Consolidated financial statements OJSC Dixy Group and its subsidiaries for the year ended 31 December with independent auditor s report

Transcription

1 Consolidated financial statements OJSC Dixy Group and its subsidiaries for the year ended 31 December 2013 with independent auditor s report

2 Consolidated financial statements OJSC Dixy Group and its subsidiaries Contents Page Independent auditor's report 3 Consolidated statement of financial position 5 Consolidated statement of comprehensive income 6 Consolidated statement of cash flows 7 Consolidated statement of changes in equity 8 Notes to consolidated financial statements 9 2

3 Ernst & Young LLC Sadovnicheskaya Nab., 77, bld. 1 Moscow, , Russia Tel: +7 (495) (495) Fax: +7 (495) ООО «Эрнст энд Янг» Россия, , Москва Садовническая наб., 77, стр. 1 Тел.: +7 (495) (495) Факс: +7 (495) ОКПО: Independent auditor s report To the Shareholders and the Board of Directors of OJSC Dixy Group We have audited the accompanying consolidated financial statements of OJSC Dixy Group and its subsidiaries, which comprise the consolidated statement of financial position as at 31 December 2013, and the consolidated statement of comprehensive income, consolidated statement of cash flows and consolidated statement of changes in equity for the year then ended, and a summary of significant accounting policies and other explanatory information. Audited entity s responsibility for the consolidated financial statements Management of the audited entity is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on the fairness of these consolidated financial statements based on our audit. We conducted our audit in accordance with the federal standards on auditing effective in the Russian Federation and International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement. An audit involves performing audit procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The audit procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management of the audited Group, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. A member firm of Ernst & Young Global Limited 3

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6 Consolidated statement of comprehensive income For the year ended 31 December 2013 (in thousands of Russian roubles, unless otherwise indicated) Note Revenue ,504, ,022,768 Cost of sales 17 (125,134,620) (104,872,315) Gross profit 55,369,843 42,150,453 Selling, general and administrative expenses 18 (47,811,799) (37,665,787) Operating profit 7,558,044 4,484,666 Finance income 19,154 14,649 Finance costs (3,416,551) (2,533,546) Foreign exchange (loss)/gain, net (70,242) 14,196 Profit before income tax 4,090,405 1,979,965 Income tax expense 19 (1,034,734) (927,809) Profit for the year 3,055,671 1,052,156 Total comprehensive income for the year 3,055,671 1,052,156 Attributable to: Equity holders of the parent 3,055,542 1,051,796 Non-controlling interest ,055,671 1,052,156 Profit per ordinary share attributable to the equity holders of the parent, basic and diluted (in Russian roubles per share) The accompanying notes are an integral part of these consolidated financial statements. 6

7 Consolidated statement of cash flows For the year ended 31 December 2013 (in thousands of Russian roubles, unless otherwise indicated) Note Cash flows from operating activities: Profit before income tax 4,090,405 1,979,965 Adjustments for: Depreciation of property, plant and equipment 5 4,948,302 3,702,362 Amortisation of intangible assets 7 286, ,652 Amortisation of initial lease costs 18 40,525 36,236 Amortisation of unfavourable lease agreements 18 (52,685) (68,107) Loss on disposals of property, plant and equipment and intangible assets , ,732 Decrease in provision for impairment of taxes recoverable and prepayments 8, 18 (20,195) (102,799) Decrease in provision for impairment of trade and other receivables 10, 18 (14,340) (74,639) Write down of inventory to net realisable value 9 30,161 17,960 Finance costs 3,416,551 2,533,546 Finance income (19,154) (14,649) Foreign exchange losses/(gain), net 70,242 (14,196) Operating cash flows before working capital changes 13,105,379 8,464,063 Increase in trade and other receivables (2,204,110) (1,152,639) Increase in inventories (1,195,982) (1,098,926) Increase in operating lease deposits (349,102) (308,343) Decrease/(increase) in taxes recoverable and prepayments 1,558,896 (1,305,993) Increase in trade and other payables 2,258,843 3,235,958 (Decrease)/increase in tax liability other than income tax (99,370) 191,591 Increase in advances from customers 104,819 56,240 Cash generated from operations 13,179,373 8,081,951 Income tax paid (1,129,303) (1,547,935) Interest paid (3,110,109) (2,543,995) Net cash from operating activities 8,939,961 3,990,021 Cash flows from investing activities: Purchase of property, plant and equipment (7,838,740) (10,382,239) Proceeds from sale of property, plant and equipment 323, ,254 Initial lease costs paid (29,343) (66,136) Loans repaid 857 5,608 Interest received 10,216 9,351 Purchases of intangible assets (163,259) (212,321) Net cash used in investing activities (7,696,862) (10,314,483) Cash flows from financing activities: Proceeds from loans and borrowings 7,890,650 31,357,196 Repayment of loans and borrowings (8,377,180) (23,602,879) Buy-out of shares 12 (26,485) Proceeds from sale of treasury shares 12 32,271 Purchase of non-controlling interest in subsidiary 12 (505) Finance lease payments (37,358) (140,954) Net cash (used in) / from financing activities (492,122) 7,586,878 Net increase in cash and cash equivalents 750,977 1,262,416 Cash and cash equivalents at the beginning of the year 11 3,646,067 2,383,651 Cash and cash equivalents at the end of the year 11 4,397,044 3,646,067 The accompanying notes are an integral part of these consolidated financial statements. 7

8 Consolidated statement of changes in equity For the year ended 31 December 2013 (in thousands of Russian roubles, unless otherwise indicated) Note Share capital Attributable to equity holders of the Parent Additional paid-in Treasury Retained capital shares earnings Total Noncontrolling interest Total equity At 31 December ,248 20,437,555 (554) 2,976,625 23,414, ,415,160 Total comprehensive income for the year 1,051,796 1,051, ,052,156 Buy-out of shares 12 (26,485) (26,485) (26,485) At 31 December ,248 20,437,555 (27,039) 4,028,421 24,440, ,440,831 Total comprehensive income for the year 3,055,542 3,055, ,055,671 Buy-out of noncontrolling interest in a subsidiary 12 (87) (87) (418) (505) Sale of treasury shares 12 5,786 26,485 32,271 32,271 At 31 December ,248 20,443,341 (554) 7,083,876 27,527, ,528,268 The accompanying notes are an integral part of these consolidated financial statements. 8

9 Notes to the consolidated financial statements For the year ended 31 December 2013 (in thousands of Russian roubles, unless otherwise indicated) 1 Corporate information CJSC Company Uniland Holding was incorporated in January 2003 in Moscow, Russian Federation for the purpose of consolidation and reorganization of entities under common control. In March 2007 CJSC Company Uniland Holding was reorganized into an Open Joint Stock Company and renamed to Dixy Group (the Company ). The address of the Company s registered office is Russia, Moscow, Ochakovskaya B., 47A, building 1. The OJSC Dixy Group and its subsidiaries (the Group ) operate in the retail sales business. The Group s principal activities include trading of consumer goods through stores within the Russian Federation. Since 24 May 2007 shares of OJSC Dixy Group are listed on the Russian Stock Exchange. As of 31 December 2013 and 2012 the Group is controlled by Dixy Holding Limited (Cyprus), which as of 31 December 2013 and 2012 owned % in OJSC Dixy Group. As of 31 December 2012 Dixy Holding Limited (Cyprus) was 100% owned by Dixy Retail Limited (BVI), which is in its turn was 100% owned by CJSC Trade Company Megapolis. As of 31 December 2013 Dixy Holding Limited (Cyprus) was 18% owned by Megapolis Holdings (Overseas) Ltd and 82% by Dixy Retail Limited (BVI), which is in its turn was 100% owned by Megapolis Holdings (Overseas) Ltd. Megapolis Holdings (Overseas) Ltd and CJSC Trade Company Megapolis are the parts of the Mercury Group. Mercury Group is ultimately controlled by Mr. Igor Kesaev. These consolidated financial statements of the Group were signed and authorized for release by the General Director and the Head of IFRS Reporting of OJSC Dixy Group on 7 April Basis of preparation The Group s companies maintain their accounting records and prepare their statutory financial statements in accordance with the regulations on accounting and reporting of the country in which the particular Group company is resident. The financial statements are based on the statutory accounting records with adjustments and reclassifications recorded for the purpose of fair presentation in accordance with International Financial Reporting Standards ( IFRS ). The consolidated financial statements have been prepared under the historical cost convention except as disclosed in the accounting policies below. The functional currency of the Group s companies was determined on an entity by entity basis. In 2013 and 2012 the functional currency of all of the Group s operating companies was determined to be Russian roubles. The consolidated financial statements are presented in Russian roubles and all values are rounded to the nearest thousand except when otherwise indicated. 9

10 2.1 Basis of preparation (continued) Statement of compliance The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS). Basis of consolidation These consolidated financial statements comprise the financial statements of the Group and its subsidiaries as at 31 December 2013 and for the year then ended. Control is achieved when the Group 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 Group controls an investee if and only if the Group 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, and; The ability to use its power over the investee to affect its returns. When the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including: The contractual arrangement with the other vote holders of the investee; Rights arising from other contractual arrangements; The Group s voting rights and potential voting rights. The Group 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 Group obtains control over the subsidiary and ceases when the Group 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 statement of comprehensive income from the date the Group gains control until the date the Group ceases to control the subsidiary. 10

11 2.1 Basis of preparation (continued) Basis of consolidation (continued) As at 31 December 2013 and 31 December 2012 the principal operating and holding consolidated subsidiaries of OJSC Dixy Group were: Ownership (%) Company Country Nature of operations Timefield Trading & Investments Ltd Cyprus Financial company 100% 100% Lexavart Holding Ltd BVI Holder of trademarks 100% 100% CJSC Discount Centre Russia Retailing * 100% CJSC DIXY Yug Russia Retailing 100% 100% CJSC DIXY Logistics Russia Transportation * 100% CJSC Regionalnyje magaziny Russia Managing of Group s assets * 100% LLC Yaroslavskie magaziny Russia Retailing * 100% LLC Denver Russia Retailing * 100% LLC Kalitniki Russia Real estate * 100% LLC D-Vostok Russia Retailing * 100% LLC Kostromatorg Russia Real estate * 100% LLC Kaluzhskie magaziny Russia Retailing * 100% CJSC DIXY Petersburg Russia Retailing * 100% LLC Severo-Zapad Russia Holding company 100% 100% LLC Victoria-Finance Russia Financial company ** 100% LLC Victoria Moscoviya Russia Retailing ** 100% LLC Vikom-M Russia Wholesale ** 100% LLC Korporasion Russia Managing of Group s assets ** 100% LLC Gamma Zvezdnaya Russia Managing of Group s assets ** 99% LLC Baltiskie magaziny Russia Managing of Group s assets ** 100% LLC Victoria Baltiya Russia Retailing 100% 100% LLC Victoria Development Russia Managing of Group s assets ** 100% LLC Kopilka Russia Retailing 100% 100% CJSC Sankt-Petersburgkie magaziny Russia Managing of Group s assets in Saint-Petersburg * 100% CJSC Megamart Russia Retailing 100% 100% CJSC SPb-Leasing Russia Real estate * 100% LLC DIXY Chelyabinsk Russia Retailing * 100% OJSC YarTorgOdezhda Russia Real estate 100% 100% LLC Dixy Finance Russia Financing company 0% 0% * These subsidiaries were merged into CJSC DIXY Yug in 2013 ** These subsidiaries were merged into LLC Victoria Baltiya in 2013 LLC Dixy Finance satisfied the criteria of SIC 12 Consolidation Special Purpose Entities and accordingly is consolidated in these consolidated financial statements (refer to Note 2.3). 11

12 2.2 Changes in accounting policy and disclosures The accounting policies adopted in the preparation of the consolidated financial statements for the year ended 31 December 2013 are consistent with those followed in the preparation of the Group s annual consolidated financial statements for the year ended 31 December 2012, except for the adoption of new Standards and Interpretations. Adoption of new standards The accounting policies adopted are consistent with those of the previous financial year except as follows: IAS 1 Presentation of Items of Other Comprehensive Income Amendments to IAS 1 The amendments to IAS 1 introduce a grouping of items presented in other comprehensive income (OCI). Items that could be reclassified (or recycled) to profit or loss at a future point in time (e.g., net gain on hedge of net investment, exchange differences on translation of foreign operations, net movement on cash flow hedges and net loss or gain on available-for-sale financial assets) now have to be presented separately from items that will never be reclassified (e.g., actuarial gains and losses on defined benefit plans and revaluation of land and buildings). The amendment has no impact on the Group's consolidated financial statements. IAS 1 Clarification of the Requirement for Comparative Information (Amendment) The amendment to IAS 1 clarifies the difference between voluntary additional comparative information and the minimum required comparative information. An entity must include comparative information in the related notes to the financial statements when it voluntarily provides comparative information beyond the minimum required comparative period. The additional voluntarily comparative information does not need to be presented in a complete set of consolidated financial statements. An opening statement of financial position (known as the third balance sheet ) must be presented when an entity applies an accounting policy retrospectively, makes retrospective restatements, or reclassifies items in its financial statements, provided any of those changes has a material effect on the statement of financial position at the beginning of the preceding period. The amendment clarifies that a third balance sheet does not have to be accompanied by comparative information in the related notes. The adoption of this interpretation has no effect on the consolidated financial statements of the Group. IAS 32 Tax Effects of Distributions to Holders of Equity Instruments (Amendment) The amendment to IAS 32 Financial Instruments: Presentation clarifies that income taxes arising from distributions to equity holders are accounted for in accordance with IAS 12 Income Taxes. The amendment removes existing income tax requirements from IAS 32 and requires entities to apply the requirements in IAS 12 to any income tax arising from distributions to equity holders. The amendment did not have an impact on the consolidated financial statements of the Group, as there is no tax consequences attached to cash or non-cash distribution. 12

13 2.2 Changes in accounting policy and disclosures (continued) Adoption of new standards (continued) IAS 34 Interim Financial Reporting and Segment Information for Total Assets and Liabilities (Amendment) The amendment clarifies the requirements in IAS 34 relating to segment information for total assets and liabilities for each reportable segment to enhance consistency with the requirements in IFRS 8 Operating Segments. Total assets and liabilities for a reportable segment need to be disclosed only when the amounts are regularly provided to the chief operating decision maker and there has been a material change in the total amount disclosed in the entity's previous annual consolidated financial statements for that reportable segment. This amendment has no effect on the financial statements of the Group as the Group does not report total assets and liabilities for a reportable segment to the chief operating decision maker (CODM). IAS 19 Employee Benefits (Revised 2011) (IAS 19R) IAS 19R includes a number of amendments to the accounting for defined benefit plans, including actuarial gains and losses that are now recognised in other comprehensive income (OCI) and permanently excluded from profit and loss; expected returns on plan assets that are no longer recognised in profit or loss, instead, there is a requirement to recognise interest on the net defined benefit liability (asset) in profit or loss, calculated using the discount rate used to measure the defined benefit obligation, and unvested past service costs are now recognised in profit or loss at the earlier of when the amendment occurs or when the related restructuring or termination costs are recognised. Other amendments include new disclosures, such as, quantitative sensitivity disclosures. The adoption of this standard has no effect on the consolidated financial statements of the Group. IFRS 7 Financial Instruments: Disclosures Offsetting Financial Assets and Financial Liabilities Amendments to IFRS 7 The amendment requires an entity to disclose information about rights to set-off financial instruments and related arrangements (e.g., collateral agreements). The disclosures would provide users with information that is useful in evaluating the effect of netting arrangements on an entity's financial position. The new disclosures are required for all recognised financial instruments that are set off in accordance with IAS 32. The disclosures also apply to recognised financial instruments that are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether the financial instruments are set off in accordance with IAS 32. As the Group is not setting off financial instruments in accordance with IAS 32 and does not have relevant offsetting arrangements, the amendment does not have an impact on the Group. 13

14 2.2 Changes in accounting policy and disclosures (continued) Adoption of new standards (continued) IFRS 10 Consolidated Financial Statements and IAS 27 Separate Financial Statements IFRS 10 establishes a single control model that applies to all entities including special purpose entities. IFRS 10 replaces the parts of previously existing IAS 27 Consolidated and Separate Financial Statements that dealt with consolidated financial statements and SIC-12 Consolidation Special Purpose Entities. IFRS 10 changes the definition of control such that an investor controls an investee when it 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. To meet the definition of control in IFRS 10, all three criteria must be met, including: (a) an investor has power over an investee; (b) the investor has exposure, or rights, to variable returns from its involvement with the investee; and (c) the investor has the ability to use its power over the investee to affect the amount of the investor's returns. IFRS 10 had no impact on the consolidation of investments held by the Group. IFRS 11 Joint Arrangements and IAS 28 Investment in Associates and Joint Ventures IFRS 11 replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly-controlled Entities Non-monetary Contributions by Venturers. IFRS 11 removes the option to account for jointly controlled entities (JCEs) using proportionate consolidation. Instead, JCEs that meet the definition of a joint venture under IFRS 11 must be accounted for using the equity method. The adoption this new standard of this interpretation has no effect on the consolidated financial statements of the Group. IFRS 12 Disclosure of Interests in Other Entities IFRS 12 sets out the requirements for disclosures relating to an entity s interests in subsidiaries, joint arrangements, associates and structured entities. The requirements in IFRS 12 are more comprehensive than the previously existing disclosure requirements for subsidiaries. For example, where a subsidiary is controlled with less than a majority of voting rights. The Group does not have subsidiaries with non-controlling interests and there are no unconsolidated structured entities. Therefore this standard has no significant effect on the consolidated financial statements of the Group. IFRS 13 Fair Value Measurement IFRS 13 establishes a single source of guidance under IFRS for all fair value measurements. IFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under IFRS. IFRS 13 defines fair value as an exit price. As a result of the guidance in IFRS 13, the Group re-assessed its policies for measuring fair values, in particular, its valuation inputs such as non-performance risk for fair value measurement of liabilities. IFRS 13 also requires additional disclosures. Application of IFRS 13 has not materially impacted the fair value measurements of the Group. Additional disclosures where required, are provided in the individual notes relating to the assets and liabilities whose fair values were determined. Fair value hierarchy is provided in Note

15 2.2 Changes in accounting policy and disclosures (continued) Adoption of new standards (continued) In addition to the above-mentioned amendments and new standards, IFRS 1 First-time Adoption of International Financial Reporting Standards was amended with effect for reporting periods starting on or after 1 January The Group is not a first-time adopter of IFRS, therefore, this amendment is not relevant to the Group. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective. Standards and interpretations issued but not yet effective The standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Group s consolidated financial statements are disclosed below. The Group intends to adopt these standards, if applicable, when they become effective. IFRS 9 Financial Instruments IFRS 9, as issued, reflects the first phase of the IASB s work on the replacement of IAS 39 and applies to classification and measurement of financial assets and financial liabilities as defined in IAS 39. The standard was initially effective for annual periods beginning on or after 1 January 2013, but Amendments to IFRS 9 Mandatory Effective Date of IFRS 9 and Transition Disclosures, issued in December 2011, moved the mandatory effective date to 1 January In subsequent phases, the IASB is addressing hedge accounting and impairment of financial assets. The adoption of the first phase of IFRS 9 will have an effect on the classification and measurement of the Group s financial assets, but will not have an impact on classification and measurements of the Group s financial liabilities. The Group will quantify the effect in conjunction with the other phases, when the final standard including all phases is issued. Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) These amendments are effective for annual periods beginning on or after 1 January 2014 provide an exception to the consolidation requirement for entities that meet the definition of an investment entity under IFRS 10. The exception to consolidation requires investment entities to account for subsidiaries at fair value through profit or loss. It is not expected that this amendment would be relevant to the Group, since none of the entities in the Group would qualify to be an investment entity under IFRS 10. IAS 32 Offsetting Financial Assets and Financial Liabilities Amendments to IAS 32 These amendments clarify the meaning of currently has a legally enforceable right to set-off and the criteria for non-simultaneous settlement mechanisms of clearing houses to qualify for offsetting. These amendments are effective for annual periods beginning on or after 1 January These amendments are not expected to be relevant to the Group. 15

16 2.2 Changes in accounting policy and disclosures (continued) Standards and interpretations issued but not yet effective (continued) IFRIC Interpretation 21 Levies (IFRIC 21) IFRIC 21 clarifies that an entity recognises a liability for a levy when the activity that triggers payment, as identified by the relevant legislation, occurs. For a levy that is triggered upon reaching a minimum threshold, the interpretation clarifies that no liability should be anticipated before the specified minimum threshold is reached. IFRIC 21 is effective for annual periods beginning on or after 1 January The Group does not expect that IFRIC 21 will have material financial impact in future financial statements. IAS 39 Novation of Derivatives and Continuation of Hedge Accounting Amendments to IAS 39 These amendments provide relief from discontinuing hedge accounting when novation of a derivative designated as a hedging instrument meets certain criteria. These amendments are effective for annual periods beginning on or after 1 January These amendments are not expected to be relevant to the Group. 2.3 Significant accounting judgments, estimates and assumptions The preparation of the Group's 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 reporting date. However, uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of the asset or liability affected in the future. Judgements Consolidation of a special purpose entity In 2005 the immediate shareholder of the Company founded a wholly-owned subsidiary LLC Dixy Finance. The objective of LLC Dixy Finance is to obtain external financing and provide loans to operating companies of the Group and to pay a remuneration to the Group s management. Having analysed the criteria set out in SIC-12 Consolidation Special Purpose Entities, management concluded that in substance LLC Dixy Finance represents a special purpose entity controlled by the Group and is therefore consolidated in these consolidated financial statements. Estimates and assumptions The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. 16

17 2.3 Significant accounting judgments, estimates and assumptions (continued) Estimates and assumptions (continued) Impairment of non-financial assets The Group assesses, at each reporting date, whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset s recoverable amount. An asset s recoverable amount is the higher of an asset s or cash-generating unit s (CGU) fair value less costs to sell and its value in use. Recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups 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 pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs to sell recent market transactions are taken into account. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded companies or other available fair value indicators. The Group bases its impairment calculation on detailed budgets and forecast calculations, which are prepared separately for each of the Group s CGUs to which the individual assets are allocated. These budgets and forecast calculations generally cover a period of five years. For longer periods a long-term growth rate is calculated and applied to project future cash flows after the fifth year. Impairment losses are recognised in profit or loss in expense categories consistent with the function of the impaired asset. For assets excluding goodwill an assessment is made at each reporting date to determine whether there is an indication that previously recognised impairment losses no longer exist or have decreased. If such indication exists, the Group estimates the asset s or CGU s 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. Such reversal is recognised in profit or loss unless the asset is carried at a revalued amount, in which case, the reversal is treated as a revaluation increase. The following assets have specific characteristics for impairment testing. Goodwill Goodwill is tested for impairment annually as at 30 September and when circumstances indicate that the carrying value may be impaired. Impairment is determined for goodwill by assessing the recoverable amount of each CGU (or group of CGUs) to which the goodwill relates. When the recoverable amount of the CGU is less than its carrying amount, an impairment loss is recognised. Impairment losses relating to goodwill cannot be reversed in future periods. 17

18 2.3 Significant accounting judgments, estimates and assumptions (continued) Estimates and assumptions (continued) Intangible assets Intangible assets with indefinite useful lives are tested for impairment annually as at 30 September either individually or at the CGU level, as appropriate, and when circumstances indicate that the carrying value may be impaired. Useful lives of items of property, plant and equipment and intangible assets The Group assesses the remaining useful lives of items of property, plant and equipment and intangible assets at least at each financial year-end and if expectations differ from previous estimates the changes are accounted for as a change in an accounting estimate in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. Allowance for trade and other receivables The Group maintains an allowance for trade and other receviables to account for estimated losses resulting from the inability of customers to make required payments. When evaluating the adequacy of an allowance for trade and other receivables, management bases its estimates on the ageing of trade and other receivable balances and historical write-off experience, customer credit worthiness and changes in customer payment terms. If the financial condition of customers were to deteriorate, actual write-offs might be higher than expected. As of 31 December 2013 allowances for trade and other receivables have been created in the amount of 94,597 (2012: 108,937). Inventory valuation The Group determines the amounts to be written-down for obsolete or slow moving items of inventories based on their expected future use and realisable value. The net realisable value is the estimated selling price in the ordinary course of business less the estimated costs to sell. Selling prices and costs to sale are subject to change as new information becomes available. Revisions to the estimates may significantly affect future operating results. Litigations The Group exercises considerable judgment in measuring and recognising provisions and the exposure to contingent liabilities related to pending litigations or other outstanding claims subject to negotiated settlement, mediation, arbitration or government regulation, as well as other contingent liabilities. Judgement is necessary in assessing the likelihood that a pending claim will succeed, or a liability will arise, and to quantify the possible range of the final settlement. Because of the inherent uncertainties in this evaluation process, actual losses may be different from the originally estimated provision. These estimates are subject to change as new information becomes available, primarily with the support of internal specialists, if available, or with the support of outside consultants, such as actuaries or legal counsel. Revisions to the estimates may significantly affect future operating results. 18

19 2.3 Significant accounting judgments, estimates and assumptions (continued) Estimates and assumptions (continued) Current taxes Russian tax, currency and customs legislation is subject to varying interpretations and changes occur frequently. Further the interpretation of tax legislation by tax authorities as applied to the transactions and activity of the Group s entities may not coincide with that of management. As a result, tax authorities may challenge transactions and the Group s entities may be assessed additional taxes, penalties and interest, which can be significant. The periods remain open to review by the tax and customs authorities with respect to tax liabilities for three calendar years preceding the year of review. Under certain circumstances reviews may cover longer periods (refer to Note 21). Deferred tax assets Group's management judgment is required for the calculation of current and deferred income taxes. Deferred tax assets are recognised to the extent that their utilization is probable. The utilization of deferred tax assets will depend on whether it is possible to generate sufficient taxable income in respective tax type and jurisdiction. Various factors are used to assess the probability of the future utilization of deferred tax assets, including past operating results, the operational plan, expiration of tax losses carried forward, and tax planning strategies. If actual results differ from these estimates or if these estimates must be adjusted in future periods, the financial position, results of operations and cash flows may be negatively affected. In the event that an assessment of future utilization indicates that the carrying amount of deferred tax assets must be reduced, this reduction is recognised in profit or loss (refer to Note 19). 2.4 Summary of significant accounting policies Current versus non-current classification The Group presents assets and liabilities in consolidated statement of financial position based on current/non-current classification. An asset is current when it is: Expected to be realised or intended to be sold or consumed in 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 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 non-current. A liability is current when: It is expected to be settled in 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, or There is no unconditional right to defer the settlement of the liability for at least twelve months after the reporting period. 19

20 2.4 Summary of significant accounting policies (continued) Fair value measurement Fair values of financial instruments measured at amortised cost are disclosed in Note 22. 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. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: In the principal market for the asset or liability, or In the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible to by the Group. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. All assets and liabilities for which fair value is measured or disclosed in the consolidated financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: Level 1 Quoted (unadjusted) market prices in active markets for identical assets or liabilities. Level 2 Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable. Level 3 Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable. For assets and liabilities that are recognised in the consolidated financial statements on a recurring basis the Group determines whether transfers have occurred between Levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. 20

21 2.4 Summary of significant accounting policies (continued) Property, plant and equipment The Group s property, plant and equipment, except for assets acquired prior to 1 January 2003, are stated at historical cost less accumulated depreciation and any impairment in value. Property, plant and equipment acquired before 1 January 2003 is stated at cost, restated to the equivalent purchasing power of the Russian rouble at 31 December 2002, less accumulated depreciation and any impairment in value. At each reporting date management assesses whether there is any indication of impairment of property, plant and equipment. If any such indication exists, management of the Group companies estimates the recoverable amount, which is determined as the higher of an asset s fair value less costs to sell and its value in use. The carrying amount is reduced to the recoverable amount, and the difference is recognised as an expense (impairment loss) in profit or loss. An impairment loss recognised for an asset in previous years is reversed if there is any indication that impairment loss may no longer exist or may have decreased. After initial recognition property, plant and equipment is measured at purchase or construction cost, excluding the costs of day-to-day servicing, less accumulated depreciation and accumulated impairment loss. Such cost includes the cost of replacing part of the property, plant and equipment when that cost is incurred, if the recognition criteria is met. Depreciation is calculated using the straight-line basis over the useful life of the asset as follows: Useful lives in years Buildings 30 Renovation of stores 5 Equipment 3-5 The residual value of an asset is the estimated amount that the Group would currently obtain from disposal of the asset less the estimated costs of disposal, if the asset was already of the age and in the condition expected at the end of its useful life. The residual value of an asset is nil if the Group expects to use the asset until the end of its physical life. The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date. Costs of minor repairs and maintenance are expensed when incurred. Cost of replacing major parts or components of property, plant and equipment items are capitalised and the replaced part is derecognised. Renewals and permanent improvements to leased premises are capitalised and depreciated over the expected lease term but not exceeding their useful lives. Management expects that all short term lease agreements can be prolonged. This group of assets is depreciated from the month of store opening. An item of property, plant and equipment is derecognised 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 profit or loss in the year the asset is derecognised. Interest costs on borrowings to finance the construction of property, plant and equipment are capitalised during the period of time that is required to complete and prepare the asset for its intended use. All other borrowing costs are expensed. 21

22 2.4 Summary of significant accounting policies (continued) Operating leases Where the Group is a lessee in a lease, which does not transfer substantially all the risks and rewards incidental to ownership from the lessor to the Group, the total lease payments (including initial lease costs) are charged to profit or loss on a straight-line basis over the period of the lease. When assets are leased out under an operating lease, the lease payments receivable are recognised as rental income on a straight-line basis over the lease term. Finance lease liabilities Where the Group is a lessee in a lease, which transferred substantially all the risks and rewards incidental to ownership to the Group, the assets leased are capitalised in property, plant and equipment at the commencement of the lease at the lower of the fair value of the leased asset and the present value of the minimum lease payments. Each lease payment is allocated between settlement of outstanding liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The interest cost is charged to the profit or loss over the lease term so as to produce constant periodic rate of interest on remaining balance of the liability. The assets acquired under finance leases are depreciated over the shorter of their useful life or lease term. Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the acquirer s share of the net identifiable assets, liabilities and contingent liabilities of the acquired subsidiary or associate at the date of exchange. Goodwill on acquisitions of subsidiaries is presented separately in the consolidated statement of financial position. Goodwill on acquisitions of associates is included in the investment in associates. Goodwill is carried at cost less accumulated impairment losses, if any. The Group tests goodwill for impairment at least annually. These calculations require the use of estimates as further detailed in Note 6. Goodwill is allocated to the cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the business combination. Such units or groups of units represent the lowest level at which the Group monitors goodwill and are not larger than a segment. Gains or losses on disposal of an operation within a cash generating unit to which goodwill has been allocated include the carrying amount of goodwill associated with the operation disposed of, generally measured on the basis of the relative values of the operation disposed of and the portion of the cash-generating unit which is retained. Other intangible assets All Group s other intangible assets except Kvartal trademark have definite useful lives and primarily include capitalised computer software, trademarks and favourable operating lease agreements. Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. 22

23 2.4 Summary of significant accounting policies (continued) Other intangible assets (continued) Intangible assets are amortised using the straight-line method over their useful lives: Useful lives in years Software licenses 5-10 Favourable lease agreements over the lease term 5-10 Amortisation periods and methods for intangible assets with finite useful lives are reviewed at least annually at each financial year-end. 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 amortisation period or method, as appropriate, and treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the profit or loss in the expense category consistent with the function of the intangible asset. If impaired, the carrying amount of intangible assets is written down to the higher of value in use and fair value less costs to sell. Intangible assets with indefinite useful lives are not amortised, but are tested for impairment annually, either individually or at the cash-generating unit level. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite to finite is made on a prospective basis. Capital advances Capital advances include amounts prepaid for property, plant and equipment and are measured at cost. Payments for purchases of property, plant and equipment are presented net of VAT in the cash flow statement. Initial lease costs Initial lease costs include lump sum amounts paid to the lessors under operating leases of stores and warehouses either for the right to conclude the lease or to finance construction and repair works on the leased assets. Initial lease costs are capitalised and charged to profit or loss on a straight-line basis over the period of lease. Income taxes Income taxes have been provided for in the consolidated financial statements in accordance with Russian legislation enacted by the reporting date. The income tax charge comprises current tax and deferred tax and is recognised in the consolidated profit or loss unless it relates to transactions that are recognised, in the same or a different period, in other comprehensive income or directly in equity. Current tax is the amount expected to be paid to or recovered from the taxation authorities in respect of taxable profits or losses for the current and prior periods. A liability is also recorded for any uncertain tax positions for which tax obligation is considered to be probable. This liability is released to profit or loss after three years. A provision for taxes, other than on income, is set up and recorded within selling, general and administrative expenses. 23