SPAO RESO Garantia. Consolidated Financial Statements. for the year ended 31 December 2015

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1 Consolidated Financial Statements for the year ended 31 December 2015

2 Contents Auditors Report 3 Consolidated Statement of Profit or Loss and Other Comprehensive Income 5 Consolidated Statement of Financial Position 7 Consolidated Statement of Cash Flows 8 Consolidated Statement of Changes in Equity 9 Notes to the Consolidated Financial Statements 10 78

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10 1 Background (a) Principal activities These consolidated financial statements include the financial statements of the parent company SPAO RESO Garantia (the Company ) and its subsidiaries (together referred to as the Group ). The Company was established in 1991 in the Russian Federation as an open joint stock insurance company. Starting from 3 June 2015 organization form of open joint stock company RESO Garantia was changed to insurance public stock company. The Company s registered office is 12 Gasheka Street, bld 1, Moscow , Russia. The Company is licensed to provide insurance services in the Russian Federation. The Company conducts insurance business throughout Russia through its head office and a network of branches. The principal subsidiaries are as follows: Name OOO Life Insurance Company Country of incorporation Principal activities 31 December 2015 Ownership, % 31 December 2014 RESO-Garantia Russian Federation Life insurance 100% 100% IPIF Global Capital Markets Russian Federation Regulated mutual fund 100% 100% IPIF Financial Sector Russian Federation Regulated mutual fund 100% 100% ZAO RESO Financial Markets Russian Federation Investments 100% 100% ZAO Investment Company RESO Russian Federation Investments 100% 100% Secular Investments Limited Cyprus Real estate investments 100% 100% OOO Fort Avto Russian Federation Real estate investments 100% 100% OOO SMK RESO-Med Russian Federation Obligatory medical insurance 100% 100% ZAO SK Belrosstrakh Belarus Non-life insurance 100% 98.4% ZAO SNS Lithuania Real estate investments 100% 100% OOO RESO-Leasing Russian Federation Finance leasing 100% 100% OOO RESO Gostinichnye Investicii Russian Federation Real estate investments 100% 100% SOOO RESO Belleasing Belarus Finance leasing % % OOO MIKA Russian Federation Real estate investments 100% 100% OOO RESO-Auto-Service Russian Federation Vehicle repairs 100% - (b) Russian business environment The Group s operations are primarily located in the Russian Federation. Consequently, the Group is exposed to the economic and financial markets of the Russian Federation, which display emergingmarket characteristics. Legal, tax and regulatory frameworks continue to be developed, but are subject to varying interpretations and frequent changes that, together with other legal and fiscal impediments, contribute to the challenges faced by entities operating in the Russian Federation. Current economic and politic situation, including situation in Ukraine and introduction of sanctions against the Russian Federation by particular countries and introduction of responsive sanctions against particular countries by the Russian Federation creates risks for operations conducted by the Group. 10

11 The consolidated financial statements reflect management s assessment of the impact of the Russian business environment on the operations and financial position of the Group. The future business environment may differ from management s assessment. 2 Basis of preparation (a) Statement of compliance The accompanying consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRS). Starting from 1 January 2010 the Group early adopted IFRS 9 Financial Instruments (2009), the standard which specifies how an entity should classify and measure financial assets, in particular that they should be classified on the basis of the entity s business model for managing the financial assets and the contractual cash flow characteristics of the financial asset. (b) Basis of measurement The consolidated financial statements are prepared on the historical cost basis except that financial instruments at fair value through profit or loss, financial instruments at fair value through other comprehensive income, buildings and investment property are stated at fair value. (c) Changes in presentation The amount of RUB thousand that was recognised as additional paid-in capital in the consolidated statement of financial position as at 31 December 2014 and 31 December 2013, and the amount of RUB thousand that was recognised as retained earnings in the consolidated statement of financial position as at 31 December 2014 and 31 December 2013, were reclassified to share capital in the consolidated statement of financial position as at 31 December These reclassifications were made in order to reconcile share capital recognized in financial statements under IFRS to share capital stated in the Charter of the Company. Comparative information has been reclassified to conform to changes in presentation in the current year. The effect of the reclassifications on the consolidated statement of financial position as at 31 December 2014 as previously reported is as follows: As previously reported Amount reclassified As reported in the financial statements 000 RUB 000 RUB 000 RUB Share capital Additional paid-in capital ( ) - Retained earnings ( ) The effect of the reclassifications on the consolidated statement of financial position as at 1 January 2014 as previously reported is as follows: As previously reported Amount reclassified As reported in the financial statements 000 RUB 000 RUB 000 RUB Share capital Additional paid-in capital ( ) - Retained earnings ( )

12 (d) Functional and presentation currency The functional currency of the Company and the majority of its subsidiaries is the Russian Rouble (RUB) as, being the national currency of the Russian Federation, it reflects the economic substance of the majority of underlying events and circumstances relevant to them. The functional currency of ZAO SK Belrosstrakh and SOOO RESO Belleasing is the Belorussian Rouble ( BYR ). In translating BYR to the RUB, assets and liabilities that are included in the statement of financial position are translated at the foreign exchange rate ruling at the reporting date. Income and expense items for all periods presented are translated at the exchange rates existing at the dates of the transactions or a rate that approximates the actual exchange rates and all exchange differences resulting from translation are recorded in the foreign currency translation reserve. Cash flows are translated using the exchange rates existing at the dates of the transactions or at the average rate for a period. Financial information presented in RUB has been rounded to the nearest thousand. (e) Use of estimates and judgements The preparation of consolidated financial statements in conformity with IFRSs 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 could differ from those estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. Information about significant areas of estimation uncertainty and critical judgments in applying accounting policies is described in the following Notes: Revaluation of property and investment property Note 11 and Note 12; Net investments in finance lease Allowance for impairment - Note 13; Financial instruments at amortized cost Allowance for impairment Note 15 and Note 16; Insurance receivables Allowance for impairment - Note 19; Insurance contract provisions Note

13 3 Significant accounting policies The accounting policies set out below are applied consistently to all periods presented in these consolidated financial statements, and are applied consistently by Group entities. (a) (i) Basis of consolidation Business combinations Business combinations, including those under common control, are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. The Group measures goodwill at the acquisition date as the fair value of the consideration transferred (including the fair value of any previously-held equity interest in the acquiree if the business combination is achieved in stages) and the recognised amount of any non-controlling interest in the acquiree, less the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed. When the excess is negative, a bargain purchase gain is recognised immediately in profit or loss. The Group elects on transaction-by-transaction basis whether to measure non-controlling interests at fair value, or at their proportionate share of the recognised amount of the identifiable net assets of the acquiree, at the acquisition date. Transaction costs, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination are expensed as incurred. (ii) Subsidiaries Subsidiaries are investees controlled by the Group. The Group controls an investee when it is exposed to, or has rights to, variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. In particular the Group consolidates investees that it controls on the basis of de facto circumstances. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. (iii) Acquisitions and disposals of non-controlling interests In any business combination non-controlling interests are measured at their proportionate share of the acquiree s identifiable net assets at the acquisition date. Changes in the Group s interest in a subsidiary that do not result in a loss of control are accounted as equity transaction. (iv) Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised gains arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with associates are eliminated to the extent of the Group s interest in the enterprise. Unrealised gains resulting from transactions with associates are eliminated against the investment in the associate. Unrealised losses are eliminated in the same way as unrealised gains except that they are only eliminated to the extent that there is no evidence of impairment. (v) Goodwill Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill is allocated to cash-generating units for impairment testing purposes and is stated at cost less impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. 13

14 (b) Non-controlling interests SPAO RESO Garantia Non-controlling interests are the equity in a subsidiary not attributable, directly or indirectly, to the Group. Non-controlling interests are presented in the consolidated statement of financial position within equity, separately from the equity attributable to equity holders of the Group. Non-controlling interests in profit or loss and total comprehensive income are separately disclosed in the consolidated statement of profit or loss and other comprehensive income. (c) Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of the Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value is determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Foreign currency differences arising on retranslation are recognised in profit or loss. Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of that foreign operation shall be treated as assets and liabilities of the foreign operation. Thus they shall be expressed in the functional currency of the foreign operation and shall be translated at the exchange rate as at the repoting date. (d) (i) Insurance contracts Classification of contracts Contracts under which the Group accepts significant insurance risk from another party (the policyholder ) by agreeing to compensate the policyholder or other beneficiary if a specified uncertain future event (the insured event ) adversely affects the policyholder or other beneficiary are classified as insurance contracts. Insurance risk is risk other than financial risk. Financial risk is the risk of a possible future change in one or more of a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract. Insurance contracts may also transfer some financial risk. Insurance risk is significant if, and only if, an insured event could cause the Group to pay significant claims. Once a contract is classified as an insurance contract, it remains classified as an insurance contract until all rights and obligations are extinguished or expire. Contracts under which the transfer of insurance risk to the Group from the policyholder is not significant are classified as financial instruments. (ii) Recognition and measurement of contracts General insurance contracts Premiums Gross premiums written comprise premiums on contracts entered into during the year, irrespective of whether they relate in whole or in part to a later accounting period. Premiums are disclosed gross of commission payable to intermediaries, insurance premium taxes, levies and similar mandatory contributions. The earned portion of premiums received is recognised as revenue. Premiums are earned from the date of attachment of risk, over the indemnity period using the daily pro-rata method. Outward reinsurance premiums are recognised as an expense in accordance with the daily pro-rata method. The portion of outward reinsurance premiums not recognised as an expense is treated as a prepayment. 14

15 Policy cancellations SPAO RESO Garantia Policies are cancelled if there is objective evidence that the policyholder is not willing or able to continue paying policy premiums. Cancellations therefore affect mostly those policies where policy premiums are paid in instalments over the term of the policy. Cancellations are reported separately from gross written premiums. Unearned premium provision The provision for unearned premiums comprises the proportion of gross premiums written which is estimated to be earned in later accounting periods, computed separately for each insurance contract using the daily pro-rata method. The provision for unearned premiums is recognized net of estimated cancellations of policies in force as of the reporting date. Claims Сlaims incurred comprise claims settled during the financial year together with the movement in the provision for outstanding claims. Claims outstanding comprise provisions for the Group s estimate of the ultimate cost of settling all claims incurred but unpaid at the consolidated statement of financial position date, whether reported or not, and provisions for related external claims handling expenses. Claims outstanding are assessed by reviewing individual claims and making allowance for claims incurred but not yet reported, the effect of both internal and external foreseeable events, such as changes in external claims handling expenses, legislative changes and past experience and trends. Provisions for claims outstanding are not discounted. Anticipated reinsurance and subrogation recoveries are recognised separately as assets. Reinsurance and subrogation recoveries are assessed in a manner similar to the assessment of claims outstanding. Adjustments to the amounts of claims provisions established in prior years are reflected in the consolidated financial statements for the period in which the adjustments are made, and disclosed separately if material. The methods used, and the estimates made, are reviewed regularly. Unexpired risk provision Provision is made for unexpired risks arising from general insurance contracts where the expected value of claims and expenses attributable to the unexpired periods of policies in force at the consolidated statement of financial position date exceeds the unearned premiums provision in relation to such policies after the deduction of any deferred acquisition costs. The provision for unexpired risks is calculated by reference to classes of business which are managed together to back the unearned premiums and unexpired claims provisions. (iii) Reinsurance The Group cedes reinsurance in the normal course of business for the purpose of limiting its potential net loss through the partial transfer of risk to reinsurers. Reinsurance arrangements do not relieve the Group from its direct obligations to its policyholders. Premiums ceded and benefits reimbursed are presented in consolidated statement of profit or loss and other comprehensive income and consolidated statement of financial position on a gross basis. Reinsurance assets include balances due from reinsurance companies for ceded insurance liabilities. Amounts recoverable from reinsurance are estimated in a manner consistent with the outstanding claims provision or settled claims associated with the reinsured policy. Premiums on reinsurance assumed are recognised as revenue and accounted for as if the reinsurance was considered direct business, taking into account the product classification of the reinsured business. 15

16 Amounts recoverable under reinsurance contracts are assessed for impairment at each statement of financial position date. Such assets are deemed impaired if there is objective evidence, as a result of an event that occurred after its initial recognition, that the Group may not recover all amounts due and that the event has a reliably measurable impact on the amounts that the Group will receive from the reinsurer. Only rights under contracts that give rise to significant transfer of insurance risk are accounted for as reinsurance assets. Rights under contracts that do not transfer significant insurance risk are accounted for as financial instruments. (iv) Deferred acquisition costs Acquisition costs, representing commissions, levies and similar mandatory contributions, which vary with and are incurred in connection with the acquisition or renewal of insurance policies, are deferred and amortised over the period in which the related written premiums are earned. Deferred acquisition costs are calculated separately for each line of business and are reviewed by line of business at the time of the policy issue and at the end of each accounting period to ensure they are recoverable based on future estimates. (v) Liability adequacy test At each statement of financial position date, liability adequacy tests are performed to determine if the insurance contract provisions, less deferred acquisition cost and any related intangible assets, such as those acquired in a business combination or portfolio transfer, are adequate. Current best estimates of all future contractual cash flows and related expenses, such as claims handling expenses, and investment income from assets backing the insurance contract provisions are used in performing these tests. If a shortfall is identified, the related deferred acquisition cost and related intangible assets are written down and, if necessary, an additional provision is established. The deficiency is recognised in consolidated statement of profit or loss and other comprehensive income for the year. (vi) Insurance receivables and payables Amounts due to and from policyholders, agents and reinsurers are financial instruments and are included in insurance receivables and payables, and not in insurance contract provisions or reinsurance assets. Amounts due from policyholders are recognized net of estimated cancellations of policies in force as at the balance sheet date. The Group reviews its insurance receivables to assess impairment on a regular basis. The accounting policy on impairment is described in Note 3 (k). (e) Cash and cash equivalents The Group considers cash and demand deposits to be cash and cash equivalents. Cash and cash equivalents are carried at amortised cost in the consolidated statement of financial position. (f) Financial instruments (i) Classification Financial instruments at amortized cost are financial assets which are held within a business model whose objective is to hold assets in order to collect contractual cash flows. The contractual terms of such financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. The Group has a business model to hold bonds recognized as financial instruments at amortized cost until maturity unless: - there is a regulatory change that has come into force or is imminently pending that affects the Group s ability to hold bonds generally or bonds recognized as financial instruments at amortized cost in particular; - there is an issuer or a bond credit rating deterioration, typically evidenced by more than two notches downgrade vs. credit rating at acquisition of the bond recognized as financial instruments at amortized cost; 16

17 - international sanctions have come into force or are being considered which may have a material negative effect on the value of the financial instrument; - the Group takes a decision to exit, or reduce its exposure to, a particular bond market segment or country; - market yield-to-maturity on a bond falls below 5.5% p.a. In any of the above circumstances bonds may be disposed of on the market, provided further that disposals from the bonds portfolio recognized as financial instruments at amortized cost shall not exceed 10% of such portfolio in each financial year (other than disposals caused by the regulatory changes, credit rating deterioration or imposition of international sanctions described above). Financial instruments at fair value through profit or loss are financial assets that are measured at fair value unless they are measured at amortised cost. Financial instruments at fair value through other comprehensive income are those investments in equity instruments for which the Group has made an irrevocable election to present in other comprehensive income subsequent changes in the fair value of these instruments. (ii) Recognition Financial assets and liabilities are recognized in the consolidated statement of financial position when the Group becomes a party to the contractual provisions of the instrument. All regular way purchases of financial assets are accounted for at the settlement date. (iii) Measurement A financial asset or liability is initially measured at its fair value plus, in the case of a financial asset or liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or liability. Subsequent to initial recognition, financial assets, including derivatives that are assets, are measured at their fair values, without any deduction for transaction costs that may be incurred on sale or other disposal, except for financial instruments at amortized cost which are measured at amortized cost using the effective interest rate method. All financial liabilities, other than those designated at fair value through profit or loss and financial liabilities that arise when a transfer of a financial asset carried at fair value does not qualify for derecognition, are measured at amortized cost. Amortized cost is calculated using the effective interest rate method. Premiums and discounts, including initial transaction costs, are included in the carrying amount of the related instrument and amortized based on the effective interest rate of the instrument. (iv) Amortized cost The amortised cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment. Premiums and discounts, including initial transaction costs, are included in the carrying amount of the related instrument and amortized based on the effective interest rate of the instrument. (v) Fair value measurement principles 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 in the principal, or in its absence, the most advantageous market to which the Group has access at that date. The fair value of a liability reflects its non-performance risk. 17

18 When available, the Group measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. When there is no quoted price in an active market, the Group uses valuation techniques that maximize the use of relevant observable inputs and minimize the use of unobservable inputs. The chosen valuation technique incorporates all the factors that market participants would take into account in these circumstances. The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price, i.e., the fair value of the consideration given or received. If the Group determines that the fair value at initial recognition differs from the transaction price and the fair value is evidenced neither by a quoted price in an active market for an identical asset or liability nor based on a valuation technique that uses only data from observable markets, the financial instrument is initially measured at fair value, adjusted to defer the difference between the fair value at initial recognition and the transaction price. Subsequently, that difference is recognised in profit or loss on an appropriate basis over the life of the instrument but no later than when the valuation is supported wholly by observable market data or the transaction is closed out. Fair values reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the Group entity and the counterparty where appropriate. Fair value estimates obtained from models are adjusted for any other factors, such as liquidity risk or model uncertainties, to the extent that the Group believes a third-party market participant would take them into account in pricing a transaction. The fair value of derivatives that are not exchange-traded is estimated at the amount that the Group would receive or pay to terminate the contract at the consolidated statement of financial position date taking into account current market conditions and the current creditworthiness of the counterparties. The Group recognises transfers between levels of the fair value hierarchy as of the end of the reporting period during which the change has occurred. A gain or loss arising from a change in the fair value of a financial asset or liability is recognized as follows: - a gain or loss on a financial instrument classified as at fair value through profit or loss is recognized in profit or loss; - a gain or loss on an financial instruments at fair value through other comprehensive income is recognized as other comprehensive income in equity until the asset is derecognized, at which time the cumulative gain or loss previously recognised in equity is recognized in retained earnings. For financial assets and liabilities carried at amortized cost, a gain or loss is recognized in profit or loss when the financial asset or liability is derecognized or impaired, and through the amortization process. (vi) Derecognition The Group derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire, or when it transfers the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred or in which the Group neither transfers nor retains substantially all the risks and rewards of ownership and it does not retain control of the financial asset. Any interest in transferred financial assets that qualify for derecognition that is created or retained by the Group is recognised as a separate asset or liability in the statement of financial position. The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. The Group enters into transactions whereby it transfers assets recognised on its consolidated statement of financial position, but retains either all risks and rewards of the transferred assets or a portion of them. If all or substantially all risks and rewards are retained, then the transferred assets are not derecognised. 18

19 In transactions where the Group neither retains nor transfers substantially all the risks and rewards of ownership of a financial asset, it derecognises the asset if control over the asset is lost. In transfers where control over the asset is retained, the Group continues to recognise the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred assets. If the Group purchases its own debt, it is removed from the consolidated statement of financial position and the difference between the carrying amount of the liability and the consideration paid is included in gains or losses arising from early retirement of debt. The Group writes off assets deemed to be uncollectible. (vii) Repurchase agreements and reverse repurchase agreements Securities sold under sale and repurchase (repo) agreements are accounted for as secured financing transactions, with the securities retained in the consolidated statement of financial position and the counterparty liability included in amounts payable under repo transactions. The difference between the sale and repurchase prices represents interest expense and is recognized in profit or loss over the term of the repo agreement using the effective interest rate method. Securities purchased under agreements to resell (reverse repo) are recorded as loans issued within financial instruments measured at amortized cost. The difference between the purchase and resale prices represents interest income and is recognized in profit or loss over the term of the repo agreement using the effective interest method. If assets purchased under an agreement to resell are sold to third parties, the obligation to return securities is recorded as a trading liability and measured at fair value. (viii) Offsetting Financial assets and liabilities are offset and the net amount reported in the consolidated statement of financial position when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. (g) (i) Property and equipment Owned assets Items of property and equipment are stated at cost less accumulated depreciation and impairment losses, except for buildings which are stated at revalued amounts as described below. Where an item of property and equipment comprises major components having different useful lives, they are accounted for as separate items of property and equipment. (ii) Leased assets Leases under which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Equipment acquired by way of finance lease is stated at the amount equal to the lower of its fair value and the present value of the minimum lease payments at inception of the lease, less accumulated depreciation and impairment losses. (iii) Subsequent expenditure Expenditure incurred to replace a component of an item of property, plant and equipment that is accounted for separately, is capitalized with the carrying amount of the component being written off. Other subsequent expenditure is capitalized if future economic benefits will arise from the expenditure. All other expenditure, including repairs and maintenance expenditure, is recognized in profit or loss as an expense as incurred. 19

20 (iv) Revaluation SPAO RESO Garantia Buildings of the Group are subject to revaluation on a regular basis. The frequency of revaluation depends upon the movements in the fair values of the buildings being revalued. A revaluation increase on a building is recognised as other comprehensive income directly in equity except to the extent that it reverses a previous revaluation decrease recognised in profit or loss, in which case it is recognised in profit or loss. A revaluation decrease on a building is recognised in profit or loss except to the extent that it reverses a previous revaluation increase recognised as other comprehensive income directly in equity, in which case it is recognised in other comprehensive income. (v) Depreciation Depreciation is charged to profit or loss on a straight-line basis over the estimated useful lives of the individual assets. Depreciation commences on the date of acquisition or, in respect of internally constructed assets, from the time an asset is completed and ready for use. Land is not depreciated. The estimated useful lives are as follows: Buildings Office and computer equipment Vehicles Other (h) Investment property 40 years; 5 years; 5 years; 3 to 5 years. Investment properties are properties which are held either to earn rental income or for capital appreciation, or for both. Investment properties are measured initially at cost, including transaction costs. After initial recognition investment properties are measured at fair value. Any gain or loss arising from a change in fair value is recognised in profit or loss. Rental income from investment property is accounted for as described in Note 3(n). If an investment property becomes owner-occupied, it is reclassified to property and equipment, and its fair value at the date of reclassification becomes its cost for accounting purposes. When the Group begins to redevelop an existing investment property for continued future use as investment property, the property remains an investment property, which is measured based on the fair value model, and is not reclassified as property and equipment during the redevelopment. (i) Intangible assets Acquired intangible assets with finite useful life are carried at cost less accumulated amortisation and impairment losses. Amortisation is charged to profit or loss on a straight-line basis over the estimated useful lives of intangible assets. The estimated useful life and amortisation method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. Intangible assets with indefinite useful lives that are acquired separately are carried at cost less accumulated impairment losses. (j) Finance lease operations In accordance with IAS 17 Leases leasing operations of the Group are classified as operating or finance lease from the inception date. A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership. The inception of the lease is the earlier of the date of the lease agreement and the date of commitment by the parties to the principal provisions of the lease. As at this date the amounts to be recognised at the commencement of the lease term are determined. 20

21 The commencement of the lease term is the date from which the lessee is entitled to exercise its right to use the leased asset. It is the date of initial recognition of the lease. (i) Finance lease Group as a lessor Gross investment in lease consists of minimum lease payments in accordance with the lease agreement. Minimum lease payments are the payments over the lease term that the lessee is or can be required to make, excluding contingent rent, costs for services and taxes to be paid by and reimbursed to the lessor. Net investment in lease is equal to gross investment in lease net of unearned lease income and is shown in the consolidated statement of financial position as net investment in finance lease. Unearned lease income is amortised and included in interest income over the term of the lease contract in order to maintain invariable return on net investment in lease. Impairment of finance lease contracts is treated as an expense and is reflected as a decrease in net investment in lease by means of impairment provision. The interest rate implicit in the lease is the discount rate that, at the inception of the lease, causes the aggregate present value of the minimum lease payments and the unguaranteed residual value to be equal to the sum of the fair value of the leased asset and any initial direct costs of the lessor. Advances paid by the lessee prior to the commencement of the lease are included within advances received and are netted off with the finance lease receivables at the inception of the lease. (ii) Assets to be recovered upon termination of finance leases When finance lease receivables are overdue, the Group terminates the finance lease agreement with the lessee, and finance lease receivables are transferred to assets to be recovered upon termination of finance lease in amount of finance lease receivable lea impairment provision as at the date of the transfer. The Group informs the lessee of the termination of the lease agreement. The Group stops accrual of interest income as at the date of the transfer of finance lease receivables to assets to be recovered upon termination of finance leases. Management considers the following factors when making a decision on whether the lease agreement should be terminated: impairment of finance lease receivable, loss of leased asset or damage of leased asset, insolvency of the lessee, legal claims against the lessee, and other. These factors, considered together or individually, influence management decision on whether to terminate the lease agreement. Upon termination of lease agreement finance lease receivables are transferred to assets to be recovered upon termination of finance lease. Assets to be recovered cannot be transferred to finance lease receivables. Assets to be recovered are interest-free assets that are subsequently measured at the lower of cost, which equals net finance lease receivable, and net realisable value. Carrying value of these assets is to be recovered by collection assets from lessees and subsequent sale of those assets. (iii) Assets held for sale Assets held for sale include equipment repossessed from lessees that failed to make the lease payments, which will later be sold. Assets held for sale are measured at the lower of carrying amount and net realisable value. (k) Impairment The Group assesses at the end of each reporting period whether there is any objective evidence that a financial asset or group of financial assets is impaired. If any such evidence exists, the Group determines the amount of any impairment loss. 21

22 A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the financial asset (a loss event) and that event (or events) has had an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Objective evidence that financial assets are impaired can include default or delinquency by a borrower, breach of loan covenants or conditions, restructuring of financial asset or group of financial assets that the Group would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, deterioration in the value of collateral, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers in the group, or economic conditions that correlate with defaults in the group. (i) Financial assets carried at amortized cost and receivables Financial assets carried at amortized cost consist principally of financial instruments at amortized cost and receivables. The Group reviews its financial instruments at amortized cost and receivables, to assess impairment on a regular basis. A financial instrument at amortized cost or receivable is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the financial instrument at amortized cost or receivable (a loss event) and that event (or events) has had an impact on the estimated future cash flows of the financial instrument at amortized cost or receivable that can be reliably estimated. If the Group determines that no objective evidence of impairment exists for an individually assessed financial instrument at amortized cost or receivable, whether significant or not, it includes the financial instrument at amortized cost or receivable in a group of financial instruments at amortized cost or receivables with similar credit risk characteristics and collectively assesses them for impairment. Financial instruments at amortized cost or receivables that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. If there is objective evidence that an impairment loss on a financial instrument at amortized cost or receivable has been incurred, the amount of the loss is measured as the difference between the carrying amount of the financial instrument at amortized cost or receivable and the present value of estimated future cash flows. Contractual cash flows adjusted on the basis of relevant observable data that reflect current economic conditions provide the basis for estimating expected cash flows. (ii) Non-financial assets Other non-financial assets, other than deferred taxes, are assessed at each reporting date for any indications of impairment. The recoverable amount of goodwill is estimated at each reporting date. The recoverable amount of non-financial assets is the greater of their fair value less costs to sell and their value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the cashgenerating unit to which the asset belongs. An impairment loss is recognised when the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. All impairment losses in respect of non-financial assets except goodwill are recognized in profit or loss and reversed only if there has been a change in the estimates used to determine the recoverable amount. Any impairment loss reversed is only reversed to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. 22

23 (l) Provisions A provision is recognised in the consolidated statement of financial position when the Group has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. (m) Share capital (i) Repurchase of share capital When share capital recognised as equity is repurchased, the amount of the consideration paid, including directly attributable costs, is recognised as a decrease in equity in the consolidated financial statements. (ii) Dividends The ability of the Group to declare and pay dividends is subject to the rules and regulations of Russian legislation. Dividends in relation to ordinary shares are reflected as an appropriation of retained earnings in the period when they are declared. (n) Taxation Income tax comprises current and deferred tax. Income tax is recognised in profit or loss except to the extent that it relates to items of other comprehensive income or transactions with shareholders recognised directly in equity, in which case it is recognised within other comprehensive income or directly within equity. Current tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the following temporary differences: goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit and temporary differences related to investments in subsidiaries where the parent is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the temporary differences, unused tax losses and credits can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. (o) Interest income and expenses recognised in the consolidated financial statements Interest income and expense are recognised in profit or loss using the effective interest method. Other fee and commission income is recognised when the corresponding service is provided. Dividend income from investments in companies where the Group does not have control or significant influence is recognised in profit or loss on the date that the dividend is declared. Operating lease payments are recognised in profit or loss on a straight line basis over the period of lease. Lease incentives are recognised in profit or loss as an integral part of the total lease income. Rental income from investment properties leased out under operating leases is recognized in profit or loss on a straight line basis over the period of the lease. Lease incentives are recognised in profit or loss as an integral part of the total lease income. 23

24 (p) Segment reporting SPAO RESO Garantia An operating segment is a component of a Group that engages in business activities from which it may earn revenues and incur expenses; whose operating results are regularly reviewed by the chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. (q) New standards and interpretations not yet adopted A number of new Standards, amendments to Standards and Interpretations are not yet effective as at 31 December 2015, and have not been applied in preparing these consolidated financial statements. Of these pronouncements, potentially the following will have an impact on the Group s operations. The Group plans to adopt these pronouncements when they become effective. IFRS 9 Financial Instruments, published in July 2014, is intended ultimately to replace International Financial Reporting Standard IAS 39 Financial Instruments: Recognition and Measurement. The Group understands that new standard will bring significant changes in the process of accounting of financial instruments and will have significant impact on consolidated financial statements. The standard will be effective for annual periods beginning on or after 1 January 2018 and will be applied retrospectively with some exemptions. Starting from 1 January 2010 the Group early adopted IFRS 9 Financial Instruments (2009), the standard which specifies how an entity should classify and measure financial assets, in particular that they should be classified on the basis of the entity s business model for managing the financial assets and the contractual cash flow characteristics of the financial asset. IFRS 16 Leases replaces existing guidance on accounting for lease established by IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC 15 Operating leases Incentives and SIC 27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. It eliminates dual accounting in the financial statements of the lessor, when finance lease in recognised on balance, and operating lease is shown off-balance. Single accounting practice is established which stipulates recognition of lease in accordance with current requirements for recognition of finance lease. For the lessor current accounting practices do not change significantly lessors will go on with classification of leases as either operating or finance. The Group is currently in the process of evaluation of the effect of IFRS 16 on the consolidated financial statements. IFRS 16 is effective for annual reporting periods beginning on or after 1 January 2019, with early adoption permitted as long as IFRS 15 Revenue is adopted as well. IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaces existing revenue recognition guidance, including IAS 18 Revenue, IAS 11 Construction Contracts and IFRIC 13 Customer Loyalty Programmes. IFRS 15 is effective for annual reporting periods beginning on or after 1 January 2018, with early adoption permitted. The following new or amended standards are not expected to have a significant impact of the Group s consolidated financial statements. IFRS 14 Regulatory Deferral Accounts. Accounting for Acquisitions of Interests in Joint Operations (Amendments to IFRS 11). Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38). Equity Method in Separate Financial Statements (Amendments to IAS 27). Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28). Various Improvements to IFRS are dealt with on a standard-by-standard basis. All amendments, which result in accounting changes for presentation, recognition or measurement purposes, will 24