Consolidated

C Financial Sttatements
Ma
anagement’s
s Responsibiility for Finan
ncial Stateme
ents
Thhe Managementt of Advantagee Oil & Gas Ltd. L (the “Corp poration”) is rresponsible forr the preparatio
on and presenttation of the
connsolidated finan
ncial statementts together with h all operationaal and other finnancial inform
mation containedd in the annuaal report. The
con ncial statements have been preepared by Manaagement in accoordance with Innternational Fin
nsolidated finan nancial Reportiing Standards
as issued by the International Accounting
A Staandards Board and utilize thee best estimatees and careful jjudgments of M Management,
whhere appropriatte. Operationall and other fin nancial informaation containedd throughout tthe annual rep port is consisteent with that
pro
ovided in the coonsolidated finaancial statemennts.
Maanagement has developed and maintains a system of internaal controls desiggned to providee reasonable asssurance that alll transactions
aree accurately and reliably recorded, that the consolidated financial
f statem
ments accuratelyly report the CCorporation’s ooperating and
fin
nancial results within
w n presented is accurate, and
acceptable limits of matteriality, that alll other operatioonal and financcial information
thaat the Corporation’s assets are properly safeguuarded.
Thhe Audit Comm mittee, compriseed of non-manaagement directo ors, acts on behhalf of the Boarrd of Directors to ensure that Management
fullfills its financial reporting an nd internal conntrol responsibiilities. The Auddit Committee is responsible for meeting rregularly with
Maanagement, the external audito ors, and the intternal auditors to discuss inteernal controls oover financial reeporting processes, auditing
maatters and various aspects off financial reporting. The Audit Committeee reviewed thhe consolidatedd financial stattements with
Maanagement and the external au uditors, and reccommended app proval to the BBoard of Directtors. The Boardd of Directors h has approved
theese consolidated d financial stateements.
PriicewaterhouseCCoopers LLP, ana independent firm of Charteered Accountannts, appointed bby the sharehollders as the extternal auditor
of the Corporatioon, has audited the consolidatted statement of
o financial possition as at Deccember 31, 20111, December 31, 2010 and
Jan t consolidateed statement off comprehensivve income (losss), changes in shhareholders’ eqquity and cash flows for the
nuary 1, 2010, the
yeaars ended December 31, 20111 and 2010. The T external auuditors conduccted their auditts in accordance with Canaddian generally
acccepted auditing standards and have unlimited
d and unrestricted access to thee Audit Commmittee.

An
ndy J. Mah Kelly
K I. Drader
Preesident and CE
EO CFO
C
Maarch 23, 2012

Advantage Oil & Gas Ltd

d. - 1
Ma anagement’s s Report on Internal Conttrol over Fina ancial Reporrting
Thhe Managementt of Advantage Oil & Gas Ltd d. (the “Corporation”) is respoonsible for estaablishing and m maintaining adeqquate internal
con ncial reporting for the Corporation as such teerm is defined iin Rule 13a-15((f) of the Securrities Exchange Act of 1934,
ntrol over finan
as amended. Und der the supervission of our Chief Executive Officer
O and Chieef Financial Offficer, we have conducted an evaluation of
thee effectiveness of our internall control over financial
f reportting based on tthe Internal Coontrol-Integrateed Framework iissued by the
Coommittee of Spo onsoring Organ nizations of thee Treadway Com mmission (“CO OSO”). Based oon our assessmeent, we have co oncluded that
as of December 31,3 2011, our internal control over
o financial reeporting was efffective.
Because of inhereent limitations,, internal contrrol over financiial reporting m may not prevennt or detect missstatements andd even those
sysstems determinned to be effective can provid de only reasonaable assurance with respect tto the financiall statement preeparation and
ns of any evaluaation of effectivveness to futuree periods are suubject to the risk that controls may become
preesentation. Furtther, projection
inaadequate becausse of changes inn conditions, orr that the degreee of compliancce with the poliicies or proceduures may deterio orate.
PriicewaterhouseC Coopers LLP, the Corporation n’s independentt firm of Charttered Accountaants, was appoiinted by the shaareholders to
auddit and providee an independen nt opinion on both
b the conso olidated financiaal statements annd the Corporaation’s internal control over
fin
nancial reporting as at Decem mber 31, 2011, as stated in theeir Auditor’s R Report. PricewaaterhouseCoopers LLP has provided such
opiinion.

An
ndy J. Mah Kelly
K I. Drader
Preesident and CE
EO CFO
C
Maarch 23, 2012

Advantage Oil & Gas Ltd

d. - 2
Independent Auditor’s Report

To the Shareholders of Advantage Oil & Gas Ltd.

We have completed an integrated audit of Advantage Oil & Gas Ltd.’s 2011 consolidated financial statements and its
internal control over financial reporting as at December 31, 2011 and an audit of its 2010 consolidated financial
statements. Our opinions, based on our audits, are presented below.

Report on the consolidated financial statements

We have audited the accompanying consolidated financial statements of Advantage Oil & Gas Ltd., which comprise
the consolidated statement of financial position as at December 31, 2011, December 31, 2010 and January 1, 2010 and
the consolidated statements of comprehensive income (loss), changes in shareholders’ equity, and cash flows for the
years ended December 31, 2011 and 2010, and the related notes, which comprise 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.

Auditor’s 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 plan and perform an
audit to obtain reasonable assurance about whether the consolidated financial statements are free from material
misstatement. Canadian generally accepted auditing standards require that we comply with ethical requirements.

An audit involves performing procedures to obtain audit evidence, on a test basis, about the amounts and disclosures
in the consolidated financial statements. The procedures selected depend on the auditor’s 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 auditor considers internal control relevant to the company’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 evaluating the appropriateness of accounting principles and
policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements.

Advantage Oil & Gas Ltd. - 3

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

Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of
Advantage Oil & Gas Ltd. as at December 31, 2011, December 31, 2010, and January 1, 2010 and its financial
performance and its 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.

Report on internal control over financial reporting

We have also audited Advantage Oil & Gas Ltd.’s internal control over financial reporting as at December 31, 2011
based on criteria established in Internal Control - Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).

Management’s responsibility for internal control over financial reporting

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’s Report
on Internal Control over Financial Reporting.

Auditor’s responsibility
Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our
audit. We conducted our audit of internal control over financial reporting 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.

An audit of internal control over financial reporting includes 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 consider
necessary in the circumstances.

We believe that our audit provides a reasonable basis for our audit opinion on the company’s internal control over
financial reporting.

Definition of internal control over financial reporting

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: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii) 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 (iii) 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.

Advantage Oil & Gas Ltd. - 4

In
nherent limiitations
Beecause of its in
nherent limita
ations, intern
nal control oveer financial reeporting may not prevent o or detect missstatements.
Alsso, projection
ns of any evalu
uation of effecctiveness to fu
uture periodss are subject tto the risk thaat controls maay become
inaadequate beca ause of chang
ges in conditioons or that the degree of co ompliance witth the policies or procedurres may
deeteriorate.

Oppinion
In our opinion, Advantage Oil
O & Gas Ltd. maintained, in i all materiaal respects, efffective internal control oveer financial
rep
porting as at December
D 31,, 2011 based on
o criteria esttablished in In
nternal Contrrol - Integrateed Framework k issued by
CO
OSO.

Ch
hartered Ac ccountants
Ca
algary, Albe erta
Maarch 23, 2012
2

Advantage Oil & Gas Ltd

d. - 5
Co
onsolidated Statement of Fin
nancial Positio
on

(th
housands of Canadian dollars) Notes December 3
31, 2011 Decem
mber 31, 2010 J
January 1, 2010
(n
note 25) (note 25)
AS
SSETS
Cu
urrent assets
Traade and other receeivables 7 $ 42,344 $ 42,276 $ 54,531
Preepaid expenses an
nd deposits 6,045 6,488 9,936
Deerivative asset 6 - 25,157 30,829
To
otal current assets 48,389 73,921 95,296

No
on-current assetss
Deerivative asset 6 - - 323
Ex
xploration and evaaluation assets 8 7,730 8,262 6,923
operty, plant and equipment
Pro 9 1,8
877,287 1,883,762 1,824,699
Deeferred income tax
x asset 22 39,383 - -
To
otal non-current asssets 1,9924,400 1,892,024 1,831,945

To
otal assets $ 1,9972,789 $ 1,965,945 $ 1,927,241

LIABILITIES
Cu
urrent liabilities
Traade and other accrrued liabilities $ 1
138,119 $ 112,457 $ 113,062
Caapital lease obligatiions - 759 1,375
Co
onvertible debentu
ures 12 - 62,013 69,927
Deerivative liability 6 2,738 2,367 12,755
Otther liability 14 908 - -
To
otal current liabilitiies 1141,765 177,596 197,119

on-current liabil ities

No
Deerivative liability 6 - 177 1,165
Caapital lease obligatiions - - 759
Baank indebtedness 11 2
232,684 288,852 247,784
Co
onvertible debentu
ures 12 75,890 72,811 131,561
Deecommissioning liiability 13 2
253,796 172,130 169,665
Deeferred income tax
x liability 22 29,723 40,231 22,115
Otther liability 14 - 1,835 3,431
To
otal non-current liaabilities 5592,093 576,036 576,480

To
otal liabilities 7733,858 753,632 773,599

SH
HAREHOLDER
RS' EQUITY
Sh are capital 15 2,2
214,784 2,199,491 2,190,409
Co
onvertible debentu
ures equity compo
onent 12 8,348 8,348 8,348
Co
ontributed surpluss 5 71,762 14,783 6,114
Deeficit (1,1163,081) (1,010,309) (1,051,229)
To
otal shareholders' equity
e attributablee to Advantage sh
hareholders 1,,131,813 1,212,313 1,153,642
No
on-controlling interest 1
107,118 - -
To
otal shareholders' equity
e 238,931
1,2 1,212,313 1,153,642
To
otal liabilities and shareholders'
s equiity $ 1,9972,789 $ 1,965,945 $ 1,927,241

Co
ommitments (note 24)
Seee accompanying Notes
N to the Conso
olidated Financial Statements
On behalf of the Boarrd of Directors of Advantage
A Oil & Gas
G Ltd.:

__________________ ___ ______

____________
Pauul G. Haggis, Director Andy J. Mah, Director

Advantage Oil & Gas Ltd

d. - 6
Consolidated Statement of Comprehensive Income (Loss)
Year ended Year ended
(thousands of Canadian dollars, except for per share amounts) Notes December 31, 2011 December 31, 2010
(note 25)

Petroleum and natural gas sales 18 $ 355,288 $ 319,368

Less: royalties (52,971) (45,954)
Petroleum and natural gas revenue 302,317 273,414

Operating expense (89,166) (95,609)

General and administrative expense 19 (34,587) (38,193)
Depreciation expense 9 (152,927) (124,592)
Impairment of oil and gas properties 9 (187,684) (17,500)
Exploration and evaluation expense 8 (3,055) (752)
Finance expense 21 (29,561) (34,388)
Gains on derivatives 6 475 50,514
Other income 20 1,972 46,142
Income (loss) before taxes and non-controlling
interest (192,216) 59,036
Income tax recovery (expense) 22 46,807 (18,116)
Net income (loss) and comprehensive income
(loss) before non-controlling interest (145,409) 40,920
Net income attributable to non-controlling interest (7,363) -
Net income (loss) and comprehensive income
(loss) attributable to Advantage shareholders $ (152,772) $ 40,920

Net income (loss) per share attributable to

Advantage shareholders 17
Basic $ (0.92) $ 0.25
Diluted $ (0.92) $ 0.25

See accompanying Notes to the Consolidated Financial Statements

Advantage Oil & Gas Ltd. - 7

Consolidated Statement of Changes in Shareholders' Equity

Total
shareholders'
Convertible equity
debentures attributable to Non- Total
equity Contributed Advantage controlling shareholders'
(thousands of Canadian dollars) Notes Share capital component surplus Deficit shareholders interest equity
Balance, January 1, 2011 $ 2,199,491 $ 8,348 $ 14,783 $ (1,010,309) $ 1,212,313 $ - $ 1,212,313
Net income (loss) and comprehensive income
(loss) - - - (152,772) (152,772) 7,363 (145,409)
Share based compensation 15, 16 15,293 - (770) - 14,523 - 14,523
Common control transaction and change in
ownership interest 5 - - 57,749 - 57,749 106,093 163,842
Change in ownership interest, share based
compensation - - - - - 577 577
Dividends declared by Longview ($0.40 per
Longview share) - - - - - (6,915) (6,915)
Balance, December 31, 2011 $ 2,214,784 $ 8,348 $ 71,762 $ (1,163,081) $ 1,131,813 $ 107,118 $ 1,238,931

Balance, January 1, 2010 25 $ 2,190,409 $ 8,348 $ 6,114 $ (1,051,229) $ 1,153,642 $ - $ 1,153,642

Share based compensation 15, 16 9,082 - 8,669 - 17,751 - 17,751
Net income and comprehensive income - - - 40,920 40,920 - 40,920
Balance, December 31, 2010 $ 2,199,491 $ 8,348 $ 14,783 $ (1,010,309) $ 1,212,313 $ - $ 1,212,313

See accompanying Notes to the Consolidated Financial Statements

Advantage Oil & Gas Ltd. - 8

Consolidated Statement of Cash Flows
Year ended Year ended
(thousands of Canadian dollars) Notes December 31, 2011 December 31, 2010
(note 25)
Operating Activities

Income (loss) before taxes and non-controlling interest $ (192,216) $ 59,036

Add (deduct) items not requiring cash:
Share based compensation 16 12,348 13,415
Depreciation expense 9 152,927 124,592
Impairment of oil and gas properties 9 187,684 17,500
Exploration and evaluation expense 8 3,055 752
Non-cash general and administrative - (538)
Unrealized loss (gain) on derivatives 6 25,351 (5,381)
Gain on sale of property, plant and equipment 20 (1,325) (45,631)
Finance expense 21 29,561 34,388
Expenditures on decommissioning liability 13 (3,335) (6,275)
Changes in non-cash working capital 23 4,131 31,008
Cash provided by operating activities 218,181 222,866

Financing Activities
Proceeds from Longview financing 5 160,757 -
Increase (decrease) in bank indebtedness 11 (56,754) 40,395
Convertible debenture maturities 12 (62,294) (69,927)
Dividends paid by Longview (6,050) -
Reduction of capital lease obligations (68) (1,375)
Convertible debenture issue costs - (310)
Interest paid (20,076) (21,532)
Cash provided by (used in) financing activities 15,515 (52,749)

Investing Activities
Expenditures on property, plant and equipment 9 (231,789) (237,702)
Expenditures on exploration and evaluation assets 8 (3,006) (2,091)
Property dispositions 1,099 69,676
Cash used in investing activities (233,696) (170,117)
Net change in cash - -
Cash, beginning of year - -
Cash, end of year $ - $ -

See accompanying Notes to the Consolidated Financial Statements

Advantage Oil & Gas Ltd. - 9

 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
All tabular amounts are in thousands of Canadian dollars except as otherwise indicated.
1. Business and structure of Advantage Oil & Gas Ltd.
Advantage Oil & Gas Ltd. and its subsidiaries (together “Advantage” or the “Corporation”) are a growth oriented
intermediate oil and natural gas development and production corporation with properties located in Western Canada.
Advantage is domiciled and incorporated in Canada under the Business Corporations Act (Alberta). Advantage’s head
office address is 700, 400 – 3rd Avenue SW, Calgary, Alberta, Canada. The Corporation’s primary listing is on the Toronto
Stock Exchange and is also traded on the New York Stock Exchange as a Foreign Private Issuer, under the symbol “AAV”.

2. Basis of preparation
(a) Statement of compliance
The Corporation prepares its financial statements in accordance with Canadian generally accepted accounting principles
as defined in the Handbook of the Canadian Institute of Chartered Accountants (“CICA Handbook”). In 2010, the
CICA Handbook was revised to incorporate International Financial Reporting Standards (“IFRS”) as issued by the
International Accounting Standards Board and to require publicly accountable enterprises to apply these standards
effective for years beginning on or after January 1, 2011. Accordingly, these consolidated financial statements are
Advantage’s first annual audited consolidated financial statements to be prepared and issued under IFRS.
The consolidated financial statements are prepared in compliance with IFRS. The comparative figures for 2010 and
Advantage’s financial position as at January 1, 2010 have been restated from previous Canadian Generally Accepted
Accounting Principles (“Previous GAAP”) to IFRS. The reconciliations to IFRS from Previous GAAP are summarized
in note 25 and disclose the impact of the transition to IFRS on the Corporation's reported financial position and
financial performance, including the nature and effect of significant changes in accounting policies from those used in
the Corporation’s consolidated financial statements for the year ended December 31, 2010. Subject to certain transition
elections disclosed in note 25, the Corporation has consistently applied the same accounting policies in its opening
IFRS statement of financial position at January 1, 2010 and throughout all periods presented, as if these policies had
always been in effect.
The accounting policies applied in these financial statements are based on IFRS issued and outstanding as of March 23,
2012, the date the Board of Directors approved the statements.
(b) Basis of measurement

The consolidated financial statements have been prepared on the historical cost basis, except as detailed in the
Corporation’s accounting policies in note 3.
The methods used to measure fair values of derivative instruments are discussed in note 6.
(c) Functional and presentation currency
These consolidated financial statements are presented in Canadian dollars, which is the Corporation’s functional
currency.
(d) Basis of consolidation

These consolidated financial statements include the accounts of the Corporation and all subsidiaries over which it has
control, including Longview Oil Corp. (“Longview”), a public Canadian corporation of which Advantage owns 63%,
and remaining ownership is disclosed as non-controlling interest. All inter-corporate balances, income and expenses
resulting from inter-corporate transactions are eliminated.

Advantage Oil & Gas Ltd. - 10

3. Significant accounting policies

The accounting policies set out below have been applied consistently to all years presented in these financial statements, and
have been applied consistently by the Corporation.
(a) Cash and cash equivalents
Cash consists of balances held with banks, and other short-term highly liquid investments with original maturities of
three months or less from inception.
(b) Basis of consolidation
(i) Subsidiaries
Subsidiaries are entities controlled by the Corporation. Control exists when the Corporation has the power to
govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing
control, potential voting rights that currently are exercisable are taken into account. The financial statements
of subsidiaries are included in the consolidated financial statements from the date that control commences
until the date that control ceases.
(ii) Non-controlling interests
The Corporation treats transactions with non-controlling interests as transactions with equity owners of the
Corporation. For purchases of shares from non-controlling interests, the difference between any
consideration paid and the relevant ownership acquired of the carrying value of net assets of the subsidiary is
recorded in equity. Gains or losses on disposals of shares to non-controlling interests are also recorded in
equity, unless the disposal results in the Corporation’s loss of control of the subsidiary, in which case the gain
or loss is recognized in net income and comprehensive income.
(iii) Joint interests
A significant portion of the Corporation’s oil and natural gas activities involve jointly controlled assets. The
consolidated financial statements include the Corporation’s share of these jointly controlled assets and a
proportionate share of the relevant revenue and related costs.
(c) Financial instruments
All financial instruments are initially recognized at fair value on the Statement of Financial Position. Measurement of
financial instruments subsequent to the initial recognition, as well as resulting gains and losses, is based on how each
financial instrument was initially classified. The Corporation has classified each identified financial instrument into the
following categories: fair value through profit or loss, loans and receivables, held to maturity investments, available for
sale financial assets, and financial liabilities at amortized cost. Fair value through profit or loss financial instruments are
measured at fair value with gains and losses recognized in income immediately. Available for sale financial assets are
measured at fair value with gains and losses, other than impairment losses, recognized in other comprehensive income
and transferred to income when the asset is derecognized. Loans and receivables, held to maturity investments and
financial liabilities at amortized cost, are recognized at amortized cost using the effective interest method and
impairment losses are recorded in income when incurred.
Derivative instruments executed by the Corporation to manage market risk associated with volatile commodity prices
are classified as fair value through profit or loss and recorded on the Statement of Financial Position at fair value as
derivative assets and liabilities. Gains and losses on these instruments are recorded as gains and losses on derivatives in
the Statement of Comprehensive Income (Loss) in the period they occur. Gains and losses on derivative instruments
are comprised of cash receipts and payments associated with periodic settlement that occurs over the life of the
instrument, and non-cash gains and losses associated with changes in the fair values of the instruments, which are
remeasured at each reporting date and recorded on the Statement of Financial Position.

Advantage Oil & Gas Ltd. - 11

3. Significant accounting policies (continued)
(c) Financial instruments (continued)
Transaction costs are frequently attributed to the acquisition or issue of a financial asset or liability. Such costs incurred
on fair value through profit or loss financial instruments are expensed immediately. For other financial instruments,
transaction costs are added to the fair value initially recognized for financial assets and liabilities that are not classified as
fair value through profit or loss.
Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics
and risks of the host contract and the embedded derivative are not closely related, a separate instrument with the same
terms as the embedded derivative would meet the definition of a derivative, and the combined instrument is not
measured at fair value through profit or loss. Changes in the fair value of separable embedded derivatives are
recognized immediately in income.
Equity instruments issued by the Corporation are recorded at the proceeds received, with direct issue costs as a
deduction therefrom, net of any associated tax benefit.

(d) Property, plant and equipment and exploration and evaluation assets
(i) Recognition and measurement
a) Exploration and evaluation costs
Pre-license costs are recognized in the Statement of Comprehensive Income (Loss) as incurred.
All exploratory costs incurred subsequent to acquiring the right to explore for oil and natural gas and before
technical feasibility and commercial viability of the area have been established are capitalized. Such costs can
typically include costs to acquire land rights, geological and geophysical costs, decommissioning costs, and
exploration well costs.
Exploration and evaluation costs are not depreciated and are accumulated in cost centers by well, field or
exploration area and carried forward pending determination of technical feasibility and commercial viability.
The technical feasibility and commercial viability of extracting a mineral resource from exploration and
evaluation assets is considered to be generally determinable when proved and probable reserves are
determined to exist. Upon determination of proved and probable reserves, exploration and evaluation assets
attributable to those reserves are first tested for impairment and then reclassified from exploration and
evaluation assets to development and production assets, net of any impairment loss.
Management reviews and assesses exploration and evaluation assets to determine if technical feasibility and
commercial viability exist. If Management decides not to continue the exploration and evaluation activity, the
unrecoverable costs are charged to exploration and evaluation expense in the period in which the
determination occurs.
b) Development and production costs
Items of property, plant and equipment, which include oil and gas development and production assets, are
measured at cost less accumulated depreciation and accumulated impairment losses. Costs include lease
acquisition, drilling and completion, production facilities, decommissioning costs, geological and geophysical
costs and directly attributable general and administrative costs related to development and production
activities, net of any government incentive programs.
When significant parts of an item of property, plant and equipment, including oil and natural gas interests,
have different useful lives, they are accounted for as separate items (major components).

Advantage Oil & Gas Ltd. - 12

3. Significant accounting policies (continued)
(d) Property, plant and equipment and exploration and evaluation assets (continued)
(ii) Subsequent costs
Costs incurred subsequent to development and production that are significant are recognized as oil and gas
property only when they increase the future economic benefits embodied in the specific asset to which they relate.
All other expenditures are recognized in comprehensive income as incurred. Such capitalized oil and natural gas
interests generally represent costs incurred in developing proved and probable reserves and bringing in or
enhancing production from such reserves, and are accumulated on a field or area basis. The carrying amount of any
replaced or sold component is derecognized in accordance with our policies. The costs of the day-to-day servicing
of property, plant and equipment are recognized in the Statement of Comprehensive Income (Loss) as incurred.
(iii) Depreciation
The net carrying value of oil and gas properties is depreciated using the unit-of-production method by reference to
the ratio of production in the period to the related proved and probable reserves, taking into account estimated
future development costs necessary to bring those reserves into production. Future development costs are
estimated taking into account the level of development required to produce the reserves. These estimates are
reviewed by independent reserve engineers at least annually.
(e) Asset swaps and dispositions
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 given up is reliably measurable. The
cost of the acquired asset is measured at the fair value of the asset given up, 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 amount given up. Any gain or loss on derecognition of the asset given up is recognised in the Statement of
Comprehensive Income (Loss).
For exchanges or parts of exchanges that involve only exploration and evaluation assets, the exchange is accounted for
at carrying value.
Gains and losses on disposal of an item of property, plant and equipment, including oil and natural gas interests, are
determined by comparing the proceeds from disposition with the carrying amount of property, plant and equipment
and are recognized net within “other income” or “other expenses” in the Statement of Comprehensive Income (Loss).
(f) Impairment
(i) Financial assets
At each reporting date, the Corporation assesses whether there is objective evidence that a financial asset is
impaired. If a financial asset carried at amortized cost is impaired, the amount of the loss is measured as the
difference between the amortized cost of the loan or receivable and the present value of the estimated future cash
flows, discounted using the instrument’s original effective interest rate. The loss is recognized in other expenses in
the period incurred.

Advantage Oil & Gas Ltd. - 13

3. Significant accounting policies (continued)
(f) Impairment (continued)
(ii) Property, plant and equipment and exploration and evaluation assets
The carrying amounts of the Corporation’s property, plant and equipment are reviewed at each reporting date to
determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable
amount is estimated. For the purpose of impairment testing of property, plant and equipment, assets are grouped
together into the smallest group of assets that generates cash inflows from continuing use that are largely
independent of the cash inflows of other assets or groups of assets (the “cash-generating unit” or “CGU”).
Exploration and evaluation assets are assessed for impairment if sufficient data exists to determine technical
feasibility and commercial viability, and facts and circumstances suggest that the carrying amount exceeds the
recoverable amount. Exploration and evaluation assets are allocated to CGU’s or groups of CGU’s for the
purposes of assessing such assets for impairment.
The recoverable amount of an asset or a CGU is the greater of its value in use and its fair value less costs to sell. In
assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount
rate that reflects current market assessments of the time value of money and the risks specific to the asset. Value
in use is generally computed by reference to the present value of the future cash flows expected to be derived from
production of proved and probable reserves. Fair value less cost to sell is assessed utilizing market valuation based
on an arm’s length transaction between active participants. In the absence of any such transactions, fair value less
cost to sell is estimated by discounting the expected after-tax cash flows of the cash generating unit at an after-tax
discount rate that reflects the risk of the properties in the cash generating unit. The discounted cash flow
calculation is then increased by a tax-shield calculation, which is an estimate of the amount that a prospective buyer
of the cash generating unit would be entitled. The carrying value of the cash generating unit is reduced by the
deferred tax liability associated with its property, plant and equipment.
Impairment losses on property, plant and equipment are recognized in the Statement of Comprehensive Income
(Loss) as impairment of oil and gas properties and are separately disclosed. An impairment of exploration and
evaluation assets is recognized as exploration and evaluation expense in the Statement of Comprehensive Income
(Loss).
Impairment losses recognized in prior years are assessed at each reporting date for any indications that the loss has
decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to
determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying
amount does not exceed the carrying amount that would have been determined, net of depreciation, if no
impairment loss had been recognized.
(g) Decommissioning liability
A decommissioning liability is recognized if, as a result of a past event, the Corporation has a present legal or
constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be
required to settle the obligation. Decommissioning liabilities are determined by discounting the expected future cash
flows at a risk-free rate.

Advantage Oil & Gas Ltd. - 14

3. Significant accounting policies (continued)
(h) Share based compensation
Advantage accounts for share based compensation expense based on the fair value of rights granted under its share
based compensation plan.
Advantage’s Restricted Share Performance Incentive Plan (“RSPIP” or the “Plan”), authorizes the Board of Directors
to grant restricted shares to service providers, including directors, officers, employees, and consultants of Advantage
and Longview. The restricted share grants generally vest one-third immediately on grant date, with the remaining two-
thirds vesting on each of the two subsequent anniversary dates. Compensation cost related to the Plan is recognized as
share based compensation expense within general and administrative expense over the service period of the service
providers and incorporates the fair value at grant date, the estimated number of restricted shares to vest, and certain
management estimates. As compensation expense is recognized, contributed surplus is recorded until the restricted
shares vest at which time the appropriate shares are then issued to the services providers and the contributed surplus is
transferred to share capital.
(i) Common-control transaction
Business combinations involving entities under common control are outside the scope of IFRS 3 Business
Combinations. IFRS provides no guidance on the accounting for these types of transactions and an entity is required to
develop an accounting policy. The two most common methods utilized are the purchase method and the predecessor
values method. A business combination involving entities under common control is a business combination in which all
of the combining entities are ultimately controlled by the same party, both before and after the business combination,
and control is not transitory. Management has determined the predecessor values method to be most appropriate. The
predecessor method requires the financial statements to be prepared using the predecessor carrying values without any
step up to fair value. The difference between any consideration and the aggregate carrying value of the assets and
liabilities are recorded in shareholders’ equity.
(j) Revenue
Revenue from the sale of petroleum and natural gas is recorded when the significant risks and rewards of ownership of
the product is transferred to the buyer which is usually when legal title passes to the external party. For natural gas, this
is generally at the time product enters the pipeline. For crude oil, this is generally at the time the product reaches a
trucking terminal. For natural gas liquids, this is generally at the time the product reaches a gas plant. Revenue is
measured net of discounts, customs duties and royalties.
Royalty income is recognized as it accrues in accordance with the terms of the overriding royalty agreements.
(k) Finance expense
Finance expense comprises interest expense on bank indebtedness, capital leases, and accretion of the discount on the
decommissioning liability and convertible debentures.

Advantage Oil & Gas Ltd. - 15

3. Significant accounting policies (continued)
(l) Income tax
Income tax expense comprises current and deferred income tax. Income tax expense is recognized in income or loss
except to the extent that it relates to items recognized directly in shareholders’ equity.
Current income tax is the expected tax payable on the taxable income for the year, using tax rates enacted or
substantively enacted at the reporting date, and any adjustment to income tax payable in respect of previous years.
Deferred income tax is recognized using the liability method, providing for temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred
income tax is not recognized on the initial recognition of assets or liabilities in a transaction that is not a business
combination, and at the time of the transaction, affects neither accounting income nor taxable income. Deferred
income tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse,
based on the laws that have been enacted or substantively enacted by the reporting date.
A deferred income tax asset is recognized to the extent that it is probable that future taxable profits will be available
against which the temporary difference can be utilized. Deferred income tax assets are reviewed at each reporting date
and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. Deferred income
tax assets and liabilities are only offset when they are within the same legal entity and same tax jurisdiction. Deferred
income tax assets and liabilities are presented as non-current.
(m) Net income (loss) per share
Basic net income (loss) per share is calculated by dividing the net income (loss) attributable to common shareholders of
the Corporation by the weighted average number of common shares outstanding during the period. Diluted net income
(loss) per share is determined by adjusting the net income (loss) attributable to common shareholders and the weighted
average number of common shares outstanding for the effects of dilutive instruments such as restricted shares granted
to service providers and convertible debentures, using the treasury stock method.

Advantage Oil & Gas Ltd. - 16

3. Significant accounting policies (continued)
(n) New standards and interpretations not yet adopted
Standards issued but not yet effective up to the date of issuance of the Corporation’s financial statements are listed
below. This listing is of standards and interpretations issued which the Corporation reasonably expects to be applicable
at a future date. The Corporation intends to adopt those standards when they become effective. The Corporation has
yet to assess the full impact of these standards.
IFRS 9 Financial Instruments: Classification and Measurement
IFRS 9 is intended to supersede IAS 39, Financial Instruments: Recognition and Measurement and will be published in
three phases, of which the first phase has been published. The first phase addresses the accounting for financial assets
and financial liabilities. The second phase will address the impairment of financial instruments, and the third phase will
address hedge accounting. For financial assets, IFRS 9 uses a single approach to determine whether a financial asset is
measured at amortized cost or fair value, and replaces the multiple rules in IAS 39. The approach in IFRS 9 is based on
how an entity manages its financial instruments in the context of its business model and the contractual cash flow
characteristics of the financial assets. The new standard also requires a single impairment method to be used, replacing
the multiple impairment methods in IAS 39. For financial liabilities, although the classification criteria for financial
liabilities will not change under IFRS 9, the approach to the fair value option for financial liabilities may require
different accounting for changes to the fair value of a financial liability as a result of changes to an entity’s own credit
risk. This standard is not applicable until January 1, 2015.
IFRS 10 Consolidated Financial Statements
IFRS 10 is a new standard that will replace SIC 12, “Consolidation – Special Purpose Entities” and IAS 27
“Consolidated and Separate Financial Statements”. The new standard eliminates the current risks and rewards approach
and establishes control as the single basis for determining the consolidation of an entity. This standard is not applicable
until January 1, 2013.
IFRS 11 Joint Arrangements
IFRS 11 requires a venture to classify its interest in a joint arrangement as a joint venture or joint operation. Joint
ventures will be accounted for using the equity method of accounting whereas for a joint operation, the venture will
recognize its share of the assets, liabilities, revenue and expenses. Under existing IFRS, entities have the choice to
proportionately consolidate or equity account for interests in joint ventures. IFRS 11 supersedes IAS 31, Interests in
Joint Ventures and SIC-13, Jointly Controlled Entities, Non-Monetary Contributions by Venturers. This standard is not
applicable until January 1, 2013.
IFRS 12 Disclosure of Interests in Other Entities
IFRS 12 provides the required disclosures for interests in subsidiaries and joint arrangements. These disclosures will
require information that will assist users of financial statements to evaluate the nature, risks and financial effects
associated with an entity’s interests in subsidiaries and joint arrangements. This standard is not applicable until January
1, 2013.
IFRS 13 – Fair Value Measurement

IFRS 13 is a comprehensive standard for fair value measurement and disclosure requirements for use across all IFRS
standards. The new standard clarifies that fair value is the price that would be received to sell an asset, or paid to
transfer a liability in an orderly transaction between market participants, at the measurement date. It also establishes
disclosures about fair value measurement. Under existing IFRS, guidance on measuring and disclosing fair value is
dispersed among the specific standards requiring fair value measurement and in many cases does not reflect a clear
measurement basis or consistent disclosures. This standard is not applicable until January 1, 2013.
IAS 28 – Investments in Associates and Joint Ventures
IAS 28 has been amended to include joint ventures in its scope and to address the changes in IFRS 10 to 13.

Advantage Oil & Gas Ltd. - 17

4. Significant accounting judgments, estimates and assumptions
The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and
assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and
expenses. Actual results may differ from these estimates, and differences could be material. Estimates and underlying
assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the year in which the
estimates are revised and in any future years affected.
Estimates and assumptions
Information about significant areas of estimation uncertainty in applying accounting policies that have the most significant
effect on the amounts recognized in the consolidated financial statements is included in the following notes:
 Note 6 – valuation of financial instruments;
 Note 9 – valuation of property, plant and equipment;
 Note 8 & 9 – impairment of property, plant and equipment and exploration and evaluation assets;
 Note 6, 12 – valuation of convertible debentures;
 Note 13 – measurement of decommissioning liability;

 Note 16 – measurement of share based compensation; and

 Note 22 – measurement of deferred income tax.

Judgments

In the process of applying the Corporation’s accounting policies, management has made the following judgments, apart
from those involving estimates, which may have the most significant effect on the amounts recognized in the consolidated
financial statements.

(a) Exploration and evaluation assets

Costs incurred to acquire rights to explore for oil and natural gas may be grouped into either exploration and evaluation
or development and production, depending on facts and circumstances. Costs incurred in respect of properties that
have been determined to have proved and probable reserves, are classified as development and production properties.
In such circumstances, technical feasibility and commercial viability are considered to be established. Costs incurred in
respect of new prospects with no nearby established development past or present and no proved or probable reserves
assigned are classified as exploration and evaluation assets (note 8).

(b) Reserves base

The oil and gas development and production properties are depreciated on a unit-of-production (“UOP”) basis at a rate
calculated by reference to proved and probable reserves determined in accordance with National Instrument 51-101
“Standards of Disclosure for Oil and Gas Activities” and incorporating the estimated future cost of developing and
extracting those reserves. Proved plus probable reserves are determined using estimates of oil and natural gas in place,
recovery factors and future oil and natural gas prices. Future development costs are estimated using assumptions as to
number of wells required to produce the reserves, the cost of such wells and associated production facilities and other
capital costs.

Advantage Oil & Gas Ltd. - 18

4. Significant accounting judgments, estimates and assumptions (continued)

(c) Depreciation of oil and gas assets

Oil and gas properties are depreciated using the UOP method over proved plus probable reserves. The calculation of
the UOP rate of depreciation could be impacted to the extent that actual production in the future is different from
current forecast production based on proved plus probable reserves (note 9).

(d) Determination of cash generating units

Oil and gas properties are grouped into cash generating units for purposes of impairment testing. Management has
evaluated the oil and gas properties of the Corporation, and grouped the properties into cash generating units on the
basis of their ability to generate independent cash flows, similar reserve characteristics, geographical location, and
shared infrastructure.

(e) Impairment indicators and calculation of impairment

At each reporting date, Advantage assesses whether or not there are circumstances that indicate a possibility that the
carrying values of exploration and evaluation assets and property, plant and equipment are not recoverable, or impaired.
Such circumstances include incidents of physical damage, deterioration of commodity prices, changes in the regulatory
environment, or a reduction in estimates of proved and probable reserves.
When management judges that circumstances indicate potential impairment, property, plant and equipment are tested
for impairment by comparing the carrying values to their recoverable amounts. The recoverable amounts of cash
generating units are determined based on the higher of value-in-use calculations and fair values less costs to sell. These
calculations require the use of estimates and assumptions, that are subject to change as new information becomes
available including information on future commodity prices, expected production volumes, quantities of reserves,
discount rates, future development costs and operating costs (note 8 & 9).

(f) Decommissioning liability

Decommissioning costs will be incurred by the Corporation at the end of the operating life of some of the
Corporation’s facilities and properties. The ultimate decommissioning liability is uncertain and can vary in response to
many factors including changes to relevant legal requirements, the emergence of new restoration techniques, experience
at other production sites, or changes in the risk-free discount rate. The expected timing and amount of expenditure can
also change in response to changes in reserves or changes in laws and regulations or their interpretation. As a result,
there could be significant adjustments to the provisions established which would affect future financial results.

(g) Income taxes

The Corporation recognizes deferred income tax assets to the extent that it is probable that taxable profit will be
available to allow the benefit of that deferred income tax asset to be utilized. Assessing the recoverability of deferred
income tax assets requires the Corporation to make significant estimates related to expectations of future taxable
income. Estimates of future taxable income are based on forecast cash flows from operations and the application of
existing tax laws. To the extent that future cash flows and taxable income differ significantly from estimates, the ability
of the Corporation to realize the deferred income tax assets recorded at the reporting date could be impacted.
Additionally, future changes in tax laws in the jurisdictions in which the Corporation operates could limit the ability of
the Corporation to obtain tax deductions in future periods.

(h) Contingencies

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

Advantage Oil & Gas Ltd. - 19

5. Common-Control Transaction
Advantage sold certain oil-weighted assets to Longview for total consideration of $546.9 million, comprised of 29,450,000
common shares of Longview representing a 63% equity ownership and $252.4 million in cash. The assets were sold with an
effective date of January 1, 2011 and a closing date of April 14, 2011. As Advantage is the parent company and has a
majority ownership interest of Longview, this transaction was deemed a common-control transaction. As such, Advantage
has recognized a non-controlling interest in shareholders’ equity, representing the carrying value of the 37% shareholding of
Longview held by outside interests.
The difference of $57.7 million between the proceeds from the change in ownership interest and the carrying value of the
non-controlling interest has been recognized within contributed surplus of shareholders’ equity. At December 31, 2011,
Advantage held 63% of Longview’s issued and outstanding shares.

6. Financial risk management

Financial instruments of the Corporation include trade and other receivables, deposits, trade and other accrued liabilities,
bank indebtedness, convertible debentures, other liabilities and derivative assets and liabilities.
Trade and other receivables and deposits are classified as loans and receivables and measured at amortized cost. Trade and
other accrued liabilities, bank indebtedness and other liabilities are all classified as financial liabilities at amortized cost. As at
December 31, 2011, there were no significant differences between the carrying amounts reported on the Statement of
Financial Position and the estimated fair values of these financial instruments due to the short terms to maturity and the
floating interest rate on the bank indebtedness.
The Corporation has convertible debenture obligations outstanding, of which the liability component has been classified as
financial liabilities at amortized cost. The convertible debentures have different fixed terms and interest rates (note 12)
resulting in fair values that will vary over time as market conditions change. As at December 31, 2011, the estimated fair
value of the total outstanding convertible debenture obligation was $82.8 million (December 31, 2010 - $153.2 million). The
fair value of the liability component of convertible debentures was determined based on the current public trading activity of
such debentures.
Fair value is determined following a three level hierarchy:
Level 1: Quoted prices in active markets for identical assets and liabilities. The Corporation does not have any financial
assets or liabilities that require level 1 inputs.
Level 2: Inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly. Such inputs
can be corroborated with other observable inputs for substantially the complete term of the contract. Advantage uses Level
2 inputs in the determination of the fair value of derivative assets and liabilities. Pricing inputs include quoted forward prices
for commodities, foreign exchange rates, volatility and risk-free rate discounting, all of which can be observed or
corroborated in the marketplace. The actual gains and losses realized on eventual cash settlement can vary materially due to
subsequent fluctuations in commodity prices as compared to the valuation assumptions.
Level 3: Under this level, fair value is determined using inputs that are not observable. Advantage has no assets or liabilities
that use level 3 inputs.
The Corporation’s activities expose it to a variety of financial risks that arise as a result of its exploration, development,
production, and financing activities such as:
 credit risk;
 liquidity risk;
 price and currency risk; and
 interest rate risk.

Advantage Oil & Gas Ltd. - 20

6. Financial risk management (continued)
(a) Credit risk
Credit risk is the risk of financial loss to the Corporation if a customer or counterparty to a financial instrument fails to
meet its contractual obligations, and arises principally from the Corporation’s receivables from joint venture partners
and oil and natural gas marketers. The maximum exposure to credit risk is as follows:

December 31, 2011 December 31, 2010 January 1, 2010

Trade and other receivables $ 42,344 $ 42,276 $ 54,531
Deposits 3,157 2,936 6,108
Derivative asset - 25,157 31,152
$ 45,501 $ 70,369 $ 91,791

Trade and other receivables, deposits, and derivative assets are subject to credit risk exposure and the carrying values
reflect Management’s assessment of the associated maximum exposure to such credit risk. Advantage mitigates such
credit risk by closely monitoring significant counterparties and dealing with a broad selection of partners that diversify
risk within the sector. The Corporation’s deposits are primarily due from the Alberta Provincial government and are
viewed by Management as having minimal associated credit risk. To the extent that Advantage enters derivatives to
manage commodity price risk, it may be subject to credit risk associated with counterparties with which it contracts.
Credit risk is mitigated by entering into contracts with only stable, creditworthy parties and through frequent reviews of
exposures to individual entities. In addition, the Corporation only enters into derivative contracts with major banks and
international energy firms to further mitigate associated credit risk.
Substantially all of the Corporation’s trade and other receivables are due from customers and joint operation partners
concentrated in the Canadian oil and gas industry. As such, trade and other receivables are subject to normal industry
credit risks. As at December 31, 2011, $0.5 million or 1.2% of trade and other receivables are outstanding for 90 days
or more (December 31, 2010 - $2.3 million or 5.4% of trade and other receivables). The Corporation believes the entire
balance is collectible, and in some instances has the ability to mitigate risk through withholding production or offsetting
payables with the same parties. Management has not provided an allowance for doubtful accounts at December 31,
2011 (December 31, 2010 - $0.2 million).
The Corporation’s most significant customer, a Canadian oil and natural gas marketer, accounts for $12.3 million of the
trade and other receivables at December 31, 2011 (December 31, 2010 - $12.1 million).

Advantage Oil & Gas Ltd. - 21

6. Financial risk management (continued)
(b) Liquidity risk
The Corporation is subject to liquidity risk attributed from trade and other accrued liabilities, bank indebtedness,
convertible debentures, other liabilities, and derivative liabilities. Trade and other accrued liabilities, other liabilities, and
derivative liabilities are primarily due within one year of the statement of financial position date and Advantage does not
anticipate any problems in satisfying the obligations from cash provided by operating activities and the existing credit
facilities. The Corporation’s bank indebtedness is subject to $475 million credit facility agreements. Although the credit
facilities are a source of liquidity risk, the facilities also mitigates liquidity risk by enabling Advantage to manage interim
cash flow fluctuations. The terms of the credit facilities are such that they provide Advantage adequate flexibility to
evaluate and assess liquidity issues if and when they arise. Additionally, the Corporation regularly monitors liquidity
related to obligations by evaluating forecasted cash flows, optimal debt levels, capital spending activity, working capital
requirements, and other potential cash expenditures. This continual financial assessment process further enables the
Corporation to mitigate liquidity risk.
Advantage has convertible debentures outstanding that mature in 2015 (note 12). Interest payments are made semi-
annually with excess cash provided by operating activities. As the debentures become due, the Corporation can satisfy
the obligations in cash or issue shares at a price determined in the applicable debenture agreements. This settlement
alternative allows the Corporation to adequately manage liquidity, plan available cash resources and implement an
optimal capital structure.
To the extent that Advantage enters derivatives to manage commodity price risk, it may be subject to liquidity risk as
derivative liabilities become due. While the Corporation has elected not to follow hedge accounting, derivative
instruments are not entered for speculative purposes and Management closely monitors existing commodity risk
exposures. As such, liquidity risk is mitigated since any losses actually realized are subsidized by increased cash flows
realized from the higher commodity price environment.
The timing of cash outflows relating to financial liabilities as at December 31, 2011 and 2010 are as follows:
Less than One to Three to
December 31, 2011 one year three years five years Thereafter Total
Trade and other accrued liabilities $ 138,119 $ - $ - $ - $ 138,119
Derivative liability 2,738 - - - 2,738
Bank indebtedness - principal - 233,903 - - 233,903
- interest 12,373 5,882 - - 18,255
Convertible debentures - principal - - 86,250 - 86,250
- interest 4,313 8,625 2,156 - 15,094
Other liability 908 - - - 908
$ 158,451 $ 248,410 $ 88,406 $ - $ 495,267
Interest on bank indebtedness was calculated assuming conversion of the revolving credit facility to a one-year term facility.

Less than One to Four to five

December 31, 2010 one year three years years Thereafter Total
Trade and other accrued liabilities $ 112,457 $ - $ - $ - $ 112,457
Capital lease obligations 779 - - - 779
Derivative liability 2,367 177 - - 2,544
Bank indebtedness - principal - 290,657 - - 290,657
- interest 13,717 6,577 - - 20,294
Convertible debentures - principal 62,294 - 86,250 - 148,544
- interest 9,179 8,625 6,469 - 24,273
Other liability - 1,966 - - 1,966
$ 200,793 $ 308,002 $ 92,719 $ - $ 601,514
Interest on bank indebtedness was calculated assuming conversion of the revolving credit facility to a one-year term facility.

Advantage Oil & Gas Ltd. - 22

6. Financial risk management (continued)
(b) Liquidity risk (continued)
The Corporation’s bank indebtedness does not have specific maturity dates. It is governed by credit facility agreements
with a syndicate of financial institutions (note 11). Under the terms of the agreements, the facilities are reviewed
annually, with the next reviews scheduled in April and June 2012. The facilities are revolving and are extendible at each
annual review for a further 364 day period at the option of the syndicate. If not extended, the credit facilities are
converted at that time into one year term facilities, with the principal payable at the end of such one year terms.
Management fully expects that the facilities will be extended at each annual review.

(c) Price and currency risk

Advantage’s derivative assets and liabilities are subject to both price and currency risks as their fair values are based on
assumptions including forward commodity prices and foreign exchange rates. The Corporation enters into non-
financial derivatives to manage commodity price risk exposure relative to actual commodity production and does not
utilize derivative instruments for speculative purposes. Changes in the price assumptions can have a significant effect
on the fair value of the derivative assets and liabilities and thereby impact earnings. It is estimated that a 10% change in
the forward crude oil prices used to calculate the fair value of the crude oil derivatives at December 31, 2011 would
result in a $3.0 million change in net loss for the year ended December 31, 2011.

As at December 31, 2011, the Corporation had the following derivatives in place:

Description of Derivative Term Volume Average Price

Crude oil - WTI

Fixed price January 2012 to December 2012 1,000 bbls/d Cdn $97.10/bbl
Collar January 2012 to December 2012 1,000 bbls/d Bought put Cdn $90.00/bbl
Sold call Cdn $102.25/bbl
Electricity – Alberta Pool Price
Fixed price January 2012 to December 2012 0.9 MW Cdn $77.88/MWh

As at December 31, 2010 the Corporation had the following derivatives in place:

Description of Derivative Term Volume Average Price

Natural gas - AECO
Fixed price April 2010 to January 2011 18,956 mcf/d Cdn$7.25/mcf
Fixed price January 2011 to December 2011 9,478 mcf/d Cdn$6.24/mcf
Fixed price January 2011 to December 2011 9,478 mcf/d Cdn$6.24/mcf
Fixed price January 2011 to December 2011 9,478 mcf/d Cdn$6.26/mcf

Crude oil – WTI

Fixed price April 2010 to January 2011 2,000 bbls/d Cdn$69.50/bbl
Fixed price January 2011 to December 2011 1,500 bbls/d Cdn $91.05/bbl

Advantage Oil & Gas Ltd. - 23

6. Financial risk management (continued)
(c) Price and currency risk (continued)
As at December 31, 2011, the fair value of the derivatives outstanding resulted in an asset of $Nil (December 31, 2010
– $25.2 million) and a liability of $2.7 million (December 31, 2010 – $2.5 million).

For the year ended December 31, 2011, $0.5 million was recognized in net loss as a derivative gain (December 31, 2010
- $50.5 million derivative gain). The table below summarizes the realized and unrealized gains (losses) on derivatives.
Year ended Year ended
December 31, 2011 December 31, 2010
Realized gains on derivatives $ 25,826 $ 45,133
Unrealized gains (losses) on derivatives (25,351) 5,381
$ 475 $ 50,514

The fair value of the commodity risk management derivatives have been allocated to current and non-current assets and
liabilities on the basis of expected timing of cash settlement and the applicable counterparties.
(d) Interest rate risk
Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. The
interest charged on the outstanding bank indebtedness fluctuates with the interest rates posted by the lenders. The
Corporation is exposed to interest rate risk and has not entered into any mitigating interest rate hedges or swaps. Had
the borrowing rate been different by 100 basis points throughout the year ended December 31, 2011, net income (loss)
and comprehensive income (loss) would have changed by $2.2 million (December 31, 2010 - $1.9 million) based on the
average debt balance outstanding during the year.

Advantage Oil & Gas Ltd. - 24

6. Financial risk management (continued)
(e) Capital management
The Corporation manages its capital with the following objectives:
 To ensure sufficient financial flexibility to achieve the ongoing business objectives including replacement of
production, funding of future growth opportunities, and pursuit of accretive acquisitions; and
 To maximize shareholder return through enhancing the share value.
Advantage monitors its capital structure and makes adjustments according to market conditions in an effort to meet its
objectives given the current outlook of the business and industry in general. The capital structure of the Corporation is
composed of working capital (excluding derivative assets and liabilities), bank indebtedness, convertible debentures, and
share capital. Advantage may manage its capital structure by issuing new shares, repurchasing outstanding shares,
obtaining additional financing either through bank indebtedness or convertible debenture issuances, refinancing current
debt, issuing other financial or equity-based instruments, declaring a dividend, implementing a dividend reinvestment
plan, adjusting capital spending, or disposing of assets or its ownership interest in Longview. The capital structure is
reviewed by Management and the Board of Directors on an ongoing basis. Advantage’s capital structure as at
December 31, 2011, December 31, 2010 and January 1, 2010 is as follows:
($000, except as otherwise indicated) December 31, 2011 December 31, 2010 January 1, 2010
Bank indebtedness (non-current) (note 11) $ 233,903 $ 290,657 $ 250,262
Working capital deficit (1) 90,638 64,452 49,970
Net debt $ 324,541 $ 355,109 $ 300,232
Shares outstanding (note 15) 166,304,040 164,092,009 162,745,528
Share closing market price ($/share) 4.24 6.76 6.90
Market capitalization (2) 705,129 1,109,262 1,122,944
Convertible debentures maturity value (current
and non-current) 86,250 148,544 218,471
Capital lease obligations (non-current) - - 759
Total capitalization $ 1,115,920 $ 1,612,915 $ 1,642,406

(1) Working capital deficit is a non-GAAP measure that includes trade and other receivables, prepaid expenses and deposits, trade and other
accrued liabilities, the current portion of capital lease obligations, and current portion of other liability.
(2) Market capitalization is a non-GAAP measure calculated by multiplying shares outstanding by the closing market share price on the applicable
date.

The Corporation’s bank indebtedness is governed by credit facility agreements for $475 million (note 11) that contains
standard commercial covenants for facilities of this nature. The only financial covenant is a requirement for Advantage
to maintain a minimum cash flow to interest expense ratio of 3.5:1, determined on a rolling four quarter basis. The
Corporation is in compliance with all credit facility covenants. As well, the borrowing base for the Corporation’s credit
facilities is determined through utilizing Advantage’s regular reserve estimates. The banking syndicate thoroughly
evaluates the reserve estimates based upon their own commodity price expectations to determine the amount of the
borrowing base. Revision or changes in the reserve estimates and commodity prices can have either a positive or a
negative impact on the borrowing base of the Corporation.
Management of the Corporation’s capital structure is facilitated through its financial and operational forecasting
processes. The forecast of the Corporation’s future cash flows is based on estimates of production, commodity prices,
forecast capital and operating expenditures, and other investing and financing activities. The forecast is regularly
updated based on new commodity prices and other changes, which the Corporation views as critical in the current
environment. Selected forecast information is frequently provided to the Board of Directors.
The Corporation’s capital management objectives, policies and processes have remained unchanged during the years
ended December 31, 2011 and 2010.

Advantage Oil & Gas Ltd. - 25

7. Trade and other receivables

December 31, 2011 December 31, 2010 January 1, 2010

Trade receivables $ 32,655 $ 30,997 $ 31,608
Receivables from joint venture partners 9,038 6,296 13,719
Other 651 4,983 9,204
$ 42,344 $ 42,276 $ 54,531

8. Exploration and evaluation assets

Balance at January 1, 2010 $ 6,923

Additions 2,091
Exploration and evaluation expense (752)
Balance at December 31, 2010 $ 8,262
Additions 3,006
Transferred to property, plant and equipment (note 9) (483)
Exploration and evaluation expense (3,055)
Balance at December 31, 2011 $ 7,730

There were no indicators of impairment of exploration and evaluation assets during the years ended December 31, 2011 and
2010.

Advantage Oil & Gas Ltd. - 26

9. Property, plant and equipment
Oil & gas Furniture and
Cost properties equipment Total
Balance at January 1, 2010 $ 1,821,078 $ 3,621 $ 1,824,699
Additions 221,280 403 221,683
Change in decommissioning liability (note 13) 37,073 - 37,073
Disposals (60,482) - (60,482)
Balance at December 31, 2010 $ 2,018,949 $ 4,024 $ 2,022,973
Additions 253,731 443 254,174
Change in decommissioning liability (note 13) 79,660 - 79,660
Disposals (184) - (184)
Transferred from exploration and evaluation assets (note 8) 483 - 483
Balance at December 31, 2011 $ 2,352,639 $ 4,467 $ 2,357,106

Oil & gas Furniture and

Accumulated depreciation and impairment losses properties equipment Total
Balance at January 1, 2010 $ - $ - $ -
Depreciation 123,360 1,232 124,592
Impairment of oil and gas properties 17,500 - 17,500
Disposals (2,881) - (2,881)
Balance at December 31, 2010 $ 137,979 $ 1,232 $ 139,211
Depreciation 152,279 648 152,927
Impairment of oil and gas properties 187,684 - 187,684
Disposals (3) - (3)
Balance at December 31, 2011 $ 477,939 $ 1,880 $ 479,819

Oil & gas Furniture and

Net book value properties equipment Total
At January 1, 2010 $ 1,821,078 $ 3,621 $ 1,824,699
At December 31, 2010 $ 1,880,970 $ 2,792 $ 1,883,762
At December 31, 2011 $ 1,874,700 $ 2,587 $ 1,877,287

During the year ended December 31, 2011, Advantage capitalized general and administrative expenditures directly related to
development activities of $7.6 million (December 31, 2010 - $8.9 million).
Advantage included future development costs of $1.7 billion (December 31, 2010 – $1.6 billion) in property, plant and
equipment costs subject to depreciation.

Advantage Oil & Gas Ltd. - 27

9. Property, plant and equipment (continued)
For the year ended December 31, 2011, Advantage recognized an impairment of oil and gas properties of $187.7 million
(December 31, 2010 - $17.5 million). Impairment of oil and gas properties occur when management determines that
indicators of impairment are present in specific cash generating units. Recorded impairments are the amount by which
carrying amounts of the cash generating units exceed their respective recoverable amount based on a fair value less costs to
sell determination. Fair value less costs to sell is based on discounted after-tax future net cash flows of proved and probable
reserves using forecast prices and costs, discounted at 10%.
Forecast natural gas prices used in the calculation of impairment of oil and gas properties for the year ended December 31,
2011 are as follows:
Year AECO ($Cdn/MMBtu)
2012 3.16
2013 3.78
2014 4.13
2015 5.53
2016 5.65
2017 5.77
2018 5.89
2019 6.01
2020 6.14
2021 (1) 6.27

(1)
Escalation of 1.5% thereafter
The impairment of oil and gas properties recognized in the year ended December 31, 2011 relates to natural gas producing
assets in West and East Alberta. The decline in the price of natural gas was considered to be an indicator of impairment.
The impairment of oil and gas properties recognized in the year ended December 31, 2010 related to a West Alberta oil cash
generating unit, that was subject to negative reserve revisions at year end.

Advantage Oil & Gas Ltd. - 28

10. Related party transactions
Transactions between Advantage and Longview
Advantage sold certain oil-weighted properties to Longview on April 14, 2011 (note 5).
Concurrent with the disposition, Advantage entered into a Technical Services Agreement (“TSA”) with Longview. Under
the TSA, Advantage provides the necessary personnel and technical services to manage Longview’s business and Longview
reimburses Advantage on a monthly basis for its share of administrative charges based on respective levels of production.
All amounts paid are recorded as general and administrative expenses and measured at the exchange amount, which is the
amount agreed upon by the transacting parties.
At December 31, 2011, amounts due from Longview totaled $1.7 million (December 31, 2010 - $Nil). Advantage charged
Longview $3.8 million during the year ended December 31, 2011 under the TSA. Dividends declared and paid or payable
from Longview to Advantage during the year ended December 31, 2011 totaled $11.8 million (December 31, 2010 - $Nil).
All amounts due to and from Longview are non-interest bearing in nature, are settled monthly and were incurred within the
normal course of business. All inter-corporate balances, income and expenses resulting from inter-corporate transactions are
eliminated.

Key management compensation

The compensation paid or payable to key management, including directors, is as follows:

December 31, 2011 December 31, 2010

Salaries, director fees and short-term benefits $ 4,821 $ 4,786
Other long-term benefits - -
Share based compensation (1) 5,067 8,242
$ 9,888 $ 13,028

(1) Represents the grant date fair value of Restricted Shares granted under the RSPIP for the respective years.

Advantage Oil & Gas Ltd. - 29

11. Bank indebtedness
December 31, 2011 December 31, 2010 January 1, 2010
Revolving credit facility $ 233,903 $ 290,657 $ 250,262
Discount on Bankers Acceptances and other fees (1,219) (1,805) (2,478)
Balance, end of year $ 232,684 $ 288,852 $ 247,784

The Corporation has credit facilities (the "Credit Facilities") of $475 million, comprised of $275 million held by Advantage
and $200 million held by Longview. The Credit Facilities are comprised of $40 million extendible revolving operating loan
facilities from one financial institution and $435 million of extendible revolving loan facilities from a syndicate of financial
institutions. Amounts borrowed under the Credit Facilities bear interest at a floating rate based on the applicable Canadian
prime rate, US base rate, LIBOR rate or bankers' acceptance rate plus between 1.00% and 3.50% depending on the type of
borrowing and the Corporations’ debt to cash flow ratio. The Credit Facilities are each collateralized by a $1 billion floating
charge demand debenture covering all assets. The amounts available to the Corporation from time to time under the Credit
Facilities are based upon the borrowing base determined semi-annually by the lenders. The revolving period for the Credit
Facilities will end in April and June 2012 unless extended at the option of the syndicate for a further 364 day period. If the
Credit Facilities are not extended, they will convert to non-revolving term facilities due 365 days after the last day of the
revolving period. The Credit Facilities prohibit the Corporation from entering into any derivative contract where the term of
such contract exceeds three years. Further, the aggregate of such contracts cannot hedge greater than 60% of total estimated
petroleum and natural gas production over two years and 50% over the third year, in each respective legal entity. The Credit
Facilities contain standard commercial covenants for credit facilities of this nature. The only financial covenant is a
requirement for each entity to maintain a minimum cash flow to interest expense ratio of 3.5:1, determined on a rolling four-
quarter basis. These covenants were met at December 31, 2011, December 31, 2010, and January 1, 2010. Breach of any
covenant will result in an event of default in which case the Corporation has 20 days to remedy such default. If the default is
not remedied or waived, and if required by the lenders, the administrative agent of the lenders has the option to declare all
obligations under the credit facilities to be immediately due and payable without further demand, presentation, protest, days
of grace, or notice of any kind. Interest payments under the debentures are subordinated to the repayment of any amounts
owing under the Credit Facilities and are not permitted if the Corporation is in default of such Credit Facilities or if the
amount of outstanding indebtedness under such facilities exceeds the then existing current borrowing base. For the year
ended December 31, 2011, the average effective interest rate on the outstanding amounts under the facility was
approximately 5.3% (December 31, 2010 – 5.0%). Advantage also has issued letters of credit totaling $8.8 million at
December 31, 2011 (December 31, 2010 – $2.9 million).

Advantage Oil & Gas Ltd. - 30

12. Convertible debentures
The convertible unsecured subordinated debentures pay interest semi-annually and are convertible at the option of the
holder into shares of Advantage at the applicable conversion price per share plus accrued and unpaid interest. The details of
the convertible debentures including fair market values initially assigned and issuance costs are as follows:

6.50% 7.75% 8.00% 5.00%

Trading symbol AAV.DBE AAV.DBD AAV.DBG AAV.DBH

Issue date May 18, 2005 Sep. 15, 2004 Nov. 13, 2006 Dec. 31, 2009
Maturity date June 30, 2010 Dec. 1, 2011 Dec. 31, 2011 Jan. 30, 2015
Conversion price $ 24.96 $ 21.00 $ 20.33 $ 8.60

Liability component $ 69,952 $ 50,000 $ 41,445 $ 73,019

Equity component - - - 13,231

Gross proceeds 69,952 50,000 41,445 86,250

Issuance costs - (2,190) - (3,735)

Net proceeds $ 69,952 $ 47,810 $ 41,445 $ 82,515

The convertible debentures are redeemable prior to their maturity dates, at the option of the Corporation, upon providing
appropriate advance notification as per the debenture indentures. The redemption prices for the various debentures, plus
accrued and unpaid interest, is dependent on the redemption periods and are as follows:

Convertible Redemption
Debenture Redemption Periods Price

7.75% After December 1, 2009 and before December 1, 2011 $ 1,000

8.00% After December 31, 2010 and before December 31, 2011 $ 1,025
5.00% After January 31, 2013 and on or before January 30, 2015 $ 1,000
Provided that Current Market Price exceeds 125% of Conversion Price

Advantage Oil & Gas Ltd. - 31

12. Convertible debentures (continued)
The balance of debentures outstanding at December 31, 2011 and changes in the liability and equity components during the
years ended December 31, 2011 and 2010 are as follows:

6.50% 7.75%
Trading symbol AAV.DBE AAV.DBD
Debentures outstanding $ - $ -
Liability component:
Balance at January 1, 2010 $ 69,927 $ 46,176
Accretion of discount - 309
Matured (69,927) -
Balance at December 31, 2010 - 46,485
Accretion of discount - 281
Matured - (46,766)
Balance at December 31, 2011 $ - $ -

8.00% 5.00% Total

Trading symbol AAV.DBG AAV.DBH
Debentures outstanding $ - $ 86,250 $ 86,250
Liability component:
Balance at January 1, 2010 $ 15,528 $ 69,857 $ 201,488
Accretion of discount - 2,954 3,263
Matured - - (69,927)
Balance at December 31, 2010 15,528 72,811 134,824
Accretion of discount - 3,079 3,360
Matured (15,528) - (62,294)
Balance at December 31, 2011 $ - $ 75,890 $ 75,890

Equity component:
Balance at January 1, 2010 $ - $ 8,348 $ 8,348
Balance at December 31, 2010 $ - $ 8,348 $ 8,348
Balance at December 31, 2011 $ - $ 8,348 $ 8,348

The principal amount of 7.75% convertible debentures matured on December 1, 2011, and was settled with $46.8 million in
cash. The principal amount of 8.00% convertible debentures matured on December 31, 2011, and was settled with $15.5
million in cash. The principal amount of 6.50% convertible debentures matured on June 30, 2010 and was settled with
$69.9 million in cash. There were no conversions of convertible debentures during the years ended December 31, 2011 and
2010.

Advantage Oil & Gas Ltd. - 32

13. Decommissioning liability
The Corporation’s decommissioning liability results from net ownership interests in petroleum and natural gas assets
including well sites, gathering systems and processing facilities, all of which will require future costs of decommissioning
under environmental legislation. These costs are expected to be incurred between 2012 and 2071. A risk-free rate of 2.50%
(December 31, 2010 – 3.54%) and an inflation factor of 2% were used to calculate the fair value of the decommissioning
liability.
A reconciliation of the decommissioning liability is provided below:
Year ended Year ended
December 31, 2011 December 31, 2010
Balance, beginning of year $ 172,130 $ 169,665
Accretion expense 5,748 6,094
Liabilities incurred 4,714 3,331
Change in estimates (3,699) 6,601
Effect of change in risk-free rate 78,645 27,141
Property dispositions (407) (34,427)
Liabilities settled (3,335) (6,275)
Balance, end of year $ 253,796 $ 172,130

14. Other liability

The Corporation has a non-cancellable lease for office space which, due to changes in its activities, the Corporation ceased
to use in September 2009, while the lease expires in 2012. Management considers this to be an onerous contract, therefore
the obligation for the discounted future payments, net of expected rental income, has been provided for as a liability.
A reconcilation of the other liability is as follows:
Year ended Year ended
December 31, 2011 December 31, 2010
Balance, beginning of year $ 1,835 $ 3,431
Accretion expense (note 21) 99 199
Reduction of liability by subleasing space - (538)
Liability settled (1,026) (1,257)
Balance, end of year $ 908 $ 1,835

15. Share capital

(a) Authorized
The Corporation is authorized to issue an unlimited number of shares without nominal or par value.
(b) Issued
Number of Shares Amount
Balance at January 1, 2010 162,745,528 $ 2,190,409
Share based compensation (note 16) 1,346,481 9,082
Balance at December 31, 2010 164,092,009 $ 2,199,491
Share based compensation (note 16) 2,212,031 15,293
Balance at December 31, 2011 166,304,040 $ 2,214,784

Advantage Oil & Gas Ltd. - 33

16. Share based compensation
Advantage has a Restricted Share Performance Incentive Plan (“RSPIP” or the “Plan”) as approved by the shareholders.
The Plan authorizes the Board of Directors to grant restricted shares to service providers, including directors, officers,
employees, and consultants of Advantage. The number of restricted shares granted is based on the Corporation’s share price
return for a twelve-month period and compared to the performance of a peer group approved by the Board of Directors.
The share price return is calculated at the end of each and every quarter and is primarily based on the twelve-month change
in the share price. If the share price return for a twelve-month period is positive, a restricted share grant will be calculated
based on the return. Otherwise, no restricted shares will be granted to service providers for the period. If the share price
return for a twelve-month period is negative, but the return is still within the top two-thirds of the approved peer group
performance, the Board of Directors may grant a discretionary restricted share award. The restricted share grants generally
vest one-third immediately on grant date, with the remaining two-thirds vesting on each of the two subsequent anniversary
dates. On vesting, common shares are issued to the service providers in exchange for the restricted shares outstanding. The
holders of restricted shares may elect to receive cash upon vesting in lieu of the number of shares to be issued, subject to
consent of the Corporation. However, it is the intent to settle unvested amounts with shares.
The following table is a continuity of restricted shares:
Restricted Shares
Balance at January 1, 2010 2,226,904
Granted 2,547,020
Vested (1,818,707)
Forfeited (29,349)
Balance at December 31, 2010 2,925,868
Granted 1,443,956
Vested (2,212,031)
Forfeited (40,083)
Balance at December 31, 2011 2,117,710

The following table summarizes information about restricted shares outstanding at December 31, 2011:
Weighted
Number of Average Fair
Restricted Value at
Date Granted Shares Grant Date
September 2, 2009 344,353 $5.80
January 12, 2010 247,439 $7.27
April 12, 2010 314,232 $6.97
July 12, 2010 257,010 $6.53
January 12, 2011 43,955 $6.95
April 11, 2011 539,263 $8.28
July 12, 2011 371,458 $7.15
Total 2,117,710

During the year ended December 31, 2011, the Corporation recognized share based compensation of $15.1 million
(December 31, 2010 - $19.9 million), of which $2.8 million (December 31, 2010 - $3.9 million) was capitalized to property,
plant and equipment, and $12.3 million (December 31, 2010 - $16.0 million) was recorded as an expense in the Statement of
Income (Loss) and Comprehensive Income (Loss).

Advantage Oil & Gas Ltd. - 34

17. Net income (loss) per share attributable to Advantage shareholders

The calculations of basic and diluted net income (loss) per share are derived from both net income (loss) attributable to
Advantage common shareholders and weighted average shares outstanding, calculated as follows:

Year ended Year ended

December 31, 2011 December 31, 2010
Net income (loss) attributable to Advantage shareholders
Basic $ (152,772) $ 40,920
Restricted shares (note 16) - -
Convertible debentures - -
Diluted $ (152,772) $ 40,920
Weighted average shares outstanding
Basic 165,370,777 163,467,225
Restricted shares (note 16) - 1,094,135
Convertible debentures - -
Diluted 165,370,777 164,561,360

The calculation of diluted net income (loss) per share for the years ended December 31, 2011 and 2010 excludes convertible
debentures, as their impact would be anti-dilutive. Total weighted average shares issuable in exchange for the series of
convertible debentures excluded from the diluted net income (loss) per share calculation for the year ended December 31,
2011 was 12,828,588 (year ended December 31, 2010 – 14,401,412 shares). As at December 31, 2011, the total convertible
debentures outstanding were immediately convertible to 10,029,070 shares (December 31, 2010 – 13,019,819 shares).
Restricted shares have been excluded from the calculation of diluted net loss per share for the year ended December 31,
2011, as the impact would have been anti-dilutive. Total weighted average shares issuable in exchange for the restricted
shares and excluded from the diluted net loss per share calculation for the year ended December 31, 2011 was 1,192,566
shares.

Advantage Oil & Gas Ltd. - 35

18. Petroleum and natural gas sales
Year ended Year ended
December 31, 2011 December 31, 2010
Crude oil and natural gas liquid sales $ 186,014 $ 172,796
Natural gas sales 169,274 146,572
Total petroleum and natural gas sales $ 355,288 $ 319,368

19. General and administrative expense (“G&A”)

Year ended Year ended
December 31, 2011 December 31, 2010
Salaries and benefits $ 20,778 $ 20,334
Share based compensation (notes 15,16) 15,100 19,851
Office rent 2,337 2,192
Other 3,955 4,755
Total G&A 42,170 47,132
Capitalized (note 9) (7,583) (8,939)
Net G&A $ 34,587 $ 38,193

20. Other income

Year ended Year ended
December 31, 2011 December 31, 2010
Gain on sale of property, plant and equipment $ 1,325 $ 45,631
Miscellaneous income 647 511
Total other income $ 1,972 $ 46,142

21. Finance expense

Year ended Year ended
December 31, 2011 December 31, 2010
Interest on bank indebtedness $ 11,483 $ 13,346
Interest on convertible debentures 8,871 11,486
Accretion on convertible debentures (note 12) 3,360 3,263
Accretion of decomissioning liability (note 13) 5,748 6,094
Accretion of other liability (note 14) 99 199
Total finance expense $ 29,561 $ 34,388

Advantage Oil & Gas Ltd. - 36

22. Income taxes

The provision for income taxes is as follows:

Year ended Year ended
December 31, 2011 December 31, 2010
Current income tax expense $ - $ -
Deferred income tax expense (recovery) (46,807) 18,116
Income tax expense (recovery) $ (46,807) $ 18,116

The provision for income taxes varies from the amount that would be computed by applying the combined federal and
provincial income tax rates for the following reasons:
Year ended Year ended
December 31, 2011 December 31, 2010
Income (loss) before taxes and non-controlling interest $ (192,216) $ 59,036
Combined federal and provincial income tax rates 26.57% 28.17%
Expected income tax expense (recovery) (51,072) 16,630
Increase (decrease) in income taxes resulting from:
Non-deductible share based compensation 4,031 5,162
Difference between current and expected tax rates 234 (3,676)
$ (46,807) $ 18,116
Effective tax rate 24.35% 30.69%

The Canadian combined statutory tax rates decreased from 28.17% in 2010 to 26.57% in 2011 as a result of legislation
enacted in 2007.

Advantage Oil & Gas Ltd. - 37

22. Income taxes (continued)

The movement in deferred income tax liabilities and assets without taking into consideration the offsetting of balances
within the same tax jurisdiction is as follows:
Property, plant and Derivative
Deferred income tax liability equipment asset/liability Total
Balance at January 1, 2010 $ 194,515 $ 4,867 $ 199,382
Charged (credited) to income 47,597 1,166 48,763
Balance at December 31, 2010 242,112 6,033 248,145
Charged (credited) to income (3,771) (6,737) (10,508)
Balance at December 31, 2011 $ 238,341 $ (704) $ 237,637

Decommissioning Non-capital
Deferred income tax asset liability losses Other Total
Balance at January 1, 2010 $ (42,910) $ (127,941) $ (6,416) $ (177,267)
Charged (credited) to income (581) (31,417) 1,351 (30,647)
Balance at December 31, 2010 (43,491) (159,358) (5,065) (207,914)
Charged (credited) to income (20,444) (15,970) 115 (36,299)
Charged (credited) to equity - (1,091) (1,993) (3,084)
Balance at December 31, 2011 $ (63,935) $ (176,419) $ (6,943) $ (247,297)

Net deferred income tax liability (asset) Longview Advantage Total

Balance at January 1, 2010 $ - $ 22,115 $ 22,115
Charged (credited) to income - 18,116 18,116
Balance at December 31, 2010 - 40,231 40,231
Charged (credited) to income (36,299) (10,508) (46,807)
Charged (credited) to equity (3,084) - (3,084)
Balance at December 31, 2011 $ (39,383) $ 29,723 $ (9,660)

The net deferred income tax asset is expected to reverse within 12 months.

The estimated tax pools available at December 31, 2011 are as follows:
Longview Advantage Total
Canadian development expenses $ 35,402 $ 105,300 $ 140,702
Canadian exploration expenses - 70,761 70,761
Canadian oil and gas property expenses 366,793 - 366,793
Non-capital losses 72,582 631,660 704,242
Undepreciated capital cost 76,362 271,190 347,552
Other 7,911 5,951 13,862
$ 559,050 $ 1,084,862 $ 1,643,912
The non-capital loss carry forward balances above expire no earlier than 2023.

Advantage Oil & Gas Ltd. - 38

23. Supplemented cash flow information
Changes in non-cash working capital is comprised of:
Year ended Year ended
December 31, 2011 December 30, 2010
Source (use) of cash:
Trade and other receivables $ (68) $ 12,255
Prepaid expenses and deposits 443 3,448
Trade and other accrued liabilities 25,662 (605)
$ 26,037 $ 15,098

Related to operating activities $ 4,131 $ 31,008

Related to financing activities 2,274 2,408
Related to investing activities 19,632 (18,318)
$ 26,037 $ 15,098

24. Commitments
Advantage has several lease commitments relating to office buildings and transportation. The estimated remaining annual
minimum operating lease payments are as follows, of which $0.9 million is recognized in other liability (note 14):

December 31, 2011 December 31, 2010

2011 $ - $ 11,756
2012 15,543 11,791
2013 14,413 10,576
2014 11,812 8,723
2015 2,246 2,108
$ 44,014 $ 44,954

Advantage Oil & Gas Ltd. - 39

25. Transition to IFRS
For all periods up to and including the year ended December 31, 2010 the Corporation prepared its financial statements in
accordance with previous Canadian generally accepted accounting principles (“Previous GAAP”). These financial
statements, for the year ended December 31, 2011, are prepared in accordance with International Financial Reporting
Standards (“IFRS”). The Corporation has prepared financial statements which comply with IFRS applicable for periods
beginning on or after January 1, 2010 and the significant accounting policies meeting those requirements are described in
note 3. The Corporation has prepared its IFRS opening balance sheet as at January 1, 2010, its date of transition to IFRS.
IFRS 1 allows first-time adopters certain exemptions from the general requirement to apply IFRS retrospectively. The
Corporation has taken the following exemptions:
 Companies using full-cost accounting are allowed to measure their oil and gas assets at the amount determined
under the Previous GAAP at the date of transition. This amount is pro-rated to the underlying assets based upon
the value of proved and probable reserves at transition date, discounted at 10%.
 Companies using the full cost book value as deemed cost exemption are allowed to measure the liabilities for
decommissioning, restoration and similar liabilities at the date of transition and recognize directly in retained
earnings any difference between that amount and the carrying amount determined under Previous GAAP.
 IFRS 3 Business Combinations has not been applied to acquisitions of subsidiaries or of interests in associates and
joint ventures that occurred before January 1, 2010.
 IFRS 2 Share-based Payment has not been applied to any equity instruments that were granted on or before
November 7, 2002, nor has it been applied to equity instruments granted after November 7, 2002 that vested
before January 1, 2010.
 IAS 17 Leases has been applied as of transition date rather than at the lease’s inception date.
 IAS 32 Financial Instruments Presentation will not be applied for compound financial instruments where the
liability component is no longer outstanding.
 IAS 23 Borrowing Costs will not be applied before January 1, 2010.

Reconciliations to IFRS from Previous GAAP financial statements including the impact of the transitioning on the
Corporation’s reported financial position and financial performance, including the nature and effect of significant changes in
accounting policies are summarized as follows.

Advantage Oil & Gas Ltd. - 40

25. Transition to IFRS (continued)
Reconciliation of Consolidated Statement of Financial Position at the date of IFRS transition, January 1, 2010.

Effect of
Previous Transition IFRS
(thousands of Canadian dollars) Notes GAAP to IFRS Reclassifications IFRS

ASSETS
Current assets
Trade and other receivables $ 54,531 $ - $ - $ 54,531
Prepaid expenses and deposits 9,936 - - 9,936
Derivative asset 30,829 - - 30,829
Total current assets 95,296 - - 95,296

Non-current assets
Derivative asset 323 - - 323
Exploration and evaluation assets 2 - - 6,923 6,923
Property, plant and equipment 2 1,831,622 - (6,923) 1,824,699
Total non-current assets 1,831,945 - - 1,831,945

Total assets $ 1,927,241 $ - $ - $ 1,927,241

LIABILITIES
Current liabilities
Trade and other accrued liabilities 6 $ 111,901 $ - $ 1,161 $ 113,062
Capital lease obligations 1,375 - - 1,375
Convertible debentures 4 69,553 374 - 69,927
Derivative liability 12,755 - - 12,755
Deferred income tax liability 5 4,704 - (4,704) -
Total current liabilities 200,288 374 (3,543) 197,119

Non-current liabilities
Derivative liability 1,165 - - 1,165
Capital lease obligations 759 - - 759
Bank indebtedness 247,784 - - 247,784
Convertible debentures 4 130,658 903 - 131,561
Decommissioning liability 3 68,555 101,110 - 169,665
Deferred income tax liability 5 38,796 (21,385) 4,704 22,115
Other liability 3,431 - - 3,431
Total non-current liabilities 491,148 80,628 4,704 576,480

Total liabilities 691,436 81,002 1,161 773,599

SHAREHOLDERS' EQUITY
Share capital 2,190,409 - - 2,190,409
Convertible debentures equity component 4 18,867 (10,519) - 8,348
Contributed surplus 6 7,275 - (1,161) 6,114
Deficit (980,746) (70,483) - (1,051,229)
Total shareholders' equity 1,235,805 (81,002) (1,161) 1,153,642
Total liabilities and shareholders' equity $ 1,927,241 $ - $ - $ 1,927,241

Advantage Oil & Gas Ltd. - 41

25. Transition to IFRS (continued)
Reconciliation of Consolidated Statement of Financial Position at the end of the last reporting year under Previous GAAP,
December 31, 2010.

Effect of
Previous Transition IFRS
(thousands of Canadian dollars) Notes GAAP to IFRS Reclassifiications IFRS

ASSETS
Current assets
Trade and other receivables $ 42,276 $ - $ - $ 42,276
Prepaid expenses and deposits 6,488 - - 6,488
Derivative asset 25,157 - - 25,157
Total current assets 73,921 - - 73,921

Non-current assets
Exploration and evaluation assets 2 - - 8,262 8,262
Property, plant and equipment 1, 2, 3 1,768,650 123,374 (8,262) 1,883,762
Total non-current assets 1,768,650 123,374 - 1,892,024

Total assets $ 1,842,571 $ 123,374 $ - $ 1,965,945

LIABILITIES
Current liabilities
Trade and other accrued liabilities $ 112,457 $ - $ - $ 112,457
Capital lease obligations 759 - - 759
Convertible debentures 4 61,570 443 - 62,013
Derivative liability 2,367 - - 2,367
Deferred income tax liability 5 5,876 - (5,876) -
Total current liabilities 183,029 443 (5,876) 177,596

Non-current liabilities
Derivative liability 177 - - 177
Bank indebtedness 288,852 - - 288,852
Convertible debentures 72,811 - - 72,811
Decommissioning liability 3 58,281 113,849 - 172,130
Deferred income tax liability 5 29,399 4,956 5,876 40,231
Other liability 1,835 - - 1,835
Total non-current liabilities 451,355 118,805 5,876 576,036

Total liabilities 634,384 119,248 - 753,632

SHAREHOLDERS' EQUITY
Share capital 2,199,491 - - 2,199,491
Convertible debentures equity component 4 15,896 (7,548) - 8,348
Contributed surplus 4 17,754 (2,971) - 14,783
Deficit (1,024,954) 14,645 - (1,010,309)
Total shareholders' equity 1,208,187 4,126 - 1,212,313
Total liabilities and shareholders' equity $ 1,842,571 $ 123,374 $ - $ 1,965,945

Advantage Oil & Gas Ltd. - 42

25. Transition to IFRS (continued)
Reconciliation of Consolidated Statement of Comprehensive Income (Loss) for the year ended December 31, 2010:

Effect of
Previous Transition IFRS
(thousands of Canadian dollars) Notes GAAP to IFRS Reclassifications IFRS

Petroleum and natural gas sales $ 319,368 $ - $ - $ 319,368

Less: royalties 8 (44,640) - (1,314) (45,954)
Petroleum and natural gas revenue 274,728 - (1,314) 273,414

Operating expense 1c (93,875) (1,734) - (95,609)

General and administrative expense 1c (37,578) (615) - (38,193)
Depreciation expense 1, 7 (215,780) 86,695 4,493 (124,592)
Impairment of oil and gas properties 1d - (17,500) - (17,500)
Exploration and evaluation expense 2 - (752) - (752)
Finance expense 3, 4, 7 (29,128) (767) (4,493) (34,388)
Gains on derivatives 50,514 - - 50,514
Other income 1a - 46,142 - 46,142

Income (loss) before taxes (51,119) 111,469 (1,314) 59,036

Income tax recovery (expense) 5, 8 6,911 (26,341) 1,314 (18,116)
Net income (loss) and comprehensive
income (loss) $ (44,208) $ 85,128 $ - $ 40,920
Net income (loss) per share
Basic $ (0.27) $ 0.25
Diluted $ (0.27) $ 0.25

1. Property, Plant and Equipment

a. Gain on sale of property, plant and equipment
Under Previous GAAP, the Corporation did not recognize gains or losses on the disposal of oil and gas properties
unless such dispositions would change the depletion rate by 20% or more while IFRS does require such
recognition. This results in an increase to the carrying value and a gain on sale of property, plant and equipment
included in other income.

b. Depreciation expense
Under Previous GAAP, depletion and depreciation was calculated on a unit-of-production basis for oil and gas
properties using proved reserves, on a cost center basis that was defined as a country. Under IFRS, depreciation is
calculated based on proved and probable reserves over individual components resulting in a decrease in
depreciation expense and increase in the carrying value of property, plant and equipment.

c. Capitalization
During the transition to IFRS, revisions and refinements were made to capitalization. As a result, certain
expenditures incurred in 2010 were expensed as operating expense and general and administrative expense.

d. Impairment
At December 31, 2010 an impairment loss was recognized associated with a cash generating unit located in West
Central Alberta that was subject to negative reserve revisions at year end. The cash generating unit was written
down to fair value less costs to sell, determined on a discounted cash flow model, using a discount rate of 10%.

Advantage Oil & Gas Ltd. - 43

25. Transition to IFRS (continued)
2. Exploration and evaluation assets
Under Previous GAAP, exploration and evaluation assets were included in the full cost pool of property, plant and
equipment. Under IFRS, these assets must be reclassified from developed oil and natural gas property, plant and
equipment and presented separately. When exploration and evaluation assets are determined to be technically feasible
and commercially viable, the costs are moved to developed oil and natural gas property, plant and equipment. Assets
that are not technically feasible and commercially viable are expensed.
3. Decommissioning liability
Under Previous GAAP asset retirement obligations were discounted at a credit-adjusted risk-fee rate. Under IFRS the
discount rate has been reduced to a risk-free rate of 4.00% on January 1, 2010. Accordingly, the decommissioning
liability has increased by $101.1 million at transition date, and due to the exemption allowed by IFRS 1, the offsetting
charge has been recognized in deficit. As a result, under IFRS both the accretion expense associated with the
decommissioning liability will be different and changes in the estimate of the decommissioning liability will impact
property, plant and equipment.
4. Convertible debentures liability component
Prior to July 9, 2009, Advantage was an Income Trust that operated under the name Advantage Energy Income Fund.
As an income trust, convertible debentures were convertible into Trust Units, which contained a redemption feature
which effectively made the conversion option a “putable instrument” under IAS 32. As such, convertible debentures
were liabilities, with no equity component. Upon conversion to a corporation on July 9, 2009, all convertible debentures
became convertible into common shares, and were no longer deemed to contain a “putable instrument”. Retrospective
restatement of the convertible debentures in existence at July 9, 2009 and still outstanding at transition date resulted in
the liability component restated to their full maturity values, less any issue costs and no value assigned to the equity
component of the conversion features of these same debentures. Accretion expense as recorded under Previous GAAP
was reduced, as only debenture issue costs gave rise to accretion expense for these convertible debentures.
5. Deferred income tax liability:
a. Deferred income tax calculated according to IFRS is substantially similar to Previous GAAP and arises from
differences between the accounting and tax bases of our assets and liabilities. To the extent that assets and
liabilities have changed from transition to IFRS, the amount of deferred income tax liability would be impacted.
b. Under Previous GAAP, deferred income tax liabilities were required to be disclosed as either current or long-term.
Under IFRS, all deferred income tax liabilities are considered to be non-current liabilities.
6. Contributed surplus
At January 1, 2010, a portion of unvested RSPIP compensation costs included in contributed surplus effectively
represented cash payments. Under IFRS, this portion was considered a liability and accordingly reclassified to trade and
other accrued liabilities.

7. Finance expense
Under Previous GAAP, accretion of decommissioning liability was included in the amount presented as depreciation of
property, plant and equipment on the Statement of Income and Comprehensive Income. Under IFRS, accretion of
decommissioning liability has been reclassified and is included in finance expense.

8. Royalties
Under Previous GAAP, current taxes included Saskatchewan resource surcharge. Under IFRS, Saskatchewan resource
surcharge has been deemed a royalty and deducted from petroleum and natural gas revenues.

9. Adjustments to the Consolidated Statement of Cash Flows

The transition from Previous GAAP to IFRS had no significant impact on cash flows generated by the Corporation.
Cash flows related to interest are classified as financing while under Previous GAAP, cash flows relating to interest
were classified as operating.

Advantage Oil & Gas Ltd. - 44