VOLTAIC STRATEGIC RESOURCES LTD — Annual Report 2012

Mar 29, 2012

ABN: 66 138 145 114

INCREMENTAL OIL AND GAS LTD

Annual Report for the Year Ended 31 December 2011

Contents to Financial Report

Corporate Information	3
Directors' Report	4-12
Consolidated Statement of Financial Position	13
Consolidated Statement of Comprehensive Income	14
Consolidated Statement of Changes in Equity	15
Consolidated Statement of Cash Flows	16
Notes to the Financial Statements	17-42
Directors' Declaration	43
Independent Audit Report to the members of Incremental Oil and Gas Ltd	44
Auditor's Independence Declaration	46

Corporate Information

This annual report is of the group comprising Incremental Oil and Gas Ltd ("the Company") and its subsidiaries (collectively "the Group"). The Company's functional and presentation currency is USD (\$). At 1 January 2011 the Company adopted the US Dollar as the functional and presentation currency. Unless otherwise stated, all amounts in the Annual Report are in US Dollars.

A description of the Group's operations and of its principal activities is included in the review of operations and activities in the Directors' Report on pages 4 to 12. The Directors' Report is not part of the financial report.

Directors

Chris Cronin (Chairman) Gerry McGann (Managing Director) Mark Stowell Hon JAL (Sandy) Macdonald

Company Secretary

Susan Hunter (Appointed 1 February 2011)

Registered office

Unit 2, 16 Phillimore Street Fremantle, WA 6160 Australia

Principal place of business

Unit 2, 16 Phillimore Street Fremantle, WA 6160 Australia

Telephone: +61 8 9431 7306 Facsimile: +61 8 9430 4883 Web: www.incrementaloilandgas.com

Auditors

Stantons International Level 2, 1 Walker Avenue West Perth WA 6005 Australia

Share Registrar

Security Transfer Registrars Pty Ltd PO Box 535 Applecross WA 6953 770 Canning Highway Applecross WA 6153

Directors' Report

Your Directors submit their report for the year 1 January 2011 to 31 December 2011.

Directors

The names and details of the Company's Directors and officers in office during the financial period and until the date of this report are as follows. Directors and officers were in office for the entire period unless otherwise stated.

Names, qualifications, experience and special responsibilities

Mr C. Cronin B.Bus (Acc.) FAIM (Non-executive Chairman)

Mr Cronin has 34 years' experience in executive positions with some of the largest international companies in the oil and gas industry. He retired from the position of Director, Corporate Strategy and Planning, Woodside Petroleum Ltd in October 2003 after 23 years of service. Key responsibilities during four years in this job included mergers and acquisitions, strategy and business planning, portfolio management (economics), and external affairs.

Other roles at Woodside included Director, Northern Australian Gas Projects and prior to that General Manager, Human Resources, IT and Corporate Affairs. Prior to joining Woodside in 1980, Chris spent 9 years with BP Australia Ltd in Marketing and personnel/industrial relations roles in both Victoria and W.A. Chris is a founding investor in Incremental Oil and Gas.

Current appointments in addition to Incremental Oil and Gas are:

• •
• Chairman of the David Wirrpanda Foundation, a not-for-profit trust which provides assistance for the development of indigenous youth.

Additional non executive appointments in the last 5 years include:

• Deputy Chairman, Indian Pacific Ltd, owner and operator of the West Coast Eagles Football Club
• Chairman Incremental Petroleum Ltd (July 2005-June 2009)
• Chairman Alinta Network Holdings Pty Ltd (July 2003-Feb 2007)
• Non Executive Director, Geodynamics Ltd (October 2003-Feb 2007)
• President, Australian Institute of Management (WA) (May 2004-May 2006)
• Appointed to Chair the Inquiry into the failure by Western Power, to supply electricity to Western Australia during the period 16-18 February 2004.

Mr G. McGann B.Sc (Hons) (Managing Director)

Mr McGann has over 40 years' experience in the upstream oil and gas industry, in a career that has spanned all five continents. As a petroleum geologist, he has been instrumental in the discovery of oilfields totalling more than 200 million barrels in Australia, Middle East and the North Sea, and been part of teams that have discovered substantially more. As Exploration Manager for Occidental Petroleum, Mr McGann was responsible in increasing production from 32,000 bopd to 52,000 bopd in 3 years in Oman. Mr McGann was one of only seven exploration managers in Occidental Petroleum, and one of only four Chief Scientists in Baker Hughes (approximately 30,000 employees).

Mr McGann was a founding shareholder and Managing Director of Incremental Petroleum Ltd. He identified the Selmo Oilfield in South-east Turkey in 2005, and increased the production from a declining 1500 bopd to 2000 bopd when the company was taken over in March 2009. Additional appointments in the last 5 years include a non-executive director of Target Energy in 2009.

Mr McGann has taught Petroleum Geology at degree and post-degree level at Curtin University for seven years. He was the president of three chapters of the Society of Petrophysicists and Well Log Analysts (SPWLA) and has been an invited speaker to SPWLA and the Society of Exploration Geophysicists annual conventions. He has published 14 technical papers and is a certified petroleum geologist. He is a founding investor in IOG.

Hon JAL Macdonald LLB. (Non Executive Director)

Mr Macdonald holds a Bachelor of Law from the University of Sydney and was admitted to the Roll of Solicitors in 1977. Mr Macdonald was elected to the Australian Senate in 1993. During his parliamentary career of 15 years he was Deputy Leader of the National Party in the Senate and served in the Howard Ministry as Parliamentary Secretary for Trade and Parliamentary Secretary for Defence. He also chaired the Senate Foreign Affairs, Defence and Trade Committee for eight years. Mr Macdonald had political responsibility for Austrade and has represented Australia at a high level. He has led delegations of both business and parliamentarians on behalf of Government to Turkey, the Middle East, Asia and the Pacific Rim.

On retiring from politics in 2008 Mr Macdonald was appointed a non-executive Director of Defence Housing Australia (DHA) and serves on the DHA board audit committee. In 2011 he was appointed to the Anzac Centenary Advisory Board. (ACAB). He was a Director of Incremental Petroleum Ltd from 2008 until its takeover in March 2009. He is a founding investor in Incremental Oil and Gas Ltd.

Mr M Stowell B.Bus CA (Non-executive Director)

Mr Stowell has over 20 years of corporate finance and business management experience in a large variety of roles. Mr Stowell's initial senior role was Manager of Corporate Finance at Arthur Andersen, involved in significant IPO and merger activity in the resource and energy sectors.

Mr Stowell was a founder and board member for seven years of Anvil Mining, a significant African based copper mining company, listed on the ASX and subsequently the Toronto Stock Exchange ("TSX"). In 2004 he was a joint founder and Director of Incremental Petroleum Ltd. Mr Stowell was a joint founder and now Chairman of Mawson West Ltd, a copper producer in Africa, listed on the TSX. Mr Stowell is a founding investor in Incremental Oil and Gas Ltd. Mr Stowell is also a director of Orrex Resources Ltd and Kula Gold Ltd. He has held no other directorships in the past 3 years.

Ms S Hunter - Company Secretary BCom, ACA, F Fin (GDipAFin (SecInst)), MAICD (Dip), ACIS (Dip) Appointed – 1 February 2011

Ms Hunter has over 18 years experience in the corporate finance industry. She has held senior management positions in Ernst & Young, PricewaterhouseCoopers, Bankwest and boutique advisory firm Norvest. Ms Hunter is founder and Managing Director of consulting firm Hunter Corporate which provides corporate governance advice and company secretarial services to ASX listed companies.

Ms Hunter holds a Bachelor of Commerce degree from the University of Western Australia majoring in accounting and finance, is a Member of the Australian Institute of Chartered Accountants, a Fellow of the Financial Services Institute of Australasia and a Member of the Australian Institute of Company Directors. She is also a Member of the Institute of Chartered Secretaries and Administrators and Chartered Secretaries Australia and she is currently Company Secretary for five ASX listed companies.

Mr S Robinson – Company Secretary 13 August 2010 to 1 February 2011

Mr Robinson is a Rhodes Scholar, business strategist and financial economist with over 20 years experience across the agribusiness and mining industries. Currently Mr Robinson is a director of Lincoln Capital, a corporate advisory firm providing commercial services predominantly to the mining sector. Prior to forming Lincoln Capital, Mr Robinson held senior management roles in Barrick Gold, Iluka Resources Limited and WMC Resources Limited. During the past three years Mr Robinson has held directorships of public companies Bulletin Resources Ltd and DV01 Mechelle Limited.

Mr Jonathan Asquith BA (Hons) CA MBA - CFO

Mr Asquith is a Chartered Accountant with over 25 years corporate experience with major international accounting firms and commercial enterprises. He has held senior executive positions with a number of public and listed Australian companies. Mr Asquith completed a Masters of Business Administration at the University of Western Australia. During the past four years Mr Asquith has held the position of director of Mawson West Ltd, a public company.

Directors' interests in the shares and options of the Company

As at the date of this report, the interests of the Directors in the shares and options of Incremental Oil and Gas Ltd were:

	Director	Ordinary Shares	Unlisted Options \$0.20
			exercise price
C Cronin		7,500,002	6,000,000
G McGann		24,340,004	20,500,000
J Macdonald		5,778,001	4,250,000
M Stowell		13,500,002	10,200,000

Principal activities

The principal activities during the year of entities within the Group are oil and gas exploration and production in North America. There has been no significant change in the nature of these activities during the year.

Review of operations

The Sheep Springs oilfield operated profitably during the year. The group acquired further interests in prospective oil producing areas in California at Round Mountain, the McDonald Anticline and the Ventura Basin and an exploration prospect at Raven's Pass.

The current year had a full year of production in California USA from the Sheep Springs oilfield and the production from the Round Mountain oilfield which commenced in March 2011.

Profit before interest expense, tax, amortisation, depreciation and foreign exchange differences for the year was \$2,981,917 (2010:\$2,497,768)

Holders of convertible notes to the value of \$A5,000,000 all converted their notes to shares on 2 July 2011.

Development and production at the Sheep Springs and Round Mountain oilfields continues. The company anticipates drilling further wells at these and other projects during 2012 and increasing production.

Operating results for the year

The Group's operating profit after income tax for the year was \$814,672 (2010: \$628,016). The Group's basic earnings per share for the year was 0.66 cents (2010: 0.96 cents)

Financial condition

Following the successful Initial Public Offer in the previous period, the Group has sufficient funds to implement its expansion strategies and repay debts as and when they fall due.

Liquidity and capital resources

The consolidated cash flow statement illustrates that there was a decrease in cash and cash equivalents in the year of \$3,657,641 (Period ended 31 December 2010, increase of \$5,114,421). Analyses of the components of the increase are detailed in the consolidated statement of cash flows.

Share issues during the year and to the date of this report

The number of shares on issue at 31 December 2011 was 135,643,680. Details of the issues of shares are set out in Note19 to the accounts.

Share options

At the date of this report, the unissued ordinary shares of the Company under option are as follows:

Date of Expiry	Exercise Price (AUD)	Number under option
1 November 2014	20 cents	92,600,000

Dividends

The directors do not recommend that a dividend be paid. No dividends have been paid by the Company since incorporation.

Risk management

The Group takes a proactive approach to risk management. The Board is responsible for ensuring that risks, and also opportunities are identified on a timely basis and that the Group's objectives and activities are aligned with the risks and opportunities identified by the Board.

An Audit and Risk Committee has been established with a purpose to review and monitor the financial affairs of the Company. At the discretion of the committee, the external auditor and other members of the Board and management will be invited to Audit and Risk Committee meetings. The Audit and Risk Committee will consider any matters relating to the financial affairs of the Company and any other matter referred to it by the Board. The members of the Audit and Risk Committee are Mark Stowell (Chair) and Chris Cronin.

Significant changes in the State of Affairs

There were no significant changes in the state of affairs of the Group during the year other than as disclosed elsewhere in this report.

Environmental Regulation and Performance

The Group's activities are subject to environmental regulations under either Commonwealth or State legislation. However, the Board believes that the Group has adequate systems in place for the management of its environmental requirements and is not aware of any breach of those environmental requirements as they apply to the Group.

Significant events after the balance date

Except for the foregoing, there were no significant events after the balance date.

Likely developments and expected results

The Group will continue to focus on oil and gas production and exploration opportunities.

Indemnification and insurance of Directors and officer

The Company has entered into Director and Officer Protection Deeds ("Deed") with each Director and the Company Secretary (collectively "Officers"). Under the Deed, the Company indemnifies the Officers to the maximum extent permitted by law and the Constitution against legal proceedings, damage, loss, liability, cost, charge, expense, outgoing or payment (including legal expenses on a solicitor/client basis) suffered, paid or incurred by the officers in connection with the Officers being an officer of the Company, the employment of the officer with the Company or a breach by the Company of its obligations under the Deed. The total amount of insurance premiums paid was \$16,876.

The Company has not provided any insurance or indemnification for the Auditor of the Company.

Remuneration Report (Audited)

The remuneration report outlines the Director remuneration and executive remuneration arrangements of the Company and the Group in accordance with the requirements of the Corporations Act 2001 and its Regulations. For the purposes of this report, key management personnel (KMP) of the group are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the Company and the Group, directly or indirectly, including any Director (whether executive or otherwise) of the parent company, Incremental Oil and Gas Ltd ("the Parent").

For the purposes of this report, the term 'executive' encompasses the chief executive, senior executives, general managers and secretaries of the Parent and the Group.

Details of key directors and management personnel

The Directors of Incremental Oil and Gas Ltd during the year were:

• Chris Cronin (Chairman)
• Gerry McGann (Managing Director)
• Hon JAL (Sandy) Macdonald
• Mark Stowell

The key management personnel (other than the directors) during the year were:

Jim Hussey (Vice President)

Remuneration Policy

The performance of the Group depends on the quality of its key management and personnel. To prosper the Group must attract, motivate and retain highly skilled directors and executives.

To this end the Group embodies the following principles in its remuneration policy:

• Provide competitive rewards to attract high calibre executives;
• Link executive rewards to share holder value;
• Significant proportion of executive compensation 'at risk', dependent upon meeting predetermined targets; and
• Establishing demanding, appropriate performance hurdles in relation to variable executive compensation.

The members of the Company's remuneration committee are Chris Cronin (Chair) and Sandy Macdonald.

Non Executive Director Remuneration

Non Executive Directors' fees are determined within an aggregate fee pool limit, which is periodically recommended for approval by shareholders. This amount is separate from any specific tasks that the Directors may take on for the Company. The current aggregate fee pool limit approved by shareholders is \$350,000.

Senior Executive Remuneration Policy

The Company is committed to remunerating its senior executives in a manner that is marketcompetitive and consistent with best practice as well as supporting the interests of shareholders. Consequently, under the senior executive remuneration policy the remuneration of senior executives may be comprised of the following:

• fixed salary that is determined from a review of the market and reflects core performance requirements and expectations;
• a performance bonus designed to reward actual achievement by the individual of performance objectives and for materially improved Company performance;
• participation in any share/option scheme with thresholds approved by shareholders; and
• statutory superannuation.

There are no fixed terms of employment in the senior executive employment agreements.

By remunerating senior executives through performance and long-term incentive plans in addition to their fixed remuneration the Company aims to align the interests of senior executives with those of shareholders and increase Company performance.

The objective behind using this remuneration structure is to drive improved Company performance and thereby increase shareholder value as well as aligning the interests of executives and shareholders.

The Board may use its discretion with respect to the payment of bonuses, stock options, share purchase plans and other incentives.

Year ended 31 December 2011		Short Term		Post Employment	Equity
	Salary & Fees (i)	Non Monetary Benefits (ii)	Other Benefits (iii)	Super annuation	Equity based payments (iv)	Total	Value of Equity based payments % of Remuner ation
Directors	\$	\$	\$	\$	\$	\$	%
C Cronin	77,498	4,219	-	6,975	-	88,692	-
G McGann	236,799	4,219	-	44,776	-	285,794	-
J Macdonald	51,665	4,219	-	4,650	-	60,534	-
M Stowell	51,665	4,219	-	4,650	-	60,534	-
Executives
J Hussey	215,264	-	5,309	-	-	220,573	-
Total	632,891	16,876	5,309	61,051	-	716,127	-

Remuneration of each Company Director and key management personnel

For the period from incorporation to 31 December 2010		Short Term		Post Employment	Equity
	Salary & Fees	Non Monetary	Other Benefits	Super	Equity based payments		Value of Equity based payments % of Remuner
	(i)	Benefits (ii)	(iii)	annuation	(iv)	Total	ation
Directors	\$	\$	\$	\$	\$	\$	%
C Cronin	76,380	4,146	-	6,874	-	87,400	-
G McGann	254,600	4,146	-	22,914	-	281,660	-
J Macdonald	50,920	4,146	-	4,583	-	59,649	-
M Stowell	50,920	4,146	-	4,583	-	59,649	-
Executives
J Hussey	220,516	-	15,484	-	147,997	383,997	38.5%
J Asquith	24,442	-	-	-	-	24, 442	-
Total	677,778	16,584	15,484	38,954	147,997	896,797	-

(i) Included in Salary and Fees are amounts made available to related parties of directors. The amounts shown above in relation to directors include the provision of their services relating to other geologists and geological services and corporate services and administration.

(ii) The cost of D&O insurance is split between the Directors and is shown under Non Monetary Benefits

(iii) Other monetary benefits comprise health insurance and employment related benefits.

(iv) Employee options were issued in 2010 as part of the remuneration philosophy of the company. The value of the options has been calculated using the Black-Scholes model. Bonuses have also been issued in the form of shares to certain employees.

Mr McGann has an employment contract with the Company dated 14 February 2010 which commenced on 1 January 2010. The per annum gross salary under the contract is:

\$250,000; increasing to \$300,000 subject to the Company achieving average daily gross production of 400 boepd over a continuous 3 month period; and further increasing to \$375,000, subject to the Company achieving average daily gross production of 700 boepd over a continuous 3 month period.

In addition to the salary, one-off cash bonuses are applicable as follows:

• \$50,000 on achieving average daily gross production of 300 boepd over a continuous period of 3 months.

• \$60,000 on achieving average daily gross production of 400 boepd over a continuous period of 3 months.

• \$60,000 on achieving average daily gross production of 600 boepd over a continuous period of 3 months.

The contract is to be re-negotiated subject to average production of the Company exceeding 1000 boe per day. The contract may be terminated by either the Company or Mr McGann by providing three months notice in writing, with Mr McGann being entitled to the salary up to and including the date of termination.

Mr Hussey, Vice President USA of the Company, has an employment contract with the Company dated 5 January 2010, as amended on 7 August 2010. The salary under the contract (as amended) is related to the gross annual average oil production as follows:

< 200 bopd US\$160,000

From Board approval of two new significant projects (Round Mountain and Guijarral)

> 200 bopd	US\$200,000
> 400 bopd	US\$250,000
> 1000 bopd	US\$300,000

The contract was modified on 7 August 2010 such that the base salary was increased to US\$200,000, with other aspects remaining the same.

Cash bonuses are payable, related to half yearly average oil production, as a percentage of the gross salary as follows:

Half yearly production average >	500 bopd	20% of gross salary
Half yearly production average >	700 bopd	20% of gross salary
Half yearly production average >	1000 bopd	20% of gross salary

Analysis of movements in options issued as remuneration

There was no movement during the reporting year of options issued as remuneration for Company directors and the key management personnel of the Group (other than the directors). No remuneration options were exercised or lapsed during the year.

The movement during the prior reporting period of options issued as remuneration for Company Director and key management personnel of the Group (other than the Directors) is shown below. These are presented in AUD.

For the period from incorporation to 31 December 2010

		Terms and Conditions for each Grant
			Fair Value Per	Exercise
			Option at	Price Per		First	Last
	Granted	Grant	Grant Date	Option	Expiry	Exercise	Exercise
	No.	Date	(A\$)	(A\$)	Date	Date	Date	No.	%
J Hussey	1,000,000	1/12/2009	0.035123	0.20	1/11/2014	1/6/2010	1/11/2014	1,000,000	100

Summary options issued as remuneration for each Company Director and the 2 most highly remunerated officers of the Group (other than the Directors) by value for the period ended 31 December 2010

	Granted in period	Value of Options exercised in period	Lapsed in Period
	A\$	\$	\$
J Hussey	35,123	-	-

Committee Memberships

Memberships of Board committees by independent Board members are as follows:

Director	Audit and Risk committee	Remuneration and nomination committee	Corporate governance committee
C Cronin	X	X
JAL Macdonald		X	X
M Stowell	X		X

Corporate governance

In recognising the need for high standards of corporate behaviour and accountability, the Directors' support and have, where currently considered appropriate given the size and nature of the Company, adhered to the best practice recommendations set by the ASX Corporate Governance Council.

Directors' Meetings

The number of meetings of Directors held during the year and the numbers of meetings attended by each Director were as follows:

	DIRECTORS MEETINGS
DIRECTORS	HELD	ATTENDED
Mr C Cronin	8	8
Mr G McGann	8	8
Mr J Macdonald	8	7
Mr M Stowell	8	8

Directors' benefits

No Director of the Company has received or become entitled to receive a benefit because a contract that the Director or a firm of which the Director is a member or an entity in which the Director has a substantial financial interest made with the company or an entity that the company controlled, or a body corporate that was related to the company, when the contract was made or when the Director received, or became entitled to receive the benefit, other than a benefit included in the aggregate amount of emoluments received or due and receivable by the Directors shown in Note 6 to the Financial Statements.

Number of Employees

The number of employees at 31 December 2011 is 2.

Proceedings on behalf of the Company

No person has applied for leave of court to bring proceedings on behalf of the Company or intervene in any proceedings to which the Group is a party for the purpose of taking responsibility on behalf of the flnmprrny l'*r all *r any pflrl *f those pn:ceeding*. The eompany wai nol a pafly tr) any \$uch pnrcnrdings during thc ycar.

Auditor Independence Declaration to the Directors of Incremental Oil and Gas Ltd

The auditor's independence declaration for the yedr ended 31 Decsmber 201 I hag beenreceived and is to be found on page 46.

Non-Audit Servlces

During the year no amount was paid to Stantons International or a felated entity of Stantons Intemational for tho p'rovision of non-audit serviees,

This reporl is sigrr*el in accorrlance rvith a resnlution r:f the l)ittctor\$, made pursunnl t* \$eed*n 298{:} of th* eorporatisns Ast ?00L

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2011

		31 December 2011	31 December 2010
	Notes	\$	\$
Current assets
Cash and cash equivalents	9	1,456,780	5,114,421
Trade and other receivables	10	704,372	538,780
Inventories	11	91,046	44,521
Total current assets		2,252,198	5,697,722
Non-current assets
Other financial assets	12	100,000	100,000
Oil properties	13	15,747,741	11,120,893
Exploration assets	14	739,700	388,797
Plant and equipment	15	472,588	510,149
Total Non-current assets		17,060,029	12,119,839
Total assets		19,312,227	17,817,561
Current liabilities
Trade and other payables	16	516,805	688,826
Convertible notes	17	-	2,800,600
Provisions	18	30,769	25,460
Total current liabilities		547,574	3,514,886
Non current liabilities
Convertible notes	17	-	2,291,400
Deferred taxation	5	1,139,658	501,130
Total non-current liabilities		1,139,658	2,792,530
Total liabilities		1,687,232	6,307,416
Net assets		17,624,995	11,510,145
Equity attributable to equity holders of
the parent Issued capital	19	17,905,010	12,604,832
Reserves	20	35,769	35,769
Accumulated Losses		(315,784)	(1,130,456)
Total Equity		17,624,995	11,510,145

The above Consolidated Statement of Financial Position should be read in conjunction with the accompanying notes.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2011

		Year ended 31 December 2011	Period from incorporation to 31 December 2010
	Notes	\$	\$
Oil and Gas Revenue	4	7,704,018	6,169,254
Other Revenue	4	46,476	31,848
Royalties paid		(1,157,910)	- (956,929)
Depreciation		(68,402)	(67,807)
Amortisation		(993,442)	(705,842)
Exploration		(64,081)	(107,496)
Lease operating expenses		(1,472,946)	(799,217)
Other costs		(1,343,095)	(958,504)
Wages and salaries		(730,545)	(722,191)
Share based payments		-	(158,996)
Foreign exchange losses (differences)		(142,074)	(102,852)
Interest		(324,799)	(492,122)
Profit/(Loss) before income tax		1,453,200	1,129,146
Income tax expense	5	(638,528)	(501,130)
Profit/(Loss) after tax		814,672	628,016
Other comprehensive income/(loss) for the period
Foreign currency translation differences		-	(1,758,472)
Total comprehensive income/(loss)		814,672	(1,130,456)
Profit for the period attributable to members of the entity		814,672	628,016
Total comprehensive income/ (loss) for
the period attributable to members of the entity		814,672	(1,130,456)
Basic Earnings Per Share (cents)	21	0.66	0.96
Diluted Earnings Per Share (cents)	21	0.54	0.96

The above Consolidated Statement of Comprehensive Income should be read in conjunction with the accompanying notes

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2011

	Issued capital	Accumulated Losses	Other reserves	Total equity
	\$	\$	\$	\$
At 31 December 2010	12,604,832	(1,130,456)	35,769	11,510,145
Profit attributable to members of the Group Other comprehensive	-	814,672	-	814,672
income	-	-	-	-
Total comprehensive
income for the period	-	814,672	-	814,672
Exercise of Options	32,927	-	-	32,927
Capital raising costs	(31,373)	-	-	(31,373)
Conversion of Convertible notes	5,298,624	-	-	5,298,624
At 31 December 2011	17,905,010	(315,784)	35,769	17,624,995

For the period from incorporation to 31 December 2010	Issued capital	Accumulated Losses	Other reserves	Total equity
	\$	\$	\$	\$
Profit attributable to members of the Group Other comprehensive	-	628,016	-	628,016
income			(1,758,472)	(1,758,472)
Total comprehensive income for the period	-	628,016	(1,758,472)	(1,130,456)
Share option reserve	-	-	35,769	35,769
Issue of share capital	13,019,598	-	-	13,019,598
Capital raising costs	(414,766)	-	-	(414,766)
Effect of change of functional currency		(1,758,472)	1,758,472
At 31 December 2010	12,604,832	(1,130,456)	35,769	11,510,145

The above Consolidated Statement of Changes in Equity is to be read in conjunction with the accompanying notes.

CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2011

	Notes	2011 \$	2010 \$
Cash flows from operating activities
Receipts from customers		7,540,508	5,630,475
Payments to suppliers and employees		(4,725,584)	(3,675,203)
Interest received		44,394	31,848
Interest paid		(646,693)	(171,225)
Net cash provided by operating activities	22	2,212,625	1,815,895
Cash flows from investing activities
Payments for oil properties		(5,499,243)	(13,185,447)
Payments for purchases of property plant
and equipment	15	(30,841)	(645,714)
Payments for exploration	14	(406,286)	(430,475)
Net cash used in investing activities		(5,936,370)	(14,261,636)
Cash flows from financing activities
Proceeds from issue of shares		32,927	12,882,928
Capital raising costs		(31,373)	(414,766)
Proceeds of borrowings		-	5,438,256
Repayment of borrowings		-	(346,256)
Net cash provided by financing activities		1,554	17,560,162
Net decrease in cash and cash equivalents Exchange differences on cash balances		(3,722,191)	5,114,421
held		64,550
the year		5,114,421	-
Cash and cash equivalents at end of period/year	9	1,456,780	5,114,421
Cash and cash equivalents at beginning of

The above Consolidated Statement of Cash Flows should be read in conjunction with the accompanying notes

1. CORPORATE INFORMATION

The financial report of Incremental Oil and Gas Ltd (the Company) for the financial year ended 31 December 2011 was authorised for issue in accordance with a resolution of the Directors on 30 March 2011. The consolidated financial statements of the company as at and for the year ended 31 December 2011 comprises the Company and its subsidiaries ("Group").

Separate financial statements for Incremental Oil and Gas Ltd as an individual entity are no longer presented as the consequence of a change in the Corporations Act 2001, however required financial information for Incremental Oil and Gas Ltd as an individual entity is included in Note 29.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The significant policies that have been adopted in the preparation of this financial report are:

(a) Basis of preparation

The financial report is a general purpose financial report which has been prepared in accordance with the requirements of the Corporations Act 2001 and Australian Accounting Standards including Australian Accounting Interpretations. The financial report has also been prepared on a historical cost basis and accrual accounting, modified where applicable by the measurement of selected financial assets and financial liabilities at fair value. The financial report is presented in United States dollars.

(b) Statement of compliance

The financial report complies with Australian Accounting Standards, which include Australian equivalents to International Financial Reporting Standards (AIFRS). Compliance with AIFRS ensures that the financial report, comprising the financial statements and notes thereto, complies with International Financial Reporting Standards (IFRS).

The Company has adopted all new and revised Australian Accounting Standards issued by the AASB which are mandatory to apply to the current period. The new Standards and amendments which are mandatory are as follows:

• − AASB 124 Related Party Transactions (Amendment). The AASB issued an amendment to AASB 124 that clarifies the definitions of a related party. The new definitions emphasise a symmetrical view of related party relationships and clarifies the circumstances in which persons and key management personnel affect related party relationships of an entity. In addition, the amendment introduces an exemption from the general related party disclosure requirements for transactions with government and entities that are controlled, jointly controlled or significantly influenced by the same government as the reporting entity. The adoption of the amendment did not have any impact on the financial position or performance of the Group.
• − AASB 132 Financial instruments: Presentation (Amendment). The AASB issued an amendment that alters the definition of a financial liability in AASB 132 to enable entities to classify rights issues and certain options or warrants as equity instruments. The amendment is applicable if the rights are given pro rata to all of the existing owners of the same class of an entity's non-derivative equity instruments, to acquire a fixed number of the entity's own equity instruments for a fixed amount in any currency. The amendment has had no effect on the financial position or performance of the Group because the Group does not have these type of instruments.
• − AASB Int 14 Prepayments of a Minimum Funding Requirement (Amendment). The amendment removes an unintended consequence when an entity is subject to minimum funding requirements and makes an early payment of contributions to cover such requirements. The amendment permits a prepayment of future service cost by the entity to be recognised as a pension asset. The Group is not subject to minimum funding requirements, therefore the amendment of the interpretation has no effect on the financial position nor performance of the Group.
• − In May 2010, the AASB issued its third omnibus of amendments to its standards, primarily with a view to removing inconsistencies and clarifying wording. There are separate transitional provisions for each standard. The adoption of the following amendments resulted in changes to accounting policies, but no impact on the financial position or performance of the Group.

• − AASB 7 Financial instruments Disclosures: The amendment was intended to simplify the disclosures provided by reducing the volume of disclosures around collateral held and improving disclosures by

• requiring qualitative information to put the quantitative information in context.

• − AASB 101 Presentation of Financial Statements: The amendment clarifies that an entity may present an analysis of each component of other comprehensive income maybe either in the statement of changes in equity or in the notes to the financial statements.

Other amendments resulting from Improvements to AASBs to the following standards did not have any impact on the accounting policies, financial position or performance of the Group:

• − AASB 3 Business Combinations (Contingent consideration arising from business combination prior to adoption of AASB 3 (as revised in 2008))
• − AASB 3 Business Combinations (Un-replaced and voluntarily replaced share-based payment awards)
• − AASB 127 Consolidated and Separate Financial Statements
• − AASB 134 Interim Financial Statements

The following interpretations and amendments to interpretations did not have any impact on the accounting policies, financial position or performance of the Group:

• − AASB Int 13 Customer Loyalty Programmes (determining the fair value of award credits)
• − AASB Int 19 Extinguishing Financial Liabilities with Equity instruments

New Accounting Standards for application in future periods

The AASB has issued a number of new and amended Accounting Standards and Interpretations that have mandatory application dates for future reporting periods, some of which are relevant to the Group. The Group has decided not to early adopt any of the new and amended pronouncements. The Group's assessment of the new and amended pronouncements that are relevant to the Group but applicable in future reporting periods is set out below:

− AASB 9: Financial Instruments (December 2010) and AASB 2010-7: Amendments to Australian Accounting Standards arising from AASB 9 (December 2010) [AASB 1, 3, 4, 5, 7, 101, 102, 108, 112, 118, 120, 121, 127, 128, 131, 132, 136, 137, 139, 1023 & 1038 and Interpretations 2, 5, 10, 12, 19 & 127] (applicable for annual reporting periods commencing on or after 1 January 2013).

These Standards are applicable retrospectively and include revised requirements for the classification and measurement of financial instruments, as well as recognition and derecognition requirements for financial instruments.

The key changes made to accounting requirements include:

• − simplifying the classifications of financial assets into those carried at amortised cost and those carried at fair value;
• − simplifying the requirements for embedded derivatives;
• − removing the tainting rules associated with held-to-maturity assets;
• − removing the requirements to separate and fair value embedded derivatives for financial assets carried at amortised cost;
• − allowing an irrevocable election on initial recognition to present gains and losses on investments in equity instruments that are not held for trading in other comprehensive income. Dividends in respect of these investments that are a return on investment can be recognised in profit or loss and there is no impairment or recycling on disposal of the instrument
• − requiring financial assets to be reclassified where there is a change in an entity's business model as they are initially classified based on: (a) the objective of the entity's business model for managing the financial assets; and (b) the characteristics of the contractual cash flows; and
• − requiring an entity that chooses to measure a financial liability at fair value to present the portion of the change in its fair value due to changes in the entity's own credit risk in other comprehensive income, except when that would create an accounting mismatch. If such a mismatch would be created or enlarged, the entity is required to present all changes in fair value (including the effects of changes in the credit risk of the liability) in profit or loss.

The Group has not yet been able to reasonably estimate the impact of these pronouncements on its financial statements.

− AASB 2010-6: Amendments to Australian Accounting Standards – Disclosures on Transfers of Financial Assets [AASB 1 & AASB 71 (applicable for annual reporting periods beginning on or after 1 July 2011).

This Standard adds and amends disclosure requirements about transfers of financial assets, especially those in respect of the nature of the financial assets involved and the risks associated with them. Accordingly, this Standard makes amendments to AASB 1: First-time Adoption of Australian Accounting Standards, and AASB 7: Financial Instruments: Disclosures, establishing additional disclosure requirements in relation to transfers of financial assets.

This Standard will only affect certain disclosures relating to financial instruments and is not expected to significantly impact the Group.

− AASB 2010-8: Amendments to Australian Accounting Standards - Deferred Tax: Recovery of Underlying Assets [AASB 112] (applies to periods beginning on or after 1 January 2012).

This Standard makes amendments to AASB 112: income Taxes and incorporates Interpretation 121 into AASB 112.

Under the current AASB 112, the measurement of deferred tax liabilities and deferred tax assets depends on whether an entity expects to recover an asset by using it or by selling it. The amendments introduce a presumption that an investment property is recovered entirely through sale. This presumption is rebutted if the investment property is held within a business model whose objective is to consume substantially all of the economic benefits embodied in the investment property over time, rather than through sale.

The amendments are not expected to significantly impact the Group.

− AASB 1054: Australian Additional Disclosures and AASB 2011-1: Amendments to Australian Accounting Standards arising from the Trans-Tasman Convergence Project [AASB 1, AASB 5, AASB 101, AASB 107, AASB 108, AASB 121, AASB 128, AASB 132 & AASB 134 and Interpretations 2, 112 & 113] (applicable for annual reporting periods commencing on or after 1 July 2011).

AASB 1054 sets out the Australian-specific disclosures that are additional to IFRS disclosure requirements.

The disclosure requirements in AASB 1054 were previously located in other Australian Accounting Standards.

These Standards are not expected to significantly impact the Group.

− AASB 10: Consolidated Financial Statements, AASB 11: Joint Arrangements, AASB 12: Disclosure of Interests in Other Entities, AASB 127: Separate Financial Statements (August 2011), AASB 128: Investments in Associates and Joint Ventures (August 2011) and AASB 2011-7: Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangements Standards [AASB 1, 2, 3, 5, 7, 9, 2009-11, 101, 107, 112, 118, 121, 124. 132, 133, 136, 138: 139, 1023 & 1038 and Interpretations 5, 9, 16 & 17] (applicable for annual reporting periods commencing on or after 1 January 2013).

AASB 10 replaces parts of AASB 127: Consolidated and Separate Financial Statements (March 2008, as amended) and Interpretation 112: Consolidation - Special Purpose Entities. AASB 10 provides a revised definition of control and additional application guidance so that a single control model will apply to all investees.

The Group has not yet been able to reasonably estimate the impact of this Standard on its financial statements.

AASB 11 replaces AASB 131: Interests in Joint Ventures (July 2004, as amended). AASB 11 requires joint arrangements to be classified as either "joint operations" (whereby the parties that have joint control of the arrangement have rights to the assets and obligations for the liabilities) or 'joint ventures" (where the parties that have joint control of the arrangement have rights to the net assets of the arrangement). Joint ventures are required to adopt the equity method of accounting (proportionate consolidation is no longer allowed).

AASB 12 contains the disclosure requirements applicable to entities that hold an interest in a subsidiary, joint venture, joint operation or associate. AASB 12 also introduces the concept of a "structured entity", replacing the 'special purpose entity" concept currently used in Interpretation 112, and requires specific disclosures in respect of any investments in unconsolidated structured entities. This Standard will only affect disclosures and is not expected to significantly impact the Group.

To facilitate the application of AASBs 10, 11 and 12, revised versions of AASB 127 and AASB 128 have also been issued. These Standards are not expected to significantly impact the Group.

− AASB 13: Fair Value Measurement and AASB 2011-8: Amendments to Australian Accounting Standards arising from AASB 13 [AASB 1, 2, 3, 4, 5, 7, 9, 2009-11, 2010-7, 101, 102, 108, 110, 116, 117, 118, 119, 120, 121, 128, 131, 132, 133, 134, 136, 138, 139, 140, 141, 1004, 1023 & 1038 and Interpretations 2, 4, 12, 13, 14, 17, 19, 131 & 132] (applicable for annual reporting periods commencing on or after 1 January 2013).

AASB 13 defines fair value, sets out in a single Standard a framework for measuring fair value, and requires disclosures about fair value measurements.

AASB 13 requires:

• − inputs to all fair value measurements to be categorised in accordance with a fair value hierarchy; and
• − enhanced disclosures regarding all assets and liabilities (including, but not limited to, financial assets and financial liabilities) measured at fair value.

These Standards are not expected to significantly impact the Group.

− AASB 2011-9: Amendments to Australian Accounting Standards – Presentation of Items of Other Comprehensive Income [AASB 1, 5, 7, 101, 112, 120, 121, 132, 133, 134, 1039 & 1049] (applicable for annual reporting periods commencing on or after 1 July 2012).

The main change arising from this Standard is the requirement for entities to group items presented in other comprehensive income (OCI) on the basis of whether they are potentially reclassifiable to profit or loss subsequently.

This Standard affects presentation only and is not expected to significantly impact the Group.

− AASB 119: Employee Benefits (September 2011) and AASB 2011-10: Amendments to Australian Accounting Standards arising from AASB 119 [AASB 1, AASB 8, AASB 101, AASB 124, AASB 134, AASB 1045 & AASB 2011-8 and Interpretation 14] (applicable for annual reporting periods commencing on or after 1 January 2013).

These Standards introduce a number of changes to the presentation and disclosure of defined benefit plans. The Group does not have any defined benefit plans.

AASB 119 (September 2011) also includes changes to the accounting for termination benefits that require an entity to recognise an obligation for such benefits at the earlier of:

• (i) for an offer that may be withdrawn when the employee accepts;
• (ii) for an offer that cannot be withdrawn when the offer is communicated to affected employees; and
• (iii) where the termination is associated with a restructuring of activities under AASB 137: Provisions, Contingent Liabilities and Contingent Assets, and if earlier than the first two conditions – when the related restructuring costs are recognised.

The Group has not yet been able to reasonably estimate the impact of these changes on its financial statements.

(c) Basis of consolidation

The consolidated financial statements comprise the financial statements of Incremental Oil and Gas Ltd ("Incremental Oil and Gas") and its subsidiaries (as outlined in note 24) as at and for the period ended 31 December. Interests in associates are equity accounted and are not part of the Group.

Subsidiaries are all those entities over which Incremental Oil and Gas has the power to govern the financial and operating policies so as to obtain benefits from their activities. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether Incremental Oil and Gas controls another entity.

The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. In preparing the consolidated financial statements, all intercompany balances and transactions, income and expenses and profits and losses resulting from infra-group transactions have been eliminated in full.

Subsidiaries are fully consolidated from the date on which Incremental Oil and Gas obtains control until such time as Incremental Oil and Gas ceases to control such entities.

The acquisition of subsidiaries is accounted for using the acquisition method of accounting. The acquisition method of accounting involves recognising at acquisition, separately from goodwill, the identifiable assets acquired, the liabilities assumed and any non controlling interest in the acquiree. The identifiable assets acquired and liabilities assumed are measured at their fair values at the date of acquisition. Any difference between the fair value of the consideration and the fair values of the identifiable net assets acquired is recognised as goodwill or a discount on acquisition.

A change in the ownership interest of a subsidiary that does not result in a loss of control is accounted for as an equity transaction.

Non-controlling interests are allocated their share of net profit after tax in the statement of comprehensive income and are presented with equity in the consolidated statement of financial position, separately from the equity of the owners of the parent.

Losses are attributed to the non-controlling interest even if that results in a deficit balance.

If Incremental Oil and Gas loses control over a subsidiary, it:

• Derecognises the assets (including goodwill) and liabilities of the subsidiary;
• Derecognises the carrying value of any non-controlling interest;
• Derecognises the cumulative translation differences recorded in equity;
• Recognises the fair value of the consideration received;
• Recognises the fair value of any investment retained;
• Recognises and surplus or deficit in the statement of comprehensive income;
• Reclassifies the parent's share of components previously recognised in other comprehensive income to profit or loss.

(d) Business combinations

Business combinations occur where an acquirer obtains control over one or more businesses and results in the consolidation of its assets and liabilities.

A business combination is accounted for by applying the acquisition method, unless it is a combination involving entities or businesses under common control. The acquisition method requires that for each business combination one of the combining entities must be identified as the acquirer fie parent entity). The business combination will be accounted for as at the acquisition date, which is the date that control over the acquiree is obtained by the parent entity. At this date, the parent shall recognise, in the consolidated accounts, and subject to certain limited exceptions, the fair value of the identifiable assets acquired and liabilities assumed, in addition, contingent liabilities of the acquiree will be recognised where a present obligation has been incurred and its fair value can be reliably measured.

The acquisition may result in the recognition of goodwill (refer to Note 2 (k)) or a gain from a bargain purchase. The method adopted for the measurement of goodwill will impact on the measurement of any non-controlling interest to be recognised in the acquiree where less than 100% ownership interest is held in the acquires.

The acquisition date fair value of the consideration transferred for a business combination plus the acquisition date fair value of any previously held equity interest shall form the cost of the investment in the separate financial statements, Consideration may comprise the sum of the assets transferred by the acquirer. Liabilities incurred by the acquirer to the former owners of the acquiree and the equity interests issued by the acquirer.

Fair value uplifts in the value of pre-existing equity holdings are taken to the statement of comprehensive income. Where changes in the value of such equity holdings had previously been recognised in other comprehensive income, such amounts are recycled to profit or loss.

Included in the measurement of consideration transferred is any asset or liability resulting from a contingent consideration arrangement. Any obligation incurred relating to contingent consideration is classified as either a financial liability off equity instrument, depending upon the nature of the arrangement. Rights to refunds of consideration previously paid are recognised as a receivable. Subsequent to initial recognition, contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity. Contingent consideration classified as an asset or a liability is remeasured each reporting period to fair value through the statement of comprehensive income unless the change in value can be identified as existing at acquisition date.

All transaction costs incurred in relation to the business combination are expensed to the statement comprehensive income.

(e) Taxation

Deferred income tax is provided on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred income tax liabilities are recognised for all taxable temporary differences:

• except where the deferred income tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

• in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, except where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax assets and unused tax losses can be utilised:

• except where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

• in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.

The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised.

Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date.

Income taxes relating to items recognised directly in equity are recognised in equity and not in the income statement.

(f) Investments and other financial assets

Financial assets in the scope of AASB 139 Financial Instruments: Recognition and Measurement are classified as either financial assets at fair value through profit or loss, loans and receivables, held to maturity investments, or available-for-sale assets. When financial assets are recognised initially, they are measured at fair value, plus in the case of investments not at fair value through profit or loss, directly attributable transaction costs. The Group determines the classification of its financial assets after initial recognition and when allowed and appropriate re-evaluates this designation at each financial period-end.

All regular way purchases and sales of financial assets are recognised on the trade date i.e. the date that the Group commits to purchase the asset. Regular way purchases or sales are purchases or sales of financial assets under contracts that require delivery of the assets within the period established generally by regulation or convention in the Market place.

(i) Financial assets at fair value through profit or loss

Financial assets classified as held for trading are included in the category 'financial assets at fair value through profit or loss'. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term with the intention of making a profit. Derivatives are also classified as held for trading unless they are designated as effective hedging instruments. Gains or losses on investments held for trading are recognised in profit or loss.

(ii) Held- to- maturity investments

Non derivative financial assets with fixed or determinable payments and fixed maturity are classified as held-to maturity when the Group has the positive intention and ability to hold to maturity. Investments intended to be held for an undefined period are included in this classification. Investments that are intended to be held-to-maturity, such as bonds, are subsequently measured at amortised cost. This cost is computed as the amount initially recognised minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initially recognised amount and the maturity amount. This calculation includes all fees and points paid or received between parties to the contract that are integral part of the effective interest rate, transaction costs and all

other premiums and discounts. For investments carried at amortised cost, gains and losses are recognised in profit or loss when the investments are derecognised or impaired, as well as through amortisation process.

(iii) Loans and receivables

Loans and receivables including loan notes and loans to key management personnel are non-derivative financial assets with fixed determinable payments that are not quoted in an active market. Such assets are carried at amortised cost using the effective interest method. Gains or losses are recognised in profit or loss when the loans and receivables are derecognised or impaired, as well as through the amortisation process.

(iv) Available-for-sale investments

Available-for-sale investments are those non-derivative financial assets that are designated as available-for-sale or are not classified as any of the three preceding categories. After initial recognition available-for-sale investments are measured at fair value with gains or losses being recognised as a separate component of equity until the investment is derecognised or until the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is recognised in profit or loss.

The fair values of the investments that are actively traded in the organised financial markets are determined by reference to quoted market bid prices at the close of business on the balance sheet date. For investments with no active market fair values are determined using valuation techniques. Such techniques include: using recent arm's length market transactions; reference to the current market value of another instrument that is substantially the same discounted cash flow analysis and option pricing models making as much use of available and supportable market data as possible and keeping judgemental inputs to a minimum.

(g) Interest in a jointly controlled operation

A joint venture is a contractual agreement whereby two or more parties undertake an economic activity that is subject to joint control. A jointly controlled operation involves use of assets and other resources of the venturers rather than the establishment of a separate entity. The Group recognises its interest in the jointly controlled operation by recognising the assets that it controls and the liabilities that it incurs. The Group also recognises the expenses that it incurs and its share of the income that it earns from the sale of goods or services by the jointly controlled operation.

(h) Plant and equipment

Plant and equipment is stated at cost less accumulated depreciation and any impairment in value.

Land and buildings are measured at fair value less accumulated depreciation.

Depreciation is calculated on a straight-line basis over the estimated useful life of the asset as follows:

Plant and equipment over 5 to 10 years.

Impairment

The carrying values of plant and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets or cash-generating units are written down to their recoverable amount. The recoverable amount of plant and equipment is the greater of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current Market assessments of the time value of money and the risks specific to the asset.

(i) Exploration and evaluation expenditure

Expenditure incurred during exploration and the early stages of evaluation of new areas of interest is written off as incurred.

Costs of acquisition of exploration areas of interest are carried forward where right of tenure of the area of interest is current and they are expected to be recouped through sale or successful development and exploitation of the area of interest or, where exploration and evaluation activities in the area of interest have not yet reached a stage that permits reasonable assessment of the existence of economically recoverable reserves.

When an area of interest is abandoned or the Directors decide that it is not commercial, any accumulated costs in respect of that area are written off in the financial period the decision is made. Each area of interest is also

reviewed at the end of each accounting period and accumulated costs written off to the extent that they will not be recoverable in the future.

(j) Oil and Gas Assets

Assets in development

The costs of oil and gas assets in development are separately accounted for and include past exploration and evaluation costs, development drilling and other subsurface expenditure, surface plant and equipment and any associated land and buildings. When the committed development expenditure programs are completed and production commences, these costs are subject to amortisation. Once the required statutory documentation for a production licence is lodged the accumulated costs are transferred to oil and gas assets – producing assets.

Producing assets

The costs of oil and gas assets in production are separately accounted for and include past exploration and evaluation costs, past development costs and ongoing costs of continuing to develop reserves for production and to expand or replace plant and equipment and any associated land and buildings. These costs are subject to amortisation. Where asset costs incurred in relation to a producing field are under evaluation and appraisal, those costs will be continually reviewed for recoupment of those costs by future exploration. When a determination has been made that those expenditures will not be recouped and/or further appraisal will be undertaken, they will be written off.

Amortisation of oil and gas assets

Costs in relation to producing assets are amortised on a production output basis. Producing assets under evaluation and appraisal are not subject to amortisation until such time as the evaluation and appraisal stage is complete.

Restoration costs

Site restoration costs are capitalised within costs of the associated assets and the provision is included in the statement of financial position at total estimated present value. These costs are estimated and based on judgements and assumptions regarding removal dates, environmental legislation and technologies. Over time, the liability is increased for the change in the present value based on a risk adjusted pre-tax discount rate appropriate to the risks inherent in the liability. The costs of restoration are brought to account in the profit and loss through depreciation of the associated assets over the economic life of the projects with which these costs are associated. The unwinding of the discount is recorded as an accretion charge within finance costs.

(k) Goodwill

Goodwill on acquisition is initially measured at cost being the excess of the cost of the business combination over the acquirer's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities.

Following initial recognition, goodwill is measured at cost less any accumulated impairment losses.

Goodwill is not amortised.

Goodwill is reviewed for impairment, annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.

As at the acquisition date, any goodwill acquired is allocated to each of the cash-generating units expected to benefit from the combination's synergies.

Impairment is determined by assessing the recoverable amount of the cash-generating unit to which the goodwill relates.

Where the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognised.

Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation.

Goodwill disposed of in this circumstance is measured on the basis of the relative values of the operation disposed of and the portion of the cash-generating unit retained.

(l) Cash and cash equivalents

Cash and short-term deposits in the statement of financial position comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less. For the purposes of the Statement of Cash Flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts.

(m) Share-based payment transactions

The Group provides benefits to employees (including Directors) of the Group in the form of share-based payment transactions, whereby employees render services in exchange for shares or rights over shares ('equity-settled transactions').

In valuing equity-settled transactions, no account is taken of any performance conditions, other than conditions linked to the price of the shares of Incremental Oil and Gas Ltd (`market conditions').

The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (`vesting date').

The cumulative expense recognised for equity-settled transactions at each reporting date until vesting date reflects

• (i) the extent to which the vesting period has expired and
• (ii) the number of awards that, in the opinion of the Directors of the Group, will ultimately vest. This opinion is formed based on the best available information at balance date. No adjustment is made for the likelihood of Market performance conditions being met as the effect of these conditions is included in the determination of fair value at grant date.

No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition.

Where the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not been modified. In addition, an expense is recognised for any increase in the value of the transaction as a result of the modification, as measured at the date of modification.

Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new award are treated as if they were a modification of the original award, as described in the previous paragraph.

The dilutive effect, if any, of outstanding options is reflected as additional share dilution in the computation of earnings per share.

(n) Recoverable amount of assets

At each reporting date, the Group assesses whether there is any indication that an asset may be impaired. Where an indicator of impairment exists, the Group makes a formal estimate of recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount the asset is considered impaired and is written down to its recoverable amount. Recoverable amount is the greater of fair value less costs to sell and value in use. It is determined for an individual asset, unless the asset's value in use cannot be estimated to be close to its fair value less costs to sell and it does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

In assessing value in use, the estimated future cash flows are discounted to their present value using a pre tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

(o) Foreign currency translation

(i) Functional and presentation currency

Until 31 December 2010, both functional and presentation currency of Incremental Oil and Gas Ltd was Australian dollars. Each entity in the Group determined its own functional currency and items included in the financial statements of each entity are measured using that functional currency. The functional currency for the US subsidiary was United States (\$). At 1 January 2011 all companies in the group adopted US dollar functional and presentational currency. All amounts included in the financial statements are in US dollars unless otherwise indicated.

An entity's functional currency is the currency of the primary economic environment in which the entity operates. The economic entity now has a significant US dollar revenue stream and most of its costs are paid in US dollars. Consequently the directors determined that the functional currency of the Company and all its subsidiaries is US dollars. The change in functional currency was applied with effect from 1 January 2011 in accordance with the requirements of accounting standards.

Following the change in functional currency, Incremental Oil and Gas Ltd has elected to change its presentation currency from Australian dollars to US dollars. The directors believe that changing the presentation currency to US dollars will enhance comparability with its industry peer group, a majority which report in US dollars.

The functional and presentation currency of Incremental Oil and Gas Ltd changed during the year to United States dollars (\$). Incremental Oil and Gas Ltd changed its functional and presentation currency.

To give effect to the change in functional currency and presentation currency all balances of entities with an Australian dollar functional currency at 31 December 2010 were converted to US dollars at a fixed exchange rate on 1 January 2011 of A\$1.00:US\$1.0184, and comparative financial information has been translated at this rate

(ii) Transactions & balances

Transactions in foreign currencies are initially recorded in the functional currency by applying the exchange rates ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date.

All exchange differences in the consolidated financial report are taken to profit or loss with the exception of differences on foreign currency borrowings that provide a hedge against a net investment in a foreign operation. These are taken directly to equity until the disposal of the net investment, at which time they are recognised in profit or loss. On disposal of a foreign operation, the cumulative amount recognised in equity relating to that particular foreign operation is recognised in profit or loss. Tax charges and credits attributable to exchange differences on those borrowings are also recognised in equity.

Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of the initial transaction. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.

(iii) Foreign operations

The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to US dollars at exchange rates at the reporting date. The income and expenses of Australian operations are translated to US dollars at exchange rates at the dates of the transactions.

Foreign currency differences are recognized directly in equity. Such differences are recognised in the foreign currency translation reserve (FCTR). When the foreign operation is disposed of, in part or in full, the relevant amount in the FCTR is transferred to profit and loss.

(p) Impairment of assets

The Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Group makes an estimate of the asset's recoverable amount. An asset's recoverable amount is the higher of its fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets and the assets value in use cannot be estimated to be close to

its fair value. In such cases the asset is tested for impairment as part of the cash-generating unit to which it belongs. When the carrying amount of an asset or cash-generating unit exceeds its recoverable amount, the asset or cashgenerating unit is considered impaired and is written down to its recoverable amount.

In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Impairment losses relating to continuing operations are recognised in those expense categories consistent with the function of the impaired asset unless the asset is carried at revalued amount (in which case the impairment loss is carried as a revaluation decrease).

(q) Trade and other payables

Trade payables and other payables are carried at amortised costs and represent liabilities for goods and services provided to the Group prior to the end of the financial period that are unpaid and arise when the Group becomes obliged to make future payments in respect of the purchase of those goods and services.

(r) Share capital

Ordinary share capital is recognised at the fair value of the consideration received by the company. Any transaction costs arising on the issue of ordinary shares are recognised directly in equity as a reduction of the share proceeds received.

(s) Trade and other receivables

Debtors are carried at amounts due. The recoverability of debts is assessed at balance date and specific provision is made for any doubtful accounts.

(t) Employee leave benefits

Wages, salaries, annual leave and sick leave liabilities for wages and salaries, including non-monetary benefits and annual leave and accumulating sick leave expected to be settled within 12 months of the reporting date are recognised in other payables in respect of employee's services up to the reporting date. They are measured at the amounts expected to be paid when the liabilities are settled. Liabilities for non-accumulating sick leave are recognised when the leave is taken and are measured at the rates paid or payable.

(u) Goods and services tax

Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST), except where the amount of GST incurred is not recoverable from the Australian Tax Office (ATO). In these circumstances, the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expenses.

Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the ATO is included as a current asset or liability in the balance sheet. The GST components of cash flows arising from investing and financing activities which are recoverable from, or payable to, the ATO are classified as operating cash flows.

(v) Inventories

Oil and gas amounts are physically measured or estimated and valued at the lower of cost or net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and costs of selling final product.

(w) Revenue recognition

Revenue is recognised to the extent it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received, excluding discounts, rebates, and sales taxes or duty. The Group assesses its revenue arrangements against specific criteria in order to determine if it is acting as principal or agent. The Group has concluded that it is acting as a principal in all of its revenue arrangements.

Revenue from the sale of goods is recognised when the significant risks and rewards of ownership have been transferred, which is considered to occur when title passes to the customer. This generally occurs when product is physically transferred onto a vessel, train, conveyor or other delivery mechanisms. Revenue is measured at the fair value of the consideration received or receivable.

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised:

Interest

Revenue is recognised as the interest accrues (using the effective interest method, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial instrument) to the net carrying amount of the financial asset.

Dividends

Revenue is recognised when the shareholders' right to receive the payment is established.

(x) Earnings per share

Basic earnings per share is calculated as net profit attributable to members of the parent, adjusted to include any costs of servicing equity (other than dividends) and preference share dividends divided by the average weighted number of ordinary shares adjusted for any bonus element.

Diluted earnings per share is calculated as net profit attributable to members of the parent adjusted for:

• Costs of servicing equity (other than dividends) and preference share dividends;
• The after tax effect of dividends and interest associated with dilutive potential ordinary shares that have been recognised as expenses;
• Other non-discretionary changes in revenues or expenses during the period that would result from the dilution of potential ordinary shares divided by the weighted average number of ordinary shares; and
• Dilutive potential ordinary shares, adjusted for any bonus element.

(y) Comparatives

Where necessary, comparatives have been reclassified and repositioned for consistency with the current year disclosures. The comparatives have also been translated to the current functional and presentation currency, which is in United States dollars.

3. SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS

In applying the Group's accounting policies management continually evaluates judgements, estimates and assumptions based on experience and other factors, including expectations of future events that may have an impact on the Group. All judgements, estimates and assumptions made are believed to be reasonable based on the most current set of circumstances available to management. Actual results may differ from the judgements, estimates and assumptions. Significant judgements, estimates and assumptions made by management in the preparation of these financial statements are outlined below:

(i) Significant accounting judgements

Classification of valuation of investments

The Group has decided to classify investments in listed and unlisted securities as 'available-for-sale' investments and movements in fair value are recognised directly in equity. The fair value of listed shares has been determined by reference to published price quotations in an active market. The fair values of unlisted securities not traded in an active Market are determined by an appropriately qualified independent valuer by projecting future cash flows from expected future dividends and subsequent disposal of the securities.

Impairment of non-financial assets other than goodwill

The Group assesses impairment of all assets at each reporting date by evaluating conditions specific to the Group and to the particular asset that may lead to impairment, including economic and political environments. If an impairment trigger exists the recoverable amount of the asset is determined. This involves value in use calculations, which incorporate a number of key estimates and assumptions.

Share based payment transactions

The Group measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. The accounting estimates and assumptions relating to equity-settled share-based payments would have no impact on the carrying amounts of assets and liabilities within the next annual reporting period but may impact expenses and equity.

The Group measures the cost of cash-settled share-based payments at fair value at the grant date using the Black-Scholes formula taking into account the terms and conditions upon which the instruments were granted.

Allowance for impairment loss on trade receivables

Where receivables are outstanding beyond the normal trading terms, the likelihood of the recovery of these receivables is assessed by management.

Capitalised exploration and evaluation expenditure

The future recoverability of capitalised exploration and evaluation expenditure is dependent on a number of factors, including whether the Group decides to exploit the related lease itself or, if not, whether it successfully recovers the related exploration and evaluation asset through sale. Factors that could impact future recoverability include the level of reserves and resources, future technological changes, which could impact the cost of mining, future legal changes and changes to commodity prices. To the extent that capitalised exploration and evaluation expenditure is determined not to be recoverable, profits and net assets will be reduced in the period in which determination is made.

Estimation of useful lives of assets

The estimation of useful lives of assets has been based on historical experience as well as manufacturers' warranties (for plant and equipment), lease terms (for leased equipment) and turnover policies (for motor vehicles). In addition, the condition of the assets is assessed at least once per year and considered against the remaining useful life. Adjustments to useful life are made when considered necessary. Depreciation charges are included in note 15.

Contingencies

By their nature, contingencies will only be resolved when one or more uncertain future events occur or fail to occur. The assessment of contingencies inherently involves the exercise of significant judgment and estimates of the outcome of future events.

Recovery of deferred tax assets

Judgment is required in determining whether deferred tax assets are recognised on the statement of financial position, Deferred tax assets, including those arising from un-utilised tax losses, require management to assess the likelihood that the Group will generate taxable earnings in future periods, in order to utilise recognised deferred tax assets. Estimates of future taxable income are based on forecast cash flows from operations and the application of existing tax laws in each jurisdiction. To the extent that future cash flows and taxable income differ significantly from estimates, the ability of the Group to realise the net deferred tax assets recorded at the reporting date could be impacted. Additionally, future changes in tax laws in the jurisdictions in which the Group operates could limit the ability of the Group to obtain tax deductions in future periods.

Oil and Gas reserve and resource estimates

Oil and Gas reserves are estimates of the amount of Oil and Gas that can be economically and legally extracted from the Group's mining properties. The Group estimates its Oil and Gas reserves based on information compiled by appropriately qualified persons relating to the geological data on the size, depth and shape of the reserve, and requires complex geological judgments to interpret the data. The estimation of recoverable reserves is based upon factors such

as estimates of foreign exchange rates, commodity prices, future capital requirements, and production costs along with geological assumptions and judgments made in estimating the size and grade of the ore body. Changes in the reserve or resource estimates may impact upon the carrying value of exploration and evaluation assets, mine properties, property, plant and equipment, goodwill, provision for rehabilitation, recognition of deferred tax assets, and depreciation and amortisation charges.

Units-of-production amortisation

Estimated recoverable reserves are used in determining the amortisation of oilfield assets. This results in an amortisation charge proportional to the depletion of the anticipated remaining life of field production. Each item's life, which is assessed annually, has regard to both its physical life limitations and to present assessments of economically recoverable reserves of the property at which the asset is located. These calculations require the use of estimates and assumptions, including the amount of recoverable reserves and estimates of future capital expenditure. Numerous units-of-production (UOP) depreciation methodologies are available to choose from. Changes are accounted for prospectively.

	2011 \$	2010 \$
4. Revenues and Expenses
Revenue and expenses from continuing operations
Profit from ordinary activities before income tax includes the
following items of revenue and expense.
(a) Revenue
Oil and gas sales	7,704,018	6,169,254
Interest income	46,476	31,848
	7,750,494	6,201,102
(b) Expenses
Depreciation of property, plant and equipment	(68,402)	(67,807)
Amortisation of producing oilfield	(993,442)	(705,842)
Foreign exchange losses	(142,074)	(102,852)
Exploration expenditure expensed	(64,081)	(107,496)
5. Income tax
(a) Numerical reconciliation of income tax expense
to prima facie tax payable
Profit from ordinary activities before income tax	1,453,200	1,129,146
Prima facie tax payable on profit from
ordinary activities at 30%	435,960	338,744
Effect of different taxation rates of other countries	63,853	58,956
Movement in unrecognised temporary differences	(169,409)	-
Tax effect of amounts which are not deductible
in calculating taxable income Tax effect of current period tax losses for which no	536	1,360
deferred tax asset has been recognised	307,588	102,070
Income tax expense	638,528	501,130
(b) Unrecognised deferred tax assets (at 30%)
Carry forward revenue tax losses	44,994	54,331
Other timing differences	99,466	47,739
	144,460	102,070

The deferred tax assets have not been brought to account as it is not probable they will crystallise unless the Company generates sufficient revenue to utilise them.

	2011	2010
Note 5 (contd)	\$	\$
(c) Deferred tax assets
Provision for expenses	265,469	124,925
Carry forward foreign tax losses	1,387,401	330,583
	1,652,870	455,508
(d) Deferred tax liabilities
Oilfield acquisition and enhancements	2,504,031	956,638
Other	288,497	-
	2,598,072	956,638
Net deferred tax liability	1,139,658	501,130

No income tax is payable by the Group. The Group has \$149,981 in Australian income tax losses and \$4,080,591 in foreign losses.

6. Directors' and key management personnel compensation

The aggregate compensation of the Company's Directors and key management personnel is set out below.

	2011	2010
Compensation by category-Key Management Personnel	\$	\$
Short-Term	655,076	709,845
Post-Employment	61,051	38,954
Other long term	-	-
Termination Benefits	-	-
Equity-Based Payments	-	147,997
	716,127	896,796

Related Party Transactions

Specific transactions with Directors and Director-related entities:

There are no outstanding balances or commitments at 31 December 2012 and no valuation adjustments for doubtful or bad debts were made during the year.

Directors also applied for and received shares, options, and convertible notes and converted the convertible notes in the Company as disclosed in this note.

Movement of shareholdings of each Company Director and the key management personnel during the year ended 31 December 2011

	Balance at 1 January 2011	Conversion of Convertible notes	Net Change Other	Balance at 31 December 2011
	Number	Number	Number	Number
Directors
C Cronin	6,000,002	1,500,000		7,500,002
G McGann	20,500,004	3,750,000	90,000	24,340,004
J Macdonald	4,250,001	1,500,000	28000	5,778,001
M Stowell	9,900,002	3,500,000	100,000	13,500,002
Executives
J Hussey	1,034,000	-	-	1,034,000
J Asquith (i)	5,000,003	-	(5,000,003)	-
Total	46,684,012	10,250,000	(4,782,003)	52,152,009

(i) No longer key management personnel

Movement of shareholdings of each Company Director and the key management personnel during the period ended 31 December 2010

	Issued for cash during the period	Granted as remuneration	Balance at 31 December 2010
	Number	Number	Number
Directors
C Cronin	6,000,002	-	6,000,002
G McGann	20,500,004	-	20,500,004
J Macdonald	4,250,001	-	4,250,001
M Stowell	9,900,002	-	9,900,002
Executives
J Hussey	-	1,034,000	1,034,000
J Asquith	5,000,003	-	5,000,003
Total	45,650,012	1,034,000	46,684,012

Movement on option holdings of each Company Director and the key management personnel during the year ended 31 December 2011

					Vested at 31 December 2011
	Balance at 1 January 2011	Changed during the year	Granted as Remuner ation	Balance at 31 December 2011	Total	Exercisable	Not Exercisable
	Number	Number	Number	Number	Number	Number	Number
Directors
C Cronin	6,000,000	-	-	6,000,000	6,000,000	6,000,000	-
G McGann	20,500,000	-	-	20,500,000	20,500,000	20,500,000	-
J Macdonald	4,250,000	-	-	4,250,000	4,250,000	4,250,000	-
M Stowell	10,200,000	-	-	10,200,000	10,200,000	10,200,000	-
Executives
J Hussey	1,000,000	-	-	1,000,000	1,000,000	1,000,000	-
J Asquith (i)	5,000,000	(5,000,000)	-	-	-	-	-
Total	46,950,000	-	-	41,950,000	41,950,000	41,950,000

(i) No longer key management personnel

				Vested at 31 December 2010
	Issued during the period	Granted as Remuner ation	Balance at 31 December 2010	Total	Exercisable	Not Exercisable
	Number	Number	Number	Number	Number	Number
Directors
C Cronin	6,000,000	-	6,000,000	6,000,000	6,000,000	-
G McGann	20,500,000	-	20,500,000	20,500,000	20,500,000	-
J Macdonald	4,250,000	-	4,250,000	4,250,000	4,250,000	-
M Stowell	10,200,000	-	10,200,000	10,200,000	10,200,000	-
Executives
J Hussey	-	1,000,000	1,000,000	1,000,000	1,000,000	-
J Asquith	5,000,000	-	5,000,000	5,000,000	5,000,000	-
Total	45,950,000	1,000,000	46,950,000	46,950,000	46,950,000

Movement on option holdings of each Company Director and the key management personnel during the period ended 31 December 2010

7. Equity-based payments to Directors employees and consultants

During the current year ended 31 December 2011, the Company granted no shares and options to Directors, key management personnel, consultants and staff.

	2011 \$	2010 \$
8. Auditors remuneration The auditor of Incremental Oil and Gas Ltd is Stantons
International Amounts received or due and receivable by Stantons International
for Incremental Oil and Gas in relation to audit services Amounts received or due and receivable by Stantons International	53,925	20,367
for Incremental Oil and Gas in relation to non-audit services	-	32,589
	53,925	52,956
9. Cash and cash equivalents
For the purposes of the statements of cash flows, cash and cash
equivalents comprise the following at 31 December
Cash at bank and on hand	1,456,780	5,114,421
10. Trade and other receivables
Oil and gas sales debtors	704,372	538,780
(i) Trade and other receivables are non interest bearing and generally 30 - 90 day terms. An allowance for doubtful debts is made where there is objective evidence that a trade receivable is impaired. (ii) Trade and other receivables do not contain impaired assets and are not past due.
11. Inventories
Oil on hand, at cost	91,046	44,521
12. Other financial assets
Non current
Bonds	100,000	100,000
13. Oil properties
At cost	17,378,686	11,758,396
Accumulated Amortisation	(1,630,945)	(637,503)
	15,747,741	11,120,893
Opening balance	11,120,893	11,851,262
Additions	5,620,290	1,234,186
Amortisation	(993,442)	(705,842)
Foreign exchange differences	-	(1,258,713)
Closing balance	15,747,741	11,120,893
14. Exploration and evaluation assets
Exploration and evaluation assets at cost	739,700	430,475
Exchange rate difference	-	(41,678)
	739,700	388,797
Opening balance	388,797	-
Additions	406,286	430,475
Amounts expensed	(55,383)
Foreign exchange differences	-	(41,678)
Closing balance	739,700	388,797

The ultimate recoupment of acquisition costs carried forward is dependent on the successful development commercial exploitation or sale of the respective lease-holdings

	2011 \$	2010 \$
15. Plant and equipment
Opening balance: net of accumulated depreciation and
impairment	510,149	-
Additions	30,841	645,714
Depreciation charge	(68,402)	(67,807)
Foreign exchange differences	-	(67,758)
Closing balance: net of accumulated depreciation and impairment	472,588	510,149
Balance at beginning of year
Cost	571,868	-
Accumulated depreciation and impairment	(61,719)	-
Net carrying amount	510,149	-
Balance at end of year
Cost	594,072	571,868
Accumulated depreciation and impairment	(121,484)	(61,719)
Net carrying amount	472,588	510,149
16. Trade and other payables
Trade payables and accruals	516,805	688,826
Trade payables are non interest bearing payables and are normally settled on 30 day terms.
17. Interest Bearing Liabilities
Current
Convertible Notes - current portion	-	2,800,600
Non-Current
Convertible Notes - non-current portion	-	2,291,400
The Convertible Notes had a maturity date of 2 July 2011 and a conversion price of AUD \$0.20 per share.
Convertible Notes converted at maturity date amounted to 11,250,000 at a price of AUD \$0.20 per share. Holders of convertible notes to the value of \$A5,000,000 all converted their notes to shares on 2 July 2011, which amounted to 11,250,000 shares.
The convertible notes were secured by way of a fixed and floating charge against all the property of the company.
18. Provisions Employee entitlements – annual leave	30,769	25,460

19. Contributed Equity		2011 \$	2010 \$
135,643,680 Fully paid ordinary shares (2010:110,447,010)		17,905,010	12,604,832
	Year ended 31 December 2011		Period from incorporation to 31 December 2010
Movement in ordinary shares on issue	\$	No.	\$	No.
Equity at the start of the year	12,604,832	110,477,010	-	-
On incorporation	-	-	-	1
Issued for cash Jul-Oct 2009	-	-	203,680	20,000,000
Issued as remuneration to employee	-	-	101,840	1,000,000
Issued for cash Oct 2009 to February 2010	-	-	5,616,476	55,150,011
Exercise of Options February 2011	32,927	166,670	-	-
Conversion of convertible notes April 2010			1,692,242	16,616,670
Conversion of convertible notes June 2011	21,318	100,000	-	-
Conversion of convertible notes July 2011	5,277,306	24,900,000	-	-
Issued to consultant in lieu of payment	-	-	3,055	30,000
Issued pursuant to Initial Public Offer for cash	-	-	5,366,253	17,564,328
Issued to consultants and employees in lieu of Capital raising costs	- (31,373)	- -	36,051	116,000
At 31 December	17,905,010	135,643,680	(414,765) 12,604,832	- 110,477,010
		2011	2010
		\$	\$
20. Reserves
Share option reserve		35,769		35,769
Movement in share option reserve
Options issued to employee		-		35,769
Share Options At 31 December 2011 there were the following unlisted options over unissued fully paid ordinary shares on issue: 92,600,000 unlisted options exercisable at AUD 20 cents per option before 1 November 2014.
Foreign currency translation reserve
Translation differences		-		(1,758,472)
Less:Adjusted due to change in functional and reporting currency		-		1,758,472

• -

21. Earnings per share Basic earnings per share amounts are calculated by dividing net profit for the period attributable to equity holders of the parent by the weighted average number of ordinary shares outstanding during the year. The following reflects the income and share data used in the	2011 \$	2010 \$
basic earnings per share computations: Net profit attributable to equity holders of the parent	814,672	628,016
Basic earnings per share	2011 Cents per share 0.66	2010 Cents per share 0.96
	No.	No.
The weighted average number of ordinary shares on issue during the financial year used in the calculation of basic earnings per share Diluted earnings per share	122,417,139 Cents per share 0.54	64,968,407 Cents per share 0.96
	No.	No.
The weighted average number of ordinary shares on issue during the financial year used in the calculation of diluted earnings per share	151,168,863	64,968,407
	2011 \$	2010 \$
22. Reconciliation of net profit after tax to net cash flows from operations
Net Profit	814,672	628,016
Adjustments for: Tax expense Leave provision	638,528 5,309	501,130
Amortisation	993,442	705,842
Depreciation	68,402	67,807
Consultancy fees (non cash)	-	13,442
Share based payments	-	158,996
Current receivables Inventories	(165,592) (46,525)	(538,780) (44,521)
Current payables	(237,685)	714,287
Foreign exchange differences	142,074	(390,324)
Cash provided by operating activities	2,212,625	1,815,895

Non cash financing and investment activities:

During the year A\$5,000,000 of convertible notes were converted into shares.

23. Commitments and contingencies

The Company has entered into a lease agreement for office and parking facilities in Australia. The amount of the commitment is \$11,304 per annum. The lease was renewed for one year on 4 March 2012. The Company has entered into a lease agreement for the office facilities in the United States. The amount of the commitment is \$23,748 per annum. The lease was renewed for one year on 1 March 2012.

Except for the foregoing, the Group has no commitments or contingencies.

24. Controlled Entities

Name of entity	Country of Incorporation	Ownership Interest
Parent entity
Incremental Oil and Gas Ltd	Australia
Controlled entity
Incremental Oil and Gas USA Holdings Inc	United States	100%
Incremental Oil and Gas LLC	United States	100%
Incremental Oil and Gas (Round Mountain) LLC	United States	100%
Incremental Oil and Gas (Guijarral) LLC	United States	100%

25. Segment Reporting

The Group has adopted AASB 8 Operating Statements with effect from 1 July 2009. AASB 8 requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the chief operating decision maker in order to allocate resources to the segment and to assess its performance.

The Group has identified its operating segments based on the internal reports that are reviewed and used by the executive management team in assessing performance and in determining the allocation of resources.

The group operates in one operating segment, being oil and gas production and two geographical segments being Australia and the USA and this is the basis on which internal reports are provided to the Directors for assessing performance and determining the allocation of resources in the Group.

Geographical segments

The Group's geographical segments are determined based on location of the Group's assets.

Year ended 31 December	Australia	United States	Consolidation Adjustments	Consolidated
2011	\$	\$	\$	\$
Revenue
Income	1,626,744	7,700,209	(1,576,459)	7,750,494
Total segment revenue	1,626,744	7,700,209	(1,576,459)	7,750,494
Segment Profit/(Loss) Income tax expense	(143,120) -	1,596,320 (638,528)	-	1,453,200 (638,528)
Segment loss after income tax expense	(143,120)	957,792	-	814,672
Assets Segment assets Liabilities	1,288,801	18,023,426	-	19,312,227
Segment liabilities Other	91,742	1,595,490	-	1,687,232
Depreciation and amortisation of segment assets	5,856	1,055,988	-	1,061,844

Period from incorporation to 31	Australia	United States	Consolidation Adjustments	Consolidated
December 2010	\$	\$	\$	\$
Revenue
Income	1,263,219	6,169,255	(1,231,372)	6,201,102
Total segment revenue	1,263,219	6,169,255	(1,231,372)	6,201,102
Segment Profit/(Loss) Income tax expense	(1,844,239)	1,473,912	1,499,473	1,129,146
	-	(501,130)	-	(501,130)
Segment loss after income tax expense	(1,844,239)	972,782	1,499,473	628,016
Assets
Segment assets Liabilities	4,711,839	13,105,722	-	17,817,561
Segment liabilities Other	5,507,998	799,420	-	6,307,418
Depreciation and amortisation of segment
assets	4,930	768,719	-	773,649

26. Related Party Disclosures

The wholly-owned group includes the ultimate parent entity in the group and the controlled entities. The ultimate parent entity in the wholly owned group is Incremental Oil and Gas Ltd. During the year the company advanced loans of \$3,163,840 (2010:\$11,592,521) and charged management fees and interest of \$1,576,459 (2010:\$1,201,895) by way of loan account transactions. The loans have no fixed terms of repayment.

27. Events after the balance sheet date

Subsequent to the year end the company has continued production of oil from its properties in the USA.

28. Financial Risk Management

The Group's activities expose it to a variety of financial risks: Market risk (including currency risk, interest rate risk and price risk), credit risk and liquidity risk. The Group's overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group.

The Group takes a proactive approach to risk management. The Board is responsible for ensuring that risks, and also opportunities are identified on a timely basis and that the Group's objectives and activities are aligned with the risks and opportunities identified by the Board. The Board provides policies for overall risk management, as well as policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk and investment of excess liquidity.

(a) Market Risk

(i) Foreign Exchange Risk

The Group operates internationally and are exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the Australian dollar.

Foreign exchange risk arises from future commercial transactions and recognised assets and liabilities denominated in a currency that is not the entity's functional currency and net investments in foreign operations.

The material foreign exchange exposure on the net monetary position of key group entities against its respective functional currency, expressed in the group's presentation currency is an amount of cash of \$477,240 held in \$A by the parent entity and creditors totalling \$91,742 at 31 December 2011 . A 10% movement exchange rates would have a profit and loss effect of \$38,550 before taxation. As the Company is in a tax loss position the effect on equity would be \$38,550

(ii) Interest Rate Risk

The Group is exposed to interest rate risk as it invests funds at floating interest rates.

Sensitivity analysis has not been performed against movement in interest rates as the exposure is not considered material.

(iii) Community price risk

The Group is exposed to commodity price risk as its income is determined by reference to international prices of oil and gas. A 10% change in the oil and gas prices during the period would have had a profit and loss effect of \$770,401 before taxation.

(b) Credit Risk

There are no significant concentrations of credit risk within the Group.

Credit risk is managed on a group basis. Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposure relating to outstanding receivables and committed transactions. For banks and financial institutions, only independently rated parties with a minimum rating of 'A' are accepted. The Group has a credit risk in relation to its receivables. All sales are normally settled within 30 days of the issue of the invoice.

The Group does not have any exposure to any derivative financial instruments.

Credit risk further arises in relation to financial guarantees given to certain parties. Such guarantees are only provided in exceptional circumstances and are subject to specific board approval.

(c) Fair Values

The fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes.

The fair value of financial instruments traded in active markets (such as publicly traded derivatives, and trading and available-for-sale securities) is based on quoted market prices at the reporting date. The quoted market price used for financial assets held by the Group is the current bid price.

The fair value of financial instruments that are not traded in an active market (for example investments in unlisted subsidiaries) is determined using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance date. Other techniques, such as estimated discounted cash flows, are used to determine fair value for the remaining financial instruments.

The carrying value less impairment provision of trade receivables and payables are assumed to approximate their fair values due to their short-term nature. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments.

	Average Interest Rate %	Variable Interest Rate \$	Fixed Interest Rate Maturity Less than 1 Year \$	Fixed Interest Rate Maturity 1-5 Years \$	Non Interest Bearing \$	Total \$
2011
Financial Assets
Cash and cash
equivalents	1.64%	1,456,780	-	-	-	1,456,780
Trade and other
receivables	0.00%	-	-	-	704,372	704,372
Other financial assets	0.00%	-	-	-	100,000	100,000
		1,456,780	-	-	804,372	2,261,152
Financial Liabilities
Trade and other payables	0.00%	-	-	-	516,805	516,805
		-	-	-	516,805	516,805
Net financial assets/(liabilities)		-	-	-	287,657	1,744,347

	Average Interest Rate %	Variable Interest Rate \$	Fixed Interest Rate Maturity Less than 1 Year \$	Fixed Interest Rate Maturity 1-5 Years \$	Non Interest Bearing \$	Total \$
2010
Financial Assets
Cash and cash
equivalents	0.25%	5,114,421	-	-	-	5,114,421
Trade and other
receivables	0.00%	-	-	-	538,780	538,780
Other financial assets	0.00%	-	-	-	100,000	100,000
		5,114,421	-	-	638,780	5,753,201
Financial Liabilities
Trade and other payables	0.00%	-	-	-	688,826	688,826
Convertible notes	10.0%	-	5,092,000		-	5,092,000
			5,092,000	-	688,826	5, 780,826
Net financial
assets/(liabilities)		5,114,421	(5,092,000)	-	(50,046)	(27,625)

(c) Reconciliation of net financial assets to net assets

	2011 \$	2010 \$ \$
Net financial liabilities as above:	1,744,347	(27,625)
Non-financial assets & liabilities
Inventories	91,046	44,521
Oil properties	15,747,741	11,120,893
Exploration assets	739,700	388,797
Plant and equipment	472,588	510,149
Provision	(30,769)	(25,460)
Deferred taxation	(1,139,658)	(501,130)
Net Assets per Statement of Financial Position	17,624,995	11,510,145

29. Parent entity disclosures

	Company 2011	Company 2010
Assets Current assets	\$ 1,286,508	\$ 4,703,692
Non-current assets	14,758,654	11,600,668
Total assets	16,045,162	16,304,360
Liabilities
Current liabilities	91,742	3,216,598
Non-current liabilities	-	2,291,400
Total Liabilities	91,742	5,507,998
Net Assets
	15,953,420	10,796,362
Equity
Issued Capital	17,905,010	12,604,832
Accumulated losses	(1,987,359)	(1,844,239)
Reserves	35,769	35, 769
Total Equity	15,953,420	10,796,362
	Year ended 31 December 2011	Period from incorporation to December 2010
	\$	\$
Financial performance

Loss for the period 143,120

The Company has not guaranteed the debts of any of its subsidiaries.

The Company has no contingent liabilities.

The Company has no commitments for the acquisition of property, plant and equipment.

1,844,239

flf,IA .SUOIf, C NOIIVUVTJf,

e|?N :leql IIo puu p}'J sPc I pluerueJcul Jo eqtr srope4Q uorFloser Jo uI scuBpJoccs q\$al ?

• u1 eq1 uoluldo eql3o srotrcenq 'I
• '1002 lSrnpnlcul ecrr?pJooce qllll er{l suorprod;o3 lcv pepuSlsep su peypne pm selou oqlJo crtuouorg ,{lnue sB 1es lno uo ssEud 91 o1 Z, ere u goder pu€ aql leuorilppe seJnsopsrp pepnlcr4 u eql .srolcerlg 'sluauplels aql lurcu€ug (u)

'e1ep puu eq1 reef pepua uo leql acueuuoyod rog str Jo prre ^IJequreceq I I0Z g go s,dnorp plcueug uorlsod su lE ^\er^ (r) EuntE u en4 prr" n€J

(11) 8uil1duroc qtt,tt Supunoccy sprspuqs pup suo4erodro3 :I002 suolppEeg pue

pesolcsrp ur elou '(fl7 goder serlduroc osle qg,r. puorpuetrul ptcueqC spwpuuls Euqrodag ss oqJ lercupug (llt

• or[oreq enp pus 'olqB,ftd (q) eleqJ arp spunor8 o1 e^o[eq 1uW aq1 fuedruoc 11ua eq elqe o1 fed slqep sy su pue uaqm ,(aql
• 't toz requressc Juo^ pepue I e oril IslcrrEug JoJ vs6z Jo oql suorluodro] 1rv I00z sJopeJIC ul ecrrepJoscu qil^\ suorlces sql s?q uoltsJslcop ueeq raus epslu Eu^leceJ suope\$Icep eql peJrnboJ ol epuur oq ol aw 'z

sqtJoJ pr?ofl

ztOzqrreI{0E

Stantons International Audit and Consulting Pty Ltd trading as

PO Box 1908 West Perth WA 6872 Australia

Level 2, 1 Walker Avenue West Perth WA 6005 Australia

Tel: +61 8 9481 3188 Fax: +61 8 9321 1204

ABN: 84 144 581 519 www.stantons.com.au

INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF INCREMENTAL OIL AND GAS LIMITED

Report on the Financial Report

We have audited the accompanying financial report of Incremental Oil and Gas Limited, which comprises the consolidated statement of financial position as at 31 December 2011, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, notes comprising a summary of significant accounting policies and other explanatory information and the directors' declaration of the consolidated entity comprising the company and the entities it controlled at the year's end or from time to time during the financial year.

Directors' responsibility for the Financial Report

The directors of the company are responsible for the preparation and fair presentation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. In note 2(b), the directors also state, in accordance with Australian Accounting Standard AASB 101 Presentation of Financial Statements, that the financial report, comprising the financial statements and notes, complies with International Financial Reporting Standards.

Auditor's responsibility

Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor's judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report.

Our audit did not involve an analysis of the prudence of business decisions made by directors or management.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Independence

In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001.

Auditor's opinion

In our opinion:

• (a) the financial report of Incremental Oil and Gas Limited is in accordance with the Corporations Act 2001, including:
• (i) giving a true and fair view of the consolidated entity's financial position as at 31 December 2011 and of its performance for the year ended on that date; and
• (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001.
• (b) the consolidated financial report also complies with International Financial Reporting Standards as disclosed in note 2(b).

Report on the Remuneration Report

We have audited the remuneration report included in pages 7 to 11 of the directors' report for the year ended 31 December 2011. The directors of the Company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards

Auditor's opinion

In our opinion the remuneration report of Incremental Oil and Gas Limited for the year ended 31 December 2011 complies with section 300A of the Corporations Act 2001.

STANTONS INTERNATIONAL AUDIT AND CONSULTING PTY LTD (Trading as Stantons International) (An Authorised Audit Company)

J P Van Dieren Director

West Perth, Western Australia 30 March 2012

PO Box 1908 West Perth WA 6872 Australia

Level 2, 1 Walker Avenue West Perth WA 6005 Australia

Tel: +61 8 9481 3188 Fax: +61 8 9321 1204

ABN: 84 144 581 519 www.stantons.com.au

30 March 2012

Board of Directors Incremental Oil and Gas limited Unit 2, 16 Phillimore Street Fremantle WA 6160

Dear Directors

RE: INCREMENTAL OIL AND GAS LIMITED

In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the directors of Incremental Oil and Gas Limited.

As Audit Director for the audit of the financial statements of Incremental Oil and Gas Limited for the year ended 31 December 2011, I declare that to the best of my knowledge and belief, there have been no contraventions of:

• (i) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and
• (ii) any applicable code of professional conduct in relation to the audit.

Yours sincerely

STANTONS INTERNATIONAL AUDIT AND CONSULTING PTY LIMITED (Authorised Audit Company)

JP Van Dieren Director