Syriatel Mobile Telecom S.A. Notes to the consolidated financial statements 31 December 2014

Transcription

1 1. Corporate information During the year 2000, an agreement was concluded between Drex Technology S.A and Orascom Telecom Holding SAEEgypt to establish Syriatel Mobile Telecom (hereinafter called the Company or Syriatel ) as operator of cellular telephone network in Syria. The Company was established after signing the BOT agreement (BuildOperateTransfer) on 12 February 2001 between Drex Technology SA and Orascom Telecom Holding SAEEgypt, as one party, and the Syrian Telecommunication Establishment STE as another party, to build a cellular communication network GSM. The Company underwent two phases: the trial project phase and the permanent project phase. During the trail project phase, the Company built and operated the cellular communication network at its own expenses without any charge to the STC. Furthermore, it was agreed that all revenues would belong to the STC up to the end of the trial project phase. 13 February 2001 was the date at which the trial project ended. 14 February 2001 was the date at which the permanent project commenced. The Company obtained its commencement order from the STE on 29 June During the last quarter of 2001, the Company s registration procedures were completed, and the Company was registered as a Joint Stock Company under No.5141 and its headquarters are located in the rural area of Damascus suburbs DariaSyrian Arab Republic. The Company s main objectives are to build cellular services project, market, import and export telecommunication equipment and SIM cards, electronic circuities and perform all related services and activities, obtain rights, royalties and licenses to achieve the Company s objectives. The Company s period is unlimited starting from 18 November According to the provisions of the BOT contract (BuildOperateTransfer), the project will be transferred to the STC at the end of the investment period of 15 years from the commencement order date and is renewable for 3 more years based on the operator s request a year before the end of the contract expiry date. The provisions of the above mentioned BOT contract also stipulates for revenue sharing with STC during the term of the contract as follows: First three years 30% Second three years 40% Remaining years 50% Years of extension 60% On 30 October, an agreement to terminate the BOT contract (BuildOperateTransfer) was signed between STC and Syriatel Mobile Telecom S.A. On, the Council of Ministers has approved this termination agreement under resolution No /1. Also the Company obtained a license to operate public mobile telecommunication networks in Syrian Arab Republic from the Syrian Telecommunications Regulatory Authority (SyTRA) dated 17 December and approved by the Council of Ministers on (note 36). The BOT termination agreement became effective on 1 January 2015 which was the official date of the license. Based on legal advice, due to the outstanding legal cases with the STE which are continuing despite the BOT agreement being converted to a license, management has retained all of the provisions relating to these cases as at (note 25 and 26). Therefore, no changes were made to the consolidated financial statements in connection with the BOT termination agreement. The consolidated financial statements for the year ended were authorised for issue in accordance with a resolution of the Board of Directors on 26 March. 8

2 2. Basis of preparation and accounting policies 2.1 Basis of preparation The consolidated financial statements have been prepared on a historical cost basis. The consolidated financial statements are presented in Syrian Pounds () which is the functional currency of the Company and its subsidiaries. Taking into account the latest available official Consumer Price Index and other qualitative indicators, the economy in which the Company predominantly operates is not considered as hyperinflationary. The consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). The consolidated financial statements do no represenet the statutory consolidated financial statements of the Company and have been prepared for management use only and a separate consolidated financial statements have been issued. 2.2 Basis of consolidation The consolidated financial statements comprise the financial statements of the Company and its subsidiaries as at. Control is achieved when the Company is exposed, 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. Specifically, the Company controls an investee if, and only if, the Company has: Power over the investee (i.e., existing rights that give it the current ability to direct the relevant activities of the investee) Exposure, or rights, to variable returns from its involvement with the investee The ability to use its power over the investee to affect its returns Generally, there is a presumption that a majority of voting rights results in control. To support this presumption and when the Company has less than a majority of the voting or similar rights of an investee, the Company considers all relevant facts and circumstances in assessing whether it has power over an investee, including: The contractual arrangement(s) with the other vote holders of the investee Rights arising from other contractual arrangements The company s voting rights and potential voting rights The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated financial statements from the date the Company gains control until the date the Company ceases to control the subsidiary. Profit or loss and each component of other comprehensive income OCI are attributed to the equity holders of the parent of the Company and to the noncontrolling interests, even if this results in the noncontrolling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Company s accounting policies. All intracompany assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Company are eliminated in full on consolidation. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Company loses control over a subsidiary, it derecognises the related assets (including goodwill), liabilities, noncontrolling interest and other components of equity, while any resultant gain or loss is recognised in profit or loss. Any investment retained is recognised at fair value. 9

3 2. Basis of preparation and accounting policies (Continued) 2.2 Basis of consolidation (Continued) The consolidated financial statements comprise the financial statements of the Company and its following subsidiaries: Name Syriatel Service and Consulting S.A. Syriatel Management (LTD) Country of origin Syria Syria Direct and indirect Activities ownership interest Trading, manufacturing, consulting and service activities 99% 99% Trading, industrial, consulting, and services activities 100% 100% 2.3 Changes in accounting policies The accounting policies adopted are consistent with those of the previous financial year except for the application of hedge accounting in accordance with IAS 39 requirements as illustratred in note 10. The Company has adopted the following new and amended IFRS and IFRIC interpretations as of 1 January. The adoption of these standards and interpretations did not have any impact on the financial position or performance of the Company. Investment Entities Amendments to IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosure of Interests in Other Entities and IAS 27 Separate Financial Statements Offsetting Financial Assets and Financial Liabilities Amendments to IAS 32 Financial Instruments: Presentation Recoverable Amount Disclosures for NonFinancial Assets Amendments to IAS 36 Impairment of Assets Novation of Derivatives and Continuation of Hedge Accounting Amendments to IAS 39 Financial Instruments: Recognition and Measurement IFRIC 21 Levies Improvements to IFRSs ( ) Cycle: Amendments to IFRS 13 Shortterm receivables and payables Improvements to IFRSs (2011) Cycle: Amendments to IFRS 1 Meaning of effective IFRSs 10

4 2. Basis of preparation and accounting policies (continued) 2.4 IASB Standards and Interpretations issued not yet effective Following are the new or amended standards and interpretations which have been issued but not yet effective for the year ended : IFRS 9 Financial Instruments In July, the IASB issued the final version of IFRS 9 Financial Instruments which reflects all phases of the financial instruments project and replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. The standard introduces new requirements for classification and measurement, impairment, and hedge accounting. IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early application permitted. Retrospective application is required, but comparative information is not compulsory. Early application of previous versions of IFRS 9 (2009, 2010 and ) is permitted if the date of initial application is before 1 February The adoption of IFRS 9 will have an effect on the classification and measurement of the Company s financial assets, but no impact on the classification and measurement of the Company s financial liabilities. IFRS 14 Regulatory Deferral Accounts IFRS 14 is an optional standard that allows an entity, whose activities are subject to rateregulation, to continue applying most of its existing accounting policies for regulatory deferral account balances upon its firsttime adoption of IFRS. Entities that adopt IFRS 14 must present the regulatory deferral accounts as separate line items on the statement of financial position and present movements in these account balances as separate line items in the statement of profit or loss and other comprehensive income. The standard requires disclosures on the nature of, and risks associated with, the entity s rateregulation and the effects of that rateregulation on its financial statements. IFRS 14 is effective for annual periods beginning on or after 1 January This standard is not expected to have an effect on the Company. Amendments to IAS 19 Defined Benefit Plans: Employee Contributions IAS 19 requires an entity to consider contributions from employees or third parties when accounting for defined benefit plans. Where the contributions are linked to service, they should be attributed to periods of service as a negative benefit. These amendments clarify that, if the amount of the contributions is independent of the number of years of service, an entity is permitted to recognise such contributions as a reduction in the service cost in the period in which the service is rendered, instead of allocating the contributions to the periods of service. This amendment is effective for annual periods beginning on or after 1 July. It is not expected that this amendment would be relevant to the Company, since none of the entities within the Company has defined benefit plans with contributions from employees or third parties. Annual improvements Cycle These improvements are effective from 1 July and are not expected to have a material impact on the Company. They include: IFRS 2 Sharebased Payment IFRS 3 Business Combinations IFRS 8 Operating Segments IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets IAS 24 Related Party Disclosures Annual improvements 2011 Cycle These improvements are effective from 1 July and are not expected to have a material impact on the Company. They include: IFRS 3 Business Combinations IFRS 13 Fair Value Measurement IAS 40 Investment Property 11

5 2. Basis of preparation and accounting policies (continued) 2.4 IASB Standards and Interpretations issued not yet effective (continued) IFRS 15 Revenue from Contracts with Customers IFRS 15 was issued in May and establishes a new fivestep model that will apply to revenue arising from contracts with customers. Under IFRS 15 revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The principles in IFRS 15 provide a more structured approach to measuring and recognising revenue. The new revenue standard is applicable to all entities and will supersede all current revenue recognition requirements under IFRS. Either a full or modified retrospective application is required for annual periods beginning on or after 1 January 2017 with early adoption permitted. The Company is currently assessing the impact of IFRS 15 and plans to adopt the new standard on the required effective date. Amendments to IFRS 11 Joint Arrangements: Accounting for Acquisitions of Interests The amendments to IFRS 11 require that a joint operator accounting for the acquisition of an interest in a joint operation, in which the activity of the joint operation constitutes a business must apply the relevant IFRS 3 principles for business combinations accounting. The amendments also clarify that a previously held interest in a joint operation is not remeasured on the acquisition of an additional interest in the same joint operation while joint control is retained. In addition, a scope exclusion has been added to IFRS 11 to specify that the amendments do not apply when the parties sharing joint control, including the reporting entity, are under common control of the same ultimate controlling party. The amendments apply to both the acquisition of the initial interest in a joint operation and the acquisition of any additional interests in the same joint operation and are prospectively effective for annual periods beginning on or after 1 January 2016, with early adoption permitted. These amendments are not expected to have any impact to the Company. Amendments to IAS 16 and IAS 38: Clarification of Acceptable Methods of Depreciation and Amortisation The amendments clarify the principle in IAS 16 and IAS 38 that revenue reflects a pattern of economic benefits that are generated from operating a business (of which the asset is part) rather than the economic benefits that are consumed through use of the asset. As a result, a revenuebased method cannot be used to depreciate property, plant and equipment and may only be used in very limited circumstances to amortise intangible assets. The amendments are effective prospectively for annual periods beginning on or after 1 January 2016, with early adoption permitted. These amendments are not expected to have any impact to the Company given that the Company has not used a revenuebased method to depreciate its noncurrent assets. Amendments to IAS 27: Equity Method in Separate Financial Statements The amendments will allow entities to use the equity method to account for investments in subsidiaries, joint ventures and associates in their separate financial statements. Entities already applying IFRS and electing to change to the equity method in its separate financial statements will have to apply that change retrospectively. For firsttime adopters of IFRS electing to use the equity method in its separate financial statements, they will be required to apply this method from the date of transition to IFRS. The amendments are effective for annual periods beginning on or after 1 January 2016, with early adoption permitted. These amendments will not have any impact on the Company s consolidated financial statements. 2.5 Significant accounting judgments, estimates and assumptions The preparation of the Company s consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the end of the reporting period. However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the assets or liabilities affected in future periods. 12

6 2. Basis of preparation and accounting policies (continued) 2.5 Significant accounting judgments, estimates and assumptions effective (continued) Going concern The Company s management has made an assessment of the Company s ability to continue as a going concern. Despite the current events that the Syrian Arab Republic is experiencing and the inherently uncertain future outcomes of these events, the Company s management is satisfied that the Company has the adequate recourses to continue in buisness for the foreseeable future. Furthermore, the management is not aware of any material uncertainties that may cast significant doubt on the Company s ability to continue as going concern. Therefore, the consolidated financial statements continued to be prepared on a going concern basis. Impairment of nonfinancial assets The Company assesses at each reporting date whether there is an indication that a nonfinancial asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Company estimates the asset s recoverable amount. When the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset s recoverable amount since the last impairment loss was recognised. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Useful lives of property and equipment The management determines the estimated useful lives of its property and equipment for calculating depreciation. This estimate is determined after considering the expected usage of the asset, physical wear and tear, technical or commercial obsolescence. The management reviews, on an annual basis, the useful lives of property and equipment. Future depreciation charges would be adjusted where management believes the useful lives differ from previous estimates. Impairment of inventories Inventories are held at the lower of cost and net realizable value. When inventories become old or obsolete, an estimate is made of their net realizable value. For individually significant amounts, this estimation is performed on an individual basis. Amounts which are not individually significant, but which are old or obsolete, are assessed collectively and a provision is applied according to the inventory type and the degree of aging or obsolescence, based on anticipated selling prices. Differences in the actual amounts realized in the future and the amounts expected will be recorded in the consolidated income statement. Impairment of accounts receivable An estimate of the collectible amount of accounts receivable is made when collection of the full amount is no longer probable. For individually significant amounts, this estimation is performed on an individual basis. Amounts which are not individually significant, but are past due, are assessed collectively and a provision is applied according to the length of time past due. Differences between the amounts actually collected and the amounts expected in the future are recorded in the consolidated income statement. 13

7 2. Basis of preparation and accounting policies (continued) 2.5 Significant accounting judgments, estimates and assumptions (continued) Taxes The Company s management estimates the income tax in accordance with the applicable laws, including the estimation of net exposure that may arise from each taxable item, and assesses the temporary differences resulting from the different accouting for some elements of the financial statements in accordance with the International Financial Reporting Standards and for tax purposes. Deferred tax assets are recognised for unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Provision for project handover The Company s management estimates a yearly provision for project handover in the consolidated income statement by using the reversed sumofyears method, where the provision for recent years is greater than that of early years. The provision would be recorded in full by the year Based on management estimates and assumptions during the third quarter of 2011, the Company changed the method of estimating the provision of project handover by using the sumofyears method instead of reversed sumofyears method where the provision taken in recent years is less than the provision taken in the first years. Accordingly, the period for building the provision has been changed from year 2017 to year Other Provisions The Company's management estimates provisions for both claims clearance with the STC and for employees related expenses which might paid later. The Company's management estimated a provision on the total amounts from networking of international incoming and outgoing calls to the mobile network, taking into consideration that this issue is under discussion and the final resolution will be made soon with the parties concerned under the supervision of SyTRA. The Company s management estimated a provision for impairment of GSM equipment which may incure as a result of the probable damage of these equipment due to the current events in the Syrian Arab Republic. Foreign currencies Transactions in foreign currencies are initially recorded at the rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the reporting date. All differences are taken to the consolidated income statement. Nonmonetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. 14

8 2. Basis of preparation and accounting policies (continued) 2.6 Summary of significant accounting policies Revenue recognition Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received, net of discounts, rebates, and other sales taxes or duties. The following specific recognition criteria must also be met before revenue is recognized: Rendering of service Revenue from postpaid lines upfront connection fees is recognized at point of sale while revenue from prepaid lines upfront connection fees is recognized when the customer makes the first call. Revenue from telecommunication services is recognized when earned. Unbilled revenue from the billing cycles dating to the end of each month is determined based on traffic and is accrued at the end of each month. Revenue from sale of prepaid airtime cards and prepaid airtime is recognized based on traffic. Interest income Revenue is recognized as the interest accrues using the effective interest rate. Construction revenues According to IFRIC 12, when the operator builds infrastructure (startup capital expenditures) in exchange for the right to charge users of the public service, revenues from construction services should be accounted for in accordance with IAS 11Construction Contracts and the right to charge users of the public service should be treated as an exchange of assets and accounted for in accordance with IAS 38 Intangible Assets. In the case of Syriatel, as no distinction is made between compensation for building and compensation for operating the infrastructure when determining customer network access charges, and since there are no external benchmarks that could be used to determine the respective fair value of these two items, revenues recognized during the construction phase are limited to the amount of the costs incurred. Taxation Taxation is provided in accordance with Syrian fiscal regulations. Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the date of the consolidated statement of financial position. Deferred income tax is provided using the liability method on all temporary differences at the date of the statement of financial position. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on laws that have been enacted at the date of the consolidated statement of financial position. The carrying amount of deferred income tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilized. 15

9 2. Basis of preparation and accounting policies (continued) 2.6 Summary of significant accounting policies (continued) Inventories Inventories are valued at the lower of cost or net realizable value. Costs are those expenses incurred in bringing each inventory item to its present location and condition including purchase cost on a weighted average basis, custom duties and freight in charges. Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. Cash and cash equivalents For the purpose of the statement of cash flows, cash and cash equivalents consist of cash on hand, bank balances, and shortterm deposits with an original maturity of three months or less, net of outstanding bank overdrafts. Accounts receivable Accounts receivable are stated at original invoice value less any provision for any uncollectable amounts. An estimate for doubtful debts is made when collection of the full or partial amount is no longer probable. Bad debts are written off when there is no probability of recovery. Carrying amount is reduced through use of an allowance account. Impairment of financial assets The Company assesses at each reporting date, whether there is any objective evidence that a financial asset or group of financial asset is impaired. The value of the asset or group of financial assets is impaired 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 asset (loss event). This event has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Objective evidence include indications that the borrower or group of borrowers are experiencing significant financial difficulty or a high probability of bankruptcy or financial reorganization, where data indicates that there is a measurable decrease in the estimated future cash flows, such as deferred payments or economic conditions associated with payment delays. Financial assets carried at amortized cost For financial assets carried at amortized cost, the Company first assesses individually whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Company determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognized are not included in a collective assessment of impairment. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). discounted at the financial asset s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the loss is recognised in consolidated income statement. If the amount of impairment loss is changed, in a subsequent period whether increase or decrease, and the change can be linked objectively to a specific event occurring after the recognition of the impairment, the impairment loss that has been previously recognized will be reversed. Accounts payable and accruals Liabilities are recognized for amounts to be paid in the future for goods or services received, whether billed by the supplier or not. Provisions Provisions are recognized when the Company has an obligation (legal or constructive) arising from a past event, and the costs to settle the obligation are both probable and able to be reliably measured. 16

10 2. Basis of preparation and accounting policies (continued) 2.6 Summary of significant accounting policies (continued) Derecognition of financial assets and financial liabilities Financial assets A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognized (i.e. removed from the Company s consolidated statement of financial position) when: The rights to receive cash flows from the asset have expired, or The Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a passthrough arrangement; and either (a) the Company has transferred substantially all the risks and rewards of the asset, or (b) the Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset When the Company has transferred its rights to receive cash flows from an asset or has entered into a passthrough arrangement, it evaluates if and to what extent it has retained the risks and rewards of ownership. When it has neither transferred nor retained substantially all of the risks and rewards of the asset, nor transferred control of the asset, the Company continues to recognise the transferred asset to the extent of the Company s continuing involvement. In that case, the Company also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Company has retained. Financial liabilities A financial liability is derecognized when the obligation under the liability is discharged or cancelled, or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the consolidated income statement. Offsetting of financial instruments Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statement of financial position if there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, to realise the assets and settle the liabilities simultaneously. Dividends on ordinary shares Dividends on ordinary shares are recognized as liability and deducted from equity when they are approved by the Company s shareholders. Investment in associates The Company s investment in its associate is accounted for using the equity method. An associate is an entity in which the Company has significant influence. Under the equity method, the investment in the associate is carried in the statement of financial position at cost plus post acquisition changes in the Company s share of net assets of the associate after removing any impairment loss. The consolidated income statement reflects the share of the results of operations of the associate. Unrealised gains and losses resulting from transactions between the Company and the associate are eliminated to the extent of the interest in the associate. After application of the equity method, the Company determines whether it is necessary to recognise an additional impairment loss on the Company s investment in its associates. The Company determines at each reporting date whether there is any objective evidence that the investment in the associate is impaired. If this is the case, the Company calculates the amount of impairment as the difference between the recoverable of the associate and its carrying value and recognises the amount in the consolidated income statement. 17

11 2. Basis of preparation and accounting policies (continued) 2.6 Summary of significant accounting policies (continued) Property and Equipment Property and equipment is stated at cost, net of accumulated depreciation and accumulated impairment losses, if any. Such cost includes the cost of replacing part of the property and equipment and borrowing cost of longterm construction projects, if the recognition criteria are met. When significant parts of property and equipment are required to be replaced at intervals, the Company recognises such parts as individual assets with specific useful lives and depreciates them accordingly. Likewise, when a major inspection is performed, its cost is recognised in the carrying amount of the property and equipment as a replacement if the recognition criteria are satisfied. All other repair and maintenance costs are recognised in the consolidated statement of comprehensive income as incurred. Depreciation is calculated on a straight line basis over the estimated useful lives of the assets as follows: Computers and office fixture 4 Years Vehicles 5 Years Furniture and fixtures 10 Years Project under construction are not depreciated The assets residual values, useful life, and methods of depreciation are reviewed at each financial year end, and adjusted prospectively as appropriate. An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the consolidated income statement when the asset is derecognized. Operating Leases Operating lease payments are recognized as an expense in the consolidated income statement on a straightline basis over the lease term. Intangible assets Intangible assets include the value of frequency license, software licenses and the right to use the network. Frequency license is amortized over 15 years which is the term of the BOT contract while software licenses and the right to use the network are amortized over 5 years. Intangible assets acquired separately are measured on initial recognition at cost. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortized over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at each financial yearend. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortization period or method, as appropriate, and treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in the consolidated income statement and presented with other expense components of similar nature. Intangible assets with indefinite useful lives are not amortized, but are tested for impairment annually either individually or at the cash generating unit level. The assessment of the indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable at each financial reporting date. If not, the change in useful life from indefinite to finite is made on a prospective basis. 18

12 2. Basis of preparation and accounting policies (continued) 2.6 Summary of significant accounting policies (continued) Intangible assets (continued) Gains or losses from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognized in the statement of comprehensive income when the asset is derecognized. The impairment losses are recognized in the consolidated income statement. Service concession intangible assets: IFRIC 12 Service Concession Arrangements deals primarily with publictoprivate sector concession arrangements. For the delivery of public services, IFRIC 12 applies only to concession agreements where the use of the infrastructure is controlled by the grantor. This is considered to be the case when: The grantor controls or regulates the public service, i.e. it controls or regulates the services to be provided with the infrastructure covered by the concession, who they must be provided for and at what price; The grantor controls through ownership, beneficial entitlement or otherwise any significant residual interest in the infrastructure at the end of the arrangement. According to IFRIC 12, when the operator builds infrastructure (startup capital expenditures) in exchange for the right to charge users of the public service, revenues from construction services should be accounted for in accordance with IAS 11Construction Contracts and the right to charge users of the public service should be treated as an exchange of assets and accounted for in accordance with IAS 38 Intangible Assets. As a consequence: Assets received for free from the grantor are not recognized in the statement of financial position. Startup investments are recorded as follows: the fair value of work represents the acquisition cost of an intangible asset, which is recorded when the infrastructure is built. In the case of Syriatel, as no distinction is made between compensation for building and compensation for operating the infrastructure when determining customer network access charges, and since there are no external benchmarks that could be used to determine the respective fair value of these two items, revenues recognized during the construction phase are limited to the amount of the costs incurred. The concession intangible assets are amortized on a straightline basis over the remaining life of the concession. If the concession is renewed in advance of its original expiry date, the intangible asset continues to be amortized according to the original plan based on its carrying amount at the concession renewal date. Amortization charges are recorded in operating income, under Other direct costs. Impairment of nonfinancial assets The Company assesses at each reporting date whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Company estimates the asset s recoverable amount. An asset s recoverable amount is the higher of the asset s or cashgenerating unit s (CGU) fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or group of assets. When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pretax discount rate that reflect the current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs to sell, an appropriate valuation model is used. 19

13 2. Basis of preparation and significant accounting policies (continued) 2.6 Summary of significant accounting policies (continued) Impairment of non financial assets (continued) An assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the Company estimates the asset s or cashgenerating unit s recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the asset s recoverable amount since the last impairment loss was recognized. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the consolidated income statement. Hedge Accounting The Company uses nonderivative financial instruments in order to hedge from the risk of foreign currency. At inception, the Company officially designates and documents the hedging relationship for which it wishes to apply hedge accounting for as well as outlining the purpose of the risk management strategy for the implementation of the hedging process. The documentation includes the definition of the hedging instrument, the hedged item, the nature of the risks that being hedged, and how the Company evaluates the effectiveness of the change in the fair value of the hedging instrument in relation to the change in fair value of the hedged item or the cash flows that are attributable to the hedged risk. This hedge is expected to be highly effective in hedging changes in fair value or cash flow hedge. Hedge effectiveness is evaluated on an ongoing basis to ensure that the hedge actually is effective during the periods for which the hedge accounting is implemented. The hedge processes that meet the stringent requirements of hedge accounting are accounted for as follows: Cash flow hedge The portion of gains and losses of hedge instrument which is specified as effective are recognised in the consolidated statement of other comprehensive income. The portion which is ineffective is directly recognised as other revenues and expenses in the consolidated income statement. When the items that being hedged are related to transactions that affecting the consolidated income statement, then the amounts that already recognised in other comprehensive income are reclassed to the consolidated income statement. For example: when the hedged items are financial expenses and revenues, or when the expected transactions occur. When the hedged items are nonfinancial assets or liabilities, the amounts that recognised already in the other comprehensive income are reclassed to be included in the initial carrying cost of that items. If a hedge instrument is sold, or the hedge is no longer meets the implementation of hedging accounting requirements, then, any accumulated gains or losses that are already recognised in the statement of other comprehensive income remains in the equity as a separate item until the forecasted transaction occurs, or the Company's obligations in foreign currencies are realized. 20

14 2. Basis of preparation and significant accounting policies (continued) 2.6 Summary of significant accounting policies (continued) Current and noncurrent classification The Company classifies assets and liabilities in the statement of financial position based on current / noncurrent classification. An asset is current when it is: Expected to be realised or intended to be sold or consumed in the normal operating cycle Held primarily for the purpose of trading Expected to be realised within twelve months after the reporting period Or, Cash or cash equivalent unless it was restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period. All other assets are classified as noncurrent assets. A liability is current when: It is expected to be settled in the normal operating cycle It is held primarily for the purpose of trading It is due to be settled within twelve months after the reporting period There is no unconditional right to defer the settlement of the liability for at least twelve months after the reporting period. The Company classifies all other liabilities as noncurrent liabilities. 21

15 3. Segment information For management purposes, the Company is organised into business units based on their products and services and has three reportable operating segments as follows: Postpaid services Prepaid services 3G, internet services and others Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit or loss which in certain respects, as explained in the table below, is measured differently from operating profit or loss in the consolidated financial statements. Significantly, all of the sales and profit of the Company are earned in the Syrian Arab Republic exept the external international roaming revenues. Postpaid services Prepaid services 3G, internet service and Others Unallocated Total Revenues 9,459,164,142 54,619,438,013 7,656,888,532 71,735,490,687 Discounts ( 124,532,166) ( 5,644,587) ( 17,860,734) (148,037,487) STC share of revenues ( 4,499,385,724) ( 25,961,337,904) ( 3,852,740,480) (34,313,464,108) Operating expenses ( 2,470,823,968) ( 9,718,231,433) ( 1,584,301,512) (13,773,356,913) Gross profit 2,364,422,284 18,934,224,089 2,201,985,806 23,500,632,179 Marketing and selling expenses ( 137,283,816) ( 1,717,531,096) (134,095,428) (1,988,910,340) Administrative expenses ( 887,908,202) ( 4,598,462,344) (653,783,399) (6,140,153,945) Depreciation ( 160,390,046) ( 590,538,493) ( 82,903,310) (833,831,849) Other revenues and expenses net ( 233,703,222) ( 1,349,457,359) ( 187,212,691) (1,770,373,272) Operating profit 945,136,998 10,678,234,797 1,143,990,978 12,767,362,773 Unrealized foreign exchange gains 689,510, ,510,037 Interest income 2,611,297,799 2,611,297,799 Profit before tax 945,136,998 10,678,234,797 1,143,990,978 3,300,807,836 16,068,170,609 Income tax ( 2,727,767,413) (2,727,767,413) Profit for the year 945,136,998 10,678,234,797 1,143,990, ,040,423 13,340,403,196 Capital expenditure 6,713,731,263 Depreciation, amortization and impairment 5,836,741,879 22

16 3. Segment information (continued) Postpaid services Prepaid services 3G, internet service and Others Unallocated Total Revenues 8,982,393,842 45,412,369,052 4,308,666,432 58,703,429,326 Discounts ( 135,460,130) ( 8,147,868) ( 7,229,779) (150,837,777) STC share of revenues ( 4,037,958,215) ( 21,245,147,538) ( 2,151,229,433) (27,434,335,186) Operating expenses ( 3,194,554,600) ( 11,936,151,041) ( 1,110,435,090) (16,241,140,731) Gross profit 1,614,420,897 12,222,922,605 1,039,772,130 14,877,115,632 Marketing and selling expenses ( 128,437,041) ( 1,414,093,440) (23,053,412) (1,565,583,893) Administrative expenses ( 704,730,342) ( 4,064,033,531) (358,904,107) (5,127,667,980) Depreciation ( 157,324,777) ( 421,774,180) ( 43,769,669) (622,868,626) Other revenues and expenses net ( 405,981,890) ( 1,910,702,915) ( 45,169,346) (2,361,854,151) Operating profit 217,946,847 4,412,318, ,875,596 5,199,140,982 Interest income 1,688,267,075 1,688,267,075 Share of loss of an associate (31,064,661) (31,064,661) Profit before tax 217,946,847 4,412,318, ,875,596 1,657,202,414 6,856,343,396 Income tax ( 1,462,310,398) (1,462,310,398) Profit for the year 217,946,847 4,412,318, ,875, ,892,016 5,394,032,998 Capital expenditure 4,177,472,864 Depreciation, amortization and impairment 4,694,542,094 The revenue generated from the internet service I is not subject to STC's revenue share. The unallocated expenses are distributed based on the segment contribution in the overall revenues and the actual expenses which related directly to a specified segment are allocated directly to their corresponding segment. 23

17 4. Net revenues Postpaid revenues Prepaid revenues 3G and internet revenues Discounts 9,459,164,142 54,619,438,013 7,656,888,532 (148,037,487) 71,587,453,200 8,982,393,842 45,412,369,052 4,308,666,432 (150,837,777) 58,552,591, Other direct costs Amortization of intangible assets (note 14) Impairment of intangible assets (note 14) Cellular equipment provision (return) expenses (note 26) International incoming calls Interconnectivity expenses (note 26) Infrastructure and other expenses Rental and insurance expenses Maintenance Interconnect expenses with other networks Support, SIM voucher and charging voucher expenses 5,000,063,522 2,846,508 (354,242,710) 365,185,582 2,803,626, ,543,894 1,327,104, ,913, ,592,218 10,712,633,300 3,917,364, ,308, ,765,271 1,080,594,510 2,608,366, ,227,531 2,357,550, ,791, ,676,655 12,867,646,696 Impairment loss of 2,846,508 at (31 December : 154,308,630) represents the write down of certain assets classified under the right to use the network to bring it down to its recoverable amount. This has been recognised in the consolidated income statement under Other direct cost. The recoverable amount is based on value in use and is determined at the level of the cash generating unit. Impaired assets has no ability to generate cash. 6. Marketing and selling expenses Dealers commissions Advertising expenses Other 1,568,552, ,473,043 64,885,114 1,988,910,340 1,226,973, ,203,737 67,407,048 1,565,583,893 24