Repsol Oil & Gas Canada (TLM) 40-F 2011 FY Annual report (Canada)

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EXHIBIT 99.7

FOR THE YEAR ENDED DECEMBER 31, 2011

CONSOLIDATED FINANCIAL STATEMENTS

                

Report of Management

Management is responsible for the Consolidated Financial Statements.

Management has prepared the Consolidated Financial Statements in accordance with International Financial Reporting Standards. If alternative accounting methods exist, management has chosen those it deems most appropriate in the circumstances. Financial statements are not precise since they include certain amounts based on estimates and judgments. Management has ensured that the Consolidated Financial Statements are presented fairly in all material respects.

The Board of Directors is responsible for reviewing and approving the Consolidated Financial Statements and Management's Discussion and Analysis and, primarily through its Audit Committee, ensures that management fulfils its responsibilities for financial reporting.

The Audit Committee is appointed by the Board of Directors and is composed entirely of unrelated, independent directors. The Audit Committee meets regularly with management, and with the internal and external auditors, to discuss internal controls and reporting issues and to satisfy itself that each party is properly discharging its responsibilities. It reviews the Consolidated Financial Statements and the external auditors' report. The Audit Committee also considers, for review by the Board of Directors and approval by the shareholders, the engagement or reappointment of the external auditors.

Ernst & Young LLP, the external auditors, have audited the Consolidated Financial Statements in accordance with auditing standards generally accepted in Canada and the standards of the Public Company Accounting Oversight Board (United States) on behalf of the shareholders. Ernst & Young LLP have full and free access to the Audit Committee.

Management Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in rules 13a-15(f) and 15d-15(f) under the United States Securities Exchange Act of 1934, as amended.

Management has conducted an evaluation of the Company's internal control over financial reporting based on criteria established inInternal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Based on management's assessment as at December 31, 2011, the end of the Company's fiscal year, management has concluded that the Company's internal control over financial reporting is effective.

The results of management's assessment were reviewed with the Audit Committee of the Company's Board of Directors. Ernst & Young LLP, the independent registered public accounting firm that audited the Company's Consolidated Financial Statements included herewith, independently assessed the effectiveness of the Company's internal control over financial reporting. Ernst & Young LLP's attestation is located in the Independent Auditors' Report on Internal Controls under Standards of the Public Company Accounting Oversight Board (United States), which is an exhibit to the Company's Annual Report on Form 40-F.

John A. Manzoni	L. Scott Thomson
President and Chief Executive Officer	Executive Vice-President, Finance and Chief Financial Officer
March 1, 2012

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TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

Independent Auditors' Report on Internal Controls Under
Standards of the Public Company Accounting Oversight
Board (United States)

To the Shareholders ofTalisman Energy Inc.

We have auditedTalisman Energy Inc.'s internal control over financial reporting as at December 31, 2011, based on criteria established inInternal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Talisman Energy Inc.'s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Talisman Energy Inc. maintained, in all material respects, effective internal control over financial reporting as at December 31, 2011, based on the COSO criteria.

We also have audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States), the Consolidated Balance Sheets of Talisman Energy Inc. as at December 31, 2011 and 2010 and January 1, 2010 and the Consolidated Statements of Income, Comprehensive Income, Changes in Shareholders' Equity and Cash Flows for the years ended December 31, 2011 and 2010, and our report dated March 1, 2012 expressed an unqualified opinion thereon.

Chartered Accountants

Calgary, Canada
March 1, 2012

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TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

Independent Auditors' Report of Registered Public Accounting Firm

To the Shareholders ofTalisman Energy Inc.

We have audited the accompanying Consolidated Financial Statements ofTalisman Energy Inc., which comprise the Consolidated Balance Sheets as at December 31, 2011 and 2010, and January 1, 2010, and the Consolidated Statements of Income, Comprehensive Income, Changes in Shareholders' Equity and Cash Flows for the years ended December 31, 2011 and 2010, and a summary of significant accounting policies and other explanatory information.

MANAGEMENT'S RESPONSIBILITY FOR THE CONSOLIDATED FINANCIAL STATEMENTS

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

AUDITORS' RESPONSIBILITY

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

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

OPINION

In our opinion, the Consolidated Financial Statements present fairly, in all material respects, the financial position of Talisman Energy Inc. as at December 31, 2011 and 2010, and January 1, 2010, and its financial performance and cash flows for the years ended December 31, 2011 and 2010 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

OTHER MATTER

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Talisman Energy Inc.'s internal control over financial reporting as at December 31, 2011, based on criteria established inInternal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 1, 2012 expressed an unqualified opinion on Talisman Energy Inc.'s internal control over financial reporting.

Chartered Accountants

Calgary, Canada
March 1, 2012

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TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

Consolidated Balance Sheets

		December 31,	December 31,	January 1,
(millions of US$)		2011	2010	2010
			(note 4)	(note 4)
Assets
Current
	Cash and cash equivalents (note 28)	474	1,655	1,628
	Accounts receivable (note 9)	1,550	1,287	1,216
	Risk management (note 22)	42	119	29
	Inventories (note 10)	164	144	141
	Prepaid expenses	24	20	8
	Assets held for sale (note 5)	–	–	22
		2,254	3,225	3,044
Other assets (note 11)		101	667	74
Investments (note 12)		395	121	34
Risk management (note 22)		24	25	40
Goodwill (note 8)		1,317	1,164	1,183
Property, plant and equipment (note 13)		15,909	13,266	13,254
Exploration and evaluation assets (note 13)		3,954	3,442	2,212
Deferred tax assets (note 26)		272	184	147
		21,972	18,869	16,944
Total assets		24,226	22,094	19,988
Liabilities
Current
	Bank indebtedness	60	2	35
	Accounts payable and accrued liabilities	2,622	2,722	2,040
	Risk management (note 22)	–	117	266
	Income and other taxes payable	371	513	341
	Current portion of long-term debt (note 17)	410	359	10
	Liabilities associated with assets held for sale (note 5)	–	–	7
		3,463	3,713	2,699
Decommissioning liabilities (note 15)		2,982	2,580	2,003
Other long-term obligations (note 18)		346	326	316
Risk management (note 22)		–	–	6
Long-term debt (note 17)		4,485	3,845	3,601
Deferred tax liabilities (note 26)		2,932	2,435	2,516
		10,745	9,186	8,442
Contingencies and commitments (note 23)
Shareholders' equity
Common shares (note 20)		1,561	1,480	1,401
Preferred shares (note 20)		191	–	–
Contributed surplus		186	108	117
Retained earnings		7,292	6,819	6,135
Accumulated other comprehensive income (note 21)		788	788	1,194
		10,018	9,195	8,847
Total liabilities and shareholders' equity		24,226	22,094	19,988

See accompanying notes.

On behalf of the Board:

Charles R. Williamson	William R. P. Dalton
Chairman of the Board	Director

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TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

Consolidated Statements of Income

Years ended December 31(millions of US$)		2011		2010
				(note 4)
Revenue
	Sales	8,194		6,875
	Other income (note 24)	78		107
Total revenue and other income		8,272		6,982
Expenses
	Operating	2,190		1,890
	Transportation	216		221
	General and administrative	431		371
	Depreciation, depletion and amortization	1,949		1,788
	Impairment (note 14)	226		301
	Dry hole	241		113
	Exploration	427		374
	Finance costs (note 16)	278		276
	Share-based payments expense (recovery) (note 20)	(310	)	212
	(Gain) loss on held-for-trading financial instruments (note 22)	210		(87	)
	Gain on asset disposals (note 5)	(192	)	(520	)
	Other, net (note 25)	161		72
Total expenses		5,827		5,011
Income before taxes		2,445		1,971
Income taxes (note 26)
	Current income tax	1,441		1,136
	Deferred income tax (recovery)	228		(110	)
		1,669		1,026
Net income		776		945
Per common share (US$):
	Net income	0.76		0.93
	Diluted net income	0.38		0.93
Weighted average number of common shares outstanding (millions)
	Basic (note 29)	1,023		1,018
	Diluted (note 29)	1,038		1,018

See accompanying notes.

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TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

Consolidated Statements of Comprehensive Income

Years ended December 31(millions of US$)		2011		2010
				(note 4)
Net income		776		945
Foreign currency translation1		–		(408	)
Actuarial losses relating to pension and other post-employment benefits2		(26	)	(12	)
Gains on derivatives designated as cash flow hedges
	Gains arising during the year3	–		13
	Gains recognized in net income4	–		(11	)
		–		2
Other comprehensive loss		(26	)	(418	)
Comprehensive income		750		527

1

Includes net investment hedging gain of $nil (2010 – $22 million)

2

Net of tax of $29 million (2010 – $1 million)

3

Net of tax of $nil (2010 – $5 million)

4

Net of tax of $nil (2010 – $4 million)

See accompanying notes.

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TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

Consolidated Statements of Changes in Shareholders' Equity

Years ended December 31(millions of US$)	2011		2010
			(note 4)
Common shares
Balance at beginning of year	1,480		1,401
Issued on exercise of stock options	175		95
Shares purchased and held in trust for long-term PSU plan (note 20)	(94	)	(81	)
Shares released from trust for 2008 PSU plan (note 20)	–		65
Balance at end of year	1,561		1,480
Preferred shares
Balance at beginning of year	–		–
Issued (note 20)	191		–
Balance at end of year	191		–
Contributed surplus
Balance at beginning of year	108		117
Share-based payments (note 20)	78		(9	)
Balance at end of year	186		108
Retained earnings
Balance at beginning of year	6,819		6,135
Net income	776		945
Actuarial losses transferred to retained earnings	(26	)	(12	)
Common share dividends (note 20)	(277	)	(249	)
Balance at end of year	7,292		6,819
Accumulated other comprehensive income
Balance at beginning of year	788		1,194
Other comprehensive loss	(26	)	(418	)
Actuarial losses transferred to retained earnings	26		12
Balance at end of year	788		788

See accompanying notes.

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TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

Consolidated Statements of Cash Flows

Years ended December 31(millions of US$)		2011		2010
				(note 4)
Operating activities
Net income		776		945
Add: Finance costs (cash and non-cash) (note 16)		278		276
Dividends from equity investments		9		–
Items not involving cash (note 27)		2,124		1,556
		3,187		2,777
Changes in non-cash working capital (note 27)		(375	)	367
Cash provided by operating activities		2,812		3,144
Investing activities
Capital expenditures
	Exploration, development and other	(4,303	)	(3,566	)
	Corporate acquisitions, net of cash acquired (note 7)	(156	)	(183	)
	Property acquisitions (note 6)	(737	)	(1,340	)
Proceeds of resource property dispositions (note 5)		527		2,194
Repayment of note receivable (note 22)		40		–
Acquisition deposit		18		(630	)
Investments		54		–
Changes in non-cash working capital		18		274
Cash used in investing activities		(4,539	)	(3,251	)
Financing activities
Long-term debt repaid (note 17)		(313	)	(10	)
Long-term debt issued (note 17)		1,044		595
Common shares issued (note 20)		114		55
Common shares purchased (note 20)		(94	)	(75	)
Preferred shares issued (note 20)		191		–
Finance costs (cash)		(202	)	(197	)
Common share dividends (note 20)		(277	)	(249	)
Deferred credits and other		(9	)	(2	)
Changes in non-cash working capital		11		(1	)
Cash provided by financing activities		465		116
Effect of translation on foreign currency cash and cash equivalents		23		51
Net increase (decrease) in cash and cash equivalents		(1,239	)	60
Cash and cash equivalents net of bank indebtedness, beginning of year		1,653		1,593
Cash and cash equivalents net of bank indebtedness, end of year		414		1,653
Cash and cash equivalents (note 28)		474		1,655
Bank indebtedness		(60	)	(2	)
Cash and cash equivalents net of bank indebtedness, end of year		414		1,653

See accompanying notes.

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TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

Notes to the Consolidated Financial Statements

(tabular amounts in millions of US$, except as noted)

1. CORPORATE INFORMATION

Talisman Energy Inc. ('Talisman' or 'the Company') is a public company incorporated pursuant to the laws of Canada and domiciled in Alberta, Canada, with common shares listed on the Toronto and New York stock exchanges under the symbol TLM. The registered office is located at Suite 2000, 888 – 3^rd Street SW, Calgary, Alberta, Canada, T2P 5C5.

The Company is in the business of exploration, development, production and marketing of crude oil, natural gas and natural gas liquids (NGLs).

The Consolidated Financial Statements as at and for the year ended December 31, 2011 were authorized for issuance by the Board of Directors on March 1, 2012.

2. BASIS OF PREPARATION

The Consolidated Financial Statements of Talisman Energy Inc. represent the first annual financial statements of the Company and its subsidiaries prepared in accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB) and interpretations of the International Financial Reporting Interpretations Committee (IFRIC). Previously, the Company prepared its annual Consolidated Financial Statements in accordance with Canadian generally accepted accounting principles then applicable to publically accountable enterprises (Canadian GAAP or CGAAP).

Since this is the Company's initial year presenting its financial position, results of operations and cash flows under IFRS, these Consolidated Financial Statements have been prepared in accordance with IFRS 1First-Time Adoption of IFRS.

The preparation of these Consolidated Financial Statements resulted in changes to accounting policies as compared with the most recent annual Consolidated Financial Statements prepared in accordance with Canadian GAAP. The accounting policies set out below have been applied consistently to all periods presented in these Consolidated Financial Statements and in preparing an opening IFRS balance sheet as at January 1, 2010, as required by IFRS 1. The impact of the transition from Canadian GAAP to IFRS is presented in note 4.

These Consolidated Financial Statements were prepared on a going concern basis, under the historical cost convention, except for certain financial assets and financial liabilities measured at fair value through the Consolidated Statement of Income.

The preparation of Consolidated Financial Statements in accordance with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise judgment in applying the Company's accounting policies. The areas of accounting that require a high degree of judgment or which are based upon significant estimates are disclosed in note 3(y).

3. SIGNIFICANT ACCOUNTING POLICIES

a) Consolidation

The Consolidated Financial Statements include the accounts of Talisman and its subsidiaries, being those companies over which the Company, either directly or indirectly, has control through a majority of the voting rights or the right to exercise control or to obtain the majority of the benefits and be exposed to the majority of the risks. Subsidiaries are consolidated from the date on which control is obtained until the date that such control ceases, using consistent accounting policies. All intercompany balances and transactions, including unrealized profits arising from such transactions, are eliminated upon consolidation. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies.

b) Joint Ventures and Investments

A jointly controlled asset offers joint ownership by the venturers of the assets contributed to the joint venture, without the formation of a corporation, partnership or other entity.

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TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

A jointly controlled entity is a company, partnership or other entity in which each venturer has an interest and jointly controls the assets of the entity, earning its own income and incurring its own liabilities and expenses. Interests in jointly controlled entities are accounted for using proportionate consolidation.

Substantially all of Talisman's activities are conducted jointly with others, and the Consolidated Financial Statements reflect only the Company's proportionate interest in such activities.

Interests in entities over which Talisman has significant influence, but not control or joint control, are accounted for using the equity method. Talisman's share of the income of equity investments is recorded in the Consolidated Statement of Income. Dividends from equity investments are included in cash provided by operating activities. Interests in entities over which Talisman does not have significant influence are recorded at cost. Both equity and cost investments are tested for possible impairment whenever events or changes in circumstances indicate that the carrying value of the investment may not be recoverable.

c) Business Combinations and Goodwill

Business combinations are accounted for using the acquisition method. The cost of an acquisition is the aggregate of the consideration transferred, measured at acquisition date fair value. Acquisition costs incurred are expensed. When the Company acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts acquired.

Contingent consideration to be transferred by the Company is recognized at fair value at the acquisition date. Subsequent changes to the fair value of contingent consideration recorded as a financial asset or liability are recognized in net income in accordance with IAS 39Financial Instruments: Recognition and Measurement.

Goodwill represents the excess of the consideration transferred over the fair value of identifiable assets acquired and liabilities assumed in business combinations. Goodwill is not amortized but is subject to impairment reviews annually, or more frequently as economic events dictate, as described in note 3(i).

Where goodwill forms part of an operating segment and part of the operation within that segment 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. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the segment retained.

d) Accounts Receivable

Accounts receivable are recorded based on the Company's revenue recognition policy. The allowance for doubtful accounts is management's best estimate of accounts receivable balances that may not be collectible, and is reviewed quarterly.

e) Inventories

Inventories are valued at the lower of cost and net realizable value. Cost comprises direct purchase costs, cost of production and taxes, and is determined using the first-in first-out method for product inventories and by the average cost method for materials and supplies. Net realizable value is determined by reference to prices existing at the balance sheet date less any costs expected to be incurred to completion and disposal.

f) Property, Plant and Equipment (PP&E)

PP&E, comprising oil and gas development and production properties and corporate assets, is stated at cost less accumulated depreciation, depletion and amortization and accumulated impairment losses.

Oil and gas development and production expenditure is generally accounted for using the principles of the successful efforts method of accounting. Expenditure on the construction, installation and completion of infrastructure facilities such as platforms, pipelines and the drilling of development wells is capitalized within PP&E.

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TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

The initial cost of an asset comprises its purchase price or construction cost, any costs directly attributable to bringing the asset into operation, the initial estimate of the decommissioning liability and capitalized borrowing costs for qualifying assets. The capitalized value of a finance lease is also included within PP&E.

Expenditure on turnarounds comprises the cost of replacement assets or parts of assets and inspection and overhaul costs. Where an asset or part of an asset is replaced and it is probable that future economic benefits will flow to the Company from the replacement, the expenditure is capitalized and the replaced part is derecognized. Inspection and overhaul costs relating to turnarounds, which generally occur annually, and all other repairs and maintenance costs are expensed when incurred.

Well injection costs incurred to stimulate depleted wells are charged as an expense when incurred. Certain stimulation costs which increase production and reserves, extending beyond one year, are deferred in PP&E and depleted using the unit of production method.

Exchanges of development and production assets are measured at fair value unless the exchange transaction lacks commercial substance or the fair value of neither the asset received nor the asset exchanged is reliably measurable. The cost of the acquired asset is measured at the fair value of the asset exchanged, unless the fair value of the asset received is more clearly evident. Where fair value is not used, the cost of the acquired asset is measured at the carrying amount of the asset exchanged. The gain or loss arising is recognized in net income.

The Company assesses at each reporting date whether there is an indication that its PP&E may be impaired or subject to impairment reversals. If any indication exists, the Company estimates the asset's recoverable amount using the methodology described in note 3(h).

g) Exploration and Evaluation (E&E) Assets

Exploration well costs are initially capitalized and, if subsequently determined to have not found sufficient reserves to justify commercial production, are charged to dry hole expense. Exploration well costs that have found sufficient reserves to justify commercial production, but those reserves cannot be classified as proved, continue to be capitalized as long as sufficient progress is being made to assess the reserves and economic viability of the well and/or related project. All such carried costs are subject to technical, commercial and management review at each reporting date to confirm the continued intent to develop or otherwise extract value from the discovery. When this is no longer the case, the costs are written off. When proved reserves of oil and natural gas are determined and development is sanctioned, the relevant expenditure is tested for potential impairment and then transferred to PP&E (see note 3(h) for details of the impairment methodology).

Undeveloped land costs are classified initially as E&E assets and transferred to PP&E as proved reserves are assigned.

All other exploration costs, including geological and geophysical costs and annual lease rentals, are charged to exploration expense when incurred.

For exchanges or parts of exchanges that involve principally E&E assets, the exchange is accounted for at the carrying amount of the asset exchanged.

h) Impairment of Assets

The Company tests PP&E and E&E assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, for example, changes in assumptions relating to future prices, future costs and reserves. Individual assets are grouped for impairment assessment purposes at the lowest level at which there are identifiable cash inflows that are largely independent of the cash inflows of other groups of assets, known as a cash-generating unit (CGU). If any such indication of impairment exists, an estimate of the CGU's recoverable amount is made. A CGU's recoverable amount is the higher of its fair value less costs to sell and its value in use. These assessments require the use of estimates and assumptions regarding long-term commodity prices, discount rates, future capital expenditures requirements, reserves determination and life of field. E&E assets are also tested for possible impairment when transferred to PP&E.

A previously recognized impairment loss is reversed only if there has been a change in the estimates or assumptions used to determine the CGU's recoverable amount since the impairment loss was recognized. If that is the case, the carrying amount of the CGU is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have

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TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

been determined, net of depletion, had no impairment loss been recognized for the CGU in prior periods. Such a reversal is recognized in net income, following which the depletion charge is adjusted in future periods to allocate the CGU's revised carrying amount on a systematic basis over its remaining useful life.

i) Goodwill

Goodwill is tested for impairment annually and when circumstances indicate that the carrying amount may be impaired. The impairment test requires that goodwill be allocated to CGUs, which Talisman has determined by aggregating locations having similar economic characteristics and/or which are in similar geographic locations, and which correspond with the operating segments described in note 31, except for locations within the Other segment, which are generally grouped by country. Impairment is determined for goodwill by assessing the recoverable amount (based on fair value less costs to sell) of each segment or country, as appropriate, to which the goodwill relates. Where the recoverable amount of the segment is less than the carrying amount, an impairment loss is recognized. Goodwill impairment losses cannot be reversed.

j) Depreciation, Depletion and Amortization (DD&A)

Capitalized costs of proved oil and gas properties are depleted using the unit of production method. For purposes of these calculations, production and reserves of natural gas are converted to barrels (bbls) on an energy equivalent basis at a ratio of six thousand cubic feet (mcf) of natural gas for one barrel (bbl) of oil. Depletion and depreciation rates are updated in each reporting period that a significant change in circumstances, including reserves revisions, occurs.

Successful exploratory wells and development costs are depleted over proved developed reserves. Significant development costs incurred in connection with proved undeveloped reserves are excluded from depletion until the reserves are developed. In the case of unconventional natural gas developments, land and development costs are depleted over total proved reserves and include future development costs.

Acquired resource properties with proved reserves, including offshore platform costs, are depleted over total proved reserves. Acquisition costs of probable reserves are not depleted or amortized while under active evaluation for commercial reserves. Costs are transferred to depletable costs as proved reserves are recognized.

Costs associated with significant development projects are not depleted until the asset is substantially complete and ready for its intended use. Unproved land acquisition costs that are individually material are not amortized, but are assessed for impairment and transferred to depletable costs as proved reserves are recognized. Unproved land acquisition costs that are individually immaterial are amortized on a straight-line basis over the average lease term. Gas plants are depreciated on a straight-line basis over their estimated remaining useful lives, not to exceed the estimated remaining productive lives of related fields. Pipelines and corporate assets are depreciated using the straight-line method at annual rates of 4% and 5 - 33%, respectively. Gas plants and pipelines in the North Sea are depleted using the unit of production method based on the related fields.

k) Non-Current Assets Held for Sale

Non-current assets classified as held for sale and associated liabilities are measured at the lower of carrying amount and fair value less costs to sell, and are presented as current on the Consolidated Balance Sheet.

Non-current assets are classified as held for sale if their carrying amounts will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset or disposal group is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification.

PP&E is not depreciated once classified as held for sale.

l) Decommissioning and Environmental Liabilities

Decommissioning liabilities are recognized when the Company has a legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate of the amount of the

12
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

obligation can be made. A corresponding amount equivalent to the liability is recognized as part of the cost of the related PP&E or E&E asset.

Decommissioning liabilities are carried on the Consolidated Balance Sheet at their discounted present value, which is remeasured each reporting period in order to reflect the period end discount rate. The liabilities are calculated using a weighted average credit adjusted risk free rate, and are accreted over time for the change in their present value, with this accretion expense included in finance costs on the Consolidated Statement of Income. Actual expenditures incurred are charged against the accumulated obligation. Any difference between the recorded decommissioning liability and the actual retirement costs incurred is recorded as a gain or loss.

The increase in capitalized costs is amortized to income on a basis consistent with DD&A of the underlying assets. Subsequent changes in the estimated decommissioning liabilities are capitalized and amortized over the remaining useful life of the underlying asset.

Liabilities for environmental costs are recognized when an obligation exists and the associated costs can be reliably estimated. Generally, the timing of recognition of these liabilities coincides with the commitment to a formal plan of action or, if earlier, on divestment or on closure of inactive sites. The amount recognized is the best estimate of the expenditure required. Where the liability will not be settled for a number of years, the amount recognized is the present value of the estimated future expenditure. These estimates are included in decommissioning liabilities.

Initially, the Company recognizes neither the deferred tax asset relating to the temporary difference on the decommissioning liability nor the corresponding deferred tax liability relating to the temporary difference on the decommissioning asset.

m) Finance Costs and Long-Term Debt

Finance costs include interest and other costs that Talisman incurs in connection with the borrowing of funds, as well as accretion expense relating to the Company's decommissioning liabilities.

Finance costs associated with major development projects are capitalized and included in the carrying amounts of the related assets until they are completed and ready for use. These costs are subsequently amortized to income with the related assets. The amount of borrowing costs capitalized for the period is determined by applying the weighted average interest rate applicable to appropriate borrowings outstanding during the period to the average amount of capitalized expenditure for the qualifying assets.

All other finance costs are recognized on the Consolidated Statement of Income in the period in which they are incurred.

The classification of debt instruments in the Consolidated Balance Sheet reflects management's intent in respect of the refinancing of those instruments. In particular, the classification of bankers' acceptances reflects management's intent to refinance a short-term obligation with a committed long-term facility with the same lender.

n) Foreign Currency Translation

Talisman's functional currency is the US$.

Prior to January 1, 2011 in the UK and prior to January 1, 2010 in Canada and Norway, the Company's operations were translated from UK£, C$ and NOK respectively into US$ using the current rate method whereby assets and liabilities were translated at year-end exchange rates, while revenues and expenses were converted using average rates for the period. Gains and losses arising on translation from UK£, C$ and NOK to US$ were deferred and included in a separate component of shareholders' equity described as accumulated other comprehensive income.

As a result of changes in the composition of revenue and costs and changes in intercompany loan arrangements, management has determined that the functional currency of the Company's UK operation is more closely linked to the US$. Accordingly, effective January 1, 2011, this operation has been accounted for as a US$ functional currency entity. As a result, foreign currency translation adjustments remain in accumulated other comprehensive income until Talisman reduces its ownership interest in its UK subsidiary. Following the change in the functional currency of the UK operation on January 1, 2011, the debt denominated in UK£ was no longer designated as a hedge of Talisman's net investment in the UK and, accordingly, foreign exchange gains and losses are recorded on the Consolidated Statement of Income.

13
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

The Company's operations in Canada and Norway are accounted for as US$ functional currency entities. As a result, foreign currency translation adjustments remain in accumulated other comprehensive income until Talisman reduces its net investment in its Canadian or Norwegian subsidiaries. The reduction of the net investment in a Canadian subsidiary that occurred during 2010 is described in note 5.

The remaining foreign operations are translated as follows: monetary assets and liabilities at exchange rates in effect at the balance sheet date, non-monetary assets and liabilities at rates in effect on the dates the assets were acquired or liabilities were assumed, and revenues and expenses at rates of exchange prevailing on the transaction dates. Gains and losses on translation are reflected in income when incurred.

Effective 2011, the Company reports its financial position and results of operations in US$. The impact of changing the reporting currency from C$ to US$ is presented in note 4.

o) Employee Benefit Plans

The cost of providing benefits under the Company's defined benefit pension plans and non-pension post-employment benefit plans is determined using the projected benefit method pro-rated on service and management's best estimate of expected plan investment performance, salary escalation and employee retirement ages. There is uncertainty relating to the assumptions used to calculate the net benefit expense and accrued benefit obligation, due to their long-term nature.

The discount rate used to determine the accrued benefit obligation is determined by reference to market interest rates at the measurement date on high quality debt instruments with cash flows that match the timing and amount of expected benefit payments. The Company recognizes all actuarial gains and losses immediately in other comprehensive loss and transfers them to retained earnings in the year recorded.

Payments to defined contribution plans are expensed as incurred, which is as the related service is rendered.

The pension benefits of key management personnel represent the attributable amount of the net benefit expense of the plans in which they participate.

p) Financial Instruments

The Company classifies its financial instruments into one of the following categories: held-for-trading assets and liabilities, assets available-for-sale, loans and receivables, assets held-to-maturity and other financial liabilities. All financial assets and liabilities are recognized on the Consolidated Balance Sheet when the Company becomes a party to the contractual requirements of the instrument. All financial instruments are measured at fair value on initial recognition. Transaction costs are included in the initial carrying amount of financial instruments except for held-for-trading items, in which case they are expensed as incurred. Measurement in subsequent periods depends on the classification of the financial instrument.

In conducting its business, the Company may use derivative financial instruments in order to manage risks associated with fluctuations in commodity prices, interest rates and foreign currency exchange rates.

Non-Hedge Financial Instruments

Held-for-trading financial assets and liabilities are subsequently measured at fair value with changes in fair value recognized in net income. Financial assets available-for-sale are subsequently measured at fair value with changes in fair value recognized in other comprehensive loss, net of tax. Financial assets held-to-maturity, loans and receivables and other financial liabilities are subsequently measured at amortized cost using the effective interest rate method.

Cash equivalents are classified as held-for-trading and are measured at carrying value, which approximates fair value, due to the short-term nature of these instruments. Accounts receivable and certain other assets that are financial instruments are classified as loans and receivables. Accounts payable and accrued liabilities, certain other long-term obligations and current and long-term debt are classified as other financial liabilities. Financial liabilities are derecognized when the obligation under the liability is discharged, cancelled or expires.

Financial instruments that are derivative contracts are considered held-for-trading unless they are designated as a hedge. The financial derivative contracts outstanding at December 31, 2011 are disclosed in note 22.

14
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

Derivatives embedded in other financial instruments and non-financial host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contract. Contracts are assessed for embedded derivatives when the Company becomes a party to them, including at the date of a business combination. Embedded derivatives requiring separation are measured at fair value at each balance sheet date and any gains or losses arising from changes in fair value are recognized in net income.

Hedges

The Company may designate financial instruments as a hedging instrument for accounting purposes. Hedge accounting requires the designation of a hedging relationship, including a hedged and a hedging item, identification of the risk exposure being hedged and an expectation that the hedging relationship will be highly effective throughout its term. In addition, in the case of anticipated transactions, it must also be highly probable that the transaction designated as being hedged will occur. The Company assesses, both at the hedge's inception and on an ongoing basis, whether the derivative financial instruments designated as hedges are highly effective in offsetting changes in fair value or cash flows of the hedged items. If the derivative financial instrument that has been designated as a hedge is terminated or is no longer designated as part of the hedging relationship, the gain or loss on the hedge at that date is deferred in other comprehensive loss and recognized in net income concurrently with the anticipated transaction. If the forecast transaction is no longer expected to occur, the gain or loss on the hedge at that date is recognized immediately in net income. The Company had the following hedges during the periods covered by these Consolidated Financial Statements:

Cash flow hedges – Until January 2011, when the cross-currency hedge and related debt were settled, the effective portion of changes in the fair value of financial instruments designated as cash flow hedges was recognized in other comprehensive loss, net of tax, with any ineffective portion being recognized immediately in net income. Gains and losses were recovered from other comprehensive loss and recognized in net income in the same period as the hedged item was realized.

Net investment hedges – Until December 31, 2010, foreign exchange gains and losses on UK£ debt designated as a net investment hedge would have been recognized in other comprehensive loss. These gains and losses would have been recovered from other comprehensive loss and recognized in net income if the net investment was reduced below the value of the debt. Since January 1, 2011, following the change in functional currency described in note 3(n), the debt denominated in UK£ is no longer designated as a hedge of the Company's net investment.

Own Use Exemption

Contracts that were entered into and continue to be held for the purpose of the receipt or delivery of a non-financial item in accordance with the Company's expected purchase, sale or usage requirements fall within the exemption from IAS 32 and IAS 39, which is known as the 'own use' exemption. The Company enters into physical commodity contracts in the normal course of business, including contracts with fixed terms. The Company's production is expected to be sufficient to deliver all required volumes under these contracts. No amounts are recognized in the Consolidated Financial Statements related to these contracts until such time as the associated volumes are delivered.

q) Comprehensive Income and Equity

The Consolidated Statement of Comprehensive Income reflects net income and items of other comprehensive loss which comprise changes in the fair value of financial instruments designated as cash flow hedges, to the extent they are effective, gains and losses recovered from other comprehensive loss and recognized in net income and actuarial gains and losses arising in relation to the Company's employee benefit plans. Until December 31, 2010, foreign currency translation gains or losses arising from the translation of the Company's foreign operations or reductions in the net investments therein and translation from the Company's functional currency to its presentation currency also gave rise to other comprehensive loss. See note 3(n) for more details.

15
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

r) Income Taxes

Income taxes comprise current tax, deferred tax and Petroleum Revenue Tax (PRT) and are recognized on the Consolidated Statement of Income except to the extent they relate to items recognized in other comprehensive loss or directly in equity. PRT is treated as an income tax and deferred PRT is accounted for on a temporary difference basis.

Interest and penalties assessed by taxing authorities on any underpayment of income tax are accrued and classified as a component of income taxes on the Consolidated Statement of Income.

Certain of the Company's contractual arrangements in foreign jurisdictions stipulate that income taxes be paid by the respective national oil company out of its entitlement share of production. Such amounts are included in income taxes at the statutory tax rate in effect at the time of production.

Current Tax

Current tax is based on estimated taxable income and tax rates which are determined pursuant to the tax laws that are enacted or substantively enacted at the balance sheet date.

Deferred Tax

Deferred tax is determined using the liability method. Under the liability method, deferred tax is calculated based on the differences between assets and liabilities reported for financial accounting purposes and those reported for income tax purposes. Deferred tax assets and liabilities are measured using substantively enacted tax rates. The impact of a change in tax rate is recognized in net income in the period in which the tax rate is substantively enacted. The Company recognizes in its financial statements the best estimate of the impact of a tax position by determining if the available evidence indicates whether it is more likely than not, based solely on technical merits, that the position will be sustained on audit. The Company estimates the amount to be recorded by weighting all possible outcomes by their associated probabilities.

Deferred tax assets and liabilities are offset only when a legally enforceable right of offset exists and the deferred tax assets and liabilities arose in the same tax jurisdiction and relate to the same taxable entity.

s) Revenue Recognition

Revenues associated with the sale of crude oil, natural gas and NGLs are recognized at the fair value of the consideration received or receivable when the significant risks and rewards of ownership have been transferred, which is when title passes from the Company to the customer. For the Company's international operations, generally, customers take title when the crude oil is loaded onto a tanker. The Company employs the entitlement method in accounting for crude oil and natural gas sales and records a receivable from a joint interest participant if a participant sells more than its proportionate share of crude oil or natural gas production. Crude oil and natural gas produced and sold, below or above the Company's working interest share in the related resource properties, results in production underliftings, or overliftings. Underliftings are recorded as inventory at the cost to produce and transport the product to storage tanks, and overliftings are recorded in accounts payable and accrued at the sales value. Underliftings are reversed from inventory when the crude oil is lifted and sold, with the sales proceeds recorded as revenue and the cost of the inventory expensed. Overliftings are reversed from accounts payable and accrued liabilities when sufficient volumes are produced to make up the overlifted volume. Amounts received under take-or-pay gas sales contracts in respect of undelivered volumes are accounted for as deferred income in accounts payable and accrued liabilities and recognized as revenue when volumes are delivered. Transportation expenses are reported as a separate expense and are not netted against revenue.

A significant portion of the Company's operations outside North America and the North Sea are governed by Production Sharing Contracts (PSCs). Under PSCs, revenues are derived from cost recovery oil and gas and profit oil and gas. Generally, cost recovery oil and gas allows the Company to recover its capital and production costs and, as appropriate, the costs carried by the Company on behalf of state oil companies from production. Profit oil is allocated to the host government and contract parties in accordance with their respective equity interests.

All taxes collected from customers that are remitted to governments are excluded from revenues.

16
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

Certain of the Company's foreign operations are conducted jointly with the respective national oil companies. These operations are reflected in the Consolidated Financial Statements based on Talisman's working interest in such activities. All other government takes, other than income taxes, are considered to be royalty interests. Royalties on production from these joint foreign operations represent the entitlement of the respective governments to a portion of Talisman's share of crude oil, natural gas and NGLs production and are recorded using rates in effect under the terms of contracts at the time of production.

Sales as reported represents the Company's share of revenues from the sale of crude oil, natural gas and NGLs and is presented after deduction of royalty payments to governments and other mineral interest owners.

t) Leases

Leases that transfer substantially all of the benefits and risks of ownership to Talisman are accounted for at the commencement of the lease term as finance leases and recorded as PP&E at the fair value of the leased asset, or, if lower, at the present value of the minimum lease payments, together with an offsetting liability. Finance charges are allocated to each period so as to achieve a constant rate of interest on the remaining balance of the liability and are recognized in net income. Capitalized leased assets are depreciated over the shorter of the estimated useful life of the asset or the lease term.

All other leases are accounted for as operating leases and the lease costs are expensed as incurred.

u) Share-Based Payments

Talisman has stock option plans, cash unit plans, performance share unit (PSU) plans, a deferred share unit plan and a restricted share unit plan, under which it receives services from employees and directors as consideration for cash payments or equity instruments of the Company. The long-term PSU plan must be settled in shares. The cash unit, deferred share unit and restricted share unit plans must be settled in cash. The stock option plans may be settled in cash at the option of the holder. The 2008 PSU plan was settled in 2010 – see note 20.

Equity-Settled Awards

The Company uses the Black-Scholes pricing model to estimate the fair value of equity-settled awards.

For the PSU plans, the Company determines the fair value of the units on the date of grant and recognizes the fair value over the vesting period as share-based payments expense and contributed surplus.

Cash-Settled Awards

The Company uses the Black-Scholes pricing model to estimate the fair value of cash-settled awards. Fair value is established initially at the grant date and the obligation is revalued each reporting period until the awards are settled with any changes in the obligation recognized as share-based payments expense (recovery) on the Consolidated Statement of Income, except for the changes related to deferred share units, which are included in general and administrative expenses.

The stock option plans are classified as liability instruments and re-measured at their fair value at the end of each reporting period.

For plans having vesting conditions, the total expense is recognized over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. At the end of each reporting period, the Company revises its estimates of the number of options and units that are expected to vest based on the vesting conditions and recognizes the impact of the revision to original estimates, if any, in net income.

v) Net Income and Diluted Net Income Per Share

Net income per share is calculated by dividing net income by the weighted average number of common shares outstanding. Diluted net income per share is calculated giving effect to the potential dilution that could occur if stock options were exercised in exchange for common shares.

The method the Company uses to determine the dilutive impact of stock options assumes that any proceeds from the exercise of in-the-money stock options would be used to purchase common shares at the average market price during the period. In

17
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

periods when a share-based payments recovery is reported, net income used in the dilution calculation is reduced by the amount of the recovery.

For stock options that may be settled in cash or shares at the employees' option, the more dilutive impact of cash settlement and equity settlement is used in calculating diluted net income per share regardless of how the stock option plan is accounted for. Stock options that are reported as cash-settled for accounting purposes may require an adjustment to the numerator in the diluted net income per share calculation for any changes in net income that would result if the stock options had been reported as equity instruments.

w) Cash and Cash Equivalents

Cash and cash equivalents include cash on deposit with banks and interest-bearing short-term investments with an original maturity of three months or less. Cash and cash equivalents are stated at cost, which approximates market value.

For the purpose of the Consolidated Statements of Cash Flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of bank indebtedness.

x) Segmented Information

The Company's reporting segments are established on the basis of having similar economic characteristics and/or which are in similar geographic locations and those components of the Company that are evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.

Effective January 1, 2011, the composition of the Company's segments changed such that the activities in the UK and Norway are reported as a single North Sea segment since, in management's judgment, the assets in those locations now share similar economic characteristics. Comparative period balances have been restated accordingly. See note 31 for disclosure of segmented information.

y) Significant Accounting Judgments, Estimates and Assumptions

To facilitate the timely preparation of the Consolidated Financial Statements, management has made estimates and assumptions regarding certain assets and liabilities and contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the periods noted. Such estimates relate primarily to unsettled transactions and events as of the date of the Consolidated Financial Statements. Accordingly, actual results may differ from estimated amounts.

DD&A, the fair value of PP&E and E&E assets, amounts recognized for impairment charges and reversals and the recognition of assets acquired and liabilities assumed upon a business combination are impacted by estimates of oil and natural gas reserves, commodity prices and capital and operating costs required to develop and produce those reserves. By their nature, estimates of reserves and the related future cash flows are subject to measurement uncertainty, and the impact of differences between actual and estimated amounts on the Consolidated Financial Statements of future periods could be material. The measurement of impairment charges and reversals is also dependent upon management's judgment in determining CGUs.

Inherent in the calculation of decommissioning liabilities are numerous assumptions and judgments, including the ultimate settlement amounts, inflation factors, credit-adjusted discount rates, timing of settlement and changes in the legal, regulatory, environmental and political environments. To the extent future revisions to assumptions impact the amount of decommissioning liabilities, a corresponding adjustment is made to the PP&E and/or E&E assets balance.

The values of pension assets and obligations and the amount of the net benefit expense charged to net income depend on certain actuarial and economic assumptions which, by their nature, are subject to measurement uncertainty.

The measurement of income tax expense, and the related provisions on the Consolidated Balance Sheet, is subject to uncertainty associated with future recoverability of oil and natural gas reserves, commodity prices, the timing of future events and changes in legislation, tax rates and interpretations by tax authorities.

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TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

The fair values of financial instruments are estimated based upon market and third party inputs. These estimates are subject to change with fluctuations in commodity prices, interest rates, foreign currency exchange rates and estimates of non-performance risk.

The fair values of equity-settled and cash-settled share-based payment awards are estimated using the Black-Scholes pricing model. These estimates depend on certain assumptions including share price volatility, risk free interest rate, the term of the awards, the forfeiture rate and the annual dividend yield which, by their nature, are subject to measurement uncertainty.

The designation of the Company's functional currency is a management judgment based on the composition of revenue and costs in the locations in which it operates.

Provisions are recorded when the Company has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where appropriate, the future cash flow estimates are adjusted to reflect risks specific to the liability.

Contingent liabilities are possible obligations whose existence will only be confirmed by future events not wholly within the control of the Company. Contingent liabilities are not recognized in the financial statements but are disclosed unless the possibility of an outflow of economic resources is considered remote. The evaluation of the likelihood of the contingent events requires management judgment as to the probability of exposure to potential loss.

z) Accounting Standards and Interpretations Issued but Not Yet Effective

The following pronouncements from the IASB are applicable to Talisman and will become effective for future reporting periods, but have not yet been adopted:

•

IFRS 9Financial Instruments – as part of its project to replace IAS 39, the IASB issued the first phase of IFRS 9 implementation dealing with the classification and measurement of financial assets. In October 2010, the IASB updated IFRS 9 by incorporating requirements for the accounting for financial liabilities;

•

IFRS 10Consolidated Financial Statements – establishes the accounting principles for consolidated financial statements when one entity controls other entities and replaces IAS 27Consolidated and Separate Financial Statements and the related provisions of SIC-12Consolidation – Special Purpose Entities. This standard establishes a new control model that applies to all entities;

•

IFRS 11Joint Arrangements – establishes the accounting principles for parties to a joint arrangement and replaces IAS 31Interest in Joint Ventures and SIC-13Jointly Controlled Entities: Non-Monetary Contributions by Venturers. This standard requires a party to assess its rights and obligations from the arrangement in order to determine the type of joint arrangement. The choice of proportionate consolidation accounting is removed for joint ventures (currently jointly controlled entities under IAS 31) as equity accounting is required;

•

IFRS 12Disclosure of Interests in Other Entities – establishes comprehensive disclosure requirements for subsidiaries, joint arrangements, associates, and unconsolidated structured entities and replaces existing disclosures in related standards;

•

IFRS 13Fair Value Measurement – establishes a single framework for fair value measurement and disclosures when fair value is required or permitted under IFRS;

•

IAS 1Presentation of Financial Statements – amendment requires items within other comprehensive loss to be grouped based on whether they can be reclassified to the income statement and is applicable to annual periods beginning on or after July 1, 2012, with earlier adoption permitted;

•

IAS 19Employee Benefits amendment – improves the accounting for employee benefits by eliminating the corridor method to defer recognition of actuarial gains and losses, introducing presentation changes for the financial statements effect arising from defined benefit plans, and introducing enhanced disclosure requirements for defined benefit plans;

•

IAS 27Separate Financial Statements – establishes the accounting and disclosure requirements for investments in subsidiaries, joint ventures, and associates when an entity prepares separate financial statements and replaces the current

19
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

IAS 27Consolidated and Separate Financial Statements as the consolidation guidance is included in IFRS 10Consolidated Financial Statements; and

•

IAS 28Investments in Associates and Joint Ventures – establishes the accounting for investments in associates and defines how the equity method is applied when accounting for associates and joint ventures.

Except as noted above, all of the above pronouncements are effective for annual periods beginning on or after January 1, 2013 with earlier adoption permitted, except for IFRS 9, which is effective January 1, 2015. The Company is currently assessing the impact of adopting these pronouncements.

4. IFRS FIRST-TIME ADOPTION

The accounting policies described in note 3 have been applied in preparing the Consolidated Financial Statements as at and for the year ended December 31, 2011, the comparative information as at and for the year ended December 31, 2010 and the opening IFRS balance sheet as at January 1, 2010, the Company's date of transition to IFRS.

The adoption of IFRS does not impact the underlying economics of Talisman's operations or its cash flows. The most significant impacts of adoption are from the application of IFRS 1 exemptions and new accounting policies that reset the Company's balance sheet, in particular, the election to use the IFRS 1 fair value as deemed cost exemption, and changes in the accounting for impairments, income taxes, decommissioning liabilities and share-based payments.

Retained earnings at the time of adoption of IFRS decreased by approximately $1.8 billion as a result of the after tax impact of adjustments to the opening balance sheet described below. These adjustments comprise approximately $1.2 billion for the deemed fair value election, a significant portion of which related to assets sold during 2010, and impairment of E&E assets, and approximately $0.6 billion relating to derecognition of capitalized borrowing costs, decommissioning liabilities, share-based payments, employee benefits and deferred taxes.

IFRS 1 Exemptions

The general principle to be applied on first-time adoption of IFRS is that standards in force at the first annual reporting date (December 31, 2011) should be applied as at the date of transition to IFRS (i.e. January 1, 2010) and throughout all periods presented in the first IFRS financial statements. However, IFRS 1 contains a number of exemptions that companies are permitted to apply. Talisman elected to apply the following exemptions:

•

To measure certain properties at fair value as at January 1, 2010 and use those fair values as deemed cost at that date;

•

To apply a modified approach in calculating the retrospective cost component of PP&E relating to the Company's decommissioning liabilities. Under the modified approach, decommissioning liabilities are re-measured at the date of transition to IFRS under IAS 37Provisions, Contingent Liabilities and Contingent Assets and amounts to be included in the related assets are estimated by discounting the liabilities to the date at which they first arose using the best estimates of the historical risk-adjusted discount rates. The related accumulated DD&A is then calculated based on the current estimates of the useful lives of the assets;

•

To apply IFRS 3Business Combinations prospectively and not restate business combinations that occurred prior to January 1, 2010;

•

To not apply IFRS 2Share-Based Payments to equity awards that vested and liability awards that settled prior to January 1, 2010;

•

To recognize cumulative unrecognized net actuarial losses on employee future benefits in opening retained earnings as at January 1, 2010. Also, to prospectively disclose required benefit plans amounts under IAS 19Employee Benefits as the amounts are determined for each accounting period from January 1, 2010 instead of the current annual period and previous four annual periods; and

•

To apply IAS 23Borrowing Costs prospectively from January 1, 2010 and derecognize the carrying value of capitalized borrowing costs recorded under Canadian GAAP as at January 1, 2010.

Reconciliations from Canadian GAAP to IFRS

In preparing the Consolidated Financial Statements, the Company adjusted amounts reported previously in its Consolidated Financial Statements prepared under Canadian GAAP. An explanation of how the transition from Canadian GAAP to IFRS affected the Company's financial position, results of operations and cash flows is presented in the following reconciliations (as required by IFRS 1) and explanatory notes, together with the impact of the Company changing its reporting currency from C$ to US$.

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TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

Reconciliation of Consolidated Balance Sheet at January 1, 2010

			CGAAP		IFRS adjustments & reclassifications		IFRS
January 1, 2010(millions of $)		Notes	C$1	US$	US$		US$
Assets
Current
	Cash and cash equivalents		1,690	1,615	13		1,628
	Accounts receivable		1,223	1,168	48		1,216
	Risk management		30	29	–		29
	Inventories		144	137	4		141
	Prepaid expenses		9	8	–		8
	Assets of discontinued operations/Assets held for sale	4.8	58	56	(34	)	22
			3,154	3,013	31		3,044
Other assets		4.7	128	122	(14	)	108
Risk management			42	40	–		40
Goodwill			1,176	1,124	59		1,183
Property, plant and equipment		4.1-4.4, 4.11-12	16,431	15,698	(2,444	)	13,254
Exploration and evaluation assets		4.1, 4.12	–	–	2,212		2,212
Future income taxes/Deferred tax assets			120	115	32		147
Assets of discontinued operations		4.8	2,567	2,453	(2,453	)	–
			20,464	19,552	(2,608	)	16,944
Total assets			23,618	22,565	(2,577	)	19,988
Liabilities
Current
	Bank indebtedness		36	35	–		35
	Accounts payable and accrued liabilities	4.6	1,845	1,759	281		2,040
	Risk management		276	266	–		266
	Income and other taxes payable		357	341	–		341
	Current portion of long-term debt		10	10	–		10
	Future income taxes/Deferred tax liabilities	4.12	68	65	(65	)	–
	Liabilities of discontinued operations/liabilities associated with assets held for sale	4.8	9	9	(2	)	7
			2,601	2,485	214		2,699
Deferred credits			59	56	(9	)	47
Asset retirement obligations/Decommissioning liabilities		4.4	2,116	2,023	(20	)	2,003
Other long-term obligations		4.6, 4.7	161	155	114		269
Risk management			7	6	–		6
Long-term debt			3,770	3,601	–		3,601
Future income taxes/Deferred tax liabilities		4.3, 4.12	3,599	3,437	(921	)	2,516
Liabilities of discontinued operations		4.8	194	185	(185	)	–
			9,906	9,463	(1,021	)	8,442

21
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

		CGAAP			IFRS adjustments & reclassifications		IFRS
January 1, 2010(millions of $)	Notes	C$1		US$	US$		US$
Shareholders' equity
Common shares		2,374		1,401	–		1,401
Contributed surplus		153		117	–		117
Retained earnings		9,174		7,905	(1,770	)	6,135
Accumulated other comprehensive income (loss)	4.10	(590	)	1,194	–		1,194
		11,111		10,617	(1,770	)	8,847
Total liabilities and shareholders' equity		23,618		22,565	(2,577	)	19,988

1

Canadian GAAP Consolidated Balance Sheet as at December 31, 2009 restated for operations classified as discontinued during 2010.

Reconciliation of Shareholders' Equity at January 1, 2010

(millions of US$)		January 1, 2010
Shareholders' equity under Canadian GAAP		10,617
Adjustments:
	Opening balance sheet	(1,770	)
Shareholders' equity under IFRS		8,847

22
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

Reconciliation of Consolidated Balance Sheet at December 31, 2010

			CGAAP			IFRS adjustments & reclassifications		IFRS
December 31, 2010(millions of $)		Notes	C$		US$	US$		US$
Assets
Current
	Cash and cash equivalents		1,646		1,655	–		1,655
	Accounts receivable		1,281		1,287	–		1,287
	Risk management		118		119	–		119
	Inventories		143		144	–		144
	Prepaid expenses		20		20	–		20
			3,208		3,225	–		3,225
Other assets		4.7	837		841	(53	)	788
Risk management			24		25	–		25
Goodwill			1,150		1,157	7		1,164
Property, plant and equipment		4.1-4.4, 4.11-12	18,804		18,906	(5,640	)	13,266
Exploration and evaluation assets		4.1, 4.12	–		–	3,442		3,442
Future income taxes/Deferred tax assets			170		171	13		184
			20,985		21,100	(2,231	)	18,869
Total assets			24,193		24,325	(2,231	)	22,094
Liabilities
Current
	Bank indebtedness		2		2	–		2
	Accounts payable and accrued liabilities	4.6	2,416		2,433	289		2,722
	Risk management		116		117	–		117
	Income and other taxes payable		510		513	–		513
	Current portion of long-term debt		357		359	–		359
			3,401		3,424	289		3,713
Deferred credits			51		51	(5	)	46
Asset retirement obligations/Decommissioning liabilities		4.4	2,252		2,264	316		2,580
Other long-term obligations		4.6, 4.7	212		213	67		280
Long-term debt			3,824		3,845	–		3,845
Future income taxes/Deferred tax liabilities		4.12	3,974		3,995	(1,560	)	2,435
			10,313		10,368	(1,182	)	9,186
Shareholders' equity
Common shares			2,457		1,480	–		1,480
Contributed surplus			132		98	10		108
Retained earnings			9,568		8,269	(1,450	)	6,819
Accumulated other comprehensive income (loss)		4.10	(1,678	)	686	102		788
			10,479		10,533	(1,338	)	9,195
Total liabilities and shareholders' equity			24,193		24,325	(2,231	)	22,094

23
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

Reconciliation of Shareholders' Equity at December 31, 2010

(millions of US$)		December 31, 2010
Shareholders' equity under Canadian GAAP		10,533
Adjustments:
	Opening balance sheet	(1,770	)
	Consolidated Statement of Comprehensive Income for the year ended December 31, 2010	422
	Share-based payments impact on contributed surplus	10
Shareholders' equity under IFRS		9,195

Reconciliation of Consolidated Statement of Income for the Year Ended December 31, 2010

			CGAAP				IFRS adjustments & reclassifications		IFRS
Year ended December 31, 2010(millions of $)		Notes	C$		US$		US$		US$
Revenue
	Sales	4.12	8,076		7,846		(971	)	6,875
	less: Royalties	4.12	(1,274	)	(1,238	)	1,238		–
	Other income		110		107		–		107
Total revenue and other income			6,912		6,715		267		6,982
Expenses
	Operating		1,867		1,813		77		1,890
	Transportation		227		221		–		221
	General and administrative	4.7	392		381		(10	)	371
	Depreciation, depletion and amortization	4.5, 4.12	2,164		2,099		(311	)	1,788
	Impairment	4.1	118		115		186		301
	Dry hole		123		121		(8	)	113
	Exploration		384		374		–		374
	Interest on long-term debt	4.12	163		158		(158	)	–
	Finance costs	4.4, 4.12	–		–		276		276
	Stock-based compensation/share-based payments	4.6	201		198		14		212
	(Gain) loss on held-for-trading financial instruments		(102	)	(92	)	5		(87	)
	Gain on asset disposals	4.8, 4.9	(59	)	(57	)	(463	)	(520	)
	Other, net	4.7, 4.11-12	135		134		(62	)	72
Total expenses			5,613		5,465		(454	)	5,011
Income before taxes			1,299		1,250		721		1,971
Taxes
	Current income tax		1,032		1,006		130		1,136
	Deferred income tax (recovery)		(272	)	(266	)	156		(110	)
	Petroleum revenue tax		131		128		(128	)	–
		4.3	891		868		158		1,026
Income from continuing operations			408		382		563		945
Income from discontinued operations		4.8	240		231		(231	)	–
Net income			648		613		332		945

24
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

Reconciliation of Consolidated Statement of Comprehensive Income (Loss) for the Year Ended December 31, 2010

			CGAAP				IFRS adjustments & reclassifications		IFRS
Year ended December 31, 2010(millions of $)		Notes	C$		US$		US$		US$
Net income			648		613		332		945
Foreign currency translation			(625	)	(46	)	5		(41	)
Transfer of accumulated foreign currency gain to net income		4.9	(465	)	(464	)	97		(367	)
Actuarial losses relating to pension and other post-employment benefits1		4.7	–		–		(12	)	(12	)
Gains and losses on derivatives designated as cash flow hedges
	Gains arising during the year		14		13		–		13
	Gains recognized in net income		(12	)	(11	)	–		(11	)
			2		2		–		2
Other comprehensive loss			(1,088	)	(508	)	90		(418	)
Comprehensive income (loss)			(440	)	105		422		527

1

Actuarial gains and losses are transferred to retained earnings each year.

Reconciliation of Consolidated Statement of Cash Flows for the Year Ended December 31, 2010

		CGAAP				IFRS adjustments & reclassifications		IFRS
Year ended December 31, 2010 (millions of $)	Notes	C$		US$		US$		US$
Cash provided by operating activities	4.12	3,460		3,331		(187	)	3,144
Cash used in investing activities	4.12	(3,734	)	(3,635	)	384		(3,251	)
Cash provided by financing activities	4.12	309		313		(197	)	116
Effect of translation on foreign currency cash and cash equivalents		(59	)	51		–		51
Net increase (decrease) in cash and cash equivalents		(24	)	60		–		60
Cash and cash equivalents net of bank indebtedness, beginning of year		1,668		1,593		–		1,593
Cash and cash equivalents net of bank indebtedness, end of year		1,644		1,653		–		1,653

Notes for Reconciliation from Canadian GAAP to IFRS

4.1) Fair Value as Deemed Cost and Impairments

a) Fair Value as Deemed Cost

The Company elected to use the fair value as deemed cost exemption under IFRS 1 to record certain assets at fair value as at January 1, 2010 as their deemed cost under IFRS while these assets were measured on a historical cost basis under Canadian GAAP. As a result of the change in accounting, the Company recorded a $1.7 billion reduction in PP&E at January 1, 2010, of which $463 million related to assets sold during 2010. The aggregate fair value of properties at January 1, 2010 for which the Company used this exemption was $2.3 billion.

25
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

b) Impairments

Under Canadian GAAP, only if an asset's estimated undiscounted future cash flows was below its carrying value was a determination required of the amount of any impairment based on discounted cash flows. Under IFRS, impairment assessments are based on the recoverable amount of the asset, which the Company has determined to be fair value calculated using discounted cash flows.

As a result of these accounting changes, the Company recorded impairments of $209 million under IFRS at January 1, 2010 relating to E&E assets. The Company recorded additional impairments of $186 million under IFRS for the year ended December 31, 2010. In the North America segment, $66 million was recorded in respect of natural gas assets primarily as a result of the decline in natural gas price assumptions. In the North Sea segment, $99 million was recorded as a result of a change in reserves estimates relating to PP&E, a change in the estimated timing of cash flows relating to oil and gas E&E assets and changes in investment decisions. In the Southeast Asia segment, $21 million was recorded relating to oil assets due to an increase in estimated future costs. The carrying values of these assets were previously supported under Canadian GAAP on an undiscounted cash flow basis. The impairments are subject to future reversal if certain criteria are met.

c) Assumptions

In estimating the adjustments to PP&E and E&E assets at the time of adoption of IFRS, management estimated fair value based on market information which consisted of offers to purchase the asset or comparable assets, independent market surveys and values derived from exchange quoted prices. Where reliable market information was not available, the recoverable amount was determined using cash flow projections that were based on a long-term view of commodity prices and a post-tax discount rate. The following assumptions were used in computing discounted cash flows at January 1, 2010 and December 31, 2010, respectively:

	December 31, 2010	January 1, 2010
WTI ($/bbl)	80.00	70.00
Dated Brent ($/bbl)	78.53	68.75
Henry Hub natural gas ($/mmbtu)	5.50	6.00
AECO (C$/gj)	4.92	5.60
US$/C$	0.95	0.90
US$/UK£	1.60	1.69
Post-tax discount rate	10%	10%

4.2) Capitalized Borrowing Costs

The Company elected to use the exemption under IFRS 1 to derecognize borrowing costs that had been capitalized under Canadian GAAP, which reduced PP&E by $218 million at January 1, 2010.

4.3) Income Taxes

Under Canadian GAAP, when the cost of an acquired asset that was recorded as PP&E differed from its tax base, deferred tax was recorded on the difference. Under IFRS, deferred tax is not recognized on asset acquisitions.

Under Canadian GAAP, deferred PRT was calculated using the life-of-field method. Under IFRS, a temporary differences basis is used. While PRT was presented separately on the Consolidated Statement of Income under Canadian GAAP, the Company has chosen to present the current and deferred portions of PRT as components of current and deferred income tax expense, respectively, under IFRS.

Under Canadian GAAP, deferred tax was not recognized for temporary differences resulting from differences between the functional currency of accounting for a foreign operation and the currency in which the taxes are filed. Under IFRS, such temporary tax differences in currencies are recognized.

26
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

As a result of all measurement differences impacting deferred tax, including the three discussed above, but excluding the impact of discontinued operations and other reclassifications, the Company recorded a decrease of deferred tax liabilities of $1.1 billion at January 1, 2010 (December 31, 2010 – $1.6 billion) under IFRS. Additional income tax expense of $232 million for the year ended December 31, 2010 was recorded under IFRS.

4.4) Decommissioning

Decommissioning liabilities (formerly asset retirement obligations under Canadian GAAP) are measured based on the estimated cost of abandonment discounted to its net present value. Under Canadian GAAP, the current discount rate was applied only to new obligations and upward revisions, whereas the entire liability is recalculated using the current discount rate under IFRS. As a result, the Company recorded a decrease of $83 million, excluding the impact of discontinued operations, at January 1, 2010 (December 31, 2010 – $301 million increase) to decommissioning liabilities under IFRS. Under IFRS, the provision has been discounted using a weighted average credit-adjusted risk free rate of 6.7% at January 1, 2010 (Canadian GAAP – 6.6%) and 5.3% at December 31, 2010 (Canadian GAAP – 6.6%).

The Company elected to apply a modified approach under IFRS 1 in calculating the retrospective cost component of PP&E relating to the Company's decommissioning liabilities, described above in the 'IFRS Exemptions' section of note 4. As a result, the Company recorded a decrease of $221 million to PP&E at January 1, 2010 under IFRS.

The measurement difference described above resulted in a lower decommissioning liability under IFRS at January 1, 2010. The Company recorded a reduction in finance costs under IFRS of $46 million for the year ended December 31, 2010 as a result of lower accretion expense.

4.5) DD&A

The Company recorded a decrease to DD&A of $260 million, excluding the impact of discontinued operations and other reclassifications, for the year ended December 31, 2010 as a result of the Canadian GAAP and IFRS differences described in these reconciliation notes that reduced PP&E, namely electing to use the fair value as deemed cost exemption under IFRS 1, impairments, income taxes and decommissioning.

4.6) Share-Based Payments

Under Canadian GAAP, the intrinsic value method was used to measure share-based payments plans having a cash settlement feature. Under IFRS, this method is not permitted and all share-based payments plans must be measured at fair value using an accepted option pricing model. As a result, the Company recorded an increase of $321 million at January 1, 2010 and $304 million at December 31, 2010 to the share-based payments liability under IFRS. In addition, the Company elected to not apply IFRS 2Share-Based Payments to equity awards that vested and liability awards that settled prior to January 1, 2010 in determining the adjustment at January 1, 2010.

The following assumptions are used in the Black-Scholes option pricing model to estimate the fair value of share-based payments plans:

	December 31, 2010	January 1, 2010
Expected volatility	42%	47%
Risk-free interest rate	2.6%	2.8%
Expected term (years)	5	5
Expected forfeiture rate	3.4%	4.2%
Expected annual dividend yield	1.1%	1.0%

The Company recorded an additional share-based payments expense of $14 million for the year ended December 31, 2010 under IFRS arising from the measurement differences described above.

27
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

4.7) Employee Benefits

Under Canadian GAAP, actuarial gains and losses were deferred on the balance sheet and amortized to net income over the average remaining service life of active employees. The Company elected to recognize cumulative unrecognized net actuarial losses of $49 million in retained earnings at January 1, 2010, which reduced the accrued pension asset by $22 million and increased the accrued pension liability by $57 million. As a result of this measurement difference, the Company reversed the Canadian GAAP amortization of actuarial gains and losses of $7 million for the year ended December 31, 2010, and recorded net actuarial losses of $12 million for the year ended December 31, 2010 in other comprehensive loss under IFRS.

4.8) Discontinued Operations

Under IFRS, only disposals of significant operations such as a separate major line of business or geographical area are presented as discontinued operations. Under Canadian GAAP, this definition was broader and included a component of an entity. Under both Canadian GAAP and IFRS, assets classified as held for sale and associated liabilities are presented separately on the balance sheet. However, they are reported as current under IFRS and comparative information is not restated.

Income from discontinued operations was reported separately in the Consolidated Statement of Income under Canadian GAAP, but is not presented separately under IFRS since the asset disposals occurring during 2010 did not meet the definition of a discontinued operation under IFRS. The gains and losses arising on such disposals are reported in 'Gain on asset disposals' on the Consolidated Statements of Income.

4.9) Asset Disposals

Due to Canadian GAAP and IFRS differences described above that reduced PP&E, namely electing to use the fair value as deemed cost exemption under IFRS 1, income taxes and decommissioning, the gains and losses recorded on asset disposals under IFRS differ from Canadian GAAP. In particular, the transfer of non-taxable foreign exchange gains previously accumulated in other comprehensive income to net income resulting from the disposal of North American assets was deferred within 2010 under IFRS to coincide with the closing of the transactions.

4.10) Cumulative Translation Differences

Cumulative translation differences arising from translation of foreign operations have been recalculated under IFRS to reflect the impact of other adjustments to the opening IFRS balance sheet as at January 1, 2010.

4.11) Other Adjustments

Other reconciling items include differences between Canadian GAAP and IFRS related to asset transactions and risk sharing arrangements, embedded derivatives, and derecognition of replacement parts, none of which are significant.

4.12) Reclassifications

a) Deferred Taxes

Deferred taxes are classified as non-current under IFRS, but were classified as both current and non-current under Canadian GAAP based on the classification of the underlying assets and liabilities that gave rise to the differences. As a result, the Company reclassified $65 million of current deferred tax liabilities at January 1, 2010 (December 31, 2010 – $nil) to non-current liabilities under IFRS.

b) E&E Assets

E&E assets are presented as a separate line item under IFRS but were reported as part of PP&E under Canadian GAAP. As a result, the Company reclassified PP&E with a net book value of $2.2 billion at January 1, 2010 (December 31, 2010 – $3.4 billion) to E&E assets under IFRS.

28
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

c) Royalties

Under Canadian GAAP, royalties were presented separately from revenue, while revenue is presented net of royalties under IFRS. As a result, the Company reclassified royalties as a reduction of sales under IFRS of $1.3 billion, excluding the impact of discontinued operations, for the year ended December 31, 2010.

d) Finance Costs

Under Canadian GAAP, interest on long-term debt was presented as a separate item in the Consolidated Statement of Income and accretion expense was included as part of DD&A. These items are presented as finance costs under IFRS. The Company reclassified interest on long-term debt of $158 million for the year ended December 31, 2010 and accretion expense of $79 million for the year ended December 31, 2010 to finance costs under IFRS. The remaining reclassification related to other interest.

e) Statement of Cash Flows

The underlying cash flows of the Company do not change under IFRS. However, the Company reclassified exploration costs of $384 million for the year ended December 31, 2010 from an investing activity under Canadian GAAP to an operating activity under IFRS, and reclassified finance costs of $197 million for the year ended December 31, 2010 from an operating activity under Canadian GAAP to a financing activity under IFRS.

5. ASSETS SOLD AND HELD FOR SALE

Sale of Farrell Creek Interests to Sasol Limited (Sasol)

In March 2011, Talisman completed a transaction creating a strategic partnership with Sasol to develop the Farrell Creek assets in Talisman's Montney shale play in British Columbia. Talisman sold 50% of its working interests in the Farrell Creek assets for approximately $1 billion, comprising $238 million in cash and approximately $800 million of certain future development costs. The transaction resulted in a pre-tax gain of $89 million, which is included in 'Gain on asset disposals' on the Consolidated Statement of Income.

Sale of Cypress A Interests to Sasol

In June 2011, Talisman completed an additional transaction with Sasol to develop the Cypress A assets in Talisman's Montney shale play in British Columbia. Talisman sold 50% of its working interests in the Cypress A assets for approximately $1.1 billion, comprising $257 million in cash and approximately $800 million of certain future development costs. The transaction resulted in a pre-tax gain of $113 million, which is included in 'Gain on asset disposals' on the Consolidated Statement of Income.

Asset Sales Completed in 2010

During the year ended December 31, 2010, Talisman completed the sale of oil and gas producing properties in North America with a carrying value of approximately $2 billion for aggregate proceeds of approximately $2.2 billion. The net investment in the Company's Canadian operations was reduced as a result of the transactions occurring in 2010 and, accordingly, $367 million of exchange gains previously accumulated in other comprehensive income were included in the gains of $520 million, which are included in 'Gain on asset disposals' on the Consolidated Statement of Income. Tax of $38 million was recorded in respect of these transactions.

Assets Held for Sale

During 2010, Talisman completed the sale of oil and gas producing assets in Tunisia (included in the Other segment) for proceeds of $23 million, resulting in a loss of $5 million, net of tax of $nil. The assets held for sale and liabilities associated with assets held for sale included in the Consolidated Balance Sheet as at January 1, 2010 were $22 million and $7 million, respectively. The operating results related to these assets held for sale were included in net income for the year ended December 31, 2010 and the loss was included in 'Gain on asset disposals' on the Consolidated Statement of Income.

29
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

6. PROPERTY ACQUISITIONS

During the year ended December 31, 2010, Talisman acquired undeveloped land in the Eagle Ford shale play for approximately $910 million and a 35% working interest in the PL378 Grosbeak discovery and a 20% interest in the PL375 Beta discovery in Norway for $192 million. During the year ended December 31, 2011, Talisman acquired additional undeveloped land in the Eagle Ford shale play for approximately $145 million and undeveloped land in the Alberta Duvernay shale play for approximately $510 million.

7. BUSINESS COMBINATIONS

Equión Energía Limited

On January 24, 2011, Talisman, together with Ecopetrol, completed the acquisition of BP Exploration Company (Colombia) Limited, renamed Equión Energía Limited (Equión). Talisman acquired a 49% interest in Equión for cash consideration of $785 million. Since Equión is a jointly controlled entity, the Company is proportionately consolidating its interest, which is reported in the Other segment.

The recognition of assets acquired and liabilities assumed has been updated as a result of the completion of the Company's process to evaluate the acquired reserves, and reflects additional market-based information for certain acquired assets.

The assets acquired through this transaction include interests in producing properties and investments in companies having interests in oil and gas pipelines in Colombia.

This acquisition, which builds on the Company's acreage position in Colombia, was accounted for using the acquisition method. The fair values of the identifiable assets acquired and liabilities assumed by Talisman, after working capital and other adjustments, were as follows:

Fair value of share of net assets acquired
Property, plant and equipment		559
Cash		16
Accounts receivable		81
Inventories		16
Investments		350
Indemnification asset		52
Accounts payable		(113	)
Other current liabilities		(52	)
Decommissioning liability		(25	)
Provisions		(52	)
Deferred tax liability		(209	)
Total identifiable net assets at fair value		623
Goodwill arising on acquisition (note 8)		162
Total cost of acquisition		785
Satisfied by:
	Cash deposit paid in 2010	613
	Cash paid in 2011	172
Total cash paid		785

The fair value of the acquired accounts receivable approximates the carrying value due to their short-term nature. None of the accounts receivable were impaired and the full contractual amount was collected.

30
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

The goodwill arising on acquisition is attributable to the difference between the accounting fair value and the tax basis of the net assets acquired, and is not expected to be deductible for income tax purposes.

From the date of acquisition, Equión contributed revenue of $287 million and net income of $110 million to the Company's Consolidated Statement of Income during the year ended December 31, 2011. Had the transaction closed on January 1, 2011, the incremental revenue and net income reported by Talisman would have been immaterial.

Transaction costs of $11 million were expensed in 2010 and included in other expenses on the Consolidated Statement of Income and shown as a component of cash provided by operating activities in the Consolidated Statement of Cash Flows.

As part of the purchase transaction, Talisman assumed provisions of $52 million for which the vendor has indemnified the Company. Accordingly, a non-current asset was recorded in the same amount.

No contingent consideration arose from this transaction.

Jambi Merang

On January 13, 2010, Talisman acquired 100% of the share capital of Hess (Indonesia-Jambi Merang) Limited, a company which owns a 25% interest in the Jambi Merang PSC, for cash consideration of $183 million.

This acquisition, which facilitates Talisman's strategy to increase its presence in Indonesia and is being reported in the Southeast Asia segment, was accounted for using the acquisition method. The fair values of the identifiable assets acquired and liabilities assumed by Talisman were as follows:

Fair value of net assets acquired
Property, plant and equipment		181
Accounts receivable		26
Other assets		13
Accounts payable		(20	)
Other current liabilities		(17	)
Deferred tax liability		(43	)
Total identifiable net assets at fair value		140
Goodwill arising on acquisition (note 8)		43
Total cost of acquisition		183
Satisfied by:
	Cash paid	183

The fair value of the acquired accounts receivable approximates the carrying value due to their short-term nature. None of the accounts receivable acquired were impaired and the full contractual amount was collected.

The goodwill recognized above is attributable to the difference between the accounting fair value and the tax basis of the net assets acquired and is not expected to be deductible for income tax purposes.

Revenue and net income from Jambi Merang did not have a material impact on the Company during 2010, since first production was achieved in April 2011.

Transaction costs of $1 million were expensed in 2010 and included in other expenses in the Consolidated Statement of Income and shown as a component of cash provided by operating activities in the Consolidated Statement of Cash Flows.

No contingent consideration or contingent liabilities arose from this transaction.

31
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

8. GOODWILL

Continuity of goodwill	2011		2010
Balance, beginning of year	1,164		1,183
Acquisitions (note 7)	162		43
Disposals	(9	)	(57	)
Foreign currency translation	–		(5	)
Balance, end of year	1,317		1,164

Goodwill has no tax basis. See note 14 for details of the impairment testing of goodwill.

9. ACCOUNTS RECEIVABLE

	December 31, 2011		December 31, 2010		January 1, 2010
Trade receivables	1,617		1,289		1,218
Allowance for doubtful accounts (note 25)	(67	)	(2	)	(2	)
	1,550		1,287		1,216

The fair value of accounts receivable approximates the carrying amount due to their short term to maturity.

Trade receivables are non-interest bearing and are generally on 30-90 day terms.

At December 31, the analysis of trade receivables that were due or past due, but not impaired, was as follows:

			Past due but not impaired
	Total	Neither past due nor impaired	91-120 days	> 120 days
2011	1,550	1,483	12	55
2010	1,287	1,221	14	52

10. INVENTORIES

	December 31, 2011	December 31, 2010	January 1, 2010
Materials and supplies	56	69	75
Product	108	75	66
	164	144	141

32
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

11. OTHER ASSETS

	December 31, 2011	December 31, 2010	January 1, 2010
Accrued pension asset (note 30)	1	5	4
Note receivable (note 22)	–	–	40
Decommissioning sinking fund (note 15)	38	30	22
Acquisition deposits	–	630	–
Indemnification asset (note 7)	52	–	–
Other	10	2	8
	101	667	74

12. INVESTMENTS

	December 31, 2011	December 31, 2010	January 1, 2010
Investment in Oleoducto Central S.A (Ocensa) (note 7)	325	–	–
Other investments acquired pursuant to the Equión business combination (note 7)	25	–	–
Investment acquired pursuant to a property disposition	–	54	–
Investment in Transasia Pipeline Company Pvt. Ltd.	34	34	34
Other	11	33	–
	395	121	34

Investments comprise Talisman's interests accounted for using the equity method and the cost method.

The investment in Ocensa was acquired as part of the Equión business combination described in note 7 and is accounted for using the equity method. Ocensa has an interest in a pipeline in Colombia. The equity income recorded by Talisman in respect of this investment during the year ended December 31, 2011 was not material.

Three other investments were acquired pursuant to the Equión business combination, one of which is accounted for using the equity method and two using the cost method.

In 2010, Talisman acquired shares in a Canadian private company as part of the consideration for one of the North American property dispositions described in note 5. This private company completed an initial public offering later in 2010. These shares were subsequently sold on the open market in January 2011 for cash proceeds of $54 million.

The investment in Transasia Pipeline Company Pvt. Ltd. is accounted for using the cost method.

33
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

13. OIL AND GAS ASSETS

Cost and Accumulated DD&A

The cost and accumulated DD&A of the Company's PP&E (including corporate assets) and E&E assets are as follows:

	PP&E		E&E assets		Total
Cost
At January 1, 2010	25,726		2,212		27,938
Acquisitions through business combinations (note 7)	181		–		181
Other additions	3,044		1,856		4,900
Disposals and derecognition	(3,982	)	(229	)	(4,211	)
Transfers from E&E assets to PP&E	168		(168	)	–
Change in decommissioning liabilities	596		–		596
Expensed to dry hole	–		(113	)	(113	)
Foreign exchange	(273	)	(4	)	(277	)
At December 31, 2010	25,460		3,554		29,014
Acquisitions through business combinations (note 7)	559		–		559
Other additions	3,491		1,527		5,018
Disposals and derecognition	(384	)	(73	)	(457	)
Transfers from E&E assets to PP&E	654		(654	)	–
Change in decommissioning liabilities	363		–		363
Expensed to dry hole	–		(241	)	(241	)
At December 31, 2011	30,143		4,113		34,256
Accumulated DD&A
At January 1, 2010	12,472		–		12,472
Charge for the year	1,788		–		1,788
Disposals and derecognition	(2,119	)	–		(2,119	)
Impairment losses	189		112		301
Foreign exchange	(136	)	–		(136	)
At December 31, 2010	12,194		112		12,306
Charge for the year	1,949		–		1,949
Disposals and derecognition	(88	)	–		(88	)
Impairment losses	313		47		360
Impairment reversals	(134	)	–		(134	)
At December 31, 2011	14,234		159		14,393
Net book value
At December 31, 2011	15,909		3,954		19,863
At December 31, 2010	13,266		3,442		16,708
At January 1, 2010	13,254		2,212		15,466

Included in PP&E are capitalized interest costs of $161 million (December 31, 2010 – $81 million; January 1, 2010 – $nil) relating to projects under construction and development. During the year ended December 31, 2011, interest costs of $85 million (2010 – $81 million) were capitalized.

34
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

An incremental DD&A expense of $24 million was booked in the fourth quarter of 2011 to reflect an adjustment to reserves. For 2010, the impact of adjusting the DD&A expense in the fourth quarter for reserves revisions was a reduction of $47 million.

Non-Depleted Capital

PP&E and E&E assets include the following costs that were not subject to DD&A:

December 31		2011	2010
Undeveloped land
	North America	2,240	1,763
	Southeast Asia	304	287
	Other	219	201
Acquired unproved reserve costs not associated with producing fields1
	North Sea	224	235
	Other	9	9
Exploration costs2
	North America	130	123
	North Sea	314	305
	Southeast Asia	194	340
	Other	320	179
E&E assets		3,954	3,442
Development projects3
	North America	–	58
	North Sea	1,714	1,144
	Southeast Asia	486	482
	Other	362	117
		6,516	5,243

1

Acquisition costs of unproved reserves are not depleted while under active evaluation for commercial reserves.

2

Exploration costs consist of drilling in progress and wells awaiting determination of proved reserves and are not depleted pending approval of development plans.

3

Development projects are not depleted until the asset is substantially complete and ready for its intended use.

Costs relating to wells drilled prior to 2011 continue to be capitalized, since management's ongoing assessment includes further planned activity. The number of wells drilled prior to 2011 and related costs are as follows:

	Years	Number of wells	Cost
North America	2008-2010	12	103
North Sea	2007-2010	10	513
Southeast Asia	2007-2010	8	26
Other	2008-2010	11	202
		41	844

North America wells drilled prior to 2011 are in the process of being evaluated or are awaiting completion of the construction of infrastructure. The remaining wells relate to fields where either further appraisal drilling is ongoing or development options are being assessed.

35
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

North Sea and other international wells relate to projects that are in the process of being evaluated, including the drilling of additional appraisal wells and the completion of additional seismic analysis. Some of these projects are in the final stages of project sanction.

14. IMPAIRMENT

Impairment of Assets

Years ended December 31		2011	2010
Impairment losses
	E&E assets	47	112
	PP&E	313	189
		360	301
Impairment reversals
	E&E assets	–	–
	PP&E	134	–
		134	–
Net impairment		226	301

At December 31, 2011, the Company assessed the carrying amount of its oil and gas assets for indicators of impairment such as changes in future prices, futures costs and reserves. The Company generally calculates the recoverable amount as the fair value less costs to sell using a discounted cash flow model. The discount rate is derived from the Company's post-tax weighted average cost of capital. Any country-specific risks are adjusted for within the cash flows. The rate to be applied is reassessed each year. The calculation is sensitive to the following assumptions which have been based on a long-term view of global oil and gas supply and demand as well as extensive industry experience:

•

Production volumes;

•

Discount rates;

•

Commodity prices;

•

Operating costs;

•

Future capital cost estimates;

•

Foreign exchange rates; and

•

Income taxes.

The following assumptions were used in developing the cash flow model for each cash-generating unit:

	2012	2013 and beyond
WTI ($/bbl)	90.00	86.69
Dated Brent ($/bbl)	95.00	85.77
Henry Hub natural gas ($/mmbtu)	5.00	5.50
AECO (C$/gj)	4.17	4.54
US$/C$	1.00	1.00
US$/UK£	1.63	1.63
Post-tax discount rate	10%	10%

36
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

During the year ended December 31, 2011, the Company recorded impairment of $129 million in North America due principally to reduced third party tariffs in the Company's midstream operations and lower conventional natural gas reserves. Impairments of $231 million in the North Sea were recorded in respect of oil and gas PP&E ($184 million) and E&E assets ($47 million). Of the $231 million, $102 million was as a result of a change in legislation announced by the UK government in March 2011 that raises the combined corporation tax and supplementary charge rate from 50% to 62% for oil and gas companies with fields not subject to PRT, and 75% to 81% with fields subject to PRT. See note 26 for further details. Additional impairment expense of $129 million in the North Sea arose due to a reduction in year-end reserves in a field in Norway.

Also during 2011, an impairment reversal of $134 million (2010 – $nil) resulted from price increases and an increase in estimated reserves for oil and gas assets that were previously impaired in the North Sea and Southeast Asia.

During the year ended December 31, 2010, the Company recorded $301 million of impairments, of which $189 million related to PP&E and $112 million to E&E assets. In North America, natural gas assets of $92 million were written down due to the decline in natural gas price assumptions and $24 million of exploration acreage was relinquished. In the North Sea, oil and gas assets of $76 million and E&E assets of $23 million were written down due to a change in reserves estimates, a change in the estimated timing of cash flows and changes in investment decisions. In addition, $65 million of exploration acreage was relinquished. In Southeast Asia, $21 million was recorded relating to oil assets due to an increase in estimated future costs.

The Yme project in Norway has experienced significant delays and cost overruns. The project is subject to arbitration with the contractor. Management has assessed the project's recoverability based on the above assumptions and a range of possible start up dates, arbitration outcomes and completion costs. No impairment writedown of the Yme project was recorded during the year ended December 31, 2011. Management will continue to assess the project's recoverability as new information becomes available. The net carrying value of Yme is approximately $800 million. The net after tax exposure is significantly less than the net carrying value of the project.

Impairment of Goodwill

No impairment of goodwill was recorded during the year ended December 31, 2011 (2010 – $nil), and there were no accumulated impairment losses at January 1, 2010. No reasonably possible change in assumptions would cause goodwill to become impaired.

37
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

15. DECOMMISSIONING LIABILITIES

Continuity of decommissioning liabilities	2011		2010
Balance, beginning of year	2,610		2,031
Liabilities incurred during the year	115		50
Liabilities settled during the year	(44	)	(76	)
Accretion expense (note 16)	76		79
Revisions in estimated cash flows	204		89
Change in discount rate	74		437
Balance, end of year	3,035		2,610
Expected to be settled within one year	53		30
Expected to be settled in more than one year	2,982		2,580
	3,035		2,610

Revisions in estimated cash flows occurring in 2011 related to cost increases in the North Sea as well as cost increases and a revision of the expected timing of settlement of liabilities in North America. The liabilities incurred during the year related principally to new wells and facilities in North America and Southeast Asia, as well as the addition of the decommissioning liabilities of Equión.

The Company provides for the future cost of decommissioning oil and natural gas properties and facilities on a discounted basis. At December 31, 2011, the estimated undiscounted decommissioning liabilities associated with oil and gas properties and facilities were $5.0 billion (December 31, 2010 – $4.5 billion; January 1, 2010 – $4.6 billion). The majority of the payments to settle this provision will occur over a period of 35 years and will be funded from the general resources of the Company as they arise. The provision for the costs of decommissioning production facilities and pipelines at the end of their economic lives has been estimated using existing technology, at current prices or long-term assumptions and based upon the expected timing of the activity. The provision has been discounted using a weighted average credit-adjusted risk free rate of 5.1% (2010 – 5.3%). Total accretion expense for the year ended December 31, 2011 of $76 million (2010 – $79 million) has been included in finance costs on the Consolidated Statements of Income.

While the provision is based on the best estimate of future costs and the economic lives of the facilities and pipelines, there is uncertainty regarding both the amount and timing of the costs to be incurred.

The Company provided letters of credit at January 1, 2012 in an amount of $1.1 billion as security for the costs of decommissioning obligations in the UK.

The Company has established a decommissioning sinking fund of $38 million at December 31, 2011 (December 31, 2010 – $30 million; January 1, 2010 – $22 million) that represents secured funding for its decommissioning obligations in Southeast Asia.

16. FINANCE COSTS

Years ended December 31	2011		2010
Interest on long-term debt	240		235
Miscellaneous interest expense and other fees	47		43
Accretion expense (note 15)	76		79
Less: interest capitalized	(85	)	(81	)
	278		276

The interest rate applied in determining the amount of interest capitalized in 2011 was approximately 6.1% (2010 – 6.4%).

38
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

17. LONG-TERM DEBT

		December 31, 2011		December 31, 2010		January 1, 2010
Bank Credit Facilities		648		–		–
Commercial Paper		402		–		–
Tangguh Project Financing		97		105		101
Debentures and Notes (Unsecured)1
	6.89% notes (US$10 million), Series B, due 2010	–		–		10
	4.44% medium term notes (C$350 million), due 20112	–		352		334
	8.25% notes (US$50 million), due 2014	50		50		50
	5.125% notes (US$375 million), due 20153	374		374		373
	8.50% notes (US$150 million), due 2016	150		150		150
	6.625% notes (UK£250 million), due 2017	385		386		399
	7.75% notes (US$700 million), due 2019	694		693		692
	3.75% notes (US$600 million), due 2021	592		592		–
	7.25% debentures (US$300 million), due 2027	300		300		300
	5.75% notes (US$125 million), due 2035	123		123		123
	5.85% notes (US$500 million), due 2037	493		493		493
	6.25% notes (US$600 million), due 2038	587		586		586
Gross debt4		4,895		4,204		3,611
Less: current portion		(410	)	(359	)	(10	)
Long-term debt		4,485		3,845		3,601

1

Interest on debentures and notes is payable semi-annually except for interest on the 6.625% notes, which is payable annually, and interest on the 6.89%, 8.25% and 8.50% notes, which is payable quarterly.

2

The currency and interest rate on these notes was swapped to $304 million bearing interest at 5.054%. See note 22 for details.

3

The interest rate on $300 million of these notes has been swapped to a floating rate obligation bearing interest at three-month LIBOR plus 0.43% (0.89% at December 31, 2011). See note 22 for details.

4

Financing costs of $41 million, $44 million and $38 million have been netted against the individual debt facilities as at December 31, 2011, December 31, 2010 and January 1, 2010, respectively.

During the year ended December 31, 2011, Talisman repaid $313 million of debt from cash on hand, and settled the cross-currency swap which was designated as a cash flow hedge.

Bank Credit Facilities and Commercial Paper

At December 31, 2011, Talisman had unsecured credit facilities totaling $4 billion, consisting of facilities of $3.8 billion (Facility No. 1) and $200 million (Facility No. 2). These facilities mature in November 2014, although the maturity date may be extended from time to time upon agreement between the Company and the respective lenders. Prior to the maturity date, the Company may borrow, repay and reborrow at its discretion. All facilities must be repaid on the maturity date.

Borrowings under Facility No. 1 are available in the form of prime loans, C$ or US$ bankers' acceptances, US$ base rate loans or LIBOR-based loans. In addition, drawings to a total of $1 billion are available in the form of letters of credit. Borrowings under Facility No. 2 are available in the form of prime loans, C$ or US$ guaranteed notes, US$ base rate loans and LIBOR-based loans. At December 31, 2011, $648 million in the form of bankers' acceptances (C$410 million and US$245 million) was drawn on the Company's facilities and $30 million was supporting letters of credit. The average rate on the outstanding bankers' acceptances was 2.88%, which reflects the weighted average interest rate of instruments outstanding at December 31, 2011. The rate is floating rate-based and varies with changes in short-term market interest rates.

39
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

The Company established a US commercial paper program in November 2011. The authorized amount under this program is $1 billion. The amount available under the commercial paper program is limited to the availability of backup funds under the Company's bank credit facilities. At December 31, 2011, the amount of commercial paper outstanding was $402 million and the average interest rate on outstanding commercial paper was 0.6%.

At December 31, 2011, available borrowing capacity under the bank credit facilities was $3 billion.

Tangguh Project Financing

In connection with the acquisition of its interest in the Tangguh LNG Project, Talisman became a participant in a series of project financing facilities, the Company's share of which is up to $105 million. Approximately $97 million was outstanding under these facilities at December 31, 2011 (December 31, 2010 – $105 million; January 1, 2010 – $101 million), of which $8 million is due for repayment in 2012. The amount outstanding is secured by Talisman's interest in the Tangguh LNG Project, having a net book value of $223 million. Draws under these facilities bear interest at LIBOR plus 0.19% through to LIBOR plus 0.33% per annum and will mature in 2021.

Debentures and Notes

In 2010, Talisman completed a $600 million offering of 3.75% notes due February 2021. Interest on the notes is payable semi-annually.

Other

The Company has a financing structure whereby subsidiaries have $1.3 billion drawn on bank facilities that have been offset against equal amounts of cash deposited by another subsidiary with the same bank under a right of offset agreement. The Company intends to offset these amounts at maturity.

Repayment Schedule

The Company's contractual minimum repayments of gross long-term debt are as follows:

Year
20121	410
2013	8
2014	707
2015	384
2016	161
Subsequent to 2016	3,225
Gross debt	4,895

1

Includes $402 million of commercial paper to be refinanced in 2012.

40
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

18. OTHER LONG-TERM OBLIGATIONS

	December 31, 2011	December 31, 2010	January 1, 2010
Accrued pension and other post-employment benefits liability (note 30)	163	107	92
Deferred credits	25	46	47
Long-term portion of discounted obligations under finance leases	66	76	90
Long-term portion of share-based payments liability (note 20)	14	66	75
Acquired provisions (note 7)	52	–	–
Other	26	31	12
	346	326	316

The fair value of financial liabilities included above approximates the carrying amount.

Finance Leases

The Company has entered into two leasing arrangements for the modification, refitting and use of Floating Storage Offloading (FSO) vessels for use in its operations. Elements of the leasing arrangements have been defined by the Company as finance leases. The imputed rates of interest on these leases, which expire in 2016 and 2019, are 6% and 10%, respectively. Of the total discounted liability of $84 million (December 31, 2010 – $94 million; January 1, 2010 – $108 million), $18 million (December 31, 2010 – $18 million; January 1, 2010 – $18 million) is included in accounts payable and accrued liabilities.

The future minimum lease payments for finance leases and the present value of minimum finance lease payments by payment date are as follows:

	December 31, 2011			December 31, 2010			January 1, 2010
	Minimum payments		Present value of payments	Minimum payments		Present value of payments	Minimum payments		Present value of payments
Within one year	18		18	18		18	18		18
After one year but not more than five years	68		51	71		53	76		55
More than five years	28		15	43		23	66		35
Total minimum lease payments	114		84	132		94	160		108
Less amounts representing accretion	(30	)	–	(38	)	–	(52	)	–
Present value of minimum lease payments	84		84	94		94	108		108

19. CAPITAL DISCLOSURES

Talisman's objective in managing capital is to retain access to capital markets, ensure its ability to meet all financial obligations and meet its operational and strategic objectives.

Talisman's capital structure consists of shareholders' equity and debt. The Company makes adjustments to its capital structure based on changes in economic conditions and its planned requirements. Talisman has the ability to adjust its capital structure by issuing new equity or debt, selling assets to reduce debt, controlling the amount it returns to shareholders and making adjustments to its capital expenditure program.

41
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

Talisman manages its balance sheet with reference to its liquidity and a debt-to-cash flow ratio. The main factors in assessing the Company's liquidity are cash flow (defined below), cash provided by and used in investing activities and available bank credit facilities. The debt-to-cash flow ratio at December 31, 2011 and 2010 was as follows:

	2011	2010
Debt	4,967	4,226
Cash flow	3,572	3,140
Debt-to-cash flow	1.39:1	1.35:1

The calculation of debt is as follows:

	2011		2010
Gross debt and bank indebtedness	4,955		4,206
Add: Production payments and finance leases	109		125
Less: Non-recourse debt	(97	)	(105	)
Debt	4,967		4,226

The calculation of cash flow is as follows:

	2011		2010
Cash provided by operating activities	2,812		3,144
Changes in non-cash operating working capital	375		(367	)
Add: Exploration expenditure	427		374
Less: Amounts attributable to assets subject to non-recourse debt	(42	)	(11	)
Cash flow	3,572		3,140

Talisman is in compliance with all of its debt covenants. The Company's principal financial covenant under its primary bank credit facility is a debt-to-cash flow ratio of less than 3.5:1, calculated quarterly on a trailing 12-month basis as of the last day of each fiscal quarter.

1

1     Dollar amounts in share-based payments tables are provided in C$.

20. SHARE CAPITAL AND SHARE-BASED PAYMENTS¹

Authorized

Talisman's authorized share capital consists of an unlimited number of common shares without nominal or par value and an unlimited number of first and second preferred shares.

42
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

Common Shares Issued

Continuity of common shares	2011				2010
	Shares		Amount		Shares		Amount
Balance, beginning of year	1,019,290,939		1,480		1,014,876,564		1,401
Issued on exercise of stock options	7,500,131		175		4,835,056		95
Shares purchased and held in trust for long-term PSU plan (see below)	(5,368,600	)	(94	)	(4,482,681	)	(81	)
Shares released from trust for 2008 PSU plan (see below)	–		–		4,062,000		65
Balance, end of year	1,021,422,470		1,561		1,019,290,939		1,480

During 2011, Talisman declared dividends of $0.27 per share (2010 – C$0.25 per share) for an aggregate dividend of $277 million (2010 – $249 million).

Subsequent to December 31, 2011, 296,153 stock options were exercised for shares and a further 80,000 common shares were purchased and held in trust for the long-term PSU plan. There were 1,021,638,623 common shares outstanding at February 28, 2012.

Holders of common shares are entitled to receive notice of and to attend all meetings of shareholders. Each common share carries with it the right to one vote. Subject to the rights of holders of other classes of shares who are entitled to receive dividends in priority to or rateably with the common shares, the Board of Directors may declare dividends on the common shares to the exclusion of any other class of shares of the Company. In the event of liquidation, dissolution or winding up of the Company or any other distribution of assets of the Company among its shareholders for the purpose of winding up its affairs, and subject to the rights of other classes of shares on a priority basis, the holders of common shares are entitled to participate rateably in any distribution of any assets of the Company.

Normal Course Issuer Bid

Talisman's normal course issuer bid expired on December 14, 2011. During the years ended December 31, 2011 and 2010, Talisman did not repurchase any common shares of the Company under its normal course issuer bid.

Preferred Shares Issued

Continuity of preferred shares		2011		2010
		Shares	Amount	Shares	Amount
Cumulative Redeemable Rate Reset First Preferred Shares,
	4.2% Series 1:
Balance, beginning of year		–	–	–	–
Issued		8,000,000	191	–	–
Balance, end of year		8,000,000	191	–	–

On December 5, 2011, Talisman issued 8,000,000 Cumulative Redeemable Rate Reset First Preferred Shares, Series 1 ("Series 1 preferred shares") at a price of C$25 per share for aggregate gross proceeds of C$200 million. Net proceeds, after deducting underwriting fees, were C$194 million ($191 million).

Holders of Series 1 preferred shares are entitled to receive a cumulative quarterly fixed dividend of 4.2% annually for the initial period ending December 31, 2016, as and when declared by the Board of Directors. Thereafter, the dividend rate will be reset every five years at a rate equal to the five-year Government of Canada bond yield plus 2.77%.

43
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

The Company may redeem all or a portion of the outstanding Series 1 preferred shares for C$25 per share plus accrued and unpaid dividends, on December 31, 2016 and on December 31 every five years thereafter. Holders of Series 1 preferred shares will have the right to convert their shares into Cumulative Rate Reset First Preferred Shares, Series 2 ("Series 2 preferred shares"), subject to certain conditions, on December 31, 2016 and on December 31 every five years thereafter. Holders of Series 2 preferred shares will be entitled to receive cumulative quarterly floating rate dividends at a rate equal to the three-month Government of Canada Treasury Bill yield plus 2.77%.

In the event of the liquidation, dissolution or winding up of the Company, the holders of Series 1 preferred shares will be entitled to receive C$25 per share together with all dividends accrued and unpaid to the date of payment before any amount will be paid or any assets of the Company distributed to the holders of any shares ranking junior to the Series 1 preferred shares. The holders of Series 1 preferred shares will not be entitled to share in any further distribution of the assets of the Company.

Holders of Series 1 preferred shares are not entitled to voting rights or to receive notice of or to attend shareholders' meetings unless dividends on the Series 1 preferred shares are in arrears to the extent of eight quarterly dividends, whether or not consecutive.

Stock Option Plans

Talisman has stock option plans that govern the granting of options to employees and directors. All options issued by the Company permit the holder to purchase one common share of the Company at the stated exercise price per share or to receive a cash payment equal to the appreciated value of the shares underlying the stock option. Options granted under the plans are generally exercisable after three years and expire 10 years after the grant date. Commencing in 2006, options granted to new employees vest evenly on an annual basis over a three-year period. Option exercise prices approximate the market price for the common shares on the date the options are granted.

Continuity of stock options	2011			2010
	Number of shares underlying options		Weighted average exercise price (C$)	Number of shares underlying options		Weighted average exercise price (C$)
Outstanding, beginning of year	62,959,223		15.89	69,489,526		15.22
Granted	6,686,170		23.29	7,743,117		17.42
Exercised for common shares	(7,500,131	)	14.54	(4,835,056	)	11.75
Surrendered for cash	(642,889	)	15.62	(6,254,804	)	12.59
Forfeited	(2,410,329	)	17.40	(3,183,560	)	17.81
Outstanding, end of year	59,092,044		16.82	62,959,223		15.89
Exercisable, end of year	39,242,566		16.33	35,790,358		15.59
Options available for future grants pursuant to Stock Option Plans	39,523,835			42,653,842

44
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

The range of exercise prices of the Company's outstanding stock options is as follows:

December 31, 2011			Outstanding options	Exercisable options
Range of exercise prices (C$)	Number of shares underlying options	Weighted average exercise price (C$)	Weighted average years to expiry	Number of shares underlying options	Weighted average exercise price (C$)
6.34 - 9.99	4,813,660	7.42	1	4,813,660	7.42
10.00 - 12.99	1,697,995	11.69	7	1,332,554	11.70
13.00 - 15.99	15,050,150	13.64	5	7,963,961	13.89
16.00 - 18.99	18,812,911	17.76	7	12,506,360	17.97
19.00 - 21.99	12,485,108	20.04	5	12,247,551	20.05
22.00 - 23.92	6,232,220	23.84	9	378,480	22.99
6.34 - 23.92	59,092,044	16.82	6	39,242,566	16.33

The fair value of the liability for the stock option plans at December 31, 2011 was $209 million (December 31, 2010 – $596 million; January 1, 2010 – $529 million), of which $196 million (December 31, 2010 – $540 million; January 1, 2010 – $462 million) is included in accounts payable and accrued liabilities on the Consolidated Balance Sheets.

Subsequent to December 31, 2011, 3,033 stock options were surrendered for cash, 296,153 were exercised for shares, 61,520 were granted and 943,909 were forfeited, with 57,910,469 stock options outstanding at February 28, 2012.

Cash Unit Plan

In addition to the Company's stock option plans, Talisman's subsidiaries issue stock appreciation rights under the cash unit plan. Cash units are similar to stock options except that the holder does not have a right to purchase the underlying shares of the Company. Units granted under the cash unit plan are generally exercisable after three years and expire 10 years after the grant date.

Continuity of cash units	2011			2010
	Number of units		Weighted average exercise price (C$)	Number of units		Weighted average exercise price (C$)
Outstanding, beginning of year	10,112,792		16.64	10,078,102		16.42
Granted	1,547,670		22.34	1,170,920		17.38
Exercised	(1,636,458	)	17.42	(826,175	)	14.39
Forfeited	(562,840	)	18.33	(310,055	)	17.49
Outstanding, end of year	9,461,164		17.35	10,112,792		16.64
Exercisable, end of year	6,234,650		16.90	6,180,730		16.83

45
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

The range of exercise prices of the Company's cash units is as follows:

December 31, 2011			Outstanding units	Exercisable units
Range of exercise prices (C$)	Number of units	Weighted average exercise price (C$)	Weighted average years to expiry	Number of units	Weighted average exercise price (C$)
6.60 - 9.99	754,840	7.64	2	754,840	7.64
10.00 - 12.99	101,427	10.96	7	35,144	11.12
13.00 - 15.99	2,209,111	13.70	6	1,090,826	13.94
16.00 - 18.99	2,467,694	17.67	7	1,570,903	17.94
19.00 - 21.99	2,790,482	20.02	5	2,739,077	20.03
22.00 - 25.19	1,137,610	24.21	9	43,860	23.93
6.60 - 25.19	9,461,164	17.35	6	6,234,650	16.90

The fair value of the liability for the cash unit plan at December 31, 2011 was $28 million (December 31, 2010 – $95 million; January 1, 2010 – $74 million), of which $27 million (December 31, 2010 – $85 million; January 1, 2010 – $66 million) is included in accounts payable and accrued liabilities on the Consolidated Balance Sheets.

Subsequent to December 31, 2011, 6,531 cash units were exercised, 92,240 were granted and 70,913 were forfeited, with 9,475,960 cash units outstanding at February 28, 2012.

Long-Term Performance Share Unit (PSU) Plan

In 2009, the Company implemented a long-term PSU plan that allows for the granting of PSUs to employees, vesting after three years to varying degrees (0-150%) subject to predetermined performance measures being achieved. Each PSU represents the right, subject to performance, to receive one common share of the Company. Participants in the PSU plan are credited with additional PSUs corresponding to any associated dividend payments (referred to as 'dividend equivalent PSUs').

Continuity of long-term PSU plan	2011		2010
	Number of units		Number of units
Outstanding, beginning of year	8,173,762		5,520,158
Granted	3,450,930		3,768,840
Forfeited	(605,949	)	(1,221,258	)
Dividend equivalent PSUs	200,284		106,022
Outstanding, end of year	11,219,027		8,173,762

To satisfy the Company's obligations to deliver common shares to settle the PSUs, Talisman has arranged for a third party trustee to hold common shares which were purchased on the open market. During 2011, the Company purchased 5,368,600 common shares on the open market for $94 million. For accounting purposes, the cost of the purchase of the common shares held in trust has been accounted for as a reduction in outstanding common shares and the trust has been consolidated since it is a special purpose entity controlled by the Company. The Company is not exposed to fluctuations in the stock price in respect of the shares held in trust. Additional purchases of common shares to satisfy the Company's obligations are contemplated.

The 2009 long-term PSU grant vested on December 31, 2011 and settlement is expected to occur during the first quarter of 2012. Based on the Company's performance relative to the predetermined performance measures, the Board of Directors approved the vesting of 104% of the PSUs granted.

Subsequent to December 31, 2011, 64,453 PSUs were granted and 137,326 were forfeited with 11,146,154 outstanding at February 28, 2012. Between January 1 and February 28, 2012, a further 80,000 common shares were purchased on the open market for $1 million.

46
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

2008 PSU Plan

In 2008, Talisman implemented a PSU plan pursuant to which 4,158,860 PSUs were granted. These PSUs vested on January 31, 2010 subject to predetermined performance measures being achieved. Based on the Company's performance relative to these predetermined performance measures, the Board of Directors approved the vesting of 90% of the PSUs granted.

To satisfy the Company's obligation to deliver common shares to settle the PSUs, the Company established a trust that purchased 4,062,000 common shares on the open market for $65 million. These shares were released from trust when the PSUs vested.

Deferred Share Unit (DSU) Plan

Talisman issues DSUs to directors in lieu of cash compensation. Each DSU represents the right to receive a cash payment on retirement equal to the market value of the Company's shares at the time of surrender. Dividends are credited as additional DSUs when paid. At December 31, 2011, there were 394,655 (December 31, 2010 – 330,448; January 1, 2010 – 396,550) units outstanding and the fair value of the liability was $5 million (December 31, 2010 – $7 million; January 1, 2010 – $7 million), which is included in accounts payable and accrued liabilities on the Consolidated Balance Sheets. Recovery of $1 million (2010 – $3 million expense) related to the DSUs is recognized in general and administrative expenses on the Consolidated Statements of Income.

Restricted Share Unit (RSU) Plan

Talisman has a RSU plan that grants RSUs to eligible employees. All RSUs issued by the Company permit the holder to receive a cash payment equal to the market value of the stock. Participants are also credited with additional RSUs corresponding to any associated notional dividend payments (referred to as 'dividend equivalent RSUs'). Typically, RSUs granted under the plan are paid three years after the grant date. At December 31, 2011, there were 404,863 (December 31, 2010 – 462,133; January 1, 2010 – 342,730) units outstanding (including dividend equivalent RSUs) and the fair value of the liability was $2 million (December 31, 2010 – $5 million; January 1, 2010 – $3 million), which is included in accounts payable and accrued liabilities on the Consolidated Balance Sheets.

Share-Based Payments Expense

The Company uses the Black-Scholes option pricing model to estimate the fair value of equity-settled share-based payment plans, with the following assumptions:

	December 31, 2011	December 31, 2010
Expected volatility	45%	42%
Risk free interest rate	1.3%	2.6%
Expected term (years)	5	5
Expected forfeiture rate	3.5%	3.4%
Expected annual dividend yield	1.2%	1.1%

The expected volatility is based on the historical volatility of the Company's common shares over a historical period that matches the expected term of the share-based payment plans. The risk-free rate is based on Government of Canada bond yields for terms that match the expected term of the share-based payment plans. The expected term for each option tranche is estimated at the end of each reporting period. The expected dividend rate takes into account historical dividend payments and the Company's expectation for future payments.

During the year ended December 31, 2011, the Company recorded share-based payments recovery of $310 million (2010 – $212 million expense) in respect of the plans described above as follows: stock options – $332 million recovery (2010 – 

47
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

$146 million expense), cash units – $56 million recovery (2010 – $18 million expense), 2008 PSU plan – $nil (2010 – $3 million recovery), long-term PSU plan – $78 million expense (2010 – $51 million expense) and RSUs – $nil (2010 – $nil).

During the year ended December 31, 2011, the Company recorded a net increase in contributed surplus of $78 million relating to its long-term PSU plan, compared to a net decrease of $9 million for the year ended December 31, 2010 which related to the settlement of the 2008 PSU plan.

During the year ended December 31, 2011, the Company paid cash of $14 million (2010 – $54 million) to employees in settlement of fully accrued option liabilities for options exercised. In addition, the Company capitalized share-based payments expense of $9 million (2010 – $3 million).

Of the combined liability for cash-settled stock option, cash unit, DSU and RSU plans of $244 million (December 31, 2010 – $703 million; January 1, 2010 – $613 million), $230 million (December 31, 2010 – $637 million; January 1, 2010 – $538 million) is included in accounts payable and accrued liabilities on the Consolidated Balance Sheets and $14 million (December 31, 2010 – $66 million; January 1, 2010 – $75 million) is included in other long-term obligations.

The total number of options and cash units expected to vest as at December 31, 2011 was 68 million, with a weighted average remaining contractual life of six years, a weighted average exercise price of $16.84 and an aggregate intrinsic value of $33 million.

21. ACCUMULATED OTHER COMPREHENSIVE INCOME

The components of accumulated other comprehensive income are as follows:

		2011		2010
Balance, beginning of year
Derivative financial instruments designated as cash flow hedges		2		–
Foreign currency translation adjustments		786		1,194
		788		1,194
Other comprehensive income (loss) for the year
Derivative financial instruments designated as cash flow hedges
	Gains arising during the year	–		13
	Gains recognized in net income	–		(11	)
Foreign currency translation adjustments		–		(408	)
Actuarial losses relating to pension and other post-employment benefits		(26	)	(12	)
		(26	)	(418	)
Actuarial losses transferred to retained earnings		26		12
Balance, end of year
Derivative financial instruments designated as cash flow hedges		2		2
Foreign currency translation adjustments		786		786
		788		788

22. FINANCIAL INSTRUMENTS

Talisman's financial assets and liabilities at December 31, 2011 consisted of cash and cash equivalents, accounts receivable, investments, bank indebtedness, accounts payable and accrued liabilities, long-term debt (including the current portion) and risk management assets and liabilities arising from the use of derivative financial instruments.

The Company is exposed to financial risks arising from its financial assets and liabilities. The financial risks include market risk related to foreign exchange rates, interest rates and commodity prices, credit risk and liquidity risk.

48
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

Fair Value of Financial Assets and Liabilities

The fair values of cash and cash equivalents, accounts receivable, bank indebtedness, and accounts payable and accrued liabilities approximate their carrying values due to the short-term maturity of those instruments. The note receivable, which settled in 2011, was classified as a financial asset at fair value through the Consolidated Statement of Income and presented at fair value calculated using discounted cash flows.

Borrowings under bank credit facilities are short-term in nature and are market rate-based, thus, carrying value approximates fair value. The fair value of public debentures and notes is based on market quotations, which reflect the discounted present value of the principal and interest payments using the effective yield for instruments having the same term and risk characteristics. The fair values of private notes are based on estimations provided by third parties. The fair value of Talisman's floating rate debt is determined by discounting future estimated coupon payments at the current market interest rate. The fair value of Talisman's long-term debt at December 31, 2011 was $5.1 billion (December 31, 2010 – $4.6 billion; January 1, 2010 – $3.9 billion), while the carrying value was $4.9 billion (December 31, 2010 – $4.2 billion; January 1, 2010 – $3.6 billion).

The fair values of all other financial assets and liabilities approximate their carrying values.

Risk management assets and liabilities are recorded at their estimated fair values. To estimate fair value, the Company uses quoted market prices when available, or models that utilize observable market data. In addition to market information, the Company incorporates transaction-specific details that market participants would utilize in a fair value measurement, including the impact of non-performance risk. The Company's non-performance risk is determined based on third party quotes for the Company's debt instruments with maturity dates that are similar, or in close approximation, to the maturity dates of the corresponding financial instrument. The Company's risk management assets decreased by $3 million as a result of incorporating non-performance risk. The Company characterizes inputs used in determining fair value using a hierarchy that prioritizes inputs depending on the degree to which they are observable. The three levels of the fair value hierarchy are as follows:

•

Level 1 – inputs represent quoted prices in active markets for identical assets or liabilities (for example, exchange-traded commodity derivatives). Active markets are those in which transactions occur in sufficient frequency and volume to provide pricing information on an ongoing basis;

•

Level 2 – inputs other than quoted prices included within level 1 that are observable, either directly or indirectly, as of the reporting date. Level 2 valuations are based on inputs, including quoted forward prices for commodities, market interest rates and volatility factors, which can be observed or corroborated in the marketplace. The Company obtains information from sources such as the New York Mercantile Exchange (NYMEX) and independent price publications; and

•

Level 3 – inputs that are less observable, unavailable or where the observable data does not support the majority of the instrument's fair value, such as the Company's internally developed assumptions about market participant assumptions used in pricing an asset or liability, for example, an estimate of future cash flows used in the Company's internally developed present value of future cash flows model that underlies the fair value measurement.

In forming estimates, the Company utilizes the most observable inputs available for valuation purposes. If a fair value measurement reflects inputs of different levels within the hierarchy, the measurement is categorized based upon the lowest level of input that is significant to the fair value measurement. The valuation of over the counter financial swaps and collars is based on similar transactions observable in active markets or industry standard models that rely primarily on market observable inputs. Substantially all of the assumptions for industry standard models are observable in active markets throughout the full term of the instrument. These are categorized as level 2.

Fair values for cross currency and interest rate derivative instruments are determined based on the estimated cash payment or receipt necessary to settle the contract. Cash payments or receipts are based on discounted cash flow analysis using current market rates and prices. Fair values for commodity price derivatives are based on discounted cash flow analysis using current market rates and prices and option pricing models using forward pricing curves and implied volatility, as appropriate, which are compared to quotes received from financial institutions for reasonability.

49
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

The following table presents the Company's risk management assets measured at fair value for each hierarchy level at December 31, 2011:

	Level 1 inputs	Level 2 inputs	Level 3 inputs	Total fair value
Interest rate swaps	–	36	–	36
Commodity collars	–	30	–	30
Risk management assets	–	66	–	66

The following table sets forth a reconciliation of changes in the fair value of the assets classified as level 3 in the fair value hierarchy during 2011:

	2011		2010
Balance, beginning of year	42		40
Realized and unrealized gains (losses)	(2	)	2
Cash received	(40	)	–
Balance, end of year	–		42

At December 31, 2010, a note receivable relating to a 2008 asset disposition was classified as level 3 in the fair value hierarchy. During the year ended December 31, 2011, this note receivable was settled for $40 million and a deferred gain of $15 million was recognized, which is included in 'Gain on asset disposals' on the Consolidated Statement of Income. No other transfers in or out of level 3 occurred during 2011.

Unobservable inputs utilized to determine the fair value of the note receivable included the weighted average cost of capital and volatility of the common shares of the counterparty.

Risk Management Assets, Liabilities, Gains and Losses

		December 31,	December 31,	January 1,
Derivative instrument	Balance sheet presentation	2011	2010	2010
Interest rate swaps	Current assets	12	13	13
Interest rate swaps	Non-current assets	24	25	13
Cross-currency swaps	Current assets	–	46	–
Cross-currency swaps	Non-current assets	–	–	27
Commodity contracts	Current assets	30	60	16
Risk management assets		66	144	69
Cross-currency swaps	Current liabilities	–	–	1
Commodity contracts	Current liabilities	–	117	265
Commodity contracts	Non-current liabilities	–	–	6
Risk management liabilities		–	117	272

During the year ended December 31, 2011, the Company recorded a loss on held-for-trading financial instruments of $210 million (2010 – $87 million gain).

Currency Risk

Talisman operates internationally and is therefore exposed to foreign exchange risk. Talisman's primary exposure is from fluctuations in the US$ relative to the C$, UK£, and NOK.

50
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

Talisman manages its foreign exchange exposure in a number of ways. By denominating most of its borrowings in US$, the Company is able to reduce some of its economic exposure to currency fluctuations. Talisman also manages its translation exposure by generally matching internal borrowings with its subsidiaries' functional currencies. The Company purchases foreign currencies, mostly at spot value, to meet its current foreign currency obligations as they come due.

Prior to 2011, the Company designated loans denominated in UK£ as an effective net investment hedge of its UK operations. During the year ended December 31, 2010, losses of $14 million were included in other comprehensive loss. These losses are attributable to the translation of Talisman's UK£250 million denominated debt. Following a change in the functional currency of the UK operations on January 1, 2011, foreign exchange gains of $2 million were recorded as a reduction of other expenses during the year ended December 31, 2011.

In respect of financial instruments existing at December 31, 2011, a 1% strengthening of the US$ against the other currencies noted above, with all other variables assumed constant, would have resulted in an increase of $15 million in net income and a $nil impact on other comprehensive loss during the year ended December 31, 2011. A similar weakening of the US$ would have had the opposite impact.

In conjunction with the issuance of the C$350 million 4.44% medium-term notes in January 2006, the Company entered into a cross-currency swap in order to hedge the foreign exchange exposure on this C$ denominated liability. As a result, the Company was effectively paying interest semi-annually in US$ at a rate of 5.054% on a notional amount of $304 million. The cross-currency swap was designated as a cash flow hedge. The notes were repaid in January 2011 and the hedge was settled.

Interest Rate Risk

Talisman is exposed to interest rate risk principally by virtue of its borrowings. Borrowing at floating rates exposes Talisman to short-term movements in interest rates. Borrowing at fixed rates exposes Talisman to reset risk (i.e. at debt maturity). Risk management activities aim to manage the mix of fixed-to-floating debt to best manage the trade-off between longer-term interest rate reset risk and shorter-term volatility in interest rates.

In order to mitigate its exposure to interest rate changes, Talisman enters into interest rate swaps from time to time to manage the ratio of fixed rate debt to floating rate debt. At December 31, 2011, the Company had fixed-to-floating interest rate swap contracts with a total notional amount of $300 million that expire on May 15, 2015. During the year ended December 31, 2011, the fair value of the fixed-to-floating interest rate swaps decreased by $1 million.

In respect of financial instruments existing at December 31, 2011, a 1% increase in interest rates would have resulted in a $14 million decrease in net income and a $nil impact on other comprehensive loss during the year ended December 31, 2011.

Credit Risk

Talisman is exposed to credit risk, which is the risk that a customer or counterparty will fail to perform an obligation or settle a liability, resulting in financial loss to the Company. Talisman manages exposure to credit risk by adopting credit risk guidelines approved by the Board of Directors that limit transactions according to counterparty creditworthiness. The Company routinely assesses the financial strength of its joint participants and customers, in accordance with the credit risk guidelines. Talisman's credit policy requires collateral to be obtained from counterparties considered to present a material risk of non-payment, which would include entities internally assessed as high risk or those with ratings below investment grade. Collateral received from customers at December 31, 2011 included $30 million of letters of credit. At December 31, 2011, an allowance of $65 million ($22 million, net of tax) for a doubtful account was recorded in respect of a balance owing by a counterparty that had filed for bankruptcy.

A significant proportion of Talisman's accounts receivable balance is with customers in the oil and gas industry and is subject to normal industry credit risks. At December 31, 2011, approximately 96% of the Company's trade accounts receivable was current and the largest single counterparty exposure, accounting for 17% of the total, was with a very highly rated counterparty. Concentration of credit risk is mitigated by having a broad domestic and international customer base of highly rated counterparties.

51
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

The Company also has credit risk arising from cash and cash equivalents held with banks and financial institutions. The Company's policy allows it to deposit cash balances at financial institutions subject to a sliding scale limit, depending on creditworthiness.

The maximum credit exposure associated with financial assets is the carrying values.

Liquidity Risk

Talisman is exposed to liquidity risk, which is the risk that the Company may be unable to generate or obtain sufficient cash to meet its commitments as they come due. Talisman mitigates this risk through its management of cash, debt, committed credit capacity and its capital program.

Talisman maintains appropriate undrawn capacity in its revolving credit facilities to meet short-term fluctuations from forecasted results. Talisman manages its liquidity requirements by use of both short-term and long-term cash forecasts, and by maintaining appropriate undrawn capacity under committed bank credit facilities. The Company has in place facilities totaling $4 billion that are fully committed through 2014. At December 31, 2011, $402 million of commercial paper and $648 million in the form of bankers' acceptances (C$410 million and US$245 million) was drawn and $30 million was supporting letters of credit. Available borrowing capacity was $3 billion at December 31, 2011.

In addition, the Company utilizes letters of credit pursuant to letter of credit facilities, most of which are uncommitted. At January 1, 2012, letters of credit totaling $1.6 billion had been issued under these facilities, of which $1.1 billion were provided as security for the costs of decommissioning obligations in the UK. The remaining outstanding letters of credit relate primarily to a retirement compensation arrangement, guarantees of minimum work commitments and decommissioning obligations in other areas.

With the exception of the US commercial paper program described in note 17, the Company has no significant debt maturities until 2014.

Except for commodity price derivative contracts that mature as noted below, long-term debt that matures as outlined in note 17 and other long-term obligations detailed in note 18, all of the Company's financial liabilities are due within one year.

Commodity Price Risk

Talisman is exposed to commodity price risk since its revenues are dependent on the price of crude oil, natural gas and NGLs. Talisman enters into derivative instruments from time to time to mitigate commodity price risk volatility under guidelines approved by the Board of Directors. The Company may hedge a portion of its future production to protect cash flows to allow it to meet its strategic objectives.

The Company had the following commodity price derivative contracts outstanding at December 31, 2011, none of which are designated as hedges:

Two-way collars	Term	bbls/d	Floor/ceiling $/bbl	Fair value
Dated Brent oil index	Jan-Dec 2012	20,000	90.00/148.36	24
Dated Brent oil index	Jan-Jun 2012	9,000	90.00/126.93	1
Dated Brent oil index	Jan-Jun 2012	11,000	90.00/155.16	4
Dated Brent oil index	Jan-Jun 2012	10,000	90.00/123.08	1
Dated Brent oil index	Jul-Dec 2012	7,000	90.00/119.26	–
				30

Subsequent to December 31, 2011, the Company entered into a Dated Brent two-way collar of 3,000 bbls/d for the second half of 2012 with a floor of $90/bbl and a ceiling of $121.35/bbl.

In respect of outstanding financial instruments and assuming forward commodity prices in existence at December 31, 2011, an increase of $1/bbl in the price of oil would have reduced the net fair value of commodity derivatives, thereby resulting in a decrease in net income of $3 million during the year ended December 31, 2011. A similar decrease in the price of oil would have had the opposite impact.

52
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

23. CONTINGENCIES AND COMMITMENTS

Provisions and Contingencies

Talisman's provision for decommissioning is presented in note 15. With the exception of the provisions acquired as part of the Equión acquisition described in note 7, the other provisions recorded by the Company are not material.

From time to time, Talisman is the subject of litigation arising out of the Company's operations. Damages claimed under such litigation may be material or may be indeterminate and the outcome of such litigation may materially impact the Company's financial condition or results of operations. While Talisman assesses the merits of each lawsuit and defends itself accordingly, the Company may be required to incur significant expenses or devote significant resources to defend itself against such litigation. These claims are not currently expected to have a material impact on the Company's financial position.

The New York Attorney General has commenced an investigation, pursuant to theMartin Act, into the disclosure practices of companies engaged in hydraulic fracturing in the New York state area. TheMartin Act provides broad authority to commence and conduct investigations, whether upon receipt of a complaint, or on the Attorney General's own initiative. Subpoenas have been issued to a number of companies, including Talisman. The Company has been cooperating with the New York Attorney General in the investigation. No enforcement action has been taken against Talisman, nor has the Company been advised that any enforcement action is imminent.

Estimated Future Minimum Commitments¹

Estimated future commitments for 2012 and beyond are as follows:

	2012	2013	2014	2015	2016	Subsequent to 2016	Total
Office leases	52	48	44	19	15	79	257
Vessel leases	243	132	84	83	76	49	667
Transportation and processing commitments2	260	155	144	142	136	727	1,564
Decommissioning liabilities	53	72	81	160	179	4,490	5,035
PP&E and E&E assets3	991	330	98	45	11	–	1,475
Other service contracts	204	89	101	65	19	42	520
	1,803	826	552	514	436	5,387	9,518

1

Future minimum payments denominated in foreign currencies have been translated into US$ based on the December 31, 2011 exchange rate.

2

Certain of the Company's transportation commitments are tied to firm gas sales contracts.

3

PP&E and E&E includes drilling rig commitments to meet a portion of the Company's future drilling requirements, as well as minimum work commitments.

There have been no significant changes in the Company's expected future payment commitments, and the timing of those payments, since December 31, 2011.

Talisman's estimated undiscounted decommissioning liabilities at December 31, 2011 were $5.0 billion (December 31, 2010 – $4.5 billion; January 1, 2010 – $4.6 billion), approximately 60% of which relates to Talisman's UK operations. At December 31, 2011, Talisman had accrued $3.0 billion (December 31, 2010 – $2.6 billion; January 1, 2010 – $2.0 billion), representing the discounted amount of this liability. The Company had provided letters of credit at January 1, 2012 in an amount of $1.1 billion as security for the costs of decommissioning obligations in the UK. In addition, the Company has issued guarantees as security for certain minimum work, future dismantlement, site restoration and abandonment obligations in lieu of letters of credit. Talisman has $254 million of abandonment letters of credit in place from January 1, 2012 until December 31, 2012 in respect of assets held by third parties.

Talisman leases certain of its ocean-going vessels and corporate offices, all of which, with the exception of the leasing arrangements described in note 18, are accounted for as operating leases. In addition to the minimum lease payments, Talisman has ongoing operating commitments associated with the vessels. The majority of the vessel leases have an average

53
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

life of five years, the office leases have an average life of 10 years and the transportation commitment contracts have average lives of between 10 and 15 years.

Talisman has firm commitments for gathering, processing and transportation services that require the Company to pay tariffs to third parties for processing or shipment of certain minimum quantities of crude oil, natural gas and NGLs. The Company anticipates having sufficient production to meet these commitments.

In the case of an operating lease entered into by Talisman as the operator of a jointly controlled asset, the amounts reported represent the net operating lease expense and net future minimum lease payments. These net amounts are after deducting amounts reimbursed, or to be reimbursed, by joint venture partners, whether the joint venture partners have co-signed the lease or not. Where Talisman is not the operator of a jointly controlled asset, Talisman's share of the lease expense and future minimum lease payments is included in the amounts shown, whether Talisman has co-signed the lease or not. Where lease rentals are dependent on a variable factor, the future minimum lease payments are based on the factor as at the inception of the lease.

During the year ended December 31, 2011, Talisman incurred net rental expense of $461 million (2010 – $578 million) in respect of its operating leases.

Long-Term Sales Contracts

In order to support the Company's investments in natural gas projects outside of North America and the North Sea, Talisman has entered into a number of long-term sales contracts.

The majority of Talisman's Corridor natural gas production in Indonesia is currently sold under long-term sales agreements with PT Chevron Pacific Indonesia (Chevron), Singapore Power and PGN (West Java). Under two sales agreements with Chevron, natural gas sales are at a price equal to 76% of the equivalent value of the Indonesia Crude Price for Duri crude oil. The minimum volume commitment under this contract is approximately 346 bcf over the remaining 10-year life of the contract. Under the agreement with Singapore Power, sales to Singapore from Corridor are referenced to the spot price of high sulphur fuel oil in Singapore. The minimum volume commitment is approximately 190 bcf over the remaining 12-year life of the contract. Sales from Corridor to PGN for their markets in West Java are under long-term contract at a price of approximately $1.91/mcf, with no associated transportation costs. The minimum volume commitment is approximately 650 bcf over the remaining 12-year life of the contract.

The Company is subject to volume delivery requirements for approximately 100 mmcf/d at prices referenced to the Singapore high sulphur fuel oil spot market in relation to a long-term sales contract in Malaysia, currently scheduled to end in 2018. In the event these delivery requirements are not met in a contract year, volumes delivered in the subsequent contract year are subject to a 25% price discount for the equivalent volume of unexcused shortage that was not delivered in the prior year.

Currently, the Company anticipates having sufficient production to meet future delivery requirements.

24. OTHER INCOME

Years ended December 31	2011	2010
Pipeline and customer treating tariffs	53	75
Investment income	6	11
Marketing income	19	21
	78	107

54
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

25. OTHER EXPENSES, NET

Years ended December 31	2011		2010
Foreign exchange gain	(12	)	(15	)
PP&E derecognition	26		28
Taxes, interest and penalties	18		5
Inventory writedowns	8		1
Allowance for doubtful accounts	65		–
Other miscellaneous	56		53
	161		72

26. INCOME TAXES

Significant components of the Company's income tax expense (recovery) are as follows:

Current Tax Expense

	North America	North Sea		Southeast Asia		Other		Total
Year ended December 31, 2011
Current tax	6	769		402		149		1,326
Adjustments related to prior years	11	(4	)	(10	)	(3	)	(6	)
Petroleum Revenue Tax	–	69		52		–		121
	17	834		444		146		1,441
Year ended December 31, 2010
Current tax	13	624		292		69		998
Adjustments related to prior years	–	20		5		(11	)	14
Petroleum Revenue Tax	–	85		39		–		124
	13	729		336		58		1,136

Deferred Tax Expense (Recovery)

	North America	North Sea		Southeast Asia		Other		Total
Year ended December 31, 2011
Origination (reversal) of temporary differences	(206)	202		34		(73	)	(43	)
Adjustments related to prior years	(15)	–		10		3		(2	)
Petroleum Revenue Tax	–	40		12		–		52
Changes in tax rates	(4)	225		–		–		221
	(225)	467		56		(70	)	228
Year ended December 31, 2010
Origination (reversal) of temporary differences	40	(39	)	(19	)	(30	)	(48	)
Adjustments related to prior years	(48)	–		(5	)	11		(42	)
Petroleum Revenue Tax	–	(8	)	(12	)	–		(20	)
	(8)	(47	)	(36	)	(19	)	(110	)

During 2011, the Company made elections for its Canadian subsidiaries to file tax returns in US$ with effect from the beginning of their 2011/12 tax years. Tax on foreign exchange on tax pools has not been recorded since the effective dates of these elections.

55
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

Deferred Tax Assets and Liabilities

The most significant components of the net deferred tax liability are as follows:

	PP&E and E&E assets	Decommissioning liabilities		Tax loss carryforward		Other		Total
At January 1, 2010	3,687	(1,024	)	(116	)	(178	)	2,369
Charged (credited) to tax expense, net	409	(293	)	(314	)	88		(110	)
Acquisition adjustments	29	–		–		–		29
Other	–	–		–		(37	)	(37	)
At December 31, 2010	4,125	(1,317	)	(430	)	(127	)	2,251
Charged (credited) to tax expense, net	1,017	(418	)	(517	)	146		228
Credited to equity	–	–		–		(15	)	(15	)
Acquisition adjustments	219	(8	)	–		–		211
Other	–	–		–		(15	)	(15	)
At December 31, 2011	5,361	(1,743	)	(947	)	(11	)	2,660

Other movements in the net deferred tax liability relate mostly to reclassifications between assets and liabilities, and currency adjustments and risk management assets and liabilities.

At December 31, 2011, Talisman had unused non-capital tax losses of $2.6 billion (December 31, 2010 – $1 billion; January 1, 2010 – $408 million) in respect of which a deferred tax asset was recorded. These losses arose in the US and Canada and expire between 2028 and 2031. Income projections based upon discounted cash flow models, using assumptions consistent with those presented in note 14, show sufficient taxable income to utilize these losses within the carryforward period.

The majority of the $480 million (2010 – $294 million) of unused non-capital tax losses in respect of which no deferred tax asset has been recognized arose in Southeast Asia and South America and will not expire.

No deferred tax liability has been recognized for temporary differences associated with investments in subsidiaries, associates, branches and joint ventures since the Company is in a position to control or jointly control the entity and it is considered probable that these temporary differences will not reverse in the foreseeable future.

Effective Tax Rate

The following provides a reconciliation of the Canadian statutory tax rate of 26.76% (2010 – 28.26%) to the effective tax rate on the Company's total income before income taxes.

Years ended December 31		2011		2010
Income before taxes		2,445		1,971
Statutory income tax rate (%)		26.76%		28.26%
Income taxes calculated at the Canadian statutory rate		654		557
Increase (decrease) in income taxes resulting from:
	Change in statutory tax rates, net	221		–
	Non-taxable income	(54	)	(187	)
	Deductible PRT expense	(81	)	(46	)
	Higher foreign tax rates	799		533
	Share-based payments	(72	)	163
	Uplift	(74	)	(72	)
	Other	103		(26	)
Income tax expense (excluding PRT)		1,496		922

56
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

In March 2011, the UK government announced that, from March 24, 2011, the rate of supplementary charge levied on ring fence profits increased from 20% to 32%. Supplementary charge is levied on ring fence profits in addition to the ring fence corporation tax rate of 30%, which remains unchanged. Consequently, there is now a combined UK corporation tax and supplementary charge rate of 62% for oil and gas companies with fields not subject to PRT and 75% to 81% with fields subject to PRT. If the price of oil falls below a certain level (currently expected to be $75/bbl) for a sustained period of time, the UK government has indicated that it will reduce the supplementary charge rate back towards 20% on a "staged and affordable basis" while prices remain low. As a result of this legislative change, the Company recorded additional current income tax expense of $101 million and additional deferred tax expense of $225 million during the year ended December 31, 2011.

In 2010, changes in Canadian and foreign statutory tax rates did not materially impact the Company's income tax expense.

Unrecognized Tax Benefit

Changes in the Company's unrecognized tax benefit are as follows:

	2011		2010
Unrecognized tax benefit, beginning of year	49		33
Increase due to prior period tax positions	22		30
Decrease due to prior period tax positions	(7	)	–
Decrease due to settlement with taxation authorities	(18	)	(14	)
Unrecognized tax benefit, end of year	46		49

Talisman's entire unrecognized tax benefit as at December 31, 2011 and December 31, 2010, if recognized, would affect the Company's effective tax rate.

The settlement with taxation authorities occurring in 2011 was the result of the Company settling a tax position in Norway regarding the deductibility of insurance premiums.

No significant change in the total unrecognized tax benefit is expected in 2012.

27. SUPPLEMENTAL CASH FLOW INFORMATION

Items Not Involving Cash

Years ended December 31	2011		2010
Depreciation, depletion and amortization	1,949		1,788
Impairment, net of reversals	226		301
Dry hole	241		113
Share-based payments expense (recovery)	(324	)	158
Gain on asset disposals	(192	)	(520	)
Unrealized gain on held-for-trading financial instruments	(61	)	(258	)
Deferred income tax (recovery)	228		(110	)
Foreign exchange	(11	)	3
PP&E derecognition	26		28
Other	42		53
	2,124		1,556

57
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

Changes in Non-Cash Operating Working Capital

Years ended December 31	2011		2010
Accounts receivable	(292	)	(47	)
Inventories	(26	)	(14	)
Prepaid expenses	(4	)	(12	)
Decommissioning expenditures1	(34	)	(17	)
Accounts payable and accrued liabilities	142		294
Income and other taxes payable	(161	)	163
	(375	)	367

1

$30 million of the decommissioning expenditures in 2011 were to settle liabilities that were recorded in accounts payable and accrued liabilities at December 31, 2010.

Other Cash Flow Information

Years ended December 31	2011	2010
Cash interest paid	254	240
Cash interest received	5	11
Cash income taxes paid	1,592	974

In respect of its exploration and evaluation activities, the Company has included exploration expenditure of $427 million within cash provided by operating activities, and exploration capital expenditure and acquisitions of $750 million and $737 million, respectively, within cash used in investing activities.

28. CASH AND CASH EQUIVALENTS

Of the cash and cash equivalents balance of $474 million, $286 million has been invested in bank deposits and the remainder in highly rated investments with original maturities of less than three months.

Cash and cash equivalents at December 31, 2011 includes $nil (2010 – $63 million) that is restricted and subject to currency controls and other legal restrictions.

29. NET INCOME PER SHARE – BASIC AND DILUTED

(millions)	2011	2010
Weighted average number of common shares outstanding – basic	1,023	1,018
Dilution effect of stock options and PSUs	15	–
Weighted average number of common shares outstanding – diluted	1,038	1,018

Outstanding stock options and PSUs are the only instruments that are dilutive to net income per share.

Basic net income per share is calculated by dividing the net income for the year by the weighted average number of common shares outstanding during the year, excluding shares held in trust to settle long-term PSU plan obligations.

For the diluted net income per share calculation, the net income is adjusted for the change in the fair value of stock options. The weighted average number of shares outstanding during the year is adjusted for options expected to be exercised and management's best estimate of shares expected to be issued in settlement of the Company's obligations pursuant to the long-term PSU plan.

58
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

30. EMPLOYEE BENEFITS

The Company sponsors both defined benefit and defined contribution pension arrangements covering substantially all employees. The Company also provides non-pension post-employment benefits to its Canadian retirees.

Defined benefit pension plans are based on years of service and final average salary. The defined benefit pensions in the UK and Norway, which account for 36% of the accrued benefit obligation at December 31, 2011, will increase at the rate of inflation. Although the Company has no commitment to provide for increases related to inflation on its Canadian defined benefit pension plans, the benefits have generally been increased annually by one-half of the rate of inflation since 2003.

Talisman uses actuarial reports prepared by independent actuaries on the defined benefit pension plans for funding and accounting purposes. The Company uses a December 31 measurement date to value its benefit plan assets and obligations. The most recent actuarial valuation of the Canadian employee and executive pension plans for funding purposes was at December 31, 2010, with the next valuation no later than December 31, 2013. The most recent actuarial valuation of the UK pension scheme for funding purposes was at March 31, 2009, with the next valuation at March 31, 2012.

Actuarial Assumptions

The following significant actuarial assumptions were employed to determine the net benefit expense and the accrued benefit obligations:

	2011	2010
Accrued benefit obligation
Discount rate (%)	4.3	5.2
Rate of compensation increase (%)	4.7	4.8
Benefit expense
Discount rate (%)	5.2	5.8
Expected long-term rate of return on plan assets (%)	5.9	6.1
Assumed health care cost trend rates
Initial health care cost trend rate (%)	10	10
Health care cost trend rate declines to (%)	5	5
Year that cost trend reaches final rate	2036	2036

The discount rate assumptions reflect the prevailing rates available on high quality, fixed-income debt instruments.

The expected long-term rate of return on plan assets is established by developing a forward-looking, long-term return assumption for each asset class, taking into account factors such as the expected real return for the specific asset class and inflation. A single, long-term rate of return is then calculated as the weighted average of the target asset allocation and the long-term return assumption for each asset class.

Investment Policies

The Canadian defined benefit pension plans' investment policy provides a framework for managing the plan assets, without undue risk of capital loss and with a reasonable expectation of a rate of return or appreciation in value. Investment managers must manage the plan assets to reasonably track the return of the appropriate index. Equity investments are passively managed to replicate the S&P/TSX Index, the S&P 500 Index and the MSCI EAFE Index. Foreign equity investments are hedged to the Canadian dollar. Investments in bonds and debentures are managed passively to replicate the DEX Long Term Bond Index and are limited to those meeting minimum credit ratings.

The UK defined benefit pension plan's investment policy is designed to spread risks across a range of different sources. This is achieved through asset diversification so as to limit the impact of any single risk. Asset classes considered for the UK pension plan's investments are UK government and corporate bonds, UK and global equities and diversified growth funds. Most plan

59
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

assets are actively managed, with assets re-balanced to the target asset allocation, described below, within a 5% tolerance range.

Plan Assets

The approximate target allocation percentage for the Canadian defined benefit pension plans that account for 29% of total plan assets is 50% equities and 50% bonds. The approximate target allocation for the UK pension plan that accounts for 58% of total plan assets is 45% UK equities, 35% global equities and 20% UK bonds. In late 2011, a new target allocation of 10% UK equities, 35% global equities, 35% diversified growth funds and 20% UK bonds was adopted for the UK pension plan and is gradually being implemented. Plan assets do not include any common shares of Talisman, other than through Canadian equity pooled funds, or any assets used by the Company.

The allocation of the assets of the defined benefit plans is as follows:

	December 31, 2011	December 31, 2010	January 1, 2010
Equity securities (%)	61	64	60
Fixed income (%)	31	30	32
Cash (%)	6	4	6
Real estate (%)	2	2	2
	100	100	100

The Company characterizes inputs used in determining fair value using a hierarchy that prioritizes inputs depending on the degree to which they are observable. Refer to note 22 for details concerning the three levels of the fair value hierarchy.

The fair values of defined benefit plan assets at December 31, 2011 by asset category were as follows:

		Level 1 inputs	Level 2 inputs	Level 3 inputs	Total fair value
Cash		16	–	–	16
Pooled Funds:
	Canadian companies	–	7	–	7
	US companies	–	14	–	14
	International companies	–	142	–	142
	Bonds	–	72	–	72
	International government securities	–	12	–	12
	Real estate	–	–	6	6
		16	247	6	269

60
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

Obligation, Assets and Funded Status

Information about the Company's defined benefit pension plans is as follows:

	2011				2010
	Pension plans grouped by funded status				Pension plans grouped by funded status
	Surplus		Deficit		Surplus		Deficit
Accrued benefit obligation
Accrued benefit obligation, beginning of year	209		139		58		228
Transition of plans from a surplus to a deficit position	(145	)	145		–		–
Transition of plans from a deficit to a surplus position	–		–		121		(121	)
Current service cost	–		28		14		10
Interest cost	3		15		11		6
Actuarial loss	2		39		12		16
Plan participants' contributions	–		1		1		–
Benefits paid	(5	)	(8	)	(6	)	(5	)
Foreign currency translation	(1	)	(4	)	(2	)	4
Other	–		–		–		1
Accrued benefit obligation, end of year	63		355		209		139
Plan assets
Fair value of plan assets, beginning of year	214		43		62		147
Transition of plans from a surplus to a deficit position	(146	)	146		–		–
Transition of plans from a deficit to a surplus position	–		–		112		(112	)
Expected return on plan assets	4		12		12		1
Actuarial gain (loss) on plan assets	–		(15	)	15		–
Employer contributions	–		26		19		12
Plan participants' contributions	–		1		1		–
Benefits paid	(5	)	(8	)	(6	)	(5	)
Foreign currency translation	(3	)	–		(1	)	–
Fair value of plan assets, end of year	64		205		214		43
Funded status – surplus (deficit)1	1		(150	)	5		(96	)

1

The net accrued benefit asset and net accrued benefit liability are included in other assets and other long-term obligations, respectively, on the Consolidated Balance Sheets.

During 2012, the Company expects to make contributions of $27 million to its defined benefit pension plans.

At December 31, 2011, the actuarial net present value of the accrued benefit obligation for non-pension post-employment benefits was $13 million (December 31, 2010 – $11 million; January 1, 2010 – $11 million). Non-pension post-employment benefits include medical, dental and life insurance benefits for current and future Canadian retired employees.

Of the aggregate accrued benefit obligation of $355 million at December 31, 2011, $99 million related to plans that are unfunded. The $78 million deficit of one unfunded plan is secured by letters of credit in the amount of $110 million.

61
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

History of Deficit and Experience Gains and Losses

Years ended December 31	2011		2010
Accrued benefit obligation at December 31	418		348
Fair value of plan assets at December 31	269		257
Net deficit	(149	)	(91	)
Experience loss on plan liabilities	(41	)	(28	)
Actual return less expected return on plan assets	(16	)	16

Net Benefit Expense

The net benefit expense for the pension plans recognized in the Consolidated Statements of Income is as follows:

Years ended December 31	2011		2010
Current service cost – defined benefit	28		24
Interest cost	18		17
Expected return on plan assets	(16	)	(13	)
Other	2		1
Defined benefit plan expense	32		29
Defined contribution plan expense	14		13
Net benefit expense	46		42

The actual return on plan assets in 2011 was $nil (2010 – $29 million).

During the year ended December 31, 2011, the net benefit expense for non-pension post-employment benefits was $1 million (2010 – $1 million).

The pension and non-pension post-employment benefits of key management personnel are disclosed in note 32.

Sensitivity Information

A 1% increase or decrease in the assumed medical cost trend rate would have an immaterial impact on both the accrued benefit at December 31, 2011 and the aggregate of service and interest costs during the year ended December 31, 2011.

62
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

31. SEGMENTED INFORMATION

Talisman's activities are conducted in four geographic segments: North America, the North Sea, Southeast Asia and Other. The North America segment includes operations in Canada and the US. The North Sea segment includes operations and exploration activities in the UK and Norway. The Southeast Asia segment includes operations and exploration activities in Indonesia, Malaysia, Vietnam and Papua New Guinea and operations in Australia/Timor-Leste. The Company also conducts operations in Algeria, operations and exploration activities in Colombia, and exploration activities in Peru, Poland, Sierra Leone and the Kurdistan region of northern Iraq. For ease of reference, the activities in Algeria, Colombia, Peru, Poland, Sierra Leone and the Kurdistan region of northern Iraq are referred to collectively as the Other geographic segment.

All activities relate to the exploration, development, production and transportation of oil, liquids and natural gas. Effective January 1, 2011, the composition of the Company's segments changed such that the activities in the UK and Norway are reported as a single North Sea segment since, in management's judgment, the assets in those locations now share similar economic characteristics. Comparative period balances have been restated accordingly.

	North America1				North Sea2		Southeast Asia3			Other4			Total
(millions of US$)	2011		2010		2011	2010	2011		2010	2011	2010		2011		2010
Revenue
Sales	1,695		1,679		4,074	3,526	1,882		1,476	543	194		8,194		6,875
Other income	63		85		14	21	1		1	–	–		78		107
Total revenue and other income	1,758		1,764		4,088	3,547	1,883		1,477	543	194		8,272		6,982
Segmented expenses
Operating	454		487		1,292	1,096	372		280	72	27		2,190		1,890
Transportation	68		59		84	95	55		60	9	7		216		221
DD&A	852		717		671	766	305		277	121	28		1,949		1,788
Impairment	129		116		113	164	(16	)	21	–	–		226		301
Dry hole	6		(11	)	106	70	127		31	2	23		241		113
Exploration	70		52		40	47	208		116	109	159		427		374
Other	22		(25	)	105	91	17		16	29	5		173		87
Total segmented expenses	1,601		1,395		2,411	2,329	1,068		801	342	249		5,422		4,774
Segmented income (loss) before taxes157			369		1,677	1,218	815		676	201	(55	)	2,850		2,208
Non-segmented expenses
General and administrative													431		371
Finance costs													278		276
Share-based payments (recovery) expense													(310	)	212
Currency translation													(12	)	(15	)
(Gain) loss on held-for-trading financial instruments													210		(87	)
Gain on asset disposals													(192	)	(520	)
Total non-segmented expenses													405		237
Income before taxes													2,445		1,971
Capital expenditures
Exploration	198		216		128	133	257		125	138	119		721		593
Development	1,960		1,481		1,077	984	230		317	157	95		3,424		2,877
Midstream	(3	)	3		–	–	–		–	–	–		(3	)	3
Exploration and development	2,155		1,700		1,205	1,117	487		442	295	214		4,142		3,473
Acquisitions													1,319		1,530
Proceeds on dispositions													(569	)	(2,273	)
Other non-segmented													159		78
Net capital expenditures													5,051		2,808
Property, plant and equipment	6,740		5,351		5,809	5,368	2,501		2,296	859	251		15,909		13,266
Exploration and evaluation assets	2,370		1,886		538	540	498		627	548	389		3,954		3,442
Goodwill	140		149		866	866	149		149	162	–		1,317		1,164
Other	987		2,389		645	920	560		628	788	141		2,980		4,078
Segmented assets	10,237		9,775		7,858	7,694	3,708		3,700	2,357	781		24,160		21,950
Non-segmented assets													66		144
Total assets													24,226		22,094
Decommissioning liabilities	394		210		2,390	2,196	208		189	43	15		3,035		2,610

63
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

1	North America	2011	2010
	Canada	1,127	1,454
	US	631	310
	Total revenue and other income	1,758	1,764
	Canada	3,937	3,920
	US	2,803	1,431
	Property, plant and equipment	6,740	5,351
	Canada	1,207	685
	US	1,163	1,201
	Exploration and evaluation assets	2,370	1,886

2	North Sea	2011	2010
	UK	2,835	2,190
	Norway	1,253	1,357
	Total revenue and other income	4,088	3,547
	UK	3,927	3,763
	Norway	1,882	1,605
	Property, plant and equipment	5,809	5,368
	UK	210	260
	Norway	328	280
	Exploration and evaluation assets	538	540

3	Southeast Asia	2011	2010
	Indonesia	974	839
	Malaysia	565	481
	Vietnam	183	52
	Australia	161	105
	Total revenue and other income	1,883	1,477
	Indonesia	1,023	986
	Malaysia	883	1,053
	Vietnam	297	19
	Papua New Guinea	47	26
	Australia	251	212
	Property, plant and equipment	2,501	2,296
	Indonesia	12	27
	Malaysia	41	29
	Vietnam	5	253
	Papua New Guinea	440	318
	Exploration and evaluation assets	498	627

4	Other	2011	2010
	Algeria	256	194
	Colombia	287	–
	Total revenue and other income	543	194
	Algeria	284	251
	Colombia	575	–
	Property, plant and equipment	859	251
	Colombia	75	49
	Kurdistan	303	239
	Peru	133	98
	Other	37	3
	Exploration and evaluation assets	548	389

64
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

32. RELATED PARTY DISCLOSURES

Corporate Structure

The Consolidated Financial Statements include the financial statements of Talisman Energy Inc. and the directly or indirectly wholly owned subsidiaries (unless otherwise noted) listed in the following table. Transactions between subsidiaries are eliminated on consolidation. There were no related party transactions with entities or other parties outside the consolidated group during the years ended December 31, 2011 and 2010.

Company Name	Jurisdiction
504744 Alberta Ltd.	Alberta
7308051 Canada Ltd.	Canada
Amulet Maritime Limited	England
Equión Energía Limited (49%)	England
FEI Shale GP Inc.	Delaware
FEI Shale L.P.	Delaware
FEX GP Inc.	Delaware
FEX L.P.	Delaware
Foreland Oil Limited	British Virgin Islands
Fortuna (US) Investments Limited	Delaware
Fortuna (US) L.P.	Delaware
Fortuna Energy Holding Inc.	Delaware
Fortuna Finance Corporation	Barbados
Fortuna International (Barbados) Inc.	Barbados
Fortuna International Petroleum Corporation	Barbados
Fortuna Resources (Sunda) Limited	British Virgin Islands
FUSI GP Inc.	Delaware
Honner Limited	Papua New Guinea
International Petroleum Corporation	Canada
Keelwood Limited	England
Oleum Insurance Company Limited	Barbados
Paladin Resources Limited	Scotland
Papua Petroleum Pty Ltd.	Australia
Papua Petroleum (PNG) Ltd.	Papua New Guinea
Pittencrieff America Inc.	Nevada
Pittencrieff Resources Inc.	Nevada
Potts Limited	Papua New Guinea
Red Sea Oil Corporation	Canada
Rigel Petroleum (NI) Limited	Northern Ireland
Rift Oil Limited	England
Rigel Petroleum UK Limited	England
Rowell Limited	Papua New Guinea
Talisman (Algeria) B.V.	Netherlands
Talisman (Asia) Ltd.	Alberta
Talisman (Block K 39) B.V.	Netherlands
Talisman (Block K 44) B.V.	Netherlands
Talisman (Block K 9) B.V.	Netherlands
Talisman (Colombia) Oil & Gas Ltd.	Canada
Talisman (Corridor) Ltd.	Barbados
Talisman (Jambi) Ltd.	Alberta
Talisman (Jambi Merang) Limited	England
Talisman (Masalima) Ltd.	Alberta
Talisman (Ogan Komering) Ltd.	Alberta
Talisman (Pasangkayu) Ltd.	Alberta
Talisman (Sageri) Ltd.	Alberta
Talisman (Sumatra) Ltd.	Canada
Talisman (Tunisia) Inc.	Alberta
Talisman (Vietnam 133 & 134) Ltd.	Alberta
Talisman (Vietnam 15-2/01) Ltd.	Alberta
Talisman (Vietnam 46/02) Ltd.	Alberta
Talisman Andaman B.V.	Netherlands
Talisman Australasia Pty Ltd.	Australia
Talisman Caño Sur B.V.	Netherlands
Talisman Colombia Holdco Limited	England
Talisman Energia Brasil Ltda	Brazil
Talisman Energy (Sahara) B.V.	Netherlands
Talisman Energy (UK) Limited	England
Talisman Energy (UK) Pension & Life Scheme Ltd.	England
Talisman Energy Alpha Limited	England
Talisman Energy Beta Limited	England
Talisman Energy Canada	Alberta
Talisman Energy Danmark AS	Norway
Talisman Energy DL Limited	England
Talisman Energy Holdings Ltd.	Alberta
Talisman Energy Investments Norge AS	Norway
Talisman Energy Kimu Alpha Pty Ltd.	Australia
Talisman Energy Kimu Beta Pty Limited	Papua New Guinea
Talisman Energy Niugini Limited	Papua New Guinea
Talisman Energy Norge AS	Norway
Talisman Energy NS Limited	England
Talisman Energy Poland B.V.	Netherlands
Talisman Energy Polska sp. z o.o.	Poland
Talisman Energy Services Inc.	Delaware
Talisman Energy Tangguh B.V.	Netherlands
Talisman Energy USA Inc.	Delaware
Talisman Finance (UK) Limited	England
Talisman Indonesia Ltd.	Alberta
Talisman International (Barbados) Inc.	Barbados
Talisman International Business Corporation	Barbados
Talisman International Holdings B.V.	Netherlands
Talisman K Holdings B.V.	Netherlands
Talisman LNS Limited	England
Talisman Malaysia (PM3) Limited	Barbados
Talisman Malaysia Holdings Limited	Barbados
Talisman Malaysia Limited	Barbados
Talisman Niugini Pty Ltd	Australia
Talisman North Sea Limited	England
Talisman Oil & Gas (Australia) Pty Limited	Australia
Talisman Oil Limited	Barbados
Talisman Oil Trading Limited	England
Talisman Peru B.V.	Netherlands
Talisman Production Norge AS	Norway
Talisman Resources (Bahamas) Limited	Bahamas
Talisman Resources (JPDA 06-105) Pty Limited	Australia
Talisman Resources Norge AS	Norway
Talisman Resources (North West Java) Limited	England
Talisman RTC Sdn.Bhd.	Malaysia
Talisman Sadang B.V.	Netherlands
Talisman Sasol Montney Partnership (50%)	British Columbia
Talisman SEA Pte. Ltd.	Singapore
Talisman Sierra Leone B.V.	Netherlands
Talisman South Mandar B.V.	Netherlands
Talisman South Sageri B.V.	Netherlands
Talisman Transgasindo Ltd.	Barbados
Talisman Transportation (UT) Limited	England
Talisman Trustees (UK) Limited	England
Talisman UK (South East Sumatra) Limited	England
Talisman Vietnam Limited	Barbados
Talisman Vietnam 05-2/10 B.V.	Netherlands
Talisman Vietnam 135-136 B.V.	Netherlands
Talisman Wiriagar Overseas Limited	British Virgin Islands
Teakan Investments Limited	Bermuda
TE Capital S.ar.l	Luxembourg
TE Finance S.ar.l	Luxembourg
TE Global Services Inc.	Delaware
TE Holding S.ar.l	Luxembourg
TE NOK S.ar.l.	Luxembourg
TE Resources S.ar.l	Luxembourg
TE Transworld S.ar.l	Luxembourg
TEGSI (UK) Limited	England
Thang Long Joint Operating Company (60%)	Vietnam
TLM Capital Finance ULC	Nova Scotia
TLM Capital Management Hungary Limited Liability Company	Hungary
TLM Finance Corp.	Alberta
Transasia Pipeline Company Pvt. Ltd. (15%)	Mauritius
Trans Mediterranean Oil Company Ltd.	British Columbia
Transworld Petroleum (U.K.) Limited	England
Triad Minerals Inc.	Canada
Triad Oil Manitoba Ltd.	Manitoba
Truong Son Joint Operating Company (30%)	Vietnam
TV 05-2/10 Holdings B.V.	Netherlands
TV 135-136 Holdings B.V.	Netherlands

65
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

Key Management Personnel Compensation

The compensation of key management personnel, consisting of the Company's directors and executive officers, is as follows:

Years ended December 31	2011	2010
Short-term benefits	15	14
Pension and other post-employment benefits	5	4
Termination benefits	4	–
Share-based payments	11	15
	35	33

Short-term benefits comprise salaries and fees, annual bonuses, cash, vehicle and other benefits.

The amount of pension benefits reported represents the attributable amount of the net benefit expense of the plans in which the key management personnel participate.

Termination benefits comprise amounts paid and accrued.

The share-based payments amount reported represents the cost to the Company of key management's participation in share-based payment plans, as measured by the fair value that the individual received based on the value of the shares exercised in the current period.

66
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

Supplementary Oil and Gas Information

(unaudited)

The supplemental data on the Company's oil and gas activities was prepared in accordance with the FASB standardExtractive Activities – Oil & Gas. Activities not directly associated with conventional crude oil and natural gas production are excluded from all aspects of this supplementary oil and gas information. Comparable information prepared in accordance with Canadian disclosure requirements (National Instrument 51-101 of the Canadian Securities Administrators) is contained in Appendix A of Talisman's Annual Information Form.

Results of Operations from Oil and Gas Producing Activities

		North America				North Sea		Southeast Asia
Years ended December 31 (millions of $)		Canada		US		UK	Norway	Indonesia	Other SEA2		Other3		Total
2011
Net oil and gas revenue derived from proved reserves1		1,040		633		2,823	1,252	1,126	756		543		8,173
Less:	Production costs	328		121		921	367	146	226		72		2,181
	Transportation	35		33		37	47	55	–		9		216
	Exploration and dry hole expense	54		29		64	81	114	218		107		667
	Depreciation, depletion and amortization	581		352		492	354	73	217		120		2,189
	Tax expense	12		38		847	329	365	100		91		1,782
Results of operations		30		60		462	74	373	(5	)	144		1,138
2010
Net oil and gas revenue derived from proved reserves1		1,365		304		2,172	1,354	852	624		194		6,865
Less:	Production costs	421		59		793	296	127	153		27		1,876
	Transportation	48		11		33	62	60	–		7		221
	Exploration and dry hole expense	43		2		76	41	55	90		179		486
	Depreciation, depletion and amortization	562		221		553	440	50	247		29		2,102
	Tax expense	75		4		396	401	269	80		15		1,240
Results of operations		216		7		321	114	291	54		(63	)	940
20094
Net oil and gas revenue derived from proved reserves1		1,667		126		2,183	986	700	620		265		6,547
Less:	Production costs	555		30		872	285	104	151		48		2,045
	Transportation	55		4		46	54	55	–		8		222
	Exploration and dry hole expense	222		53		48	92	26	302		142		885
	Depreciation, depletion and amortization	894		151		837	411	51	331		48		2,723
	Tax expense (recovery)	(15	)	(43	)	255	112	219	–		33		561
Results of operations		(44	)	(69	)	125	32	245	(164	)	(14	)	111

1

Net oil and gas revenue derived from proved reserves is net of applicable royalties.

2

Other Southeast Asia includes operations in Malaysia, Vietnam, Australia/Timor-Leste and Papua New Guinea.

3

The reporting segment entitled "Other" includes Algeria, Colombia (Equión and Talisman's other Colombia assets), Peru, Poland, Sierra Leone, the Kurdistan region of northern Iraq and, prior to their sales in 2010 and 2009, respectively, Tunisia and Trinidad and Tobago.

4

2011 and 2010 amounts are reported in US$ and are in accordance with IFRS; 2009 amounts are reported in Canadian dollars and are in accordance with Canadian GAAP.

67
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

Capitalized Costs Relating to Oil and Gas Activities

		North America		North Sea		Southeast Asia
Years ended December 31 (millions of $)		Canada	US	UK	Norway	Indonesia	Other SEA1	Other2	Total
2011
Proved properties		7,037	3,798	8,730	3,890	1,415	3,110	1,323	29,303
Unproved properties		1,196	1,165	195	276	192	259	389	3,672
Incomplete wells and facilities		8	–	15	52	1	45	161	282
		8,241	4,963	8,940	4,218	1,608	3,414	1,873	33,257
Less:	Accumulated depreciation, depletion and amortization	3,660	1,040	4,806	2,012	577	1,463	476	14,034
Net capitalized costs		4,581	3,923	4,134	2,206	1,031	1,951	1,397	19,223
2010
Proved properties		6,554	2,113	8,092	3,280	1,358	2,556	611	24,564
Unproved properties		669	1,202	253	258	137	574	346	3,439
Incomplete wells and facilities		15	–	28	16	16	27	43	145
		7,238	3,315	8,373	3,554	1,511	3,157	1,000	28,148
Less:	Accumulated depreciation, depletion and amortization	3,152	693	4,347	1,669	499	1,251	364	11,975
Net capitalized costs		4,086	2,622	4,026	1,885	1,012	1,906	636	16,173
20093
Proved properties		10,933	1,351	8,603	3,313	1,275	2,635	410	28,520
Unproved properties		856	410	435	136	70	490	552	2,949
Incomplete wells and facilities		30	10	9	7	2	56	78	192
		11,819	1,771	9,047	3,456	1,347	3,181	1,040	31,661
Less:	Accumulated depreciation, depletion and amortization	4,891	608	4,498	1,414	488	1,176	203	13,278
Net capitalized costs		6,928	1,163	4,549	2,042	859	2,005	837	18,383

1

Other Southeast Asia includes operations in Malaysia, Vietnam, Australia/Timor-Leste and Papua New Guinea.

2

The reporting segment entitled "Other" includes Algeria, Colombia (Equión and Talisman's other Colombia assets), Peru, Poland, Sierra Leone, the Kurdistan region of northern Iraq and, prior to their sale in 2010 and 2009, respectively, Tunisia and Trinidad and Tobago.

3

2011 and 2010 amounts are reported in US$ and are in accordance with IFRS; 2009 amounts are reported in Canadian dollars and are in accordance with Canadian GAAP.

68
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

Costs Incurred in Oil and Gas Activities

		North America				North Sea		Southeast Asia
Years ended December 31 (millions of $)		Canada		US		UK	Norway	Indonesia	Other SEA1	Other2		Total
2011
Property acquisition costs
	Proved properties	3		208		–	15	–	11	570		807
	Unproved properties	590		51		–	–	–	26	17		684
Exploration costs		93		14		52	116	105	349	248		977
Development costs		528		1,427		554	520	129	96	157		3,411
Decommissioning costs		177		35		34	95	13	3	(2	)	355
Total costs incurred		1,391		1,735		640	746	247	485	990		6,234
2010
Property acquisition costs
	Proved	5		133		–	–	117	–	–		255
	Unproved	3		1,029		–	191	54	39	52		1,368
Exploration costs		199		19		93	87	72	163	234		867
Development costs		581		909		497	485	74	250	100		2,896
Decommissioning costs		66		(11	)	470	18	6	17	7		573
Total costs incurred		854		2,079		1,060	781	323	469	393		5,959
20093
Property acquisition costs
	Proved	147		1		–	–	2	–	–		150
	Unproved	394		392		–	–	8	343	47		1,184
Exploration costs		339		188		149	157	28	195	217		1,273
Development costs		436		120		523	578	43	385	59		2,144
Decommissioning costs		(17	)	4		208	41	10	5	4		255
Total costs incurred		1,299		705		880	776	91	928	327		5,006

1

Other Southeast Asia includes operations in Malaysia, Vietnam, Australia/Timor-Leste and Papua New Guinea.

2

The reporting segment entitled "Other" includes Algeria, Colombia (Equión and Talisman's other Colombia assets), Peru, Poland, Sierra Leone, the Kurdistan region of northern Iraq and, prior to their sale in 2010 and 2009, respectively, Tunisia and Trinidad and Tobago.

3

2011 and 2010 amounts are reported in US$ and are in accordance with IFRS; 2009 amounts are reported in Canadian dollars and are in accordance with Canadian GAAP.

69
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

Standardized Measure of Discounted Future Net Cash Flows from Proved Reserves

Future net cash flows were calculated by applying the prescribed average annual prices to the Company's estimated future production of proved reserves and deducting estimates of future development, decommissioning, production and transportation costs, and income taxes. Future costs have been estimated based on existing economic and operating conditions. Future income taxes have been estimated based on statutory tax rates enacted at year-end using existing tax and cost pools. The present values of the estimated future cash flows were determined by applying a 10% discount rate prescribed by the US Financial Accounting Standards Board.

In order to increase the comparability between companies, the standardized measure of discounted future net cash flows necessarily employs uniform assumptions that do not necessarily reflect management's best estimate of future events and anticipated outcomes. There are numerous uncertainties inherent in estimating quantities of proved reserves and projecting future rates of production and timing of development expenditures. Accordingly, the Company does not believe that the standardized measure of discounted future net cash flows will be representative of actual future net cash flows and should not be considered to represent the fair market value of the oil and gas properties. Actual future net cash flows will differ significantly from estimates due to, but not limited to, the following:

•

production rates will differ from those estimated both in terms of timing and amount. For example, future production may include significant additional volumes from unproved reserves;

•

future prices and economic conditions will differ from those used in the preparation of the estimates;

•

future production and development costs will be determined by future events and will differ from those used in the preparation of the estimates; and

•

estimated income taxes will differ in terms of amounts and timing dependent on the above factors, changes in enacted rates and the impact of future expenditures on unproved properties.

70
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

The standardized measure of discounted future net cash flows was prepared using the following prices:

	2011	2010	2009
Oil and Liquids ($/bbl)
Canada1	76.79	62.25	48.43
US	74.91	57.66	–
UK	111.01	78.97	60.18
Norway	108.34	78.21	59.61
Indonesia	111.89	78.71	61.09
Other Southeast Asia2	112.11	75.83	59.56
Other3	108.69	78.10	59.30
Total	104.26	75.79	57.82
Natural Gas ($/mcf)
Canada	3.92	4.05	3.53
US	4.19	4.63	3.94
UK	6.51	4.57	3.68
Norway	7.25	4.95	5.18
Indonesia	7.64	6.61	4.78
Other Southeast Asia2	7.61	5.65	4.44
Other3	3.65	–	6.34
Total	5.27	5.22	4.12

1

The price for Talisman's oil in North America is lower than other oil prices as it is a heavier grade.

2

Other Southeast Asia includes Malaysia, Vietnam and Australia/Timor-Leste.

3

Other includes Algeria, Colombia, and prior to their sale in 2010 and 2009, respectively, Tunisia and Trinidad and Tobago.

In order to derive the prices in the cash flow, the following benchmark prices and exchange rates were used:

	2011	2010	2009
WTI ($/bbl)	96.19	79.42	61.18
Dated Brent ($/bbl)	110.96	79.02	59.91
HH gas ($/mmbtu)	4.12	4.37	3.82
AECO-C (C$/gj)	3.57	3.82	3.58
US$/C$	1.01	0.97	0.87
US$/UK£	1.61	1.60	1.79

71
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

Discounted Future Net Cash Flows from Proved Reserves

		North America				North Sea				Southeast Asia
Years ended December 31 (millions of $)		Canada		US		UK		Norway		Indonesia		Other SEA2		Other3		Total
2011
Future cash inflows1		9,951		9,775		27,326		6,195		9,864		4,711		3,320		71,142
Future costs
	Transportation	(315	)	(480	)	(414	)	(150	)	(540	)	–		(75	)	(1,974	)
	Production	(3,576	)	(1,984	)	(14,327	)	(2,811	)	(1,207	)	(1,526	)	(479	)	(25,910	)
	Development and site restoration	(1,490	)	(2,336	)	(6,491	)	(1,276	)	(805	)	(779	)	(364	)	(13,541	)
Future costs		(5,381	)	(4,800	)	(21,232	)	(4,237	)	(2,552	)	(2,305	)	(918	)	(41,425	)
Future inflows before income taxes		4,570		4,975		6,094		1,958		7,312		2,406		2,402		29,717
Future income & production revenue taxes		(809	)	(358	)	(4,447	)	(342	)	(3,061	)	(784	)	(764	)	(10,565	)
Net cash flows		3,761		4,617		1,647		1,616		4,251		1,622		1,638		19,152
Less 10% annual discount for estimated timing of cash flows		(1,516	)	(2,144	)	(236	)	(318	)	(1,551	)	(365	)	(448	)	(6,578	)
Discounted cash flows		2,245		2,473		1,411		1,298		2,700		1,257		1,190		12,574
2010
Future cash inflows1		10,027		6,029		20,952		4,551		9,612		3,165		1,479		55,815
Future costs
	Transportation	(381	)	(189	)	(398	)	(166	)	(794	)	–		(48	)	(1,976	)
	Production	(3,801	)	(1,014	)	(11,037	)	(2,123	)	(1,103	)	(1,143	)	(268	)	(20,489	)
	Development and site restoration	(1,697	)	(1,289	)	(4,970	)	(852	)	(830	)	(474	)	(121	)	(10,233	)
Future costs		(5,879	)	(2,492	)	(16,405	)	(3,141	)	(2,727	)	(1,617	)	(437	)	(32,698	)
Future inflows before income taxes		4,148		3,537		4,547		1,410		6,885		1,548		1,042		23,117
Future income & production revenue taxes		(1,003	)	(437	)	(2,787	)	(45	)	(2,845	)	(329	)	(347	)	(7,793	)
Net cash flows		3,145		3,100		1,760		1,365		4,040		1,219		695		15,324
Less 10% annual discount for estimated timing of cash flows		(1,258	)	(1,588	)	(18	)	(202	)	(1,709	)	(222	)	(219	)	(5,216	)
Discounted cash flows		1,887		1,512		1,742		1,163		2,331		997		476		10,108
2009
Future cash inflows1		11,604		2,242		16,101		3,814		7,230		2,807		1,265		45,063
Future costs
	Transportation	(410	)	(8	)	(322	)	(87	)	(727	)	–		(53	)	(1,607	)
	Production	(4,432	)	(489	)	(10,031	)	(1,858	)	(1,068	)	(1,052	)	(307	)	(19,237	)
	Development and site restoration	(2,033	)	(630	)	(4,767	)	(947	)	(572	)	(666	)	(199	)	(9,814	)
Future costs		(6,875	)	(1,127	)	(15,120	)	(2,892	)	(2,367	)	(1,718	)	(559	)	(30,658	)
Future inflows before income taxes		4,729		1,115		981		922		4,863		1,089		706		14,405
Future income & production revenue taxes		(873	)	–		(444	)	273		(2,011	)	(133	)	(240	)	(3,428	)
Net cash flows		3,856		1,115		537		1,195		2,852		956		466		10,977
Less 10% annual discount for estimated timing of cash flows		(1,671	)	(730	)	377		(221	)	(1,251	)	(195	)	(173	)	(3,864	)
Discounted cash flows		2,185		385		914		974		1,601		761		293		7,113

1

Net oil and gas revenue derived from proved reserves is net of applicable royalties.

2

Other Southeast Asia includes Malaysia, Vietnam and Australia/Timor-Leste.

3

Other includes Algeria and Colombia, and prior to their sale in 2010 and 2009, respectively, Tunisia and Trinidad and Tobago.

72
TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

Principal Sources of Changes in Discounted Cash Flows

Years ended December 31 (millions of $)	2011		2010		2009
Sales of oil & gas produced net of production costs	(5,776	)	(4,768	)	(3,748	)
Net change in prices	8,351		5,416		4,292
Net change in transportation costs	62		(197	)	195
Net changes in production costs	(2,755	)	391		(619	)
Net changes in future development & site restoration costs	(2,052	)	(27	)	(622	)
Development costs incurred during year	1,560		1,603		1,468
Extensions, discoveries and improved recovery	2,132		1,990		930
Revisions of previous reserve estimates	513		679		356
Net purchases	1,039		189		15
Net sales of reserves in place	(75	)	(893	)	(707	)
Accretion of discount	1,556		1,099		729
Net change in taxes	(1,847	)	(2,453	)	(1,278	)
Other	(242	)	(34	)	292
Net change	2,466		(2,995	)	1,303

Continuity of Net Proved Reserves¹

	Canada		US		UK		Norway		Indonesia		Other Southeast Asia		Latin America		Other		Total
Oil and Liquids (mmbbls)
Total Proved
Proved reserves at December 31, 2008	131.5		–		215.4		56.6		16.1		27.1		–		26.3		473.0
Discoveries, additions and extensions	4.0		–		5.2		1.1		(0.5	)	5.3		–		6.5		21.6
Purchase of reserves	0.1		–		–		–		0.7		–		–		–		0.8
Sale of reserves	(39.0	)	–		(0.2	)	(4.0	)	–		–		–		(3.7	)	(46.9	)
Net revisions and transfers	2.7		–		76.8		14.5		(1.8	)	3.8		–		(4.7	)	91.3
2009 Production	(9.9	)	–		(31.1	)	(12.3	)	(1.8	)	(7.6	)	–		(3.4	)	(66.1	)
Proved reserves at December 31, 2009	89.4		–		266.1		55.9		12.7		28.6		–		21.0		473.7
Discoveries, additions and extensions	4.7		2.5		6.8		9.7		1.4		2.5		–		1.0		28.6
Purchase of reserves	–		0.9		–		–		1.5		–		–		–		2.4
Sale of reserves	(15.1	)	(0.2	)	–		–		–		–		–		(0.5	)	(15.8	)
Net revisions and transfers	(2.4	)	0.1		18.0		1.8		(0.8	)	0.6		–		(0.2	)	17.1
2010 Production	(6.6	)	(0.1	)	(27.0	)	(14.2	)	(2.0	)	(6.1	)	–		(2.4	)	(58.4	)
Proved reserves at December 31, 2010	70.0		3.2		263.9		53.2		12.8		25.6		–		18.9		447.6
Discoveries, additions and extensions	2.1		13.7		(4.1	)	2.3		0.4		9.7		–		(0.9	)	23.2
Purchase of reserves	–		0.6		–		–		–		–		15.1		–		15.7
Sale of reserves	(0.3	)	–		–		–		–		–		–		–		(0.3	)
Net revisions and transfers	(3.5	)	0.3		10.4		7.2		4.1		0.5		–		(0.1	)	18.9
2011 Production	(6.3	)	(0.5	)	(25.2	)	(10.0	)	(1.8	)	(5.5	)	(2.3	)	(2.4	)	(54.0	)
Proved reserves at December 31, 2011	62.0		17.3		245.0		52.7		15.5		30.3		12.8		15.5		451.1

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TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

Proved developed
December 31, 2008	122.0		–		172.0		24.8		13.5		17.7		–		20.2		370.2
December 31, 2009	82.1		–		196.0		26.1		11.0		21.2		–		13.0		349.4
December 31, 2010	65.6		0.7		210.6		21.6		8.6		18.6		–		9.8		335.5
December 31, 2011	59.9		7.3		201.9		17.0		9.9		19.0		6.7		9.0		330.7
Natural Gas (bcf)
Total Proved
Proved reserves at December 31, 2008	2,169.2		119.2		95.6		101.9		1,407.7		289.7		–		222.8		4,406.1
Discoveries, additions and extensions	185.6		474.6		–		(0.5	)	62.8		25.3		–		–		747.8
Purchase of reserves	14.2		–		–		–		7.5		–		–		–		21.7
Sale of reserves	(115.8	)	(1.4	)	(67.0	)	–		–		–		–		(220.0	)	(404.2	)
Net revisions and transfers	28.2		–		2.9		12.7		(19.5	)	(33.3	)	–		(1.0	)	(10.0	)
2009 Production	(238.4	)	(26.2	)	(7.0	)	(21.1	)	(84.4	)	(20.3	)	–		(0.1	)	(397.5	)
Proved reserves at December 31, 2009	2,043.0		566.2		24.5		93.0		1,374.1		261.4		–		1.7		4,363.9
Discoveries, additions and extensions	263.7		738.6		0.1		6.7		8.1		(22.6	)	–		–		994.6
Purchase of reserves	–		17.5		–		–		42.4		–		–		–		59.9
Sale of reserves	(772.5	)	(5.8	)	–		–		–		–		–		(1.6	)	(779.9	)
Net revisions and transfers	11.2		10.3		4.9		12.1		(57.2	)	14.3		–		(0.1	)	(4.5	)
2010 Production	(190.9	)	(68.9	)	(5.7	)	(32.2	)	(98.2	)	(27.3	)	–		–		(423.2	)
Proved reserves at December 31, 2010	1,354.5		1,257.9		23.8		79.6		1,269.2		225.8		–		–		4,210.8
Discoveries, additions and extensions	251.1		799.4		(0.2	)	4.6		36.1		9.2		–		–		1,100.2
Purchase of reserves	–		3.6		–		–		–		–		93.5		–		97.1
Sale of reserves	(165.5	)	–		–		–		–		–		–		–		(165.5	)
Net revisions and transfers	3.5		66.8		(1.4	)	(1.3	)	(94.1	)	(13.0	)	0.2		–		(39.3	)
2011 Production	(150.9	)	(141.9	)	(3.5	)	(15.3	)	(104.0	)	(33.2	)	(10.2	)	–		(459.0	)
Proved reserves at December 31, 2011	1,292.7		1,985.8		18.7		67.6		1,107.2		188.8		83.5		–		4,744.3
Proved developed
December 31, 2008	1,785.8		101.8		65.5		99.0		1,022.2		149.0		–		1.2		3,224.5
December 31, 2009	1,663.5		171.1		22.4		91.2		915.2		225.5		–		0.8		3,089.7
December 31, 2010	1,011.4		584.9		22.0		73.3		763.7		187.2		–		–		2,642.5
December 31, 2011	936.5		814.7		18.2		63.1		688.5		149.7		62.3		–		2,733.0

1

Talisman's estimates of its reserves as at December 31, 2011, December 31, 2010 and December 31, 2009 are based on average pricing methodology. Talisman's estimates of its reserves as at December 31, 2008 were prepared on a single-day end-of-year price basis (using existing economical and operating conditions). For definitions of reserves, see notes found on page 58 of Talisman's Annual Report.

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TALISMAN ENERGYCONSOLIDATED FINANCIAL STATEMENTS 2011

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