based upon historical results and experience, consultation with experts, trends and other methods considered reasonable in the particular circumstances, as well as forecasts as to how these might change in the future. The following is a summary of which estimates and judgments could have a material effect on the accounts. 4.1
Critical accounting estimates and assumptions
4.1.1 Impairment
The Group assesses long-lived assets for possible impairment upon the occurrence of indicators. Events that can trigger assessments for possible impairments include, but are not limited to (a) significant decreases in the market value of an asset, (b) significant changes in the extent or manner of use of an asset, and (c) a physical change in the asset. Estimating undiscounted future cash flows requires the management to make judgments about long-term forecasts of future revenues and costs related to the assets subject to review. These forecasts are uncertain as they require assumptions about demand for our products and services, future market conditions and future technological developments. Significant and unanticipated changes in these assumptions could require a provision for impairment in a future period. Given the nature of these evaluations and their application to specific assets and specific times, the management cannot reasonably quantify the impact of changes in these assumptions. 4.1.2 Fair value of financial instruments
The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. Management uses its judgment to select a variety of methods and make assumptions that are mainly based on market conditions existing at each balance sheet date. The primary assumptions used in the valuations are interest rates, share price, expected life of instruments, volatility and likelihood of certain events happening. The employee stock option was priced using a Black Scholes formula for equity options. For the simulation of “Change of Control�, the event was drawn from a uniform distribution in the simulations. Financial instruments carried at fair value include warrants issued to founding share holders. Assumptions used in the calculations of fair value of the financial instrument that are more sensitive are the following: -
Market price of the Company’s shares (warrants) Volatility of the share price (warrants) Probability of change of control event (warrants)
4.1.3 Warrants
The Group has issued 42,500,000 warrants where the strike price might vary dependent upon circumstances outside of the control of the Group. The warrants are classified as a liability and measured at fair value through profit or loss. No cash outflows will arise in relation to the warrants. As at 31 December 2008, the value of the warrants was calculated to be USD 10.9 million using 57 % volatility and a share price of USD 0.57 (NOK 4 at USD exchange rate of 7.02). The table below presents a calculation of the sensitivities related to the valuation of warrants. The table shows increase / decrease in fair value of warrants based on 10% change (plus or minus) in volatility, share price and market interest rate. The fair value of the warrants, and consequently the liability relating to the change of control clause, is strongly dependent on the value and the volatility in the shares. Volatility used at 31.12.2008 Warrant liability (USD million) % increase/decrease in warrant liability
Effect of -10%
+10%
57% 10.9
8.9
13
-
-18%
19%
Share Price used at 31.12.2008
Effect of -10%
+10%
$0.57 10.9
9.8
12.2
-
-10%
12%
Interest Rate used at 31.12.2008
Effect of -10%
+10%
2.30% 10.9
10.8
11.04
-
-1%
1%
51