Basis of Presentation and Significant Accounting Policies

6 Months Ended

Jun. 30, 2014

Basis of Presentation and Significant Accounting Policies

1.	Basis of Presentation and Significant Accounting Policies

Prior to its acquisition by Petroflow Energy Corporation on July 31, 2014, Equal Energy Ltd. (“Equal” or the “Company”) was a publicly listed company whose common shares trade on both the Toronto Stock Exchange (“TSX”) and the New York Stock Exchange (“NYSE”) under the symbol EQU. As further described in Note 13, Subsequent Events, on July 31, 2014, the Company was acquired by and became a wholly owned subsidiary of Petroflow Energy Corporation. See Note 13, Subsequent Events, for further information. Equal is engaged in the exploration, development and production of Natural Gas Liquids (“NGLs”), natural gas and oil in the United States and conducts many of its activities jointly with others. These consolidated financial statements reflect only the Company’s proportionate interest in such activities. See Note 13, Subsequent Events, for discussion regarding the acquisition of all of the Company’s issued and outstanding common shares on July 31, 2014.

As required by Rule 3b-4(c) of the United States Securities Exchange Act of 1934, as amended, and Rule 405 of the United States Securities Act of 1933, as amended, Equal has adopted generally accepted accounting principles in the United States of America (“U.S. GAAP”) for financial reporting.

The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Pursuant to such rules and regulations, certain disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted. The accompanying unaudited consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements included in Equal’s Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on March 17, 2014. The accompanying unaudited consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the Company’s financial position as of June 30, 2014, and the Company’s results of operations and cash flows for the three and six month periods ended June 30, 2014 and 2013.

Foreign Currency Transactions

As a result of the 2012 strategic review, all of Equal’s Canadian oil and gas assets were sold in Q4 2012. Starting in January 2013, the Company changed its functional currency from the Canadian dollar to the U.S. dollar, as the Company primarily generates revenue and expends cash in U.S. dollars. In addition, effective January 1, 2013, the Company changed its reporting currency from the Canadian dollar to the U.S. dollar.

RECENT ACCOUNTING STANDARDS

As of January 1, 2017, Equal will be required to adopt Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” under Topic 606, which was the result of a joint project by the FASB and International Accounting Standards Board. The new standard replaces Topic 605, “Revenue Recognition”, and other industry-specific guidance in the Accounting Standards Codification. The new standard is based on the principle that revenue is recognized on the transfer of promised goods or services to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The standard can be applied using either the full retrospective approach or a modified retrospective approach at the date of adoption. Equal is currently assessing the potential impact of the standard on the Company’s consolidated financial statements.

In April 2014, the FASB issued ASU No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” This ASU relates to discontinued operations reporting for disposals of components of an entity that represent strategic shifts that have, or will have, a major effect on an entity’s operations and financial results. The standard expands the disclosures for discontinued operations and requires new disclosures related to individually material disposals that do not meet the definition of a discontinued operation. The provisions of this ASU are effective for interim and annual periods beginning after December 15, 2014. The Company does not anticipate that the adoption of this standard will have an impact on its consolidated financial statements or disclosures.

Effective January 1, 2014, Equal adopted ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” issued by the Financial Accounting Standards Board (“FASB”). This update requires the netting of unrecognized tax benefits against a deferred tax asset for a loss or other carryforward that would apply in settlement of the uncertain tax positions. Under the amended guidance, unrecognized tax benefits are netted against all available same-jurisdiction loss or other tax carryforwards that would be utilized, rather than only against carryforwards that are created by the unrecognized tax benefits. The updated guidance is applied prospectively, effective January 1, 2014. The adoption of this update concerns presentation and disclosure only as it relates to Equal’s consolidated financial statements and had no impact to the Company at June 30, 2014.

In March 2013, the FASB issued ASU 2013-05, “Foreign Currency Matters: Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.” This ASU provides guidance for transactions that require the entire amount of a cumulative translation adjustment related to an entity’s investment in a foreign entity to be released. This guidance is effective for annual and interim periods beginning after December 15, 2013, and had no impact to the Company at June 30, 2014.

EQUAL ENERGY LTD. 10-Q