2.1 Basis of preparation

These financial statements have been prepared in accordance with approved accounting standards as applicable in Pakistan and the requirements of the Companies Ordinance, 1984. Approved accounting standards comprise of such International Financial Reporting Standards as have been notified under the provisions of the Companies Ordinance, 1984. Wherever, the requirements of the Companies Ordinance, 1984 or directives issued by the Securities and Exchange Commission of Pakistan differ from the requirements of these standards, the requirements of the Companies Ordinance, 1984 or the requirements of the said directives have been followed.

Amendments to published standards and new interpretations that are effective in 2006 and relevant

IAS 19 (Amendment) – Employee Benefits, is mandatory for the Company’s accounting periods beginning on or after January 1, 2006. It introduces the options of an alternative recognition approach for actuarial gains and losses. It also adds new disclosure requirements. The Company does not intend to adopt the alternative approach for recognition of actuarial gains and losses. Adoption of this amendment only impacts the format and extent of disclosures as presented in note 8 to the financial statements.

Standards, amendments and interpretations effective in 2006 but not relevant

–IFRIC 4 – Determining whether an Arrangement contains a Lease, requires the determination that whether an arrangement is or contains a lease to be based on the substance of the arrangement. It requires an assessment of whether: (a) fulfilment of the arrangement is dependent on the use of a specific asset or assets (the asset); and (b) the arrangement conveys a right to use the asset. The Company has assessed its arrangements with its suppliers and service providers and is of the view that none of these contain arrangements which meet the criteria for recognition as Lease, as laid down in IFRIC 4.

Standards, interpretations and amendments to published approved accounting standards that are relevant, but not yet effective

Following amendments to existing standards and interpretations have been published that are mandatory for accounting periods beginning on the dates mentioned below

Adoption of the above amendments and interpretations are not expected to have any material effect on the amounts recognised in these financial statements.

2.2 Overall valuation policy

These financial statements have been prepared under the historical cost convention except as stated below in the respective policy notes.

2.3 Fixed assets

Fixed assets are stated at cost less accumulated depreciation / amortisation except capital work-in-progress, which is stated at cost.

Depreciation / amortisation is charged to income by applying the straight-line method whereby the cost less residual value, if not insignificant, of an asset is written off over its estimated useful life to the Company. Full month's depriciation / amortisation is charged in the month of acquisition and no depriciation / amortisation is charged in the month of disposal. Cost of leasehold land is amortised fairly over the period of lease.

Costs associated with developing or maintaining computer software programmes are recognised as an expense when incurred. However, costs that are directly associated with identifiable and unique software products controlled by the Company and that have probable economic benefits exceeding their cost and beyond one year, are recognised as intangible assets.

Assets' residual values and useful lives are reviewed and adjusted if expectations significantly differ from previous estimates, at each balance sheet date.

Company accounts for impairment, where indication exists, by reducing its carrying value to the assessed recoverable amount.

Maintenance and normal repairs are charged to income as and when incurred. Renewals and improvements are capitalised and assets so replaced, if any, are retired.

Gains and losses on disposal of fixed assets are included in income currently.

2.4 Investment in associate

Investment in associate is accounted for using equity method of accounting and is initially recognised at cost. The Company's share in its associate post-acquisition profits or losses is recognised in the income statement and its share in post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Company's share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Company does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate.

2.5 Taxation

2.5.1 Current

Charge for the current taxation is based on applicable provisions of the Income Tax Ordinance, 2001.

25.2 Deferred

Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax base of assets and liabilities and their carrying amounts in the financial statements.

2.6 Stores, spares and chemicals

These are valued at cost, determined using weighted average method, less provision for obsolescence. Items in transit are valued at cost comprising invoice value plus other charges incurred thereon.

2.7 Stock-in-trade

Stock of crude oil is valued at lower of cost determined using “first-in first-out” method and net realisable value except crude oil in transit which is valued at cost. Finished products are valued at lower of cost and net realisable value. Cost in relation to finished products represents cost of crude oil and appropriate manufacturing overheads. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and estimated costs necessary to make the sale.

2.8 Trade debts

Trade debts are carried at the fair value of consideration to be received against goods and services. Provision is made in respect of doubtful debts, if any.

2.9 Investments

Financial assets at fair value through profit and loss

Financial assets held for trading are classified in this category. These are initially measured at fair value which is reassessed at each reporting date. In the case of investments in open ended mutual funds, fair value is determined on the basis of period end Net Asset Value (NAV) as announced by the Asset Management Company.

2.10 Cash and cash equivalents

Cash and cash equivalents are carried in the balance sheet at cost. For the purposes of the cash flow statement, cash and cash equivalents comprise cash in hand, with banks on current, savings and deposit accounts, running finance under mark-up arrangements and short-term finance.

2.11 Trade and other payables

Trade and other payables are carried at the fair value of the consideration to be paid for goods and services.

2.12 Borrowing costs

Borrowing costs are recognised as an expense in the period in which these are incurred.

2.13 Provisions

Provisions are recognised when the Company has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and a reliable estimate of the amount can be made.

2.14 Retirement benefits

The Company operates recognised Provident, Gratuity and Pension Funds for all its eligible employees. The Provident Fund is a defined contribution plan. All others are defined benefit plans. Actuarial valuations of defined benefit plans are carried out on periodical basis using the projected unit credit method and the latest valuations were carried out at the balance sheet date (June 30, 2007). Actuarial gain / loss is amortised over a period of 11 years for the management staff gratuity and pension funds and 17 years for non-management staff pension and gratuity funds, if it exceeds the 10% corridor limit. The unrecognised past service cost is amortised over its vesting period.

2.15 Foreign currency translation

These financial statements are presented in Pak Rupees which is also the functional currency of the Company.

Transactions in foreign currencies are translated to rupees at the rates of exchange prevailing on the date of the respective transactions. Monetary assets and liabilities in foreign currencies are translated to rupees at rates prevailing at the balance sheet date. Gains and losses resulting from the above are recognised in the profit and loss account.

2.16 Financial instruments

All financial assets and liabilities are recognised at the time when the Company becomes a party to the contractual provisions of the instrument.

The carrying values of all financial assets and liabilities reflected in the financial statements approximate their fair values. Any gains and losses on derecognition of financial assets and liabilities are taken to income statement currently.

2.17 Revenue recognition

a) Local sales are recorded on the basis of products pumped in oil marketing companies’ tanks.

b) Export sales are recorded on the basis of products shipped to customers.

c) The prices of refinery products are notified by the Oil & Gas Regulatory Authority (OGRA) which are primarily based on import parity pricing formula. However, in order to enable certain refineries including the Company to operate on a self financing basis, the Government effective from July 1, 2002 had introduced a tariff protection formula under which deemed duty is built into the import parity based prices of some of the products. Under this formula, any profit after taxation above 50% of the paid-up capital as it was on July 1, 2002 (Rs 200 million), is required to be transferred to a "Special Reserve" to offset any future losses or to make investment for expansion or upgradation of the respective refineries.

Discount on local crude, if any, wharfage and insurance is paid to Government.

d) Dividends are recognised when the right of receipt is established.

e) Income on bank deposits is recognised on accrual basis.

2.18 Government grants

Government grants related to costs are deferred and recognised in the income statement as a deduction from the related expense over the period necessary to match them with the costs that they are intended to compensate.

2.19 Dividends

Dividend distribution to the Company's shareholders is recognised as a liability in the Company's financial statements in the period in which the dividends are approved.

3. CRITICAL ACCOUNTING ESTIMATES, JUDGEMENTS AND POLICIES

The preparation of financial statements in conformity with approved accounting standards requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Company's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are; provision for income tax and provision for post employment benefits.

The Company recognises provision for income tax based on best current estimates. However, where the final tax outcome is different from the amounts that were initially recorded, such differences will impact the income tax provision in the period in which such determination is made.

Significant estimates relating to post employment benefits are disclosed in note 8.

Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

Management believes that the change in outcome of estimates would not have a material effect on the amounts disclosed in the financial statements.

No critical judgement has been used in applying the accounting policies.