##### Table of Contents



InterOil Corporation
Consolidated Financial Statements




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InterOil Corporation
Consolidated Financial Statements
(Expressed in United States dollars)
  
 Table of contents
 Managements Report
    
    
    1Auditors Report to the Shareholders
    
    
    2Consolidated Balance Sheets
    
    
    4Consolidated Statements of Operations
    
    
    5Consolidated Statements of Cash Flows
    
    
    6Consolidated Statements of Shareholders Equity
    
    
    7Consolidated Statements of Comprehensive Income
    
    
    8Notes to the Consolidated Financial Statements
    
    
    9Reconciliation to accounting principles generally accepted in the United States
    
    
    44




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##### Table of Contents



InterOil Corporation
Consolidated Financial Statements
(Expressed in United States dollars)
 
 MANAGEMENTS REPORT
      Phil Mulacek
    
    Collin VisaggioChief Executive Officer
    
    Chief Financial Officer
 Consolidated Financial Statements INTEROIL CORPORATION 1




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INDEPENDENT AUDIT REPORT TO THE SHAREHOLDERS OF INTEROIL CORPORATION
 Independent Auditors Report
   Consolidated financial statements
    Internal control over financial reporting
    Consolidated Financial Statements INTEROIL CORPORATION 2




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##### Table of Contents



Consolidated Financial Statements INTEROIL CORPORATION 3




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##### Table of Contents



InterOil Corporation
 
 Consolidated Balance Sheets
  As atDecember 31,
    
    December 31,
    
    December 31,2008
    
    2007
    
    2006$
    
    $
    
    $AssetsCurrent assets:Cash and cash equivalents (note 5)
    
    
    48,970,572
    
    
    
    43,861,762
    
    
    
    31,681,435Cash restricted (note 7)
    
    
    25,994,258
    
    
    
    22,002,302
    
    
    
    29,301,940Trade receivables (note 8)
    
    
    42,887,823
    
    
    
    63,145,444
    
    
    
    67,542,902Commodity derivative contracts (note 7)
    
    
    31,335,050
    
    
    
    
    
    
    
    1,759,575Other assets
    
    
    167,885
    
    
    
    146,992
    
    
    
    2,954,946Inventories (note 9)
    
    
    83,037,326
    
    
    
    82,589,242
    
    
    
    67,593,558Prepaid expenses
    
    
    4,489,574
    
    
    
    5,102,540
    
    
    
    880,640Total current assets
    
    
    236,882,488
    
    
    
    216,848,282
    
    
    
    201,714,996Cash restricted (note 7)
    
    
    290,782
    
    
    
    382,058
    
    
    
    3,217,284Deferred financing costs
    
    
    
    
    
    
    
    
    
    
    1,716,757Plant and equipment (note 10)
    
    
    223,585,559
    
    
    
    232,852,222
    
    
    
    242,642,077Oil and gas properties (note 11)
    
    
    128,013,959
    
    
    
    84,865,127
    
    
    
    54,524,347Future income tax benefit (note 12)
    
    
    3,070,182
    
    
    
    2,867,312
    
    
    
    1,424,014Total assets
    
    
    591,842,970
    
    
    
    537,815,001
    
    
    
    505,239,475Liabilities and shareholders equityCurrent liabilities:Accounts payable and accrued liabilities (note 13)
    
    
    78,147,736
    
    
    
    60,427,607
    
    
    
    76,095,369Commodity derivative contracts (note 7)
    
    
    
    
    
    
    1,960,300
    
    
    
    Working capital facility (note 15)
    
    
    68,792,402
    
    
    
    66,501,372
    
    
    
    36,873,508Deferred hedge gain (note 7)
    
    
    
    
    
    
    
    
    
    
    1,385Deferred liquefaction project liability (note 18)
    
    
    
    
    
    
    
    
    
    
    6,553,080Current portion of secured loan (note 18)
    
    
    9,000,000
    
    
    
    136,776,760
    
    
    
    13,500,000Current portion of indirect participation interest  PNGDV (note 19)
    
    
    540,002
    
    
    
    1,080,004
    
    
    
    730,534Total current liabilities
    
    
    156,480,140
    
    
    
    266,746,043
    
    
    
    133,753,876Accrued financing costs (note 18)
    
    
    
    
    
    
    
    
    
    
    1,087,500Secured loan (note 18)
    
    
    52,365,333
    
    
    
    61,141,389
    
    
    
    184,166,4338% subordinated debenture liability (note 23)
    
    
    65,040,067
    
    
    
    
    
    
    
    Preference share liability (note 22)
    
    
    
    
    
    
    7,797,312
    
    
    
    Deferred gain on contributions to LNG project (note 14)
    
    
    17,497,110
    
    
    
    9,096,537
    
    
    
    Indirect participation interest (note 19)
    
    
    72,476,668
    
    
    
    96,086,369
    
    
    
    96,861,259Indirect participation interest  PNGDV (note 19)
    
    
    844,490
    
    
    
    844,490
    
    
    
    1,190,633Total liabilities
    
    
    364,703,808
    
    
    
    441,712,140
    
    
    
    417,059,701Non-controlling interest (note 20)
    
    
    5,235
    
    
    
    4,292
    
    
    
    5,759,206Shareholders equity:Share capital (note 21)
    
    
    373,904,356
    
    
    
    259,324,133
    
    
    
    233,889,366Authorised  unlimitedIssued and outstanding - 35,923,692
(Dec 31, 2007 - 31,026,356)
(Dec 31, 2006 - 29,871,180)Preference shares (note 22)
    
    
    
    
    
    
    6,842,688
    
    
    
    (Authorised - 1,035,554, issued and outstanding  nil)8% subordinated debentures (note 23)
    
    
    10,837,394
    
    
    
    
    
    
    
    Contributed surplus (note 24)
    
    
    15,621,767
    
    
    
    10,337,548
    
    
    
    4,377,426Warrants (note 25)
    
    
    2,119,034
    
    
    
    2,119,034
    
    
    
    2,137,852Accumulated Other Comprehensive Income
    
    
    27,698,306
    
    
    
    6,025,019
    
    
    
    1,492,869Conversion options (note 19)
    
    
    17,140,000
    
    
    
    19,840,000
    
    
    
    20,000,000Accumulated deficit
    
    
    (220,186,930
    )
    
    
    (208,389,853
    )
    
    
    (179,476,945
    )Total shareholders equity
    
    
    227,133,927
    
    
    
    96,098,569
    
    
    
    82,420,568Total liabilities and shareholders equity
    
    
    591,842,970
    
    
    
    537,815,001
    
    
    
    505,239,475
 See accompanying notes to the consolidated financial statements. Commitments
and contingencies (note 27), Going Concern (note 2(b))
 On behalf of the Board  Phil Mulacek, Director            Christian Vinson, Director
 Consolidated Financial Statements INTEROIL CORPORATION 4




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InterOil Corporation
 
 Consolidated Statement of Operations
  December 31,
    
    December 31,
    
    December 31,2008
    
    2007
    
    2006$
    
    $
    
    $RevenueSales and operating revenues
    
    
    915,578,709
    
    
    
    625,526,068
    
    
    
    511,087,934Interest
    
    
    931,785
    
    
    
    2,180,285
    
    
    
    3,223,995Other
    
    
    3,216,445
    
    
    
    2,666,890
    
    
    
    3,747,603919,726,939
    
    
    
    630,373,243
    
    
    
    518,059,532ExpensesCost of sales and operating expenses
    
    
    888,623,109
    
    
    
    573,609,441
    
    
    
    499,494,540Administrative and general expenses
    
    
    31,227,627
    
    
    
    31,998,655
    
    
    
    23,288,330Derivative (gain)/loss
    
    
    (24,038,550
    )
    
    
    7,271,693
    
    
    
    (2,559,712
    )Legal and professional fees
    
    
    11,523,045
    
    
    
    6,532,646
    
    
    
    3,937,517Exploration costs, excluding exploration impairment (note 11)
    
    
    995,532
    
    
    
    13,305,437
    
    
    
    6,176,866Exploration impairment (note 11)
    
    
    107,788
    
    
    
    1,242,606
    
    
    
    1,647,185Short term borrowing costs
    
    
    6,514,060
    
    
    
    5,565,828
    
    
    
    8,478,540Long term borrowing costs
    
    
    17,459,186
    
    
    
    17,182,446
    
    
    
    11,856,872Depreciation and amortization
    
    
    14,142,546
    
    
    
    13,024,258
    
    
    
    12,352,672Loss on
amendment of indirect participation interest  PNGDV (note 19)
    
    
    
    
    
    
    
    
    
    
    1,851,421Gain on LNG shareholder agreement (note 18)
    
    
    
    
    
    
    (6,553,080
    )
    
    
    Gain on sale of oil and gas properties (note 11)
    
    
    (11,235,084
    )
    
    
    
    
    
    
    Foreign exchange gain
    
    
    (3,878,150
    )
    
    
    (5,078,338
    )
    
    
    (4,744,810
    )931,441,109
    
    
    
    658,101,592
    
    
    
    561,779,421Loss before income taxes and non-controlling interest
    
    
    (11,714,170
    )
    
    
    (27,728,349
    )
    
    
    (43,719,889
    )Income taxes (note 12)Current
    
    
    (1,564,038
    )
    
    
    (2,491,761
    )
    
    
    (1,232,487
    )Future
    
    
    1,482,074
    
    
    
    1,284,869
    
    
    
    (1,110,386
    )(81,964
    )
    
    
    (1,206,892
    )
    
    
    (2,342,873
    )Loss before non-controlling interest
    
    
    (11,796,134
    )
    
    
    (28,935,241
    )
    
    
    (46,062,762
    )

Non-controlling interest (note 20)
    
    
    (943
    )
    
    
    22,333
    
    
    
    263,959Net loss
    
    
    (11,797,077
    )
    
    
    (28,912,908
    )
    
    
    (45,798,803
    )Basic loss per share(note 26)
    
    
    (0.35
    )
    
    
    (0.96
    )
    
    
    (1.55
    )Diluted loss per share(note 26)
    
    
    (0.35
    )
    
    
    (0.96
    )
    
    
    (1.55
    )Weighted average number of common shares outstandingBasic and diluted
    
    
    33,632,390
    
    
    
    29,998,133
    
    
    
    29,602,360
 See accompanying notes to the consolidated financial statements
 Consolidated Financial Statements INTEROIL CORPORATION 5




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InterOil Corporation
 
 Consolidated Statement of Cash Flows
  December 31,
    
    December 31,
    
    December 31,2008
    
    2007
    
    2006$
    
    $ (restated) *
    
    $Cash flows provided by (used in):Operating activitiesNet loss
    
    
    (11,797,077
    )
    
    
    (28,912,908
    )
    
    
    (45,798,803
    )Adjustments for non-cash and non-operating transactionsNon-controlling interest
    
    
    943
    
    
    
    (22,333
    )
    
    
    (263,959
    )Depreciation and amortization
    
    
    14,142,546
    
    
    
    13,024,258
    
    
    
    12,352,672Future income tax asset
    
    
    (202,870
    )
    
    
    (1,600,985
    )
    
    
    1,333,108Fair value adjustment on IPL PNG Ltd. acquisition
    
    
    
    
    
    
    (367,935
    )
    
    
    (Gain)/loss on sale of plant and equipment
    
    
    (16,250
    )
    
    
    269,321
    
    
    
    263,945Gain on sale of exploration assets
    
    
    (11,235,084
    )
    
    
    
    
    
    
    Impairment of plant and equipment
    
    
    
    
    
    
    960,000
    
    
    
    755,857Amortization of discount on debt
    
    
    
    
    
    
    
    
    
    
    28,891Amortization of discount on debentures liability
    
    
    1,915,910
    
    
    
    
    
    
    
    Amortization of deferred financing costs
    
    
    260,400
    
    
    
    421,691
    
    
    
    219,033(Gain)/loss on unsettled hedge contracts
    
    
    851,500
    
    
    
    (47,314
    )
    
    
    (71,875
    )(Gain)/loss on derivative contracts
    
    
    (17,034,350
    )
    
    
    3,765,800
    
    
    
    (1,220,500
    )Stock compensation expense
    
    
    5,741,086
    
    
    
    6,062,962
    
    
    
    1,976,072Inventory revaluation
    
    
    8,379,587
    
    
    
    
    
    
    
    Non-cash interest on secured loan facility
    
    
    2,189,907
    
    
    
    6,143,660
    
    
    
    2,926,025Non-cash interest settlement on preference shares
    
    
    372,950
    
    
    
    
    
    
    
    Non-cash interest settlement on debentures
    
    
    2,620,628
    
    
    
    
    
    
    
    Oil and gas properties expensed
    
    
    1,103,320
    
    
    
    14,548,043
    
    
    
    7,824,051Loss on amendment of indirect participation interest  PNGDV
    
    
    
    
    
    
    
    
    
    
    1,851,421Gain on LNG shareholder agreement
    
    
    
    
    
    
    (6,553,080
    )
    
    
    Preference share transaction costs
    
    
    
    
    
    
    390,000
    
    
    
    Gain on buy back of minority interest
    
    
    
    
    
    
    (394,290
    )
    
    
    (Gain)/loss on proportionate consolidation of LNG project
    
    
    (811,765
    )
    
    
    2,375,278
    
    
    
    Unrealized foreign exchange gain
    
    
    (3,728,721
    )
    
    
    (5,078,338
    )
    
    
    (4,744,810
    )Change in operating working capitalDecrease/(increase) in trade receivables
    
    
    18,684,422
    
    
    
    6,661,838
    
    
    
    (6,663,218
    )Increase in unrealised hedge gains
    
    
    900,000
    
    
    
    
    
    
    
    Decrease/(increase) in other assets and prepaid expenses
    
    
    592,073
    
    
    
    (2,698,546
    )
    
    
    4,051Decrease/(increase) in inventories
    
    
    (3,189,859
    )
    
    
    (6,033,038
    )
    
    
    2,642,493(Decrease)/Increase in accounts payable, accrued liabilities
and income tax payable
    
    
    5,846,860
    
    
    
    (34,533,991
    )
    
    
    28,773,008Net cash from/(used in) operating activities
    
    
    15,586,156
    
    
    
    (31,619,907
    )
    
    
    2,187,462Investing activitiesExpenditure on oil and gas properties
    
    
    (63,890,512
    )
    
    
    (69,090,092
    )
    
    
    (47,990,758
    )Proceeds from IPI cash calls
    
    
    18,323,365
    
    
    
    21,782,988
    
    
    
    Expenditure on plant and equipment
    
    
    (5,172,133
    )
    
    
    (7,289,319
    )
    
    
    (13,585,792
    )Proceeds received on sale of assets
    
    
    312,500
    
    
    
    65,072
    
    
    
    3,770,080Proceeds received on sale of exploration assets
    
    
    6,500,000
    
    
    
    
    
    
    
    Acquisition of subsidiary (note 16)
    
    
    
    
    
    
    (3,326,631
    )
    
    
    (25,820,515
    )Proceeds from insurance claim
    
    
    
    
    
    
    7,000,000
    
    
    
    (Increase)/decrease in restricted cash held as security on
borrowings
    
    
    (3,900,680
    )
    
    
    10,134,864
    
    
    
    (15,856,955
    )Change in non-cash working capitalIncrease/(decrease) in accounts payable and accrued liabilities
    
    
    436,775
    
    
    
    6,353,247
    
    
    
    2,412,621Net cash (used in)/from investing activities
    
    
    (47,390,685
    )
    
    
    (34,369,871
    )
    
    
    (97,071,319
    )Financing activitiesRepayments of secured loan
    
    
    (9,000,000
    )
    
    
    (4,500,000
    )
    
    
    (4,500,000
    )(Repayments of)/proceeds from bridging facility, net of transaction costs
    
    
    (70,000,000
    )
    
    
    
    
    
    
    125,293,488Financing fees related to bridging facility
    
    
    
    
    
    
    (100,000
    )
    
    
    Proceeds from PNG LNG cash call
    
    
    9,447,250
    
    
    
    9,450,308
    
    
    
    Payments for deferred financing fees
    
    
    
    
    
    
    (362,500
    )
    
    
    Repayments of unsecured borrowings
    
    
    
    
    
    
    
    
    
    
    (21,453,132
    )Proceeds from Clarion Finanz for Elk option agreement
    
    
    5,500,000
    
    
    
    5,922,712
    
    
    
    Proceeds from Petromin for Elk participation agreement
    
    
    4,000,000
    
    
    
    
    
    
    
    Proceeds from/(repayments of) working capital facility
    
    
    2,291,030
    
    
    
    29,627,864
    
    
    
    (33,850,814
    )Proceeds from/(payments for) issue of
common shares/conversion of debt, net of transaction costs
    
    
    (104,975
    )
    
    
    23,816,100
    
    
    
    1,473,943Proceeds from issue of debentures, net of transaction costs
    
    
    94,780,034
    
    
    
    
    
    
    
    Proceeds from preference shares, net of transaction costs
    
    
    
    
    
    
    14,250,000
    
    
    
    Proceeds from conversion of warrants
    
    
    
    
    
    
    65,621
    
    
    
    Net cash from/(used in) financing activities
    
    
    36,913,339
    
    
    
    78,170,105
    
    
    
    66,963,485Increase/(decrease) in cash and cash equivalents
    
    
    5,108,810
    
    
    
    12,180,327
    
    
    
    (27,920,372
    )Cash and cash equivalents, beginning of period
    
    
    43,861,762
    
    
    
    31,681,435
    
    
    
    59,601,807Cash and cash equivalents, end of period (note 5)
    
    
    48,970,572
    
    
    
    43,861,762
    
    
    
    31,681,435
 See accompanying notes to the consolidated financial statements
 See note 6 for non cash financing and investing activities
 *
    
    See note 2(x) for details of restatement of 2007 cash flows Consolidated Financial Statements INTEROIL CORPORATION 6




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InterOil Corporation
 
 Consolidated Statements of Shareholders Equity
  Year endedDecember 31,
    
    December 31,
    
    December 31,2008
    
    2007
    
    2006$
    
    $
    
    $Share capitalAt beginning of period
    
    
    259,324,133
    
    
    
    233,889,366
    
    
    
    223,934,500Issue of capital stock (note 21)
    
    
    114,580,223
    
    
    
    25,434,767
    
    
    
    9,954,866At end of period
    
    
    373,904,356
    
    
    
    259,324,133
    
    
    
    233,889,366Preference sharesAt beginning of period
    
    
    6,842,688
    
    
    
    
    
    
    
    Issue of preference shares (note 22)
    
    
    
    
    
    
    6,842,688
    
    
    
    Converted to common shares
    
    
    (6,842,688
    )
    
    
    
    
    
    
    At end of period
    
    
    
    
    
    
    6,842,688
    
    
    
    8% subordinated debenturesAt beginning of period
    
    
    
    
    
    
    
    
    
    
    Issue of debentures (note 23)
    
    
    13,036,434
    
    
    
    
    
    
    
    Conversion to common shares during the year
    
    
    (2,199,040
    )
    
    
    
    
    
    
    At end of period
    
    
    10,837,394
    
    
    
    
    
    
    
    Contributed surplusAt beginning of period
    
    
    10,337,548
    
    
    
    4,377,426
    
    
    
    2,933,586Fair value of options exercised transferred to share capital (note 24)
    
    
    (456,867
    )
    
    
    (102,840
    )
    
    
    (532,232
    )Stock compensation expense (note 24)
    
    
    5,741,086
    
    
    
    6,062,962
    
    
    
    1,976,072At end of period
    
    
    15,621,767
    
    
    
    10,337,548
    
    
    
    4,377,426WarrantsAt beginning of period
    
    
    2,119,034
    
    
    
    2,137,852
    
    
    
    2,137,852Movement for period (note 25)
    
    
    
    
    
    
    (18,818
    )
    
    
    At end of period
    
    
    2,119,034
    
    
    
    2,119,034
    
    
    
    2,137,852Accumulated Other Comprehensive IncomeAt beginning of period
    
    
    6,025,019
    
    
    
    1,492,869
    
    
    
    477,443Deferred hedge gain recognised on transition
    
    
    
    
    
    
    1,385
    
    
    
    Deferred hedge (loss)/gain movement for period, net of tax
    
    
    18,012,500
    
    
    
    (1,385
    )
    
    
    Foreign currency translation movement for period, net of tax (note 2(g))
    
    
    3,660,787
    
    
    
    4,532,150
    
    
    
    1,015,426At end of period
    
    
    27,698,306
    
    
    
    6,025,019
    
    
    
    1,492,869Conversion optionsAt beginning of period
    
    
    19,840,000
    
    
    
    20,000,000
    
    
    
    20,000,000Movement for period (note 19)
    
    
    (2,700,000
    )
    
    
    (160,000
    )
    
    
    At end of period
    
    
    17,140,000
    
    
    
    19,840,000
    
    
    
    20,000,000Accumulated deficitAt beginning of period
    
    
    (208,389,853
    )
    
    
    (179,476,945
    )
    
    
    (133,678,142
    )Net loss for period
    
    
    (11,797,077
    )
    
    
    (28,912,908
    )
    
    
    (45,798,803
    )At end of period
    
    
    (220,186,930
    )
    
    
    (208,389,853
    )
    
    
    (179,476,945
    )Shareholders equity at end of period
    
    
    227,133,927
    
    
    
    96,098,569
    
    
    
    82,420,568
 See accompanying notes to the consolidated financial statements
 Consolidated Financial Statements INTEROIL CORPORATION 7




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##### Table of Contents



InterOil Corporation
 
 Consolidated Statements of Comprehensive Income
  December 31,
    
    December 31,
    
    December 31,2008
    
    2007
    
    2006$
    
    $
    
    $Net loss as per Statement of Operations
    
    
    (11,797,077
    )
    
    
    (28,912,908
    )
    
    
    (45,798,803
    )Other comprehensive income, net of tax
    
    
    21,673,287
    
    
    
    4,530,765
    
    
    
    1,015,426Comprehensive income/(loss)
    
    
    9,876,210
    
    
    
    (24,382,143
    )
    
    
    (44,783,377
    )
 See accompanying notes to the consolidated financial statements
 Consolidated Financial Statements INTEROIL CORPORATION 8




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##### Table of Contents



InterOil Corporation
 
 Notes to Consolidated Financial Statements
 (Expressed in United States dollars)
 1. Nature of operations and organization
    2. Significant accounting policies
  (a) Basis of preparation
   (b) Going concern
     Consolidated Financial Statements INTEROIL CORPORATION 9




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##### Table of Contents



InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 2. Significant accounting policies (contd)
  (c) Principles of consolidation
 Subsidiaries
       Proportionate consolidation of Joint Venture interests
  Consolidated Financial Statements INTEROIL CORPORATION 10




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##### Table of Contents



InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 2. Significant accounting policies (contd)
 (d) Changes in accounting policies
  
    
    CICA 1400  General standards of financial statement presentation
    
    CICA 1535  Capital Disclosures
    
    CICA 3031  Inventories
    
    CICA 3862  Financial Instruments  Disclosures; and
    
    CICA 3863  Financial Instruments  Presentation
  General standards of financial statement presentation
  Capital Disclosures
  Inventories
  Financial Instruments  Disclosure and Presentation
  a.
    
    the significance of financial instruments for the entitys financial position and performanceb.
    
    the nature and extent of risks arising from financial instruments to which the entity is
exposed during the period and at the balance sheet date, and how the entity manages those risks;
andc.
    
    to enhance financial statement users understanding of the significance of financial
instruments to an entitys financial position, performance and cash flows.
  (e) New standards issued but not yet effective
  (f) Segment reporting
  a.
    
    that engages in business activities from which it may earn revenues and incur expenses
(including revenues and expenses relating to transactions with other segments of the same
enterprise),b.
    
    whose operating results are regularly reviewed by the Companys management to make decisions
about resources to be allocated to the segment and assess its performance, andc.
    
    for which discrete financial information is available.
 Consolidated Financial Statements INTEROIL CORPORATION 11




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##### Table of Contents



InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 2. Significant accounting policies (contd)
  (g) Foreign currency translation
 Functional and reporting currency
  Self Sustaining and Integrated Foreign Operations
   (h) Revenue recognition
  Revenue from midstream operations :
  Revenue from downstream operations:
  Interest income:
  (i) Income tax
     Consolidated Financial Statements INTEROIL CORPORATION 12




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##### Table of Contents



InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 2. Significant accounting policies (contd)
 (j) Acquisitions of assets
    (k) Impairment of assets
    (l) Cash and cash equivalents
  (m) Restricted cash
  (n) Trade receivables
   (o) Inventory
 Raw materials and stores and finished goods
  Consolidated Financial Statements INTEROIL CORPORATION 13




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##### Table of Contents



InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 2. Significant accounting policies (contd)
 Crude oil and refined petroleum products
  (p) Assets held for sale
     (q) Derivative financial instruments
     (r) Deferred financing costs
  Consolidated Financial Statements INTEROIL CORPORATION 14




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##### Table of Contents



InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 2. Significant accounting policies (contd)
 (s) Plant and equipment
 Refinery assets
     Other assets
  Downstream
    
    
    0% - 25
    %Midstream
    
    
    1% - 33
    %Upstream
    
    
    4% - 100
    %Corporate
    
    
    13% - 33
    %
  Leased assets
   Asset retirement obligations
   Environmental remediation
  Consolidated Financial Statements INTEROIL CORPORATION 15




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##### Table of Contents



InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 2. Significant accounting policies (contd)
 Disposal of property, plant and equipment
  (t) Oil and gas properties
   (u) Accounts payable and accrued liabilities
  (v) Employee entitlements
 Wages and salaries, and annual leave
  Long Service Leave
  Retirement benefit obligations
  Stock-based compensation
  Profit-sharing and bonus plans
  (w) Earnings per share
 Basic earnings per share
  Consolidated Financial Statements INTEROIL CORPORATION 16




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##### Table of Contents



InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 2. Significant accounting policies (contd)
 Diluted earnings per share
  (x) Reclassification
   Six Month period
    
    Three MonthNine Month period ended
    
    ended
    
    period ended
    
    Year endedSeptember 30, 2008
    
    June 30, 2008
    
    March 31, 2008
    
    December 31, 2007$
    
    $
    
    $
    
    $Cash flows provided by (used in):Operating activities  Canadian GAAP (as per
published financial statements)
    
    
    (23,024,574
    )
    
    
    (25,662,285
    )
    
    
    6,997,815
    
    
    
    (40,716,444
    )Reclassification made:Being reclassified due to movement in
Deferred gain in relation to the LNG Project
previously classified in Investing activities
as compared to Operating activites.
    
    
    8,400,573
    
    
    
    3,107,330
    
    
    
    3,107,330
    
    
    
    9,096,537Operating activities  Canadian GAAP (revised)
    
    
    (14,624,001
    )
    
    
    (22,554,955
    )
    
    
    10,105,145
    
    
    
    (31,619,907
    )Investing activities  Canadian GAAP (as per
published financial statements)
    
    
    (19,029,830
    )
    
    
    (24,805,959
    )
    
    
    (2,921,286
    )
    
    
    (25,273,334
    )Reclassification made:Being reclassified due to movement in
Deferred gain in relation to the LNG Project
previously classified in Investing activities
as compared to Operating activites.
    
    
    (8,400,573
    )
    
    
    (3,107,330
    )
    
    
    (3,107,330
    )
    
    
    (9,096,537
    )Investing activities  Canadian GAAP (revised)
    
    
    (27,430,403
    )
    
    
    (27,913,289
    )
    
    
    (6,028,616
    )
    
    
    (34,369,871
    )Financing activities  Canadian GAAP (as per
published financial statements)
    
    
    45,158,740
    
    
    
    35,417,731
    
    
    
    (30,849,094
    )
    
    
    78,170,105Reclassification made:None
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Financing activities   Canadian GAAP (revised)
    
    
    45,158,740
    
    
    
    35,417,731
    
    
    
    (30,849,094
    )
    
    
    78,170,105
  3. Financial Risk Management
   Consolidated Financial Statements INTEROIL CORPORATION 17




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##### Table of Contents



InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 3. Financial Risk Management (contd)
 (a) Market risk
 (i) Foreign exchange risk
     December 31,2008$Financial AssetsCash and cash equivalents
    
    
    28,865,339Receivables
    
    
    39,307,624Other financial assets
    
    
    3,348,716Financial liabilitiesPayables
    
    
    17,766,660Working capital facility
    
    
    15,405,627
  Year endedDecember 31, 2008Impact on equity -Impact on profit
    
    excluding profit impact$
    
    $Post-tax gain/(loss)USD/PGK  effect of 5% change
    
    
    4,245,399
    
    
    
    3,072,446
 (ii) Price risk
  Consolidated Financial Statements INTEROIL CORPORATION 18




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##### Table of Contents



InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 3. Financial Risk Management (contd)
   Year endedDecember 31, 2008Impact on equity -Impact on profit
    
    excluding profit impact$
    
    $Post-tax gain/(loss)$10 increase in benchmark pricing
    
    
    8,144,261
    
    
    
    
 (iii) Interest rate risk
     December 31,2008
    
    Cash flow/fair value$
    
    interest rate riskFinancial AssetsCash and cash equivalents
    
    
    6,571,375
    
    
    fair value interest rate riskCash and cash equivalents
    
    
    42,399,197
    
    
    cash flow interest rate riskCash restricted
    
    
    290,782
    
    
    fair value interest rate riskCash restricted
    
    
    25,994,258
    
    
    cash flow interest rate riskFinancial liabilitiesOPIC secured loan
    
    
    62,500,000
    
    
    fair value interest rate riskBNP working capital facility
    
    
    53,386,775
    
    
    cash flow interest rate riskWestpac working capital facility
    
    
    15,405,627
    
    
    cash flow interest rate risk8% subordinated debentures
    
    
    78,975,000
    
    
    fair value interest rate risk
  Year endedDecember 31, 2008Impact on equity -Impact on profit
    
    excluding profit impact$
    
    $Post-tax loss/(gain)LIBOR +1%
    
    
    260,944
    
    
    
    
 Consolidated Financial Statements INTEROIL CORPORATION 19




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##### Table of Contents



InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 3. Financial Risk Management (contd)
 (iv) Product risk
   (b) Liquidity risk
   Payable ageing betweenTotal
    
    <30 days
    
    30-60 days
    
    >60 daysDecember 31, 2008
    
    $
    
    $
    
    $
    
    $Accounts payable and accrued liabilities
    
    
    78,147,736
    
    
    
    76,556,334
    
    
    
    1,181,334
    
    
    
    410,068
 (c) Credit risk
     December 31,2008$CurrentCash and cash equivalents
    
    
    48,970,572Cash restricted
    
    
    25,994,258Trade receivables
    
    
    42,887,823Commodity derivative contracts
    
    
    31,335,050Non-currentCash restricted
    
    
    290,782
 Consolidated Financial Statements INTEROIL CORPORATION 20




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##### Table of Contents



InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 3. Financial Risk Management (contd)
  Receivable ageing betweenTotal
    
    Current and
    
    30-60 days
    
    >60 daysDecember 31, 2008
    
    $
    
    <30 days $
    
    $
    
    $Net trade receivables
    
    
    42,887,823
    
    
    
    33,515,675
    
    
    
    5,128,127
    
    
    
    4,244,022
  Overdue
    
    OverdueTotal
    
    Current
    
    (not impaired)
    
    (impaired)December 31, 2008
    
    $
    
    $
    
    $
    
    $Gross trade receivables
    
    
    47,496,119
    
    
    
    18,592,467
    
    
    
    24,295,356
    
    
    
    4,608,296
   Year ended$Trade receivables  Impairment provisionsOpening balance
    
    
    3,176,807Movement for period
    
    
    1,431,490Closing balance
    
    
    4,608,296
 (d) Geographic risk
  (e) Financing facilities
  
    
    BNP working capital facility (refer note 15)
    
    Westpac working capital facility (refer note 15)
    
    OPIC secured loan facility (refer note 18)
    
    8% subordinated debentures (refer note 23)
  December 31,2008$Due:No later than one year
    
    
    77,792,402Later than one year but not later than two years
    
    
    9,000,000Later than two years but not later than three years
    
    
    9,000,000Later than three years but not later than four years
    
    
    9,000,000Later than four years but not later than five years
    
    
    87,975,000Later than five years
    
    
    17,500,000210,267,402
 Consolidated Financial Statements  INTEROIL CORPORATION     21




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##### Table of Contents



InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 3. Financial Risk Management (contd)
 (f) Effective interest rates and maturity profile
 Floating
    
    Fixed interest maturing between
    
    
    
    
    
    Effectiveinterest
    
    1 year
    
    
    
    
    
    
    
    
    
    more than
    
    Non-interest
    
    
    
    
    
    interestrate
    
    or less
    

    1-2

    

    2-3


    
    3-4

    

    4-5

    
    5 years
    

    bearing

    

    Total

    
    rateDecember 31, 2008
    
    $000
    
    $000
    

    $000
    $000
    
    $000
    $000
    
    $000
    
    $000
    
    $000
    
    %Financial assetsCash and cash equivalents
    
    
    42,108,415
    
    
    
    6,862,157
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48,970,572
    
    
    
    3.21
    %Cash restricted
    
    
    26,285,040
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,285,040
    
    
    
    1.93
    %Receivables
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42,887,823
    
    
    
    42,887,823
    
    
    
    Other financial assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,824,624
    
    
    
    35,824,624
    
    
    
    68,393,455
    
    
    
    6,862,157
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    78,712,447
    
    
    
    153,968,059Financial liabilitiesPayables
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    78,147,736
    
    
    
    78,147,736
    
    
    
    Interest bearing liabilities
    
    
    68,792,402
    
    
    
    9,000,000
    
    
    
    9,000,000
    
    
    
    9,000,000
    
    
    
    9,000,000
    
    
    
    9,000,000
    
    
    
    17,500,000
    
    
    
    
    
    
    
    131,292,402
    
    
    
    6.30
    %Debentures liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    78,975,000
    
    
    
    
    
    
    
    
    
    
    
    78,975,000
    
    
    
    13.50
    %Other financial liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    68,792,402
    
    
    
    9,000,000
    
    
    
    9,000,000
    
    
    
    9,000,000
    
    
    
    9,000,000
    
    
    
    87,975,000
    
    
    
    17,500,000
    
    
    
    78,147,736
    
    
    
    288,415,138
 (g) Fair values
 December 31, 2008Carrying amount
    
    Fair value$
    
    $Financial instrumentsLoans and receivablesReceivables
    
    
    42,887,823
    
    
    
    42,887,823Held for tradingCommodity derivative contracts (note 7)
    
    
    31,335,050
    
    
    
    31,335,050Financial assetsCash and cash equivalents
    
    
    48,970,572
    
    
    
    48,970,572Cash restricted
    
    
    26,285,040
    
    
    
    26,285,040Financial liabilities at amortized costCurrent liabilities:Accounts payable and accrued liabilities (note 13)
    
    
    78,147,736
    
    
    
    78,147,736Working capital facility (note 15)
    
    
    68,792,402
    
    
    
    68,792,402Current portion of secured loan (note 18)
    
    
    9,000,000
    
    
    
    9,012,228Non-current liabilitiesSecured loan (note 18)
    
    
    52,365,333
    
    
    
    58,753,2768% Subordinated debenture liability (note 23)
    
    
    65,040,067
    
    
    
    65,040,067
  (h) Capital management
   Consolidated Financial Statements  INTEROIL CORPORATION     22




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InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 3. Financial Risk Management (contd)
     4. Segmented financial information
    Notes to and forming part of the segment information
    Consolidated Financial Statements  INTEROIL CORPORATION     23




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##### Table of Contents



InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 4. Segmented financial information (contd)
 Midstream -
    
    Midstream -
    
    
    
    
    
    
    
    
    
    ConsolidationYear ended December 31, 2008
    
    Upstream
    
    Refining
    
    Liquefaction
    
    Downstream
    
    Corporate
    
    adjustments
    
    TotalRevenues from external customers
    
    
    
    
    
    
    358,895,683
    
    
    
    
    
    
    
    556,683,026
    
    
    
    
    
    
    
    
    
    
    
    915,578,709Intersegment revenues
    
    
    
    
    
    
    427,218,086
    
    
    
    
    
    
    
    185,474
    
    
    
    24,567,895
    
    
    
    (451,971,455
    )
    
    
    Interest revenue
    
    
    190,195
    
    
    
    78,023
    
    
    
    90,757
    
    
    
    17,566
    
    
    
    10,302,959
    
    
    
    (9,747,715
    )
    
    
    931,785Other revenue
    
    
    2,507,499
    
    
    
    11,623
    
    
    
    
    
    
    
    697,323
    
    
    
    
    
    
    
    
    
    
    
    3,216,445Total segment revenue
    
    
    2,697,694
    
    
    
    786,203,415
    
    
    
    90,757
    
    
    
    557,583,389
    
    
    
    34,870,854
    
    
    
    (461,719,170
    )
    
    
    919,726,939Cost of sales and operating expenses
    
    
    
    
    
    
    779,831,893
    
    
    
    
    
    
    
    536,919,622
    
    
    
    
    
    
    
    (428,128,406
    )
    
    
    888,623,109Administrative, professional and general expenses
    
    
    5,919,528
    
    
    
    10,080,835
    
    
    
    7,022,363
    
    
    
    14,669,401
    
    
    
    33,752,746
    
    
    
    (24,753,366
    )
    
    
    46,691,507Derivative (gain)/loss
    
    
    
    
    
    
    (24,038,550
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,038,550
    )Foreign exchange (gain)/loss
    
    
    132,874
    
    
    
    (5,263,901
    )
    
    
    559,793
    
    
    
    206,614
    
    
    
    486,470
    
    
    
    
    
    
    
    (3,878,150
    )Gain on sale of exploration assets
    
    
    (11,235,084
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,235,084
    )Exploration costs, excluding exploration impairment
    
    
    995,532
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    995,532Exploration impairment
    
    
    107,788
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    107,788Depreciation and amortisation
    
    
    597,343
    
    
    
    10,969,099
    
    
    
    69,142
    
    
    
    2,570,503
    
    
    
    66,427
    
    
    
    (129,968
    )
    
    
    14,142,546Interest expense
    
    
    4,027,223
    
    
    
    9,908,268
    
    
    
    240,782
    
    
    
    4,838,094
    
    
    
    10,765,759
    
    
    
    (9,747,715
    )
    
    
    20,032,411Total segment expenses
    
    
    545,204
    
    
    
    781,487,644
    
    
    
    7,892,080
    
    
    
    559,204,234
    
    
    
    45,071,402
    
    
    
    (462,759,455
    )
    
    
    931,441,109Income/(loss) before income taxes and non-
controlling interest
    
    
    2,152,490
    
    
    
    4,715,771
    
    
    
    (7,801,323
    )
    
    
    (1,620,845
    )
    
    
    (10,200,548
    )
    
    
    1,040,285
    
    
    
    (11,714,170
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    (110,037
    )
    
    
    414,193
    
    
    
    (386,120
    )
    
    
    
    
    
    
    (81,964
    )Non controlling interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (943
    )
    
    
    (943
    )Total net income/(loss)
    
    
    2,152,490
    
    
    
    4,715,771
    
    
    
    (7,911,360
    )
    
    
    (1,206,652
    )
    
    
    (10,586,668
    )
    
    
    1,039,342
    
    
    
    (11,797,077
    )Total assets
    
    
    134,485,386
    
    
    
    326,007,879
    
    
    
    7,269,000
    
    
    
    100,452,756
    
    
    
    442,464,921
    
    
    
    (418,836,972
    )
    
    
    591,842,970
 Midstream -
    
    Midstream -
    
    
    
    
    
    
    
    
    
    ConsolidationYear ended December 31, 2007
    
    Upstream
    
    Refining
    
    Liquefaction
    
    Downstream
    
    Corporate
    
    adjustments
    
    TotalRevenues from external customers
    
    
    
    
    
    
    233,868,997
    
    
    
    
    
    
    
    391,657,071
    
    
    
    
    
    
    
    
    
    
    
    625,526,068Intersegment revenues
    
    
    
    
    
    
    289,947,580
    
    
    
    
    
    
    
    81,062
    
    
    
    9,482,002
    
    
    
    (299,510,644
    )
    
    
    Interest revenue
    
    
    407,348
    
    
    
    69,721
    
    
    
    41,215
    
    
    
    13,679
    
    
    
    15,093,044
    
    
    
    (13,444,722
    )
    
    
    2,180,285Other revenue
    
    
    2,139,336
    
    
    
    
    
    
    
    
    
    
    
    527,554
    
    
    
    
    
    
    
    
    
    
    
    2,666,890Total segment revenue
    
    
    2,546,684
    
    
    
    523,886,298
    
    
    
    41,215
    
    
    
    392,279,366
    
    
    
    24,575,046
    
    
    
    (312,955,366
    )
    
    
    630,373,243Cost of sales and operating expenses
    
    
    
    
    
    
    495,058,782
    
    
    
    
    
    
    
    368,803,507
    
    
    
    
    
    
    
    (290,252,848
    )
    
    
    573,609,441Administrative, professional and general expenses
    
    
    5,020,371
    
    
    
    9,077,365
    
    
    
    5,688,932
    
    
    
    10,774,921
    
    
    
    20,276,009
    
    
    
    (9,563,067
    )
    
    
    41,274,531Derivative (gain)/loss
    
    
    
    
    
    
    7,271,693
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,271,693Foreign exchange (gain)/loss
    
    
    622,821
    
    
    
    (5,889,324
    )
    
    
    19,954
    
    
    
    (15,379
    )
    
    
    183,591
    
    
    
    
    
    
    
    (5,078,337
    )Gain on LNG shareholder agreement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,553,080
    )
    
    
    
    
    
    
    (6,553,080
    )Exploration costs, excluding exploration impairment
    
    
    13,305,437
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,305,437Exploration impairment
    
    
    1,242,606
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,242,606Depreciation and amortisation
    
    
    482,448
    
    
    
    10,404,953
    
    
    
    15,431
    
    
    
    2,204,782
    
    
    
    48,037
    
    
    
    (131,393
    )
    
    
    13,024,258Interest expense
    
    
    1,033,661
    
    
    
    16,798,634
    
    
    
    105,304
    
    
    
    4,437,994
    
    
    
    11,074,173
    
    
    
    (13,444,723
    )
    
    
    20,005,043Total segment expenses
    
    
    21,707,344
    
    
    
    532,722,103
    
    
    
    5,829,621
    
    
    
    386,205,825
    
    
    
    25,028,730
    
    
    
    (313,392,031
    )
    
    
    658,101,592(Loss)/income before income taxes and non-
controlling interest
    
    
    (19,160,660
    )
    
    
    (8,835,805
    )
    
    
    (5,788,406
    )
    
    
    6,073,541
    
    
    
    (453,684
    )
    
    
    436,665
    
    
    
    (27,728,349
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    (12,665
    )
    
    
    (1,365,674
    )
    
    
    171,447
    
    
    
    
    
    
    
    (1,206,892
    )Non controlling interest
    
    
    
    
    
    
    20,899
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,434
    
    
    
    22,333Total net income/(loss)
    
    
    (19,160,660
    )
    
    
    (8,814,906
    )
    
    
    (5,801,071
    )
    
    
    4,707,867
    
    
    
    (282,237
    )
    
    
    438,099
    
    
    
    (28,912,908
    )Total assets
    
    
    100,054,671
    
    
    
    318,454,252
    
    
    
    6,595,722
    
    
    
    133,598,054
    
    
    
    494,852,295
    
    
    
    (515,739,993
    )
    
    
    537,815,001
 Consolidated Financial Statements  INTEROIL CORPORATION     24




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##### Table of Contents



InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 4. Segmented financial information (contd)
 Midstream -
    
    Midstream -
    
    
    
    
    
    
    
    
    
    ConsolidationYear ended December 31, 2006
    
    Upstream
    
    Refining
    
    Liquefaction
    
    Downstream
    
    Corporate
    
    adjustments
    
    TotalRevenues from external customers
    
    
    
    
    
    
    315,211,130
    
    
    
    
    
    
    
    195,876,804
    
    
    
    
    
    
    
    
    
    
    
    511,087,934Intersegment revenues
    
    
    
    
    
    
    136,583,916
    
    
    
    
    
    
    
    22,480
    
    
    
    8,669,933
    
    
    
    (145,276,329
    )
    
    
    Interest revenue
    
    
    2,820,888
    
    
    
    360,319
    
    
    
    
    
    
    
    100,750
    
    
    
    1,601,491
    
    
    
    (1,659,453
    )
    
    
    3,223,995Other revenue
    
    
    2,427,816
    
    
    
    
    
    
    
    
    
    
    
    1,319,787
    
    
    
    
    
    
    
    
    
    
    
    3,747,603Total segment
revenue
    
    
    5,248,704
    
    
    
    452,155,365
    
    
    
    
    
    
    
    197,319,821
    
    
    
    10,271,424
    
    
    
    (146,935,782
    )
    
    
    518,059,532Cost of sales and operating expenses
    
    
    
    
    
    
    451,374,165
    
    
    
    
    
    
    
    183,511,182
    
    
    
    
    
    
    
    (135,390,806
    )
    
    
    499,494,541Administrative, professional and general expenses
    
    
    6,370,436
    
    
    
    10,576,957
    
    
    
    694,416
    
    
    
    7,671,208
    
    
    
    15,378,963
    
    
    
    (8,552,604
    )
    
    
    32,139,376Derivative (gain)/loss
    
    
    
    
    
    
    (2,559,712
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,559,712
    )Foreign exchange (gain)/loss
    
    
    (61,423
    )
    
    
    (4,635,878
    )
    
    
    (219
    )
    
    
    (192,433
    )
    
    
    145,142
    
    
    
    
    
    
    
    (4,744,811
    )Exploration costs, excluding exploration impairment
    
    
    6,176,866
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,176,866Exploration impairment
    
    
    1,647,185
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,647,185Depreciation and amortisation
    
    
    806,142
    
    
    
    10,729,546
    
    
    
    
    
    
    
    909,767
    
    
    
    37,247
    
    
    
    (130,030
    )
    
    
    12,352,672Interest expense
    
    
    5,428
    
    
    
    10,880,779
    
    
    
    
    
    
    
    151,730
    
    
    
    7,894,820
    
    
    
    (1,659,453
    )
    
    
    17,273,304Total segment
expenses
    
    
    14,944,634
    
    
    
    476,365,857
    
    
    
    694,197
    
    
    
    192,051,454
    
    
    
    23,456,172
    
    
    
    (145,732,893
    )
    
    
    561,779,421(Loss)/income before income taxes
and non-controlling interest
    
    
    (9,695,930
    )
    
    
    (24,210,492
    )
    
    
    (694,197
    )
    
    
    5,268,367
    
    
    
    (13,184,748
    )
    
    
    (1,202,889
    )
    
    
    (43,719,889
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,273,773
    )
    
    
    (69,100
    )
    
    
    
    
    
    
    (2,342,873
    )Non controlling interest
    
    
    
    
    
    
    259,169
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,790
    
    
    
    263,959Total net income/(loss)
    
    
    (9,695,930
    )
    
    
    (23,951,323
    )
    
    
    (694,197
    )
    
    
    2,994,594
    
    
    
    (13,253,848
    )
    
    
    (1,198,099
    )
    
    
    (45,798,803
    )Total assets
    
    
    85,335,500
    
    
    
    325,351,819
    
    
    
    (683,582
    )
    
    
    98,722,803
    
    
    
    393,700,711
    
    
    
    (397,187,776
    )
    
    
    505,239,475
 5. Cash and cash equivalents
  December 31,
    
    December 31,
    
    December 31,2008
    
    2007
    
    2006$
    
    $
    
    $Cash on deposit
    
    
    46,761,362
    
    
    
    43,861,762
    
    
    
    31,681,435Bank term deposits  Papua New Guinea kina deposits
    
    
    2,209,210
    
    
    
    
    
    
    
    48,970,572
    
    
    
    43,861,762
    
    
    
    31,681,435
 Consolidated Financial Statements  INTEROIL CORPORATION     25




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##### Table of Contents



InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 6. Supplemental cash flow information
 December 31,
    
    December 31,
    
    December 31,2008
    
    2007
    
    2006$
    
    $
    
    $Cash paid during the yearInterest
    
    
    10,705,499
    
    
    
    16,934,058
    
    
    
    8,548,552Income taxes
    
    
    6,738,175
    
    
    
    2,344,282
    
    
    
    2,306,218Interest received
    
    
    926,878
    
    
    
    2,176,678
    
    
    
    3,154,380Non-cash investing and financing activities:Deferred financing costs included in accounts payable and accrued liabilities
    
    
    
    
    
    
    
    
    
    
    500,000Increase in deferred gain on contributions to LNG project
    
    
    8,400,573
    
    
    
    9,096,537
    
    
    
    (Gain)/loss on proportionate consolidation of LNG project
    
    
    (811,765
    )
    
    
    2,375,278
    
    
    
    Fair value adjustment on IPL PNG Ltd. acquisition (note 16)
    
    
    
    
    
    
    (367,935
    )
    
    
    Decrease in plant and equipment as a result of impairment
    
    
    
    
    
    
    960,000
    
    
    
    755,857Transfer to plant and equipment to assets held for sale
    
    
    
    
    
    
    (Decrease)/increase in deferred liquefaction project liability
    
    
    
    
    
    
    (6,553,080
    )
    
    
    6,553,080Reduction to plant and equipment due to negative goodwill on Enron buy-back
    
    
    
    
    
    
    4,841,776
    
    
    
    Increase in share capital from:the exercise of share options
    
    
    456,867
    
    
    
    102,840
    
    
    
    532,232the exercise of warrants
    
    
    
    
    
    
    18,818
    
    
    
    conversion of debentures into share capital
    
    
    15,118,483
    
    
    
    
    
    
    
    conversion of preference shares into share capital
    
    
    14,640,000
    
    
    
    
    
    
    
    conversion of indirect participation interest into share capital
    
    
    15,776,270
    
    
    
    934,890
    
    
    
    7,948,691conversion of debt into share capital
    
    
    60,000,000
    
    
    
    
    
    
    
    placement fee obligation on conversion of debt
    
    
    1,800,000
    
    
    
    
    
    
    
    preference share interest obligation settled in shares
    
    
    372,950
    
    
    
    
    
    
    
    placement fee obligation on debentures issued
    
    
    5,700,000
    
    
    
    
    
    
    
    debentures interest obligation settled in shares
    
    
    2,620,628
    
    
    
    
    
    
    
    buyback of minority interest
    
    
    
    
    
    
    496,500
    
    
    
    
 7. Financial instruments
 Cash and cash equivalents
   December 31,
    
    December 31,
    
    December 31,2008
    
    2007
    
    2006$
    
    $
    
    $Cash deposit on working capital facility (1.9%)
    
    
    25,994,258
    
    
    
    20,240,553
    
    
    
    29,301,940Debt reserve for secured loan
    
    
    
    
    
    
    1,761,749
    
    
    
    Cash restricted  Current
    
    
    25,994,258
    
    
    
    22,002,302
    
    
    
    29,301,940Cash deposit on secured loan
    
    
    
    
    
    
    
    
    
    
    647,502Debt reserve for secured loan
    
    
    
    
    
    
    
    
    
    
    2,420,000Bank term deposits on Petroleum Prospecting Licenses (0.9%)
    
    
    124,097
    
    
    
    116,090
    
    
    
    107,997Cash deposit on office premises (6.7%)
    
    
    166,685
    
    
    
    265,968
    
    
    
    41,785Cash restricted  Non-current
    
    
    290,782
    
    
    
    382,058
    
    
    
    3,217,28426,285,040
    
    
    
    22,384,360
    
    
    
    32,519,224
 Consolidated Financial Statements  INTEROIL CORPORATION     26




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##### Table of Contents



InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 7. Financial instruments (contd)
    Commodity derivative contracts
   a. Hedge accounted contracts:
  Notional
    
    
    
    
    
    Fair ValueVolumes
    
    
    
    
    
    December 31, 2008Derivative
    
    Type
    
    (bbls)
    
    Expiry
    
    Derivative type
    
    $Crude Swap
    
    Buy Brent
    
    
    300,000
    
    
    Q1 2009
    
    Cash flow hedge  Manages the crack spread
    
    
    (25,493,100
    )Crude Swap
    
    Buy Brent
    
    
    300,000
    
    
    Q2 2009
    
    Cash flow hedge  Manages the crack spread
    
    
    (19,529,200
    )Crude Swap
    
    Buy Brent
    
    
    300,000
    
    
    Q3 2009
    
    Cash flow hedge  Manages the crack spread
    
    
    (18,441,700
    )Crude Swap
    
    Buy Brent
    
    
    300,000
    
    
    Q4 2009
    
    Cash flow hedge  Manages the crack spread
    
    
    (17,682,200
    )Gasoil Swap
    
    Sell Gasoil
    
    
    300,000
    
    
    Q1 2009
    
    Cash flow hedge  Manages the crack spread
    
    
    29,068,800Gasoil Swap
    
    Sell Gasoil
    
    
    300,000
    
    
    Q2 2009
    
    Cash flow hedge  Manages the crack spread
    
    
    23,425,400Gasoil Swap
    
    Sell Gasoil
    
    
    300,000
    
    
    Q3 2009
    
    Cash flow hedge  Manages the crack spread
    
    
    22,461,200Gasoil Swap
    
    Sell Gasoil
    
    
    300,000
    
    
    Q4 2009
    
    Cash flow hedge  Manages the crack spread
    
    
    21,672,80015,482,000Add: Priced out but unsettled hedge accounted contracts as at December 31, 2008
    
    
    779,00016,261,000
    Derivative
    
    Type
    
    Notional volumes (bbls)Naphtha swap
    
    Sell Naphtha
    
    
    175,000
 Consolidated Financial Statements INTEROIL CORPORATION       27




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##### Table of Contents



InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 7. Financial instruments (contd)
 b. Non-hedge accounted derivative contracts:
   Notional
    
    
    
    
    
    Fair ValueVolumes
    
    
    
    
    
    December 31, 2008Derivative
    
    Type
    
    (bbls)
    
    Expiry
    
    Derivative type
    
    $Brent Swap
    
    Sell Brent
    
    
    195,000
    
    
    Q1 2009
    
    Cash flow hedge  Manages the export price risk of LSWR
    
    
    3,965,000Brent Swap
    
    Buy Brent
    
    
    130,000
    
    
    Q1 2009
    
    Cash flow hedge  Manages the export price risk of LSWR
    
    
    (1,129,750
    )Brent Swap
    
    Sell Brent
    
    
    165,000
    
    
    Q2 2009
    
    Cash flow hedge  Manages the export price risk of LSWR
    
    
    (413,200
    )2,422,050Add: Priced out non-hedge accounted contracts as at December 31, 2008
    
    
    12,652,00015,074,050
   Derivative
    
    Type
    
    Notional volumes (bbls)Brent contracts to manage export price risk
    
    Sell Brent
    
    
    130,000Naphtha swap
    
    Sell Naphtha
    
    
    150,000As at December 31, 2006:Derivative
    
    Type
    
    Notional volumes (bbls)Brent contracts to manage export price risk
    
    Sell Brent
    
    
    320,000
 8. Trade receivables
   Consolidated Financial Statements INTEROIL CORPORATION       28




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##### Table of Contents



InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 9. Inventories
 December 31,
    
    December 31,
    
    December 31,2008
    
    2007
    
    2006$
    
    $
    
    $Midstream  refining and marketing (crude oil feedstock)
    
    
    25,556,463
    
    
    
    3,587,786
    
    
    
    12,795,356Midstream  refining and marketing (refined petroleum product)
    
    
    30,167,417
    
    
    
    43,173,806
    
    
    
    22,329,270Midstream  refining and marketing (parts inventory)
    
    
    288,643
    
    
    
    201,526
    
    
    
    46,636Downstream (refined petroleum product)
    
    
    27,024,803
    
    
    
    35,626,124
    
    
    
    32,422,29683,037,326
    
    
    
    82,589,242
    
    
    
    67,593,558
    10. Plant and equipment
   Midstream -

    
    Midstream -
    
    
    
    
    
    Corporate &December 31, 2008
    
    Upstream
    
    Refining
    
    Liquefaction
    
    Downstream
    
    Consolidated
    
    TotalsPlant and equipment
    
    
    47,315
    
    
    
    247,520,562
    
    
    
    219,315
    
    
    
    46,299,775
    
    
    
    485,628
    
    
    
    294,572,595Deferred project
costs and work in
progress
    
    
    
    
    
    
    27,211
    
    
    
    2,134,858
    
    
    
    1,979,253
    
    
    
    
    
    
    
    4,141,322Consolidation entries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,729,327
    )
    
    
    (2,729,327
    )Accumulated
depreciation and
amortisation
    
    
    (43,568
    )
    
    
    (43,768,810
    )
    
    
    (80,554
    )
    
    
    (28,363,540
    )
    
    
    (142,559
    )
    
    
    (72,399,031
    )Net book value
    
    
    3,747
    
    
    
    203,778,963
    
    
    
    2,273,619
    
    
    
    19,915,488
    
    
    
    (2,386,258
    )
    
    
    223,585,559Capital expenditure
for year ended
December 31, 2008
    
    
    
    
    
    
    529,033
    
    
    
    92,494
    
    
    
    4,108,630
    
    
    
    95,493
    
    
    
    4,825,651Midstream -

    
    Midstream -
    
    
    
    
    
    Corporate &December 31, 2007
    
    Upstream
    
    Refining
    
    Liquefaction
    
    Downstream
    
    Consolidated
    
    TotalsPlant and equipment
    
    
    1,247,201
    
    
    
    246,561,648
    
    
    
    140,051
    
    
    
    42,709,718
    
    
    
    390,135
    
    
    
    291,048,753Deferred project
costs and work in
progress
    
    
    
    
    
    
    457,092
    
    
    
    2,622,735
    
    
    
    3,405,625
    
    
    
    
    
    
    
    6,485,452Consolidation entries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,859,295
    )
    
    
    (2,859,295
    )Accumulated
depreciation and
amortisation
    
    
    (1,193,374
    )
    
    
    (32,799,711
    )
    
    
    (15,431
    )
    
    
    (27,737,982
    )
    
    
    (76,190
    )
    
    
    (61,822,688
    )Net book value
    
    
    53,827
    
    
    
    214,219,029
    
    
    
    2,747,355
    
    
    
    18,377,361
    
    
    
    (2,545,350
    )
    
    
    232,852,222Capital expenditure
for year ended
December 31, 2007
    
    
    
    
    
    
    777,962
    
    
    
    2,777,112
    
    
    
    5,200,427
    
    
    
    243,338
    
    
    
    8,998,839
 Consolidated Financial Statements INTEROIL CORPORATION       29




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##### Table of Contents



InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 10. Plant and equipment (contd)
 Midstream -
    
    Midstream -
    
    
    
    
    
    Corporate &December 31, 2006
    
    Upstream
    
    Refining
    
    Liquefaction
    
    Downstream
    
    Consolidated
    
    TotalsPlant and equipment
    
    
    1,247,201
    
    
    
    249,741,042
    
    
    
    
    
    
    
    37,697,458
    
    
    
    146,797
    
    
    
    288,832,498Deferred project
costs and work in
progress
    
    
    
    
    
    
    723,566
    
    
    
    
    
    
    
    715,653
    
    
    
    
    
    
    
    1,439,219Consolidation entries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,990,688
    )
    
    
    (2,990,688
    )Accumulated
depreciation and
amortisation
    
    
    (153,455
    )
    
    
    (21,760,341
    )
    
    
    
    
    
    
    (22,697,003
    )
    
    
    (28,153
    )
    
    
    (44,638,952
    )Net book value
    
    
    1,093,746
    
    
    
    228,704,267
    
    
    
    
    
    
    
    15,716,108
    
    
    
    (2,872,044
    )
    
    
    242,642,077Capital expenditure
for year ended
December 31, 2006
    
    
    
    
    
    
    11,948,960
    
    
    
    
    
    
    
    10,543,842
    
    
    
    156,817
    
    
    
    22,649,619
    11. Oil and gas properties
  December 31,
    
    December 31,
    
    December 31,2008
    
    2007
    
    2006$
    
    $
    
    $Drilling equipment
    
    
    13,857,772
    
    
    
    14,664,179
    
    
    
    13,949,238Inventory
    
    
    10,113,808
    
    
    
    7,661,992
    
    
    
    4,293,734Petroleum Prospecting License drilling programs at cost
    
    
    104,042,379
    
    
    
    62,538,956
    
    
    
    36,281,375128,013,959
    
    
    
    84,865,127
    
    
    
    54,524,347
  December 31,
    
    December 31,
    
    December 31,2008
    
    2007
    
    2006$
    
    $
    
    $Gain on sale of oil and gas propertiesSale of PRL 4 interest (43.13% of the property)
    
    
    1,500,000
    
    
    
    
    
    
    
    Sale of PRL 5 interest (28.576% of the property)
    
    
    5,000,000
    
    
    
    
    
    
    
    Conveyance accounting of IPI Agreement (note 19)
    
    
    4,735,084
    
    
    
    
    
    
    
    11,235,084
    
    
    
    
    
    
    
    
   Consolidated Financial Statements  INTEROIL CORPORATION       30




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##### Table of Contents



InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 11. Oil and gas properties
    Year endedDecember 31,
    
    December 31,
    
    December 31,2008
    
    2007
    
    2006$
    
    $
    
    $Exploration costs, excluding exploration impairment
    
    
    995,532
    
    
    
    13,305,437
    
    
    
    6,176,866Exploration impairmentCosts incurred in prior years
    
    
    
    
    
    
    
    
    
    
    Costs incurred in current year
    
    
    107,788
    
    
    
    1,242,606
    
    
    
    1,647,185Total exploration impairment
    
    
    107,788
    
    
    
    1,242,606
    
    
    
    1,647,1851,103,320
    
    
    
    14,548,043
    
    
    
    7,824,051
 12. Income taxes
  December 31,
    
    December 31,
    
    December 31,2008
    
    2007
    
    2006$
    
    $
    
    $(Loss) before income taxes and non controlling interest
    
    
    (11,714,170
    )
    
    
    (27,728,349
    )
    
    
    (43,719,889
    )Statutory income tax rate
    
    
    34.50
    %
    
    
    35.10
    %
    
    
    35.10
    %Computed tax (benefit)
    
    
    (4,041,389
    )
    
    
    (9,732,650
    )
    
    
    (15,345,681
    )Effect on income tax of:Losses/(income) in foreign jurisdictions not deductible/(assessable)
    
    
    (61,702
    )
    
    
    (2,481,828
    )
    
    
    251,639Non-deductible stock compensation expense
    
    
    720,825
    
    
    
    2,128,100
    
    
    
    693,601LNG Project Establishment costs
    
    
    2,584,562
    
    
    
    3,306,847
    
    
    
    1,925,090Non-taxable gain on sale of exploration assets
    
    
    (3,876,104
    )
    
    
    
    
    
    
    Gains and losses on foreign exchange unrealized
    
    
    (14,059,228
    )
    
    
    2,069,183
    
    
    
    (1,687,001
    )Tax rate differential in foreign jurisdictions
    
    
    (134,619
    )
    
    
    720,014
    
    
    
    1,103,122Over provision for tax in prior years
    
    
    148,823
    
    
    
    (218,403
    )
    
    
    (51,632
    )Tax losses for which no future tax benefit has been brought to account
    
    
    19,569,753
    
    
    
    5,012,598
    
    
    
    10,241,534Temporary differences for which no future tax benefit has been brought to account
    
    
    (253,262
    )
    
    
    192,826
    
    
    
    3,124,836Temporary differences brought to account on acquisition of subsidiary
    
    
    
    
    
    
    546,026
    
    
    
    1,135,181Other  net
    
    
    (515,695
    )
    
    
    (335,821
    )
    
    
    952,18481,964
    
    
    
    1,206,892
    
    
    
    2,342,873
  Consolidated Financial Statements INTEROIL CORPORATION       31




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##### Table of Contents



InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 12. Income taxes (contd)
  December 31,
    
    December 31,
    
    December 31,2008
    
    2007
    
    2006$
    
    $
    
    $Future tax assetsTemporary differencesPlant and equipment
    
    
    (7,051,509
    )
    
    
    (8,338,671
    )
    
    
    3,030,479Exploration expenditure
    
    
    26,901,138
    
    
    
    32,563,507
    
    
    
    41,870,390Unrealised foreign exchange losses / (gains)
    
    
    (17,177,649
    )
    
    
    19,742,048
    
    
    
    Other  net
    
    
    1,820,931
    
    
    
    1,549,740
    
    
    
    122,7134,492,911
    
    
    
    45,516,624
    
    
    
    45,023,582Losses carried forward
    
    
    28,679,655
    
    
    
    39,274,207
    
    
    
    27,754,49533,172,566
    
    
    
    84,790,831
    
    
    
    72,778,077Less valuation allowance
    
    
    (30,102,384
    )
    
    
    (81,923,519
    )
    
    
    (71,354,063
    )3,070,182
    
    
    
    2,867,312
    
    
    
    1,424,014
   13. Accounts payable and accrued liabilities
 December 31,
    
    December 31,
    
    December 31,2008
    
    2007
    
    2006$
    
    $
    
    $Accounts payable  crude import
    
    
    25,233,525
    
    
    
    
    
    
    
    41,006,000Other accounts payable and accrued liabilities
    
    
    52,914,211
    
    
    
    57,162,039
    
    
    
    32,304,793Income tax payable
    
    
    
    
    
    
    3,265,568
    
    
    
    2,784,576Total accounts payable and accrued liabilities
    
    
    78,147,736
    
    
    
    60,427,607
    
    
    
    76,095,369
 Petromin participation in Elk/Antelope field
  Consolidated Financial Statements INTEROIL CORPORATION       32




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##### Table of Contents



InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 14. Deferred gain on contributions to LNG Project
      15. Working capital facility
 December 31,
    
    December 31,
    
    December 31,2008
    
    2007
    
    2006$
    
    $
    
    $BNP Paribas working capital facility  midstream
    
    
    53,386,775
    
    
    
    66,501,372
    
    
    
    36,873,508Westpac working capital facility  downstream
    
    
    15,405,627
    
    
    
    
    
    
    
    Total working capital facility
    
    
    68,792,402
    
    
    
    66,501,372
    
    
    
    36,873,508
 BNP Paribas working capital facility
   Consolidated Financial Statements INTEROIL CORPORATION      33




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##### Table of Contents



InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 15. Working capital facility (contd)
   December 31,
    
    December 31,
    
    December 31,2008
    
    2007
    
    2006$
    
    $
    
    $Working capital credit facility
    
    
    190,000,000
    
    
    
    170,000,000
    
    
    
    170,000,000Less amounts included in the working capital facility liability:Short term advances
    
    
    (50,245,537
    )
    
    
    (66,501,372
    )
    
    
    (13,201,940
    )Discounted receivables (note 8)
    
    
    (3,141,238
    )
    
    
    
    
    
    
    (23,671,568
    )(53,386,775
    )
    
    
    (66,501,372
    )
    
    
    (36,873,508
    )Less: other amounts outstanding under the facility:Letters of credit outstanding
    
    
    (27,600,000
    )
    
    
    (32,000,000
    )
    
    
    (79,000,000
    )Bank guarantees on hedging facility
    
    
    
    
    
    
    (2,500,000
    )
    
    
    (1,500,000
    )Working capital credit facility available for use
    
    
    109,013,225
    
    
    
    68,998,628
    
    
    
    52,626,492
   Westpac and Bank South Pacific working capital facility
  16. Acquisition of a subsidiary
 InterOil New York Inc
  InterOil LNG Holdings Inc.
  PNG LNG Inc. and Liquid Niugini Gas Ltd
  Consolidated Financial Statements INTEROIL CORPORATION      34




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##### Table of Contents



InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 16. Acquisition of a subsidiary (contd)
 IPL PNG Ltd.
     $Cash
    
    
    4,989,895Trade receivables
    
    
    6,288,834Inventory
    
    
    20,429,728Other assets
    
    
    2,190,226Future income tax benefit
    
    
    1,698,224Property, plant and equipment
    
    
    10,355,322Total assets acquired
    
    
    45,952,229Accounts payable and accrued liabilities
    
    
    (11,815,188
    )Net assets acquired
    
    
    34,137,041
  17. Related parties
 Petroleum Independent and Exploration Corporation (P.I.E)
   Breckland Limited
  Consolidated Financial Statements INTEROIL CORPORATION      35




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##### Table of Contents



InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 17. Related parties
 Director fees
  BNP Paribas
  18. Secured loan
 December 31,
    
    December 31,
    
    December 31,2008
    
    2007
    
    2006$
    
    $
    
    $Secured loan (OPIC)   current portion
    
    
    9,000,000
    
    
    
    9,000,000
    
    
    
    13,500,000Secured loan (bridging facility)  current portion
    
    
    
    
    
    
    127,810,093
    
    
    
    Secured loan (bridging facility)  deferred financing costs
    
    
    
    
    
    
    (33,333
    )
    
    
    Total current secured loan
    
    
    9,000,000
    
    
    
    136,776,760
    
    
    
    13,500,000Secured loan (OPIC)   non current portion
    
    
    53,500,000
    
    
    
    62,500,000
    
    
    
    62,500,000Secured loan (OPIC)   deferred financing costs
    
    
    (1,134,667
    )
    
    
    (1,358,611
    )
    
    
    Secured loan (bridging facility)  non current portion
    
    
    
    
    
    
    
    
    
    
    121,666,433Total non current secured loan
    
    
    52,365,333
    
    
    
    61,141,389
    
    
    
    184,166,433Total secured loan
    
    
    61,365,333
    
    
    
    197,918,149
    
    
    
    197,666,433
 OPIC Secured Loan
      Consolidated Financial Statements INTEROIL CORPORATION      36




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##### Table of Contents



InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 18. Secured loan (contd)
  Bridging Facility
     19. Indirect participation interests
 Indirect participation interest (IPI)
 December 31,
    
    December 31,
    
    December 31,2008
    
    2007
    
    2006$
    
    $
    
    $Indirect participation interest (IPI)
    
    
    72,476,668
    
    
    
    96,086,369
    
    
    
    96,861,259
    Consolidated Financial Statements INTEROIL CORPORATION      37




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##### Table of Contents



InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 19. Indirect participation interests (contd)
     Indirect participation interest  PNGDV
 December 31,
    
    December 31,
    
    December 31,2008
    
    2007
    
    2006$
    
    $
    
    $Current portion
    
    
    540,002
    
    
    
    1,080,004
    
    
    
    730,534Non current portion
    
    
    844,490
    
    
    
    844,490
    
    
    
    1,190,633Total indirect participation interest  PNGDV
    
    
    1,384,492
    
    
    
    1,924,494
    
    
    
    1,921,167
    Consolidated Financial Statements  INTEROIL CORPORATION      38




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##### Table of Contents



InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 19. Indirect participation interests (contd)
 Other
  20. Non controlling interest
   21. Share capital
  Common shares 
 Number of shares
    
    $January 1, 2006
    
    
    29,163,320
    
    
    
    223,934,500Shares issued on exercise of options
    
    
    132,285
    
    
    
    2,006,175Shares issued on conversion of indirect participation interest
    
    
    575,575
    
    
    
    7,948,691December 31, 2006
    
    
    29,871,180
    
    
    
    233,889,366Shares issued on exercise of options
    
    
    22,000
    
    
    
    418,938Shares issued on conversion of indirect participation interest
    
    
    26,667
    
    
    
    934,890Shares issued on conversion of warrants
    
    
    2,995
    
    
    
    84,439Shares issued on buyback of minority interest
    
    
    25,000
    
    
    
    496,500Shares issued on Private Placement
    
    
    1,078,514
    
    
    
    23,500,000December 31, 2007
    
    
    31,026,356
    
    
    
    259,324,133Shares issued on Private Placement
    
    
    2,728,477
    
    
    
    58,938,305Shares issued on exercise of options
    
    
    58,000
    
    
    
    1,413,587Shares issued on preference share conversion and interest payments
    
    
    532,754
    
    
    
    15,012,950Share issued as placement fee on debenture issue
    
    
    228,000
    
    
    
    5,700,000Share issued on debenture conversions
    
    
    641,000
    
    
    
    15,118,483Shares issued on debenture interest payments
    
    
    259,105
    
    
    
    2,620,628Shares issued on conversion of indirect participation interest
    
    
    450,000
    
    
    
    15,776,270December 31, 2008
    
    
    35,923,692
    
    
    
    373,904,356
  Consolidated Financial Statements INTEROIL CORPORATION      39




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##### Table of Contents



InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 21. Share capital
     22. Preference Shares
    23. 8% subordinated debentures
    Consolidated Financial Statements INTEROIL CORPORATION      40




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##### Table of Contents



InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 23. 8% subordinated debentures (contd)
    24. Stock compensation
  December 31, 2008
    
    December 31, 2007
    
    December 31, 2006Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedNumber of
    
    average
    
    Number of
    
    average
    
    Number of
    
    averageStock options outstanding
    
    options
    
    exercise price $
    
    options
    
    exercise price $
    
    options
    
    exercise price $Outstanding at beginning of
period
    
    
    1,200,500
    
    
    
    23.70
    
    
    
    1,013,500
    
    
    
    20.59
    
    
    
    746,800
    
    
    
    22.23Granted
    
    
    952,500
    
    
    
    18.48
    
    
    
    354,750
    
    
    
    33.51
    
    
    
    725,500
    
    
    
    15.87Exercised
    
    
    (58,000
    )
    
    
    (16.50
    )
    
    
    (22,000
    )
    
    
    (14.37
    )
    
    
    (132,285
    )
    
    
    (11.14
    )Forfeited
    
    
    (11,500
    )
    
    
    (28.68
    )
    
    
    (143,250
    )
    
    
    (25.94
    )
    
    
    (285,433
    )
    
    
    (18.01
    )Expired
    
    
    (244,000
    )
    
    
    (25.80
    )
    
    
    (2,500
    )
    
    
    (27.00
    )
    
    
    (41,082
    )
    
    
    (15.36
    )Outstanding at end of period
    
    
    1,839,500
    
    
    
    21.03
    
    
    
    1,200,500
    
    
    
    23.70
    
    
    
    1,013,500
    
    
    
    20.59
  Options issued and outstanding
    
    Options exercisableRange of exercise
    
    
    
    
    
    Weighted average
    
    Weighted average
    
    
    
    
    
    Weighted averageprices $
    
    Number of options
    
    exercise price $
    
    remaining term (years)
    
    Number of options
    
    exercise price $8.01 to 12.00
    
    
    545,000
    
    
    
    9.81
    
    
    
    4.90
    
    
    
    40,000
    
    
    
    9.9212.01 to 24.00
    
    
    645,000
    
    
    
    17.71
    
    
    
    2.45
    
    
    
    452,000
    
    
    
    17.4524.01 to 31.00
    
    
    245,500
    
    
    
    29.10
    
    
    
    2.63
    
    
    
    93,000
    
    
    
    29.4031.01 to 41.00
    
    
    314,000
    
    
    
    34.67
    
    
    
    6.57
    
    
    
    90,000
    
    
    
    33.8241.01 to 51.00
    
    
    90,000
    
    
    
    43.22
    
    
    
    1.90
    
    
    
    90,000
    
    
    
    43.221,839,500
    
    
    
    21.03
    
    
    
    3.93
    
    
    
    765,000
    
    
    
    23.47
 Consolidated Financial Statements INTEROIL CORPORATION      41




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##### Table of Contents



InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 24. Stock compensation (contd)
     Weighted averageRisk free interest rate
    
    
    
    
    
    
    
    expected life forYear
    
    Period
    
    (%)
    
    Dividend yield
    
    Volatility (%)
    
    options2008
    
    Oct 1 to Dec 31
    
    
    1.5
    
    
    
    
    
    83
    
    
    
    4.32008
    
    April 1 to Sep 30
    
    
    2.7
    
    
    
    
    
    80
    
    
    
    5.02008
    
    January 1 to March 31
    
    
    2.2
    
    
    
    
    
    73
    
    
    
    5.02007
    
    October 1 to Dec 31
    
    
    3.4
    
    
    
    
    
    74
    
    
    
    5.02007
    
    January 1 to Sep 30
    
    
    5
    
    
    
    
    
    63
    
    
    
    5.02006
    
    October 1 to December 31
    
    
    4.6
    
    
    
    
    
    65
    
    
    
    5.02006
    
    July 1 to September 30
    
    
    5.1
    
    
    
    
    
    68
    
    
    
    4.22006
    
    January 1 to June 30
    
    
    4.4
    
    
    
    
    
    60
    
    
    
    4.8
 25. Warrants
  26. Earnings/(Loss) per share
  Number of shares
    
    Number of shares
    
    Number of sharesPotential dilutive instruments outstanding
    
    December 31, 2008
    
    December 31, 2007
    
    December 31, 2006Preferred stock
    
    
    
    
    
    
    517,777
    
    
    
    Employee stock options
    
    
    1,839,500
    
    
    
    1,200,500
    
    
    
    1,013,500IPI Indirect
Participation interest -
conversion options
    
    
    2,160,000
    
    
    
    3,306,667
    
    
    
    3,333,3348% Convertible debentures
    
    
    3,159,000
    
    
    
    
    
    
    
    Warrants
    
    
    337,252
    
    
    
    337,252
    
    
    
    340,247Others
    
    
    5,000
    
    
    
    5,000
    
    
    
    5,000Total stock
options/shares
outstanding
    
    
    7,500,752
    
    
    
    5,367,196
    
    
    
    4,692,081
 Consolidated Financial Statements  INTEROIL CORPORATION      42




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##### Table of Contents



InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 27.
    
    Commitments and contingencies
 Commitments
  Less than 1
    
    
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    year
    1-2 years
    2-3 years
    3-4 years
    4-5 years
    5 years000
    
    
    000
    
    
    000
    
    
    000
    
    
    000
    
    
    000
    
    
    000Secured loan and debenture obligations
    
    
    141,475
    
    
    9,000
    
    
    9,000
    
    
    9,000
    
    
    9,000
    
    
    87,975
    
    
    17,500Accrued financing costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Indirect participation
interest -
PNGDV (note 19)

    
    1,384
    
    
    540
    
    
    844
    
    
    
    
    
    
    
    
    
    
    
    PNG LNG Inc. Joint Venture
(proportionate share of commitments)

    
    904
    
    
    884
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    Petroleum prospecting and retention
licenses (a)

    
    95,000
    
    
    16,500
    
    
    4,500
    
    
    23,333
    
    
    35,333
    
    
    15,334
    
    
    238,763
    
    
    26,924
    
    
    14,364
    
    
    32,333
    
    
    44,333
    
    
    103,309
    
    
    17,500
 
 (a)
    
    The amount pertaining to the petroleum prospecting and retention licenses represents
the amount Interoil has committed as a condition on renewal of these licenses. Of this
commitment, as at December 31, 2008, management estimates that $43,926,310 would satisfy
the commitments in relation to the IPI investors . Contingencies:
 a)
    
    The Company, certain of its subsidiaries, the Companys Chief Executive Officer, Phil Mulacek,
and his controlled entities Petroleum Independent & Exploration Corporation and P.I.E. Group, LLC are
defendants in Todd Peters, et. al. v. Phil Mulacek et. al.; Cause No. 05-040035920-CV; in the 284th District
Court of Montgomery County, Texas.  The plaintiffs claim to be members of a partnership that bought a modular
oil refinery and subsequently, through a series of transactions, sold it to a subsidiary of the Company.
Plaintiffs contend that the defendants, including the Company, breached their fiduciary duties to the plaintiffs
as part of these transactions and also assert claims for knowing participation in a breach of a fiduciary duty,
common law fraud, fraudulent inducement, statutory fraud, securities fraud, breach of contract, investor oppression
and conspiracy.  Plaintiffs are seeking actual damages of up to $118,068,759 and unspecified punitive damages,
attorneys fees, expenses and court costs, an accounting and access to books and records.  The Company and
other defendants are vigorously contesting the matter.  Management does not believe the litigation will have a material adverse effect on the Company or its subsidiaries.
 b)
    
    During 2008, certain disputes and litigation arose between us and Merrill Lynch, Pierce,
Fenner and Smith Inc. and Merrill Lynch and Co (Merrill Lynch) and companies affiliated to
it relating to or arising from the LNG Project and PNG LNG Inc. On February 27, 2009, a
settlement agreement was entered into whereby the parties settled and agreed to release all of
their outstanding claims against each other and dismissed the litigation with prejudice. In
addition, the parties granted mutual releases and entered into arrangements for the
acquisition of Merrill Lynchs interests in the Joint Venture Company and in the LNG Project
by its other existing shareholders, InterOil LNG Holdings Inc and Pacific LNG Operations Ltd.
  Consolidated Financial Statements INTEROIL CORPORATION 43




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##### Table of Contents



InterOil Corporation
 
 Notes to Consolidated Financial Statements
 (Expressed in United States dollars)
 27.
    
    Commitments and contingencies (contd)
 Regulatory Actions
    Import Parity Price (IPP) formula
  28.
    
    Subsequent events
 Commodity derivative contracts
  Merrill Lynchs PNG LNG Inc interest buyback
  29.
    
    Reconciliation to generally accepted accounting principles in the United States
  Consolidated Financial Statements INTEROIL CORPORATION 44




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##### Table of Contents



InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 29.
    
    Reconciliation to generally accepted accounting principles in the United States (contd)
 Consolidated Balance Sheets
    As atDecember 31, 2008
    
    December 31, 2007
    
    December 31, 2006$
    
    $
    
    $Canadian GAAP
    
    US GAAP
    
    Canadian GAAP
    
    US GAAP
    
    Canadian GAAP
    
    US GAAPAssetsCurrent assets:Cash and cash equivalents (5)
    
    
    48,970,572
    
    
    
    44,051,224
    
    
    
    43,861,762
    
    
    
    40,152,026
    
    
    
    31,681,435
    
    
    
    31,681,435Cash restricted (5)
    
    
    25,994,258
    
    
    
    25,933,184
    
    
    
    22,002,302
    
    
    
    21,916,736
    
    
    
    29,301,940
    
    
    
    29,301,940Trade receivables
    
    
    42,887,823
    
    
    
    42,887,823
    
    
    
    63,145,444
    
    
    
    63,145,444
    
    
    
    67,542,902
    
    
    
    67,542,902Commodity derivative contracts
    
    
    31,335,050
    
    
    
    31,335,050
    
    
    
    
    
    
    
    
    
    
    
    1,759,575
    
    
    
    1,759,575Other assets (5)
    
    
    167,885
    
    
    
    125,119
    
    
    
    146,992
    
    
    
    120,460
    
    
    
    2,954,946
    
    
    
    2,954,946Inventories
    
    
    83,037,326
    
    
    
    83,037,326
    
    
    
    82,589,242
    
    
    
    82,589,242
    
    
    
    67,593,558
    
    
    
    67,593,558Prepaid expenses (5)
    
    
    4,489,574
    
    
    
    (50,145,093
    )
    
    
    5,102,540
    
    
    
    5,076,006
    
    
    
    880,640
    
    
    
    880,640Total current assets
    
    
    236,882,488
    
    
    
    177,224,633
    
    
    
    216,848,282
    
    
    
    212,999,914
    
    
    
    201,714,996
    
    
    
    201,714,996Cash restricted
    
    
    290,782
    
    
    
    290,782
    
    
    
    382,058
    
    
    
    382,058
    
    
    
    3,217,284
    
    
    
    3,217,284Deferred financing costs (4),
(6)
    
    
    
    
    
    
    1,279,145
    
    
    
    
    
    
    
    1,395,066
    
    
    
    1,716,757
    
    
    
    1,716,757Investment in LNG Project (5)
    
    
    
    
    
    
    6,610,480
    
    
    
    
    
    
    
    5,848,612
    
    
    
    
    
    
    
    Plant and equipment (1), (5)
    
    
    223,585,559
    
    
    
    210,803,013
    
    
    
    232,852,222
    
    
    
    219,117,006
    
    
    
    242,642,077
    
    
    
    231,175,281Oil and gas properties (2)
    
    
    128,013,959
    
    
    
    127,653,411
    
    
    
    84,865,127
    
    
    
    84,865,127
    
    
    
    54,524,347
    
    
    
    54,524,347Future income tax benefit
    
    
    3,070,182
    
    
    
    3,070,182
    
    
    
    2,867,312
    
    
    
    2,867,312
    
    
    
    1,424,014
    
    
    
    1,424,014Total assets
    
    
    591,842,970
    
    
    
    526,931,646
    
    
    
    537,815,001
    
    
    
    527,475,095
    
    
    
    505,239,475
    
    
    
    493,772,679Liabilities and shareholders
equityCurrent liabilities:Accounts payable and accrued
liabilities (6), (5)
    
    
    78,147,736
    
    
    
    77,460,413
    
    
    
    60,427,607
    
    
    
    59,682,621
    
    
    
    76,095,369
    
    
    
    76,095,369Commodity derivative contracts
    
    
    
    
    
    
    
    
    
    
    1,960,300
    
    
    
    1,960,289
    
    
    
    
    
    
    
    Working capital facility
    
    
    68,792,402
    
    
    
    68,792,402
    
    
    
    66,501,372
    
    
    
    66,501,372
    
    
    
    36,873,508
    
    
    
    36,873,508Deferred hedge gain (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,385
    
    
    
    Deferred liquefaction project
liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,553,080
    
    
    
    6,553,080Current portion of secured
loan
    
    
    9,000,000
    
    
    
    9,000,000
    
    
    
    136,776,760
    
    
    
    136,810,093
    
    
    
    13,500,000
    
    
    
    13,500,000Current portion of indirect
participation interest 
PNGDV
    
    
    540,002
    
    
    
    540,002
    
    
    
    1,080,004
    
    
    
    1,080,004
    
    
    
    730,534
    
    
    
    730,534Total current liabilities
    
    
    156,480,140
    
    
    
    155,792,817
    
    
    
    266,746,043
    
    
    
    266,034,379
    
    
    
    133,753,876
    
    
    
    133,752,491Accrued financing costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,087,500
    
    
    
    1,087,500Secured loan (6)
    
    
    52,365,333
    
    
    
    (1,134,667
    )
    
    
    61,141,389
    
    
    
    62,500,000
    
    
    
    184,166,433
    
    
    
    184,166,4338% subordinated debenture
liability (4)
    
    
    65,040,067
    
    
    
    69,710,182
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Preference share liability (3)
    
    
    
    
    
    
    
    
    
    
    7,797,312
    
    
    
    
    
    
    
    
    
    
    
    Deferred gain on
contributions to LNG project
(5)
    
    
    17,497,110
    
    
    
    
    
    
    
    9,096,537
    
    
    
    
    
    
    
    
    
    
    
    Indirect participation
interest (2)
    
    
    72,476,668
    
    
    
    88,211,120
    
    
    
    96,086,369
    
    
    
    115,926,369
    
    
    
    96,861,259
    
    
    
    116,861,259Indirect participation
interest  PNGDV
    
    
    844,490
    
    
    
    844,490
    
    
    
    844,490
    
    
    
    844,490
    
    
    
    1,190,633
    
    
    
    1,190,633Total liabilities
    
    
    364,703,808
    
    
    
    313,423,942
    
    
    
    441,712,140
    
    
    
    445,305,238
    
    
    
    417,059,701
    
    
    
    437,058,316Non-controlling interest (8)
    
    
    5,235
    
    
    
    5,427
    
    
    
    4,292
    
    
    
    4,388
    
    
    
    5,759,206
    
    
    
    5,416,831Preference shares (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,250,000
    
    
    
    
    
    
    
    Shareholders equity:Share capital
    
    
    373,904,356
    
    
    
    373,514,356
    
    
    
    259,324,133
    
    
    
    259,324,133
    
    
    
    233,889,366
    
    
    
    233,889,366Preference shares (3)
    
    
    
    
    
    
    
    
    
    
    6,842,688
    
    
    
    
    
    
    
    
    
    
    
    8% subordinated debentures (4)
    
    
    10,837,394
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Contributed surplus (4)
    
    
    15,621,767
    
    
    
    24,422,662
    
    
    
    10,337,548
    
    
    
    10,337,548
    
    
    
    4,377,426
    
    
    
    4,377,426Warrants
    
    
    2,119,034
    
    
    
    2,119,034
    
    
    
    2,119,034
    
    
    
    2,119,034
    
    
    
    2,137,852
    
    
    
    2,137,852Accumulated Other
Comprehensive Income
    
    
    27,698,306
    
    
    
    27,698,306
    
    
    
    6,025,019
    
    
    
    6,025,019
    
    
    
    1,492,869
    
    
    
    1,494,258Conversion options (2)
    
    
    17,140,000
    
    
    
    
    
    
    
    19,840,000
    
    
    
    
    
    
    
    20,000,000
    
    
    
    Accumulated deficit
    
    
    (220,186,930
    )
    
    
    (214,252,081
    )
    
    
    (208,389,853
    )
    
    
    (209,890,265
    )
    
    
    (179,476,945
    )
    
    
    (190,601,370
    )Total shareholders equity
    
    
    227,133,927
    
    
    
    213,502,277
    
    
    
    96,098,569
    
    
    
    67,915,469
    
    
    
    82,420,568
    
    
    
    51,297,532Total liabilities and
shareholders equity
    
    
    591,842,970
    
    
    
    526,931,646
    
    
    
    537,815,001
    
    
    
    527,475,095
    
    
    
    505,239,475
    
    
    
    493,772,679
 Consolidated Financial Statements INTEROIL CORPORATION 45




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##### Table of Contents



InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 29.
    
    Reconciliation to generally accepted accounting principles in the United States (contd)
 Consolidated statements of operations
  Year endedDecember 31, 2008
    
    December 31, 2007
    
    December 31, 2006$
    
    $ (restated) (*)
    
    $Canadian GAAP
    
    U.S. GAAP
    
    Canadian GAAP
    
    U.S. GAAP
    
    Canadian GAAP
    
    U.S. GAAPRevenueSales and operating revenues
    
    
    915,578,709
    
    
    
    915,578,709
    
    
    
    625,526,068
    
    
    
    625,526,068
    
    
    
    511,087,934
    
    
    
    511,189,438Interest income
    
    
    931,785
    
    
    
    
    
    
    
    2,180,285
    
    
    
    
    
    
    
    3,223,995
    
    
    
    Other income
    
    
    3,216,445
    
    
    
    
    
    
    
    2,666,890
    
    
    
    
    
    
    
    3,747,603
    
    
    
    919,726,939
    
    
    
    915,578,709
    
    
    
    630,373,243
    
    
    
    625,526,068
    
    
    
    518,059,532
    
    
    
    511,189,438ExpensesCost of sales and operating
expenses (excluding
depreciation shown below)
    
    
    888,623,109
    
    
    
    888,623,109
    
    
    
    573,609,441
    
    
    
    573,609,441
    
    
    
    499,494,540
    
    
    
    499,584,532Administrative and general
expenses (5)
    
    
    31,227,627
    
    
    
    28,354,064
    
    
    
    31,998,655
    
    
    
    30,881,433
    
    
    
    23,288,330
    
    
    
    23,322,286Derivative (gain)/loss
    
    
    (24,038,550
    )
    
    
    (24,038,550
    )
    
    
    7,271,693
    
    
    
    7,271,693
    
    
    
    (2,559,712
    )
    
    
    (2,559,712
    )Legal and professional fees (5)
    
    
    11,523,045
    
    
    
    7,692,045
    
    
    
    6,532,646
    
    
    
    4,471,684
    
    
    
    3,937,517
    
    
    
    3,937,517Exploration costs, excluding
exploration impairment
    
    
    995,532
    
    
    
    995,532
    
    
    
    13,305,437
    
    
    
    13,305,437
    
    
    
    6,176,866
    
    
    
    6,176,866Exploration impairment
    
    
    107,788
    
    
    
    107,788
    
    
    
    1,242,606
    
    
    
    1,242,606
    
    
    
    1,647,185
    
    
    
    1,647,185Short term borrowing costs
    
    
    6,514,060
    
    
    
    6,514,060
    
    
    
    13,212,112
    
    
    
    13,212,112
    
    
    
    8,478,540
    
    
    
    8,478,540Long term borrowing costs (3),
(4)
    
    
    17,459,186
    
    
    
    19,529,798
    
    
    
    9,536,162
    
    
    
    9,061,915
    
    
    
    11,856,872
    
    
    
    11,856,872Depreciation and amortization
(1), (5)
    
    
    14,142,546
    
    
    
    13,594,481
    
    
    
    13,024,258
    
    
    
    12,529,892
    
    
    
    12,352,672
    
    
    
    11,591,513Loss on amendment of indirect
participation interest  PNGDV
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,851,421
    
    
    
    1,851,421Gain on LNG shareholder
agreement
    
    
    
    
    
    
    
    
    
    
    (6,553,080
    )
    
    
    (6,553,080
    )
    
    
    
    
    
    
    Gain on equity accounted
investment (5)
    
    
    
    
    
    
    (1,047,795
    )
    
    
    
    
    
    
    (5,561,684
    )
    
    
    
    
    
    
    Gain on sale of oil and gas
properties (2)
    
    
    (11,235,084
    )
    
    
    (12,280,084
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Foreign exchange loss/(gain)
(5)
    
    
    (3,878,150
    )
    
    
    (4,437,943
    )
    
    
    (5,078,338
    )
    
    
    (5,099,651
    )
    
    
    (4,744,810
    )
    
    
    (4,744,810
    )Non-controlling interest (8)
    
    
    943
    
    
    
    1,040
    
    
    
    (22,333
    )
    
    
    (22,236
    )
    
    
    (263,959
    )
    
    
    (265,865
    )Interest income (5)
    
    
    
    
    
    
    (841,028
    )
    
    
    
    
    
    
    (2,146,183
    )
    
    
    
    
    
    
    (3,223,995
    )Other income
    
    
    
    
    
    
    (3,216,445
    )
    
    
    
    
    
    
    (2,666,890
    )
    
    
    
    
    
    
    (3,747,603
    )931,442,052
    
    
    
    919,550,072
    
    
    
    658,079,259
    
    
    
    643,536,489
    
    
    
    561,515,462
    
    
    
    553,904,747Loss before income taxes
    
    
    (11,715,113
    )
    
    
    (3,971,363
    )
    
    
    (27,706,016
    )
    
    
    (18,010,421
    )
    
    
    (43,455,930
    )
    
    
    (42,715,309
    )Income tax expense (5), (7)
    
    
    (81,964
    )
    
    
    28,073
    
    
    
    (1,206,892
    )
    
    
    (1,194,227
    )
    
    
    (2,342,873
    )
    
    
    (2,342,873
    )Net loss
    
    
    (11,797,077
    )
    
    
    (3,943,290
    )
    
    
    (28,912,908
    )
    
    
    (19,204,648
    )
    
    
    (45,798,803
    )
    
    
    (45,058,182
    )
 
 (*)
    
    Comparative results for the year ended December 31, 2007 have been adjusted to rectify
for misclassification of the following items in the U.S. GAAP Consolidated statement of operations
as per the December 31, 2007 consolidated financial statements: December 31, 2007 (as per U.S. GAAP reconciliation)
    
    Original
    
    Revised
    
    AdjustmentsExpensesLegal and professional fees
    
    
    6,038,280
    
    
    
    4,471,684
    
    
    
    1,566,596Short term borrowing costs
    
    
    11,151,150
    
    
    
    13,212,112
    
    
    
    (2,060,962
    )Long term borrowing costs
    
    
    9,536,162
    
    
    
    9,061,915
    
    
    
    474,247Depreciation and amortization
    
    
    12,550,011
    
    
    
    12,529,892
    
    
    
    20,119Net impact to the U.S. GAAP Statement of Operations
    
    
    
    
    
    
    
    
    
    
    
 Consolidated Financial Statements INTEROIL CORPORATION 46




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##### Table of Contents



InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 29.
    
    Reconciliation to generally accepted accounting principles in the United States (contd)
 Reconciliation of Canadian GAAP net income/(loss) to U.S. GAAP net income/(loss)
 Year endedDecember 31,
    
    December 31,
    
    December 31,2008
    
    2007
    
    2006$
    
    $
    
    $Net loss as shown in the Canadian GAAP financial statements
    
    
    (11,797,077
    )
    
    
    (28,912,908
    )
    
    
    (45,798,803
    )Description of items having the effect of increasing reported incomeDecrease in depreciation and amortization due to difference in date of
commencement of operations of refinery (1)
    
    
    478,923
    
    
    
    478,935
    
    
    
    761,159Decrease in non-controlling interest expense (8)
    
    
    (96
    )
    
    
    (96
    )
    
    
    1,907Increase in reporting income due to reversal of proportionate consolidation of
LNG Project and equity accounting the investment (5)
    
    
    8,400,571
    
    
    
    9,097,535
    
    
    
    Increase in sales from ineffective portion of hedges
    
    
    
    
    
    
    
    
    
    
    101,504Decrease in long term borrowing costs relating to financing costs on preference
shares expensed
    
    
    
    
    
    
    390,000
    
    
    
    Decrease in long term borrowing costs relating to dividends paid to preference
share holders expensed under Canadian GAAP (3)
    
    
    418,526
    
    
    
    84,247
    
    
    
    Decrease in long term borrowing costs relating to reduced accretion expense on
increased 8% subordinated debentures liability (4)
    
    
    291,137
    
    
    
    
    
    
    
    Increase in gain on sale of oil and gas properties arising from conveyance
accounting due to the initial IPI proceeds not being bifurcated under U.S. GAAP
(2)
    
    
    1,045,000
    
    
    
    
    
    
    
    Description of items having the effect of decreasing reported incomeIncrease in long term borrowing costs relating to immediate expense of portion of
placement fees and accretion of BCF on conversion of 8% subordinated debentures
(4)
    
    
    (2,780,274
    )
    
    
    
    
    
    
    Reduced gain on sale of minority interest under U.S. GAAP
    
    
    
    
    
    
    (342,361
    )
    
    
    Increase in cost of sales from ineffective portion of hedges
    
    
    
    
    
    
    
    
    
    
    (89,993
    )Increase in administrative and general expenses from ineffective portion of hedges
    
    
    
    
    
    
    
    
    
    
    (33,956
    )Net loss according to US GAAP
    
    
    (3,943,290
    )
    
    
    (19,204,648
    )
    
    
    (45,058,182
    )
 Statements of comprehensive income/(loss), net of tax
 Year endedDecember 31,
    
    December 31,
    
    December 31,2008
    
    2007
    
    2006$
    
    $
    
    $Net loss in accordance with U.S. GAAP, net of tax
    
    
    (3,943,290
    )
    
    
    (19,204,648
    )
    
    
    (45,058,182
    )Foreign currency translation reserve, net of tax
    
    
    3,660,787
    
    
    
    4,532,150
    
    
    
    1,015,426Deferred hedge gain, net of tax
    
    
    18,012,500
    
    
    
    (1,389
    )
    
    
    (993,153
    )Total other comprehensive income, net of tax
    
    
    21,673,287
    
    
    
    4,530,761
    
    
    
    22,273Comprehensive income/(loss), net of tax
    
    
    17,729,997
    
    
    
    (14,673,887
    )
    
    
    (45,035,909
    )
 Consolidated Financial Statements INTEROIL CORPORATION 47




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##### Table of Contents



InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 29. Reconciliation to generally accepted accounting principles in the United States (contd)
 Consolidated Statements of Shareholders Equity
 Year endedDecember 31, 2008
    
    December 31, 2007
    
    December 31, 2006$
    
    $
    
    $Canadian GAAP
    
    US GAAP
    
    Canadian GAAP
    
    US GAAP
    
    Canadian GAAP
    
    US GAAPShare capitalAt beginning of period
    
    
    259,324,133
    
    
    
    259,324,133
    
    
    
    233,889,366
    
    
    
    233,889,366
    
    
    
    223,934,500
    
    
    
    223,934,500Issue of capital stock
    
    
    114,580,223
    
    
    
    114,190,223
    
    
    
    25,434,767
    
    
    
    25,434,767
    
    
    
    9,954,866
    
    
    
    9,954,866At end of period
    
    
    373,904,356
    
    
    
    373,514,356
    
    
    
    259,324,133
    
    
    
    259,324,133
    
    
    
    233,889,366
    
    
    
    233,889,366Preference SharesAt beginning of period
    
    
    6,842,688
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issue of preference shares
    
    
    
    
    
    
    
    
    
    
    6,842,688
    
    
    
    
    
    
    
    
    
    
    
    Converted to common shares
    
    
    (6,842,688
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    At end of period
    
    
    
    
    
    
    
    
    
    
    6,842,688
    
    
    
    
    
    
    
    
    
    
    
    8% subordinated debenturesAt beginning of period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issue of debentures
    
    
    13,036,434
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Conversion to common shares
    
    
    (2,199,040
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    At end of period
    
    
    10,837,394
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Contributed surplusAt beginning of period
    
    
    10,337,548
    
    
    
    10,337,548
    
    
    
    4,377,426
    
    
    
    4,377,426
    
    
    
    2,933,586
    
    
    
    2,933,586Options exercised transferred to share capital
    
    
    (456,867
    )
    
    
    (456,867
    )
    
    
    (102,840
    )
    
    
    (102,840
    )
    
    
    (532,232
    )
    
    
    (532,232
    )Stock compensation expense
    
    
    5,741,086
    
    
    
    5,741,086
    
    
    
    6,062,962
    
    
    
    6,062,962
    
    
    
    1,976,072
    
    
    
    1,976,0728% Debenture issue BCF (note 4)
    
    
    
    
    
    
    8,800,895
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    At end of period
    
    
    15,621,767
    
    
    
    24,422,662
    
    
    
    10,337,548
    
    
    
    10,337,548
    
    
    
    4,377,426
    
    
    
    4,377,426WarrantsAt beginning of period
    
    
    2,119,034
    
    
    
    2,119,034
    
    
    
    2,137,852
    
    
    
    2,137,852
    
    
    
    2,137,852
    
    
    
    2,137,852Movement for period
    
    
    
    
    
    
    
    
    
    
    (18,818
    )
    
    
    (18,818
    )
    
    
    
    
    
    
    At end of period
    
    
    2,119,034
    
    
    
    2,119,034
    
    
    
    2,119,034
    
    
    
    2,119,034
    
    
    
    2,137,852
    
    
    
    2,137,852Accumulated Other Comprehensive IncomeAt beginning of period
    
    
    6,025,019
    
    
    
    6,025,019
    
    
    
    1,492,869
    
    
    
    1,494,258
    
    
    
    477,443
    
    
    
    1,471,985Deferred hedge gain recognised on transition
    
    
    
    
    
    
    
    
    
    
    1,385
    
    
    
    
    
    
    
    
    
    
    
    Deferred hedge (loss)/gain movement for
period, net of tax
    
    
    18,012,500
    
    
    
    18,012,500
    
    
    
    (1,385
    )
    
    
    (1,389
    )
    
    
    
    
    
    
    (993,153
    )Foreign currency translation adjustment
movement for period, net of tax
    
    
    3,660,787
    
    
    
    3,660,787
    
    
    
    4,532,150
    
    
    
    4,532,150
    
    
    
    1,015,426
    
    
    
    1,015,426At end of period
    
    
    27,698,306
    
    
    
    27,698,306
    
    
    
    6,025,019
    
    
    
    6,025,019
    
    
    
    1,492,869
    
    
    
    1,494,258Conversion optionsAt beginning of period
    
    
    19,840,000
    
    
    
    
    
    
    
    20,000,000
    
    
    
    
    
    
    
    20,000,000
    
    
    
    Movement for period
    
    
    (2,700,000
    )
    
    
    
    
    
    
    (160,000
    )
    
    
    
    
    
    
    
    
    
    
    At end of period
    
    
    17,140,000
    
    
    
    
    
    
    
    19,840,000
    
    
    
    
    
    
    
    20,000,000
    
    
    
    Accumulated deficitAt beginning of period
    
    
    (208,389,853
    )
    
    
    (209,890,265
    )
    
    
    (179,476,945
    )
    
    
    (190,601,370
    )
    
    
    (133,678,142
    )
    
    
    (145,543,188
    )Net loss for period
    
    
    (11,797,077
    )
    
    
    (3,943,290
    )
    
    
    (28,912,908
    )
    
    
    (19,204,648
    )
    
    
    (45,798,803
    )
    
    
    (45,058,182
    )Deduct:Preference Share Dividends
    
    
    
    
    
    
    (418,526
    )
    
    
    
    
    
    
    (84,247
    )
    
    
    
    
    
    
    At end of period
    
    
    (220,186,930
    )
    
    
    (214,252,081
    )
    
    
    (208,389,853
    )
    
    
    (209,890,265
    )
    
    
    (179,476,945
    )
    
    
    (190,601,370
    )Shareholders equity at end of period
    
    
    227,133,927
    
    
    
    213,502,277
    
    
    
    96,098,569
    
    
    
    67,915,469
    
    
    
    82,420,568
    
    
    
    51,297,532
 Consolidated Financial Statements INTEROIL CORPORATION 48




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##### Table of Contents



InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 29. Reconciliation to generally accepted accounting principles in the United States (contd)
 Reconciliation of Canadian GAAP Statement of cash flows to U.S. GAAP:
 Year endedDecember 31, 2008
    
    December 31, 2007
    
    December 31, 2006$
    
    $ (restated) (*)
    
    $Cash flows provided by (used in):Operating activities  Canadian GAAP (as per
consolidated cash flows)
    
    
    15,586,156
    
    
    
    (31,619,907
    )
    
    
    2,187,462Reconciling items:Reclass exploration costs expensed including exploration
impairment as investing activity for US GAAP
    
    
    (1,103,320
    )
    
    
    (14,548,043
    )
    
    
    (7,824,051
    )Being LNG project related operating cash flows reversed
for US GAAP cash flow statement
    
    
    8,666,724
    
    
    
    2,892,220
    
    
    
    Operating activities  U.S. GAAP
    
    
    23,149,560
    
    
    
    (43,275,730
    )
    
    
    (5,636,589
    )Investing activities  Canadian GAAP (as per
consolidated cash flows)
    
    
    (47,390,685
    )
    
    
    (34,369,871
    )
    
    
    (97,071,319
    )Reconciling items:Reclass exploration costs expensed including exploration
impairment as investing activity for US GAAP
    
    
    1,103,320
    
    
    
    14,548,043
    
    
    
    7,824,051Being reversal of LNG Project expenditure for US GAAP
cash flows
    
    
    (404,594
    )
    
    
    2,762,786
    
    
    
    Being reversal of movement in restricted cash held
relating to LNG Project for US GAAP cash flows
    
    
    (24,492
    )
    
    
    85,566
    
    
    
    Investing activities  U.S. GAAP
    
    
    (46,716,451
    )
    
    
    (16,973,476
    )
    
    
    (89,247,268
    )Financing activities  Canadian GAAP (as per
consolidated cash flows)
    
    
    36,913,339
    
    
    
    78,170,105
    
    
    
    66,963,485Reconciling items:Being reversal of PNG LNG cash calls from unrelated
joint venture partners proportionately consolidated in
Canadian GAAP cash flow statement
    
    
    (9,447,250
    )
    
    
    (9,450,308
    )
    
    
    Financing activities  U.S. GAAP
    
    
    27,466,089
    
    
    
    68,719,797
    
    
    
    66,963,485(Decrease)/increase in cash and cash equivalents
    
    
    3,899,198
    
    
    
    8,470,591
    
    
    
    (27,920,372
    )Cash and cash equivalents, beginning of period (U.S.GAAP)
    
    
    40,152,026
    
    
    
    31,681,435
    
    
    
    59,601,807Cash and cash equivalents, end of period (U.S. GAAP)
    
    
    44,051,224
    
    
    
    40,152,026
    
    
    
    31,681,435
  Consolidated Financial Statements INTEROIL CORPORATION 49




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InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 29. Reconciliation to generally accepted accounting principles in the United States (contd)
 (*)
    
    Comparative results for the year ended December 31, 2007 have been adjusted to correctly
reflect the reconciling items related to the LNG Project. For details of adjustments made to the
Reconciliation of Canadian GAAP Statement of cash flows to U.S. GAAP as per the December 31, 2007
consolidated financial statements, refer to the following table: Operating activities
    
    Investing activities
    
    Financing activities
    
    Total$
    
    $
    
    $
    
    $Cash flows provided
by/(used in)  (as
per original U.S.
GAAP
reconciliation)
    
    
    (57,062,320
    )
    
    
    (12,637,194
    )
    
    
    78,170,105
    
    
    
    8,470,591Adjustments:Transfer of
reversal of PNG
LNG cash call
proportionately
consolidated in
cash flow
statement
reconciling item
from Investing
activities to
Financing
activities (at
amount originally
disclosed in
reconciliation)
    
    
    
    
    
    
    (65,072
    )
    
    
    65,072
    
    
    
    Adjust reversal
of PNG LNG cash
call
proportionately
consolidated in
cash flow
statement
reconciling item
to correct amount
    
    
    9,515,380
    
    
    
    
    
    
    
    (9,515,380
    )
    
    
    Add reversal of
movement in
non-cash working
capital relating
to LNG Project
(increase in
accounts payable
and accrued
liabilities)
    
    
    7,119,562
    
    
    
    (7,119,562
    )
    
    
    
    
    
    
    Add reconciling
item for reversal
of expenditure on
plant and
equipment
relating to LNG
Project
    
    
    (2,762,786
    )
    
    
    2,762,786
    
    
    
    
    
    
    
    Add reconciling
item for reversal
of movement in
restricted cash
held relating to
LNG Project
    
    
    (85,566
    )
    
    
    85,566
    
    
    
    
    
    
    
    Cash flows
provided by/(used
in)  (as per
adjusted U.S.
GAAP
reconciliation)
    
    
    (43,275,730
    )
    
    
    (16,973,476
    )
    
    
    68,719,797
    
    
    
    8,470,591
 Per share amounts
   Year ended December 31,2008
    
    2007
    
    2006Weighted average number of shares on which earnings per
share calculations are based in accordance with U.S.
GAAPBasic
    
    
    33,632,390
    
    
    
    29,998,133
    
    
    
    29,602,360Effect of dilutive options
    
    
    
    
    
    
    
    
    
    
    Diluted
    
    
    33,632,390
    
    
    
    29,998,133
    
    
    
    29,602,360Net income/(loss) per share in accordance with U.S. GAAPBasic
    
    
    (0.12
    )
    
    
    (0.64
    )
    
    
    (1.52
    )Diluted
    
    
    (0.12
    )
    
    
    (0.64
    )
    
    
    (1.52
    )
 Consolidated Financial Statements INTEROIL CORPORATION 50




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##### Table of Contents



InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 29. Reconciliation to generally accepted accounting principles in the United States (contd)
 (1)
    
    OperationsThe Company determined that refinery operations commenced under U.S. GAAP at December 1,
2004, which is the date management assessed that construction of the refinery was
substantially complete and ready for its intended use. The Company ceased capitalization of
certain costs to the refinery project at this date and recognized one months results from
sales, related costs of sales and operating expenses and administrative and general expenses
in the statement of operations for the year ended December 31, 2004.As disclosed in note 2(s) in the consolidated financial statements, operations commenced on
January 1, 2005 under Canadian GAAP. Therefore, the Company continued to capitalize
December 2004s results to the refinery project. Due to the difference in the cost basis of
the refinery, the depreciation expense recorded under U.S. GAAP differs from that recorded
under Canadian GAAP.The useful life for the refinery under U.S. GAAP is the same as that disclosed under
Canadian GAAP.(2)
    
    Indirect participation interestAs disclosed in note 19 in the consolidated financial statements, the Company entered into
an indirect participation interest agreement in exchange for proceeds of $125,000,000.
Under Canadian GAAP, this amount was apportioned between non financial liabilities and
equity. Under U.S. GAAP, the Company has not bifurcated the amount between liability and
equity as the Company has opted to utilize the scope exception under SFAS 133 Para 10(f) for
derivatives that serve as impediments to sales accounting.As explained in note 19, during the year ended December 31, 2008, two of the investors with
a combined 5.225% interest in the eight well drilling program waived their right to convert
their IPI percentage into 696,667 common shares. These waivers have resulted in conveyance
being triggered on this portion of the IPI agreement for the year ended December 31, 2008.
As the initial IPI proceeds were not bifurcated under U.S. GAAP, the total conveyance
proceeds available for the conveyed interest is $11,938,979 (higher by $1,405,548 from the
CGAAP balance), the amounts offset against oil and gas properties is $6,158,895 (higher by
$360,548 from CGAAP balance), and the gain recognised in the statement of operations is
$5,780,084 (higher by $1,045,000 from CGAAP balance).(3)
    
    Preference sharesAs disclosed in Note 22 in the consolidated financial statements, 517,777 preference shares
were issued to an investor in November 2007 for $15,000,000.Under Canadian GAAP, the preference shares were assessed based on the rights attached to
those shares and Management valued the equity and liability component of the instrument
using the residual value basis.As the Preference share agreement has contractual redemption provisions under Fundamental
change section mainly relating to listing requirements, shareholding etc, under U.S. GAAP,
the preference shares needs to be classified under temporary equity classification in
accordance with ASR 268. Transaction costs amounting to $750,000 have been deducted from
the total proceeds of $15,000,000. Under Canadian GAAP the transaction costs attributable
to the liability component was expensed.In addition to the above, the 5% dividend paid for the twelve month period amounting to
$418,526 has been included within long term borrowing costs within Canadian GAAP, but has
been treated as a reduction to retained earnings under U.S. GAAP.During the year ended December 31, 2008 the entire preference shares issued of 517,777
shares were converted into common shares.(4)
    
    8% subordinated debenturesAs disclosed in Note 23 in the consolidated financial statements, on May 13, 2008, the
Company completed the issue of $95,000,000 unsecured 8% subordinated convertible debentures
with a maturity of five years. Under Canadian GAAP, these debentures were assessed based on
the rights attached to the instrument and Management valued the equity and liability
component of the instrument using the residual value basis.
 Consolidated Financial Statements INTEROIL CORPORATION 51




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InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 29. Reconciliation to generally accepted accounting principles in the United States (contd)
 Under U.S. GAAP, Management assessed the debentures following the guidance under FAS 133 to
decide whether the embedded conversion option needs to be bifurcated and disclosed
separately. The embedded conversion option did not satisfy the condition of embedded
derivatives that requires separation due to the scope exception under FAS 133 Para 11(a) as
the option is indexed to the Companys own stock and would have been classified in
Shareholders equity if it had been separated.As FAS 133 bifurcation is not applicable, the provisions of EITF 00-27 requires that the
instrument be assessed for any Beneficial Conversion Features (BCF) included in the
instrument, which should be separated using the intrinsic value method as noted in EITF
98-5. Based on the guidance, the BCF has been valued at $8,821,320 which will be separate
and classified separately under equity as Contributed Surplus. After separation, the
liability component would be accreted over the life of the debentures, being 5 years until
May 2013. If the conversion occurs prior to the stated redemption date, the entire
unamortized value related to the converted portion would be immediately recognized in the
Statement of operations as an ordinary interest expense.The accretion expense of the liability component for the period ending December 31, 2008 was
$1,569,709 (accretion expense under US GAAP is less due to the higher liability component of
the instrument).In addition to the above, deferred financing costs are offset against the respective
liabilities under Canadian GAAP; however, the same is disclosed as a separate item on the
face of the balance sheet under US GAAP. As at December 31, 2008, there was $144,478 of
deferred finance costs which were not amortized in relation to the 8% convertible
debentures.During the year ended December 31, 2008, debenture holders exercised their conversion rights
for $16,025,000 resulting in issue of 641,000 common shares of the Company. As at December
31, 2008, of the 3,800,000 convertible debentures issued, 3,159,000 (December 2007  nil),
were outstanding.Under U.S. GAAP, a portion of the placement fees and BCF accretion are expensed immediately
on conversion. The additional financing expense recognized under U.S. GAAP due to the
conversion of the debentures during the year ended December 31, 2008 was $2,780,274.(5)
    
    Investment in LNG Project/Deferred gain on contributions to LNG ProjectAs disclosed in Note 14 in the consolidated financial statements, a Shareholders Agreement
was signed on July 30, 2007 which converted PNG LNG Inc. and its subsidiaries into a joint
venture project from being a subsidiary of InterOil. Under Canadian GAAP, joint ventures
are proportionately consolidated into the Companys consolidated financials based on the
shareholding in the joint venture.Applying the guidance under APB 18, a corporate joint venture has to be equity accounted
under U.S. GAAP. InterOil has also followed the guidance under SAB Topic 5H wherein a gain
on contributions to the joint venture is not recognised, however, a gain is recognised as a
result of a change in economic interest.InterOil will account for the joint venture using equity accounted method. In addition to
the gain or loss recognised as part of the operations, InterOil will also recognise any
difference between the Investment carried in its balance sheet and the underlying equity in
net assets of the joint venture in the statement of operations and the investment balance
will increase/decrease in line with this difference.The adjustments to reflect the reversal of proportionately consolidated balances and take-up
of equity accounted balances have been summarised below. Given below is the Midstream -
liquefaction consolidated balance sheet and statement of operations under Canadian GAAP and
U.S. GAAP. The statement of operations incorporates results for the year ended December 31,
2008. PNG LNG Inc. was a subsidiary of InterOil until the date of the Shareholders
Agreement and has been proportionately consolidated subsequent to that date.
 Consolidated Financial Statements INTEROIL CORPORATION 52




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##### Table of Contents



InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 29. Reconciliation to generally accepted accounting principles in the United States (contd)
 Midstream - liquefaction
    
    
    
    GAAPConsolidated Balance Sheet
    

    Canadian GAAP
    
    Adjustments
    
    US GAAPCash and cash equivalents
    
    
    4,919,448
    
    
    
    (4,919,348
    )
    
    
    100Cash restricted
    
    
    61,074
    
    
    
    (61,074
    )
    
    
    Other assets
    
    
    21,710
    
    
    
    (21,710
    )
    
    
    Prepaid expenses
    
    
    
    
    
    
    
    
    
    
    Current assets
    
    
    5,002,232
    
    
    
    (5,002,132
    )
    
    
    100Investment in PNG LNG Inc.
    
    
    
    
    
    
    6,610,480
    
    
    
    6,610,480Plant and equipment
    
    
    2,273,619
    
    
    
    (2,273,619
    )
    
    
    Total assets
    
    
    7,275,851
    
    
    
    (665,271
    )
    
    
    6,610,580Accounts payable and accrued liabilities
    
    
    687,327
    
    
    
    (687,327
    )
    
    
    Intercompany payables
    
    
    3,498,042
    
    
    
    21,056
    
    
    
    3,519,098Current liabilities
    
    
    4,185,369
    
    
    
    (666,271
    )
    
    
    3,519,098Deferred gain on contributions to LNG project
    
    
    17,497,110
    
    
    
    (17,497,110
    )
    
    
    Total non-current liabilities
    
    
    17,497,110
    
    
    
    (17,497,110
    )
    
    
    Share capital
    
    
    1
    
    
    
    
    
    
    
    1Accumulated deficit
    
    
    (14,406,629
    )
    
    
    17,498,110
    
    
    
    3,091,481Shareholders Equity
    
    
    (14,406,628
    )
    
    
    17,498,110
    
    
    
    3,091,482Total liabilities and Shareholders equity
    
    
    7,275,851
    
    
    
    (665,271
    )
    
    
    6,610,580
 Midstream - liquefaction
    
    
    
    GAAPConsolidated Statement of Operation
    

    Canadian GAAP
    
    Adjustments
    
    US GAAPInterest income
    
    
    90,757
    
    
    
    (90,757
    )
    
    
    Total revenues
    
    
    90,757
    
    
    
    (90,757
    )
    
    
    Office and Administrative expenses
    
    
    3,213,034
    
    
    
    (2,873,563
    )
    
    
    339,471Depreciation
    
    
    69,142
    
    
    
    (69,142
    )
    
    
    Professional fees
    
    
    3,809,329
    
    
    
    (3,831,000
    )
    
    
    (21,671
    )Borrowing costs
    
    
    240,782
    
    
    
    
    
    
    
    240,782Exchange (Gain) loss
    
    
    559,793
    
    
    
    (559,793
    )
    
    
    Loss on proportionate consolidation of PNG LNG Inc
    
    
    
    
    
    
    
    
    
    
    Gain on equity accounted investment
    
    
    
    
    
    
    (1,047,795
    )
    
    
    (1,047,795
    )Income taxes
    
    
    110,037
    
    
    
    (110,037
    )
    
    
    Total expenses
    
    
    8,002,117
    
    
    
    (8,491,330
    )
    
    
    (489,213
    )Net gain/(loss)
    
    
    (7,911,360
    )
    
    
    8,400,573
    
    
    
    489,213
 (6)
    
    Deferred Financing costsDeferred financial costs are offset against the respective liabilities under Canadian GAAP;
however, the same is disclosed as a separate item on the face of the balance sheet under US
GAAP in accordance with guidance under APB 21.(7)
    
    Income tax effect of adjustmentsThe income tax effect of U.S. GAAP adjustments was a reduction to the future tax asset of
$2,671,594 (year ended December 31, 2007  $3,403,154) for the year ended December 31, 2008
due to a decrease in the loss carry-forwards. A corresponding decrease in the valuation
allowance was recorded.(8)
    
    Non controlling interestThe non-controlling interest movements are the result of the U.S. GAAP adjustments relating
to the midstream operations described in point 1 above.
 Consolidated Financial Statements INTEROIL CORPORATION      53




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##### Table of Contents



InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 29. Reconciliation to generally accepted accounting principles in the United States (contd)
 Recent Accounting Pronouncements
 Fair value measurements
  Fair Value Option for Financial Assets and Financial Liabilities
  Business combinations
  Non-controlling interests in consolidated financial statements
  Disclosures about derivative instruments and hedging activities
  Consolidated Financial Statements INTEROIL CORPORATION      54




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##### Table of Contents



InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
 29. Reconciliation to generally accepted accounting principles in the United States (contd)
 Hierarchy of generally accepted accounting principles
  Accounting for financial guarantee insurance contracts
  Consolidated Financial Statements INTEROIL CORPORATION 55