statements of financial position from the inception of the hedge transaction. Interests in unincorporated joint ventures are recognised by including in the financial statements the Santos Group’s proportion of the joint venture costs, assets and liabilities. The balances and effects of all transactions between controlled entities are eliminated in full on consolidation. The consolidated financial statements of the Santos Group include the financial statements of the Company, Santos Ltd being the parent entity, and its controlled entities. Foreign currency tr ansactions are translated to Austr alian currency at the rates of exchange in effect at the dates of the transactions. Amounts receivable and payable in foreign currencies at balance date are translatedat the rate of exchange existing on that d ate . Exchange differences relatin to amounts receivable or payable in foreign currencies are brought to accoun in the statements of financial performan ce in the period in which they arise. The gains and losses on derivative financial instruments hedging specific purchase or sale commitments are deferred and included in the measurement of the purchase or sale. Gains and losses on derivative financial instruments designated as hedges are accounted for on the same basis as the underlying exposures they are hedging. The accounting policies have been consistently applied by each entity in the Santos Group and are consistent with those adopted in the previous financial year. Assets transferred between entities within the Santos Group ar e recognised by the acquiring entity at f air value. The Santos Group uses derivative financial instruments to hedge its exposure to changes in foreign exchange rates, commodity prices and interest rates arising in the normal course of business. The principal derivatives used are forward foreign exchange contracts, foreign currency swaps, foreign currency option contracts, interest rate swaps and options, commodity crude oil price swap and option contracts and natural gas swap and option contracts. Their use is subject to a comprehensive set of policies, procedures and limits approved by the Board of Directors. The Santos Group does not trade in derivative financial instruments for speculative purposes. On acquisition of a controlled entity, the identifiable net assets acquired are recorded at their f air values. To the extent that there is excess purchase consideration representing good will, the goodwill is amortised using th straight line method over a period of 20 years. The unamortised balance of goodwill is reviewed at each balance date an charged against profit to the extent that th balance exceeds the value of expected futur e benefits. All assets acquired ar e recorded at their cost of acquisition, bein the fair value of the consideration provid ed plus incidental costs directly attributable to the acquisition. The financial report is a general purpose financial report prepared in accordance with applicable Accounting Standards, Urgent Issues Group Consensus Views, other authoritative pronouncements of the Australian Accounting Standards Board and the Corporations Act 2001 collectively referred to as Australian Generally Accepted Accounting Principles (“Australian GAAP”). The financial report has been prepared on the basis of historical costs and, except where stated, does not take into account changing money values or fair values of assets. The significant accounting policies that have been adopted in the preparation of this financial report are: