# to the members of Gulf Keystone Petroleum Limited

_Source: `DeepSeekOCR_Ardian_pruned_1k/energy-oil-gas-e-p/LSE_GKP.L_2022/LSE_GKP.L_2022.mmd` · pages 127-133_

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to the members of Gulf Keystone Petroleum Limited

## Report on the audit of the financial statements continued

5. Key audit matters continued

5.2. Revenue recognition

<table><tr><td>Key audit matter description</td><td>Revenue totalling \(460.1 million (2021: \)301.4 million) has been recognised during the year, being wholly comprised of oil sales for the year.
The Group has continued to recognise revenue in accordance with the terms of the Shaikan Production Sharing Contract ("PSC"), the draft Term Sheet and, up to 31 August 2022, a Crude Oil Sales Agreement (or "lifting agreement"). These documents have been used to govern the terms of Shaikan crude oil sales since 1 October 2017. The Group has not signed a new lifting agreement with the KRG since the previous agreement expired on 31 August 2022, meaning that there is an element of uncertainty in respect of revenue recognition for oil sales from 1 September 2022 to 31 December 2022. Production and export of oil has however continued whilst the negotiations around the terms of a revised lifting agreement are ongoing.
The KRG have proposed a new pricing mechanism based upon the average monthly Kurdistan blend ("KBT") sales price realised by the KRG at Ceyhan, Turkey, as advised by the KRG and published in their publicly available quarterly oil sales reports. The Company has not accepted the proposal and therefore continues to invoice the KRG for oil sales based on the previous pricing formula.
Due to the uncertainty in respect of the pricing mechanism which will be employed, the Directors have concluded it is appropriate to recognise revenue based on the mechanism proposed by the KRG from September to December 2022, and any difference between the proposed and final pricing mechanism will be reflected in future periods.
There has also been a delay in settlement of outstanding receivables with the KRG. At year end, no amounts had been received in respect of August to December oil deliveries, although those relating to August and September have been settled subsequent to year end, with the amount received for September being consistent with the KRG's proposed new pricing mechanism.
The key judgements in relation to revenue recognition are:
· whether revenue should be recognised for the oil sales from 1 September to 31 December 2022 in the absence of a signed lifting agreement in respect of those oil sales;
· the amount of revenue which should be recognised for the oil sales from 1 September to 31 December 2022 above, considering the uncertainty in respect of the pricing mechanism and the absence of a signed lifting agreement; and
· the extent of the risk in relation to unpaid revenue amounts at 31 December 2022, in particular the valuation of the expected credit loss ("ECL") and the appropriateness of the assumptions used notably the timing of payments, probability of default and loss given default.
Further details of the key considerations have been disclosed in the Audit and Risk Committee report on page 96 and in the 'Critical judgements in applying the Group's accounting policies' disclosure on page 142. Revenue is disclosed in note 2 to the financial statements.</td></tr><tr><td>How the scope of our audit responded to the key audit matter</td><td>We have assessed the appropriateness of the revenue recognition policy in light of current year developments and recalculated the revenue recognised for oil sales for the year. We have performed the following procedures:
· obtaining an understanding of relevant controls over the revenue recognition process, including management review controls;
· obtaining an understanding of the latest negotiations between the Group and the KRG in respect of the proposed updated pricing mechanism within the draft lifting agreement for oil sales from 1 September 2022 through enquiry of key management personnel;
· challenging the Directors on their assessment of the accounting implications by reference to the relevant accounting standard, being IFRS 15 Revenue from Contracts with Customers;
· recalculating the expected monthly entitlement revenue for the oil sales in line with the Shaikan PSC, the draft Term Sheet, and the latest lifting agreements. For oil sales from September 2022 onwards, the recalculation was performed by reference to the draft lifting agreement proposed by the KRG which is under negotiation between the Group and the KRG. Our calculations were based on production in the year per the approved delivery reports, the average Dated Brent price or (from 1 September onwards) the KBT price for the month, less quality and transportation discounts;
· vouching all cash receipts in 2022 and reviewed post year end bank statements to confirm the extent to which the receivables outstanding at 31 December 2022 have subsequently been received;
· challenging the ECL assumptions used, through benchmarking of the assumptions employed against external sources, and recalculating the provision; and
· assessing the relevant disclosures in relation to revenue recognition.</td></tr></table>

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<table><tr><td>Key observations</td><td>Based on our analysis, management have continued to recognise revenue appropriately in accordance with IFRS 15. We concur with the recognition of \(460.1m of oil sales for the year ended 31 December 2022. We also concur with the appropriateness of the carrying value of the associated receivables, including the ECL recognised against those receivables.</td></tr></table>

## 6. Our application of materiality

## 6.1. Materiality

We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work.

Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:

<table><tr><td></td><td>Group financial statements</td></tr><tr><td>Materiality</td><td>\(10m (2021: \)8m)</td></tr><tr><td>Basis for determining materiality</td><td>3.8% of profit before tax (2021: 1.5% of net assets)</td></tr><tr><td>Rationale for the benchmark applied</td><td>We consider that profit before tax is of particular relevance to users of the financial statements, and is a key measure of performance used by the Group. The significant increase in profit before tax during the year has resulted in large distributions being made to shareholders; we consider a profit metric to be more reflective of the improved financial performance during the year. The determined materiality also represents 1.7% of net assets.</td></tr></table>

## 6.2. Performance materiality

We set performance materiality at a level lower than materiality to reduce the probability that, in aggregate, uncorrected and undetected misstatements exceed the materiality for the financial statements as a whole.

<table><tr><td></td><td>Group financial statements</td></tr><tr><td>Performance materiality</td><td>70% (2021: 70%) of Group materiality</td></tr><tr><td>Basis and rationale for determining performance materiality</td><td>In determining performance materiality, we considered the following factors:• The quality of the control environment and conclusions from our testing of Group-wide internal controls;• The low level of historical uncorrected misstatements within the consolidated financial statements; and• The lack of significant changes in the underlying business during the year which would impact on our ability to forecast the expected level of misstatement.</td></tr></table>

## 6.3. Error reporting threshold

We agreed with the Audit and Risk Committee that we would report to the Committee all audit differences in excess of \(500k (2021: \)400k), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit and Risk Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements.

## An overview of the scope of our audit

## 7.1. Identification and scoping of components

Our audit was scoped by obtaining an understanding of the Group and its environment, including Group-wide internal controls, and assessing the risks of material misstatement. Our audit planning identified the Group's business to be a single component, and therefore all of the operations of the Group were subject to a full scope audit by the UK audit team. Our audit work was performed primarily at the Group's head office in London. Specified audit procedures in respect of the Group's property, plant and equipment and inventory balances were performed by a Deloitte member firm based in Kurdistan under the direction of the UK audit team.

## 7.2. Our consideration of the control environment

The Group operates a single asset, being the Shaikan field, and all revenues associated with Shaikan are earned from the KRG. As discussed in the key audit matters section above, we tested controls over the impairment assessment for the Shaikan field; and we also obtained an understanding of relevant controls over revenue.

In addition, we have obtained an updated understanding of the IT environment in the current year. This included understanding the changes to the main accounting system, SUN, and performing audit procedures over the associated data migration from the previous system.

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# Independent auditor's report continued to the members of Gulf Keystone Petroleum Limited

## Report on the audit of the financial statements continued

## 7. An overview of the scope of our audit continued

## 7.3. Our consideration of climate-related risks

Management has considered climate change as part of their risk assessment process when considering the principal risks and uncertainties facing the Group. This is set out in the strategic report on page 62, the principal risks set out on page 71 and accounting policies on page 143.

From the perspective of the impact on the FY22 financial statements, the climate-related risks have been identified to be most impactful on the carrying value of producing oil and gas assets and the associated impairment assessment. This is consistent with our evaluation of the climate related risks facing the Group and is linked to the key audit matter as highlighted in section 5.1 above, where we have described both the risks related to these assumptions and our audit procedures in relation to the challenge of these assumptions.

## Our climate change procedures also included:

• Assessing the impact on our risk assessment and planned audit procedures, aided by the involvement of our climate specialists, for example by understanding how certain physical and transition climate risks translate to potential implications specific to the Group, and then the potential financial impact of these on the underlying account balances and disclosures. This included consideration of the potential impact of climate change on the carrying value of oil and gas assets if the oil price was consistent with the price curve implied by the Net Zero Emissions by 2050 ("NZE") scenario presented within the IEA's World Energy Outlook 2022 publication;

• Assessing whether the impact of climate risks are material through considering specific estimates and assumptions, and determining whether those estimates and assumptions are reasonable; and

• Reading the climate related disclosures, aided by the involvement of our climate specialists, throughout the annual report and financial statements, including in the Group's TCFD disclosures within the Strategic Report, to consider whether the climate impacts and disclosures are materially consistent with the climate impacts and disclosures within the financial statements and with the knowledge the audit team have obtained during the audit.

As described above, we have considered the potential impacts of climate change as part of our key audit matter relating to the carrying value of oil and gas assets. We also considered the potential impact of climate change elsewhere in the financial statements, including but not limited to the decommissioning provision and the going concern assumption in a reduced oil price environment.

## 8. Other information

The other information comprises the information included in the annual report, other than the financial statements and our auditor's report thereon. The Directors are responsible for the other information contained within the annual report.

Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon.

Our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the course of the audit, or otherwise appears to be materially misstated.

If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether this gives rise to a material misstatement in the financial statements themselves. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.

We have nothing to report in this regard.

## 9. Responsibilities of Directors

As explained more fully in the Directors' responsibilities statement, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the Directors are responsible for assessing the Group's ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so.

## 10. Auditor's responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

A further description of our responsibilities for the audit of the financial statements is located on the FRC's website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor's report.

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## 11. Extent to which the audit was considered capable of detecting irregularities, including fraud

Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below.

## 11.1. Identifying and assessing potential risks related to irregularities

In identifying and assessing risks of material misstatement in respect of irregularities, including fraud and non-compliance with laws and regulations, we considered the following:

• the nature of the industry and sector, control environment and business performance including the design of the Group's remuneration policies, key drivers for Directors' remuneration, bonus levels and performance targets;

• the Group's own assessment of the risks that irregularities may occur either as a result of fraud or error;

• the results of our enquiries of management and members of the Board and the Audit and Risk Committee about their own identification and assessment of the risks of irregularities, including those specific to the oil and gas industry;

• the results of our enquiries with the Group's internal and external legal counsel about potential and actual litigation and claims;

• any matters we identified having obtained and reviewed the Group's documentation of their policies and procedures relating to:

• identifying, evaluating and complying with laws and regulations and whether they were aware of any instances of non-compliance, including consideration of the potential implications of the Iraqi Supreme Court ruling (as explained further on page 143 of the financial statements);

• detecting and responding to the risks of fraud and whether they have knowledge of any actual, suspected or alleged fraud; and

• the internal controls established to mitigate risks of fraud or non-compliance with laws and regulations.

• the matters discussed among the audit engagement team and relevant internal specialists, including valuations, IT, reservoir engineering, and climate specialists, regarding how and where fraud might occur in the financial statements and any potential indicators of fraud.

As a result of these procedures, we considered the opportunities and incentives that may exist within the organisation for fraud and identified the greatest potential for fraud in the following area: carrying value of oil and gas assets. In common with all audits under ISAs (UK), we are also required to perform specific procedures to respond to the risk of management override.

We also obtained an understanding of the legal and regulatory frameworks that the Group operates in, focusing on provisions of those laws and regulations that had a direct effect on the determination of material amounts and disclosures in the financial statements. The key laws and regulations we considered in this context included the Bermuda Companies Act 1981 and the UK Listing Rules.

In addition, we considered provisions of other laws and regulations that do not have a direct effect on the financial statements but compliance with which may be fundamental to the Group's ability to operate or to avoid a material penalty. These included the Group's operating licence and environmental regulations, as well as relevant legal regulations in both Kurdistan and Iraq.

## 11.2. Audit response to risks identified

As a result of performing the above, we identified the carrying value of oil and gas assets as a key audit matter related to the potential risk of fraud or non-compliance with laws and regulations. The key audit matters section of our report explains the matter in more detail and also describes the specific procedures we performed in response to that key audit matter.

In addition to the above, our procedures to respond to risks identified included the following:

• reviewing the financial statement disclosures and testing to support documentation to assess compliance with provisions of relevant laws and regulations described as having a direct effect on the financial statements;

• enquiring of management, members of the Board and the Audit and Risk Committee, including those responsible for whistleblowing, and in-house legal counsel concerning any instances of fraud noted during the year, and actual and potential litigation and claims;

• performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material misstatement due to fraud;

• reading minutes of meetings of those charged with governance; and

• in addressing the risk of fraud through management override of controls, testing the appropriateness of journal entries and other adjustments; assessing whether the judgements made in making accounting estimates are indicative of a potential bias; and evaluating the business rationale of any significant transactions that are unusual or outside the normal course of business.

We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members including internal specialists, and remained alert to any indications of fraud or non-compliance with laws and regulations throughout the audit.

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# Independent auditor's report continued to the members of Gulf Keystone Petroleum Limited

## Report on other legal and regulatory requirements

## 12. Opinions on other matters prescribed by our engagement letter

In our opinion the part of the Directors' remuneration report to be audited has been properly prepared in accordance with the UK Companies Act 2006 as if the Act had applied to the Company.

## 13. Corporate Governance Statement

Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the Corporate Governance Statement is materially consistent with the financial statements and our knowledge obtained during the audit:

- the Directors' statement with regards to the appropriateness of adopting the going concern basis of accounting and any material uncertainties identified, as set out on page 136;

- the Directors' explanation as to its assessment of the Group's prospects, the period this assessment covers and why the period is appropriate, as set out on pages 76 and 77;

• the Directors' statement on fair, balanced and understandable, as set out on page 121;

• the Board's confirmation that it has carried out a robust assessment of the emerging and principal risks, as set out on page 67;

- the section of the annual report that describes the review of effectiveness of risk management and internal control systems, as set out on page 66; and

• the section describing the work of the Audit and Risk Committee, as set out on pages 94 to 97.

## 14. Use of our report

This report is made solely to the company's members, as a body, in accordance with Section 90 of the Bermuda Companies Act 1981. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditor's report and/or those matters we have expressly agreed to report to them on in our engagement letter and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the Company's members as a body, for our audit work, for this report, or for the opinions we have formed.

As required by the Financial Conduct Authority (FCA) Disclosure Guidance and Transparency Rule (DTR) 4.1.14R, these financial statements form part of the European Single Electronic Format (ESEF) prepared Annual Financial Report filed on the National Storage Mechanism of the UK FCA in accordance with the ESEF Regulatory Technical Standard ('ESEF RTS'). This auditor's report provides no assurance over whether the annual financial report has been prepared using the single electronic format specified in the ESEF RTS.

## David Paterson ACA (Senior statutory auditor)

For and on behalf of Deloitte LLP

Statutory Auditor

London, United Kingdom

22 March 2023

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## Consolidated income statement

## For the year ended 31 December 2022

<table><tr><td></td><td>Notes</td><td>2022 \(&#x27;000</td><td>2021 \)&#x27;000</td></tr><tr><td>Revenue</td><td>2</td><td>460,113</td><td>301,389</td></tr><tr><td>Cost of sales</td><td>3</td><td>(158,651)</td><td>(111,721)</td></tr><tr><td>(Increase)/decrease of impairment provision on trade receivables</td><td>14</td><td>(1,960)</td><td>7,065</td></tr><tr><td>Gross profit</td><td></td><td>299,502</td><td>196,733</td></tr><tr><td>Other general and administrative expenses</td><td>4</td><td>(12,202)</td><td>(13,643)</td></tr><tr><td>Share option related expenses</td><td>5</td><td>(13,756)</td><td>(8,490)</td></tr><tr><td>Profit from operations</td><td></td><td>273,544</td><td>174,600</td></tr><tr><td>Finance revenue</td><td>7</td><td>648</td><td>419</td></tr><tr><td>Finance costs</td><td>7</td><td>(9,655)</td><td>(11,353)</td></tr><tr><td>Foreign exchange gains</td><td></td><td>1,232</td><td>57</td></tr><tr><td>Profit before tax</td><td></td><td>265,769</td><td>163,723</td></tr><tr><td>Tax credit</td><td>8</td><td>325</td><td>874</td></tr><tr><td>Profit after tax for the year</td><td></td><td>266,094</td><td>164,597</td></tr><tr><td>Profit per share (cents)</td><td></td><td></td><td></td></tr><tr><td>Basic</td><td>9</td><td>123.52</td><td>77.14</td></tr><tr><td>Diluted</td><td>9</td><td>118.62</td><td>73.04</td></tr></table>

## Consolidated statement of comprehensive income

For the year ended 31 December 2022

<table><tr><td></td><td>2022 \(&#x27;000</td><td>2021 \)&#x27;000</td></tr><tr><td>Profit after tax for the year</td><td>266,094</td><td>164,597</td></tr><tr><td>Items that may be reclassified to the income statement in subsequent periods:</td><td></td><td></td></tr><tr><td>Fair value losses arising in the period</td><td>—</td><td>(2,021)</td></tr><tr><td>Cumulative losses arising on hedging instruments reclassified to revenue</td><td>—</td><td>3,753</td></tr><tr><td>Exchange differences on translation of foreign operations</td><td>(1,950)</td><td>(254)</td></tr><tr><td>Total comprehensive income for the year</td><td>264,144</td><td>166,075</td></tr></table>

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## Consolidated balance sheet

As at 31 December 2022

<table><tr><td></td><td>Notes</td><td>31 December 2022 \(&#x27;000</td><td>31 December 2021 \)&#x27;000</td></tr><tr><td>Non-current assets</td><td></td><td></td><td></td></tr><tr><td>Intangible assets</td><td>10</td><td>4,307</td><td>3,583</td></tr><tr><td>Property, plant and equipment</td><td>11</td><td>436,443</td><td>404,205</td></tr><tr><td>Deferred tax asset</td><td>18</td><td>1,576</td><td>1,385</td></tr><tr><td></td><td></td><td>442,326</td><td>409,173</td></tr><tr><td>Current assets</td><td></td><td></td><td></td></tr><tr><td>Inventories</td><td>13</td><td>6,372</td><td>6,018</td></tr><tr><td>Trade and other receivables</td><td>14</td><td>176,203</td><td>179,200</td></tr><tr><td>Cash and cash equivalents</td><td></td><td>119,456</td><td>169,866</td></tr><tr><td></td><td></td><td>302,031</td><td>355,084</td></tr><tr><td>Total assets</td><td></td><td>744,357</td><td>764,257</td></tr><tr><td>Current liabilities</td><td></td><td></td><td></td></tr><tr><td>Trade and other payables</td><td>15</td><td>(128,561)</td><td>(98,800)</td></tr><tr><td>Non-current liabilities</td><td></td><td></td><td></td></tr><tr><td>Trade and other payables</td><td>15</td><td>(325)</td><td>(789)</td></tr><tr><td>Borrowings</td><td>16</td><td>—</td><td>(99,123)</td></tr><tr><td>Provisions</td><td>17</td><td>(42,546)</td><td>(43,841)</td></tr><tr><td></td><td></td><td>(42,871)</td><td>(143,753)</td></tr><tr><td>Total liabilities</td><td></td><td>(171,432)</td><td>(242,553)</td></tr><tr><td>Net assets</td><td></td><td>572,925</td><td>521,704</td></tr><tr><td>Equity</td><td></td><td></td><td></td></tr><tr><td>Share capital</td><td>20</td><td>216,247</td><td>213,731</td></tr><tr><td>Share premium</td><td>20</td><td>528,125</td><td>742,914</td></tr><tr><td>Exchange translation reserve</td><td></td><td>(4,718)</td><td>(2,768)</td></tr><tr><td>Accumulated losses</td><td></td><td>(166,729)</td><td>(432,173)</td></tr><tr><td>Total equity</td><td></td><td>572,925</td><td>521,704</td></tr></table>

The financial statements were approved by the Board of Directors and authorised for issue on 22 March 2023 and signed on its behalf by:

Jon Harris
Chief Executive Officer