Silknet JSC. Consolidated Financial Statements for 2016

Transcription

1 Consolidated Financial Statements for 2016

2 Contents Independent Auditors Report 3 Consolidated Statement of Financial Position 5 Consolidated Statement of Profit or Loss and Other Comprehensive Income 6 Consolidated Statement of Changes in Equity 7 Consolidated Statement of Cash Flows 8 Notes to the Consolidated Financial Statements 9

3 KPMG Georgia LLC 2nd Floor, Besiki Business Centre 4, Besiki Street 0108 Tbilisi, Georgia Telephone Fax Internet Independent Auditors Report To the Shareholders of Silknet JSC Opinion We have audited the consolidated financial statements of Silknet JSC (the Company ) and its subsidiaries (the Group ), which comprise the consolidated statement of financial position as at 31 December 2016, the consolidated statements of profit or loss and other comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising significant accounting policies and other explanatory information. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 31 December 2016, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS). Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditors Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants (IESBA Code), and we have fulfilled our other ethical responsibilities in accordance with the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, 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. In preparing the consolidated financial statements, management is responsible for assessing the Group s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Group s financial reporting process. Auditors Responsibilities for the Audit of the Consolidated Financial Statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from KPMG Georgia LLC, a company incorporated under the Laws of Georgia a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity.

4 Independent Auditors' Report Page 2 reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit 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 Group's internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors' report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors' report. However, future events or conditions may cause the Group to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. The engagement partner on the audit resulting in this independent auditors' report is: Andrew Coxshall F<P 116- ~e'tj, '1 ""~ ~ KPMG Georgia LLC 6 March 2017

5 Consolidated Statement of Financial Position as at 31 December GEL Note 31 December December 2015 ASSETS Non-current assets Property and equipment , ,267 Intangible assets 11 16,483 13,755 Other non-current assets 10 10,827 15,278 Loans due from related parties ,473 Total non-current assets 215, ,773 Current assets Inventories 8,226 9,301 Current tax asset - 1,837 Trade and other receivables 12 19,400 18,432 Restricted deposit 15 2,664 - Cash and cash equivalents 13 1,280 5,487 Total current assets 31,570 35,057 TOTAL ASSETS 247, ,830 EQUITY AND LIABILITIES Equity 14 Share capital 68,172 68,172 Retained earnings 28,188 4,052 Equity attributable to owners of the Company 96,360 72,224 Non-controlling interests 165 (58) TOTAL EQUITY 96,525 72,166 LIABILITIES Non-current liabilities Loans and borrowings 15 65,732 82,205 Trade and other payables 16 28,765 20,863 Deferred tax liabilities 9-15,698 Total non-current liabilities 94, ,766 Current liabilities Loans and borrowings 15 16,370 16,348 Trade and other payables 16 38,914 37,550 Current income tax payable 1,124 - Total current liabilities 56,408 53,898 TOTAL LIABILITIES 150, ,664 TOTAL LIABILITIES AND EQUITY 247, ,830 5 The consolidated statement of financial position is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 9 to 37.

6 Si/knetJSC Consolidated Statement of Profit or loss and Other Comprehensive Income/or 2016 '000 GEL Note Revenues 5 161, ,989 Purchased services 6 (35,527) (41,753) Salaries and benefits 7 (30,798) (37,936) Depreciation and amortization (36,318) (32,702) Other operating expenses 8 (28,929) (24,403) Other expenses (290) (1,088) Profit from operating activities 30,034 22,107 Interest income Interest expense 340 (10,245) 13,163 (11,158) Net foreign exchange gain /(loss) 868 (5,028) Profit before income tax 20,997 19,084 Income tax benefit/ (expense) 9 14,2 16 (3,833) Profit and total comprehensive income for the year 35,213 15,251 Profit and total comprehensive income attributable to: Owners of the Company 35,328 15,835 Non-controlling interests (115) (584) 35,213 15,251 These consolidated financial statements were approved by management on 6 March 2017 and were signed on its behalf by: David Mamulaishvili General Director The consolidated statement of profit or loss and other comprehensive income is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 9 to 37. 6

7 Consolidated Statement of Changes in Equity for GEL Attributable to owners of the Company Share capital (Accumulated losses)/ retained earnings Total Noncontrolling interests Total equity Balance as at 1 January ,172 (4,390) 159, ,308 Total comprehensive income for the year Profit for the year - 15,835 15,835 (584) 15,251 Transactions with owners, recorded directly in equity Dividends to equity holders (note 14 (b)) - (7,393) (7,393) - (7,393) Decrease in share capital (note 14 (a)) (96,000) - (96,000) - (96,000) Balance as at 31 December ,172 4,052 72,224 (58) 72,166 Balance as at 1 January ,172 4,052 72,224 (58) 72,166 Total comprehensive income for the year Profit for the year - 35,328 35,328 (115) 35,213 Transactions with owners, recorded directly in equity Dividends to equity holders (note 14 (b)) (10,352) (10,352) - (10,352) Purchase of non-controlling interest (note 20 (a) (iii)) - (840) (840) 338 (502) Balance as at 31 December ,172 28,188 96, ,525 The consolidated statement of changes in equity is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 9 to 37. 7

8 Consolidated Statement of Cash Flows for GEL Note Cash flows from operating activities Cash received from subscribers 163, ,070 Cash received from other telecom operators and for IRU contracts 28,190 33,674 Salaries and benefits paid to and on behalf of employees (31,537) (35,450) Interconnection fees and expenses paid (13,651) (18,197) Purchase of inventory (4,438) (2,904) Taxes paid other than on income (22,881) (26,775) Income tax paid (361) (4,188) Network maintenance costs paid (10,393) (4,112) Other operating expenses paid (31,949) (34,898) Net cash from operating activities 76,800 69,220 Cash flows from investing activities Acquisition of property and equipment (36,075) (26,694) Acquisition of intangible assets (9,551) (8,813) Proceeds from disposals of property and equipment 1,182 2,012 Acquisition of subsidiaries, net of cash acquired - (7,791) Investment in term deposit (2,606) - Issue of loans (534) (9,060) Repayment of issued loans 26 8,897 Interest received Net cash used in investing activities (47,545) (41,420) Cash flows from financing activities Proceeds from borrowings 23,116 38,269 Repayment of borrowings (37,168) (44,474) Interest paid (9,696) (10,366) Dividends paid (9,766) (6,325) Net cash used in financing activities (33,514) (22,896) Effect of exchange rate changes on cash and cash equivalents 52 (55) Net (decrease)/ increase in cash and cash equivalents (4,207) 4,849 Cash and cash equivalents at the beginning of year 13 5, Cash and cash equivalents at the end of year 13 1,280 5,487 The consolidated statement of cash flows is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 9 to 37. 8

9 1. Reporting entity (a) Georgian business environment The Group s operations are located in Georgia. Consequently, the Group is exposed to the economic and financial markets of Georgia, which display characteristics of an emerging market. The legal, tax and regulatory frameworks continue development, but are subject to varying interpretations and frequent changes which together with other legal and fiscal impediments contribute to the challenges faced by entities operating in Georgia. The consolidated financial statements reflect management s assessment of the impact of the Georgian business environment on the operations and the financial position of the Group. The future business environment may differ from management s assessment. (b) Organisation and operations These consolidated financial statements include the financial statements of Silknet JSC (the Company) and its subsidiaries as detailed in note 20 (together referred to as the Group and individually as the Group entities). The Company and its subsidiaries are limited liability and joint stock companies as defined under the Law of Georgia on Entrepreneurs and are incorporated and domiciled in Georgia. The Company s legal address is 95 Tsinamdzgvrishvili street, Tbilisi, 0112 Georgia. The principal activity of the Group is provision of telecommunication services to corporate and individual customers in Georgia, including local and international telephone services, internet and internet television (IPTV) services and leasing the underground communication facilities. The Group directs its activities as one operating segment. In September 2016 the Fitch Rating agency affirmed the Company s Long-Term Issuer Default Rating as 'B+' with a Stable Outlook. The Company is wholly-owned by Rhinestream Holdings Limited and is ultimately controlled by an individual, Giorgi Ramishvili. Related party transactions are detailed in note Basis of accounting Statement of compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRSs ). 3. Functional and presentation currency The national currency of Georgia is the Georgian Lari (GEL), which is the functional currency of the Group entities and the currency in which these consolidated financial statements are presented. All financial information presented in GEL has been rounded to the nearest thousand, except when otherwise indicated. 4. Use of estimates and judgments The preparation of consolidated financial statements in conformity with IFRSs requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from those estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. 9

10 Information about critical judgments in applying accounting policies and assumptions and estimation uncertainties that have the most significant effect on the amounts recognised in the consolidated financial statements is included in note 22 (g) (iii) useful lives of property and equipment. In the opinion of management, there are no assumptions or estimation uncertainties that have a significant risk of resulting in a material adjustment within the next financial year. Measurement of fair values A number of the Group s accounting policies and disclosures require the measurement of fair values for financial and non-financial assets and liabilities. Fair values have been determined for disclosure and for measurement purposes. Fair values are categorised into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows. Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). If the inputs used to measure the fair value of an asset or a liability might be categorised in different levels of the fair value hierarchy, then the fair value measurement is categorised in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. Further information about the assumptions made in measuring fair values is included in the following notes: Note 17 (a) fair values of financial assets and liabilities; Note 20 (a) (i) fair value determination of the identifiable net assets of VTEL Georgia LLC at the acquisition date. 5. Revenues 000 GEL Internet service 79,592 76,509 Fixed telephone service 29,082 32,333 Internet television 27,941 27,824 Facility rental service 10,883 9,769 Interconnect service 10,073 8,567 Wireless telephone ("CDMA*") service 3,967 4,964 Other Total revenues 161, ,989 Tariffs, other than for interconnect service, are not subject to government regulation. * Code Division Multiple Access technology supporting the Group s wireless telephone services. 10

11 6. Purchased services 000 GEL IPTV content cost 8,296 9,658 Internet clear channel costs 7,548 9,363 Interconnection fees 4,676 4,164 Internet service cost 3,762 4,916 Software maintenance and technical support services 3,478 3,900 Utility expenses 3,245 2,972 Advertising expenses 2,947 3,692 Professional fees 1,361 2,948 Other Total purchased services 35,527 41, Salaries and benefits 000 GEL Salaries 26,477 32,545 Bonuses 3,679 4,494 Employee health insurance Other Total salaries and benefits 30,798 37,936 In 2015 the majority of the technical staff left the Group through a spin-off of various operations (see note 8). 11

12 8. Other operating expenses 000 GEL Network maintenance costs 13,270 6,945 Operating lease expenses 3,885 3,532 Taxes, other than on income 2,078 1,896 Provision for impairment of trade and other receivables (see note 17 (b) (ii)) 1,503 1,710 Bank fees and charges 1, Regulation fee 1,209 1,176 Security expenses 1,168 1,226 Office supplies Charity expenses Commission for pay box machines Business trip expenses Fuel and lubricants used Wireless devices cost 252 1,702 Transportation costs Other 613 1,240 Total other operating expenses 28,929 24,403 In % (approximately 4 months of 2015: 62%) of network maintenance costs represent expenses to ServiceNet LLC. In August 2015, the Group completed a spin-off of several operations, including network maintenance and subscriber installations, to ServiceNet LLC. As a result, approximately 1,260 technical staff left the Group. Services from ServiceNet LLC, depending on their nature, are either capitalised or expensed by the Group. Total contract fee paid to ServiceNet LLC, excluding Value Added Tax, during 2016 was approximately GEL 19 million (approximately 4 months of 2015: GEL 7 million). If ServiceNet LLC breaches any of its contractual obligations, pursuant to the shareholders agreement, signed by and between the shareholders of Silknet JSC and ServiceNet LLC, the shareholders of the Group will have an option to acquire ServiceNet LLC. 12

13 9. Taxation The Group s applicable tax rate is the income tax rate of 15%. 000 GEL Current year 1, Current tax expense 1, Origination and reversal of temporary differences - 3,053 Change in recognised deductible temporary differences (due to change in the legislation) (15,698) - Deferred tax (benefit)/ expense (15,698) 3,053 Income tax (benefit)/ expense for the year (14,216) 3,833 Reconciliation of effective tax rate: GEL % 000 GEL % Profit before income tax 20, , Tax at applicable domestic tax rate 3, , Differences between tax and IFRS bases of income and expenses (1,668) (8) - - Non-deductible expenses Change in recognised deductible temporary differences (due to change in (15,698) (75) - - the legislation) (14,216) (68) 3, Reversal of previously recognized deferred tax liabilities of GEL 15,698 thousand is attributable to changes in Georgian tax legislation. On 13 May 2016 the Parliament of Georgia passed a bill on corporate income tax reform (also known as the Estonian model of corporate taxation), which mainly moves the moment of taxation from when taxable profits are earned to when they are distributed. The law is effective for tax periods starting after 1 January Considering that the change in the Georgian Tax Code was enacted before the reporting date, the Group has recognized the full effect of the change by derecognizing previously recognized deferred tax liabilities through the current period consolidated statement of profit or loss as an income tax benefit. (a) Movement in temporary differences during the year 000 GEL 1 January 2016 Reversal of deferred tax liability 31 December 2016 Property and equipment (20,192) 20,192 - Intangible assets 439 (439) - Trade and other receivables 2,197 (2,197) - Parent company loan (78) 78 - Inventories 484 (484) - Trade and other payables 1,167 (1,167) - Cash and cash equivalents 70 (70) - Tax loss carry - forwards 215 (215) - Recognized deferred tax asset 4,572 (4,572) - Recognized deferred tax liability (20,270) 20,270 - Net deferred tax liability (15,698) 15,698-13

14 000 GEL 1 January 2015 Recognized in profit or loss Assumed in business combinations 31 December 2015 Property and equipment (20,717) (437) 962 (20,192) Intangible assets Trade and other receivables 1, ,197 Parent company loan 281 (359) - (78) Inventories 601 (117) Trade and other payables ,167 Cash and cash equivalents Tax loss carry - forwards - (3,383) 3, Recognized deferred tax asset 3,512 (3,500) 4,560 4,572 Recognized deferred tax liability (20,717) (20,270) Net deferred tax liability (17,205) (3,053) 4,560 (15,698) 14

15 10. Property and equipment and other non-current assets 000 GEL Land Buildings and facilities Machinery and equipment Vehicl es Furnitu re and fixture Construct ion in progress Total Cost at 1 January , , ,195 3,851 12,650 2, ,412 Accumulated depreciation - (26,303) (53,834) (3,478) (7,167) - (90,782) Carrying amount at 1 January ,854 80,314 72, ,483 2, ,630 Additions , ,647 25,144 Disposals (345) (1,516) (5,939) (247) (1,067) - (9,114) Transfers and others - 2,481 11, (15,844) (1,376) Disposals of depreciation , ,139 Depreciation charge - (2,188) (19,441) (494) (2,657) - (24,780) Acquisitions through business combinations - - 1, ,624 Carrying amount at 31 December ,509 79,406 74, , ,267 Cost at 31 December , , ,166 3,957 12, ,690 Accumulated depreciation - (28,176) (69,405) (3,827) (9,015) - (110,423) Carrying amount at 31 December ,509 79,406 74, , ,267 Additions , ,091 39,409 Disposals (311) (1,166) (7,845) (61) (687) - (10,070) Transfers and others - 2,865 13, (18,528) (917) Disposals of depreciation , ,593 Depreciation charge - (2,341) (24,858) (134) (1,203) - (28,536) Carrying amount at 31 December ,198 79,211 82, , ,746 Cost at 31 December , , ,450 4,450 13, ,112 Accumulated depreciation - (30,070) (86,848) (3,831) (9,617) - (130,366) Carrying amount at 31 December ,198 79,211 82, , ,746 15

16 (a) Security At 31 December 2016 property and equipment with a carrying amount of GEL 186,990 thousand (2015: GEL 177,306 thousand) is pledged under the secured bank loans (see note 15). (b) Other non-current assets As at 31 December 2016 other non-current assets include uninstalled equipment of GEL 8,897 thousand and prepayments for non-current assets of GEL 1,808 thousand (2015: uninstalled equipment of GEL 13,771 thousand and prepayments for non-current assets of GEL 1,403 thousand). (c) Change in estimates In 2016 the Group made a decision to abandon the CDMA technology due to the significant decline in the customer base of this particular technology. As a result, the remaining useful lives of the assets supporting the CDMA technology were reduced so that these assets will be fully depreciated by July 2017, when the Group expects to leave the CDMA business line. The effect of this change on depreciation expense in current and future periods is as follows: 000 GEL Increase in depreciation expense 1,

17 11. Intangible assets 000 GEL Computer software licenses Telecom operating licenses Broadcasting rights Goodwill (note 20 (a)) Total Cost at 1 January ,777 19,574 6,423 2,685 37,459 Accumulated amortization (6,262) (14,389) (2,552) - (23,203) Carrying amount at 1 January ,515 5,185 3,871 2,685 14,256 Acquisitions through business combinations ,075 Additions 2, ,492-6,346 Amortization charge (1,097) (3,159) (3,666) - (7,922) Carrying amount at 31 December ,424 3,535 3,902 2,894 13,755 Cost at 31 December ,783 21,083 10,120 2,894 44,880 Accumulated amortization (7,359) (17,548) (6,218) - (31,125) Carrying amount at 31 December ,424 3,535 3,902 2,894 13,755 Additions 1,664 3,177 5,797-10,638 Amortization charge (901) (3,621) (3,260) - (7,782) Disposals - (4,858) (4,260) - (9,118) Disposals of amortization - 4,858 4,132-8,990 Carrying amount at 31 December ,187 3,091 6,311 2,894 16,483 Cost at 31 December ,447 19,402 11,657 2,894 46,400 Accumulated amortization (8,260) (16,311) (5,346) - (29,917) Carrying amount at 31 December ,187 3,091 6,311 2,894 16,483 The net book values at 31 December and expiry dates of the most significant telecom operating licenses are as follows: 31 December 31 December License N and (RF) Spectrum Expiry date technology 000 GEL 000 GEL F98 (LTE*) 2,300 MHz - 2,350 MHz August, ,160 - F48 (LTE) 2,299 MHz 2,350 MHz May, F53 (LTE) 2,300 MHz - 2,350 MHz January, , * Long-term evolution technology. 17

18 12. Trade and other receivables 000 GEL 31 December December 2015 Receivables from customers 12,937 11,346 Receivables from telecom operators 1,639 1,944 Other trade receivables 1,473 2,618 Total trade receivables 16,049 15,908 Prepaid expenses 3,351 2,182 Prepaid taxes Total trade and other receivables 19,400 18,432 The Group s exposure to credit and currency risks and impairment losses related to trade and other receivables is disclosed in note Cash and cash equivalents 000 GEL 31 December December 2015 Bank balances 1,036 4,017 Cash in transit Restricted cash - 1,308 Total cash and cash equivalents 1,280 5,487 As at 31 December 2015 the bank balances with a carrying amount of GEL 1,308 thousand were pledged as a security for the Group s trade and other payables. The Group s exposure to interest rate, credit and currency risks and a sensitivity analysis for financial assets and liabilities are disclosed in note Equity (a) Share capital The holders of ordinary shares are entitled to receive dividends as declared from time to time, and are entitled to one vote per share at meetings of the Company. As at 31 December 2016 and 2015 the Company s share capital was pledged under the secured bank loans (see note 15). Number of shares Ordinary shares In issue at 1 January 68,171, ,171,901 Set off with the loans due from related parties (see note 19 (c)) - (96,000,000) In issue at 31 December, fully paid 68,171,901 68,171,901 Authorised shares - par value 1 1 In 2015 the shareholder made a decision to reduce the Company s share capital by GEL 96,000 thousand. The payable that originated from the capital reduction was settled against the Company s loan receivable from the parent company (see note 19 (c)). 18

19 (b) Dividends In 2016 the Company declared dividends of GEL 10,352 thousand to its shareholder (2015: GEL 7,393 thousand). This represented dividends of GEL 0.15 per share (2015: GEL 0.05 per share). On 15 July 2016, the Charter of the Company was amended. The amendments included restrictions on dividend distribution. According to the new Charter, total dividends declared during any financial year will be restricted to 70% of the consolidated net income for the two preceding financial years less dividends paid during the same preceding two years. (c) Capital management The Group has no formal policy for capital management but management seeks to maintain a sufficient capital base for meeting the Group s operational and strategic needs, and to maintain confidence of market participants. This is achieved with efficient cash management, constant monitoring of Group s revenues and profit, and long-term investment plans mainly financed by the Group s operating cash flows and longterm loans and borrowings. With these measures the Group aims for steady profits growth. Neither the Company nor its subsidiaries are subject to externally imposed capital requirements. 19

20 15. Loans and borrowings This note provides information about the contractual terms of the Group s interest-bearing loans and borrowings, which are measured at amortised cost. For more information about the Group s exposure to interest rate, foreign currency and liquidity risk, see note GEL 31 December December 2015 Secured bank loans non-current 65,732 82,205 Secured bank loans current 16,370 16,348 (a) Terms and debt repayment schedule Terms and conditions of outstanding loans were as follows: 000 GEL Currency Nominal interest rate Year of maturity 82,102 98, December 2016 Face Value Carrying amount Secured bank loans USD 5-6% ,589 1,589 Secured bank loans USD 10.5% ,534 2,534 Secured bank loans GEL 12% ,979 77,979 Total loans and borrowings 82,102 82, GEL Currency Nominal interest rate Year of maturity 31 December 2015 Face Value Carrying amount Secured bank loans GEL 14-15% ,203 2,203 Secured bank loans GEL 13-14% ,901 5,901 Secured bank loans USD 10-11% ,449 90,449 Total loans and borrowings 98,553 98,553 In September 2016 the Group converted a major part its outstanding loans and borrowings denominated in US Dollars into loans and borrowings denominated in Georgian Lari. As at 31 December 2016 and 2015 the bank loans are secured by the Company s share capital, inventories, property and equipment and restricted deposit. The restricted deposit of GEL 2,664 thousand bears an annual interest rate of 3.8 % and matures in April

21 16. Trade and other payables 31 December December GEL Non-current Current Noncurrent Current Payable to suppliers - 14,406-13,403 Payable for non-current assets - 7,774-9,367 Payable for licenses and broadcasting rights 1,557 5,524 1,479 2,427 Payable to other operators - 1,617-1,528 Taxes payable, other than on income - 1, Advances received under IRU contracts 25,525 3,457 17,401 2,102 Advances received from subscribers - 1,672-1,345 Deferred revenue 1,683 2,395 1,983 2,788 Dividend payable ,068 Payable to employees ,776 Other payables Total trade and other payables 28,765 38,914 20,863 37,550 The Group s exposure to liquidity and currency risks and a sensitivity analysis for financial assets and liabilities is disclosed in note Fair values and financial risk management (a) Fair values of financial assets and liabilities The estimates of fair value are intended to approximate 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. However given the uncertainties and the use of subjective judgment, the fair value should not be interpreted as being realizable in an immediate sale of the assets or transfer of liabilities. The Group has determined fair values of financial assets and liabilities using valuation techniques. The objective of valuation techniques is to arrive at a fair value determination that reflects the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date. The valuation technique used is the discounted cash flow model. Fair value of all financial assets and liabilities is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date. Management believes that the fair value of the Group s financial assets and liabilities approximates their carrying amounts. (b) Financial risk management The Group has exposure to the following risks from its use of financial instruments: credit risk; liquidity risk; market risk. (i) Risk management framework Board of Directors together with the Supervisory Board has overall responsibility for establishment and oversight of the Group s risk management framework and is responsible for developing and monitoring the Group s risk management policies and reporting regularly to the shareholders on its activities. 21

22 The Group s risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group s activities. The Group, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. The shareholder oversees how management monitors compliance with the Group s risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Group. (ii) Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group s loans receivable, trade receivables and bank balances. The maximum exposure to credit risk for recognised financial assets and unrecognised commitments at the reporting date was as follows: 000 GEL 31 December December 2015 Trade receivables 16,049 15,908 Loans due from related parties 804 1,473 Restricted deposit 2,664 - Cash and cash equivalents 1,280 5,487 Recognized financial assets 20,797 22,868 Credit related commitments (note 18 (c)) 35,000 20,022 Trade and other receivables The Group s exposure to credit risk is influenced mainly by the individual characteristics of each customer. The demographics of the Group s customer base, including the default risk of the industry and country, in which customers operate, has less of an influence on credit risk. Credit risk is managed by assessing the creditworthiness of the customers before the Group s standard payment and service terms and conditions are offered. No collateral in respect of trade and other receivables is generally required. In monitoring customer credit risk, customers are grouped according to their credit characteristics, including whether they are an individual or legal entity, whether they are a wholesale, retail or end-user customer, geographic location, industry, aging profile, maturity and existence of previous financial difficulties. The Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables. The main component of this allowance is a collective loss component. The Group s trade receivables are mainly from the domestic retail customers. The Group does not have a significant concentration of customers. 22

23 Impairment losses The ageing of trade and other receivables at the reporting date was as follows: GEL Gross Impairment Net Neither past due nor impaired 15,455-15,455 Past due less than 30 days 297 (89) 208 Past due days 426 (188) 238 Past due days 452 (329) 123 Past due days 517 (492) 25 Past due more than 365 days 11,496 (11,496) - Total 28,643 (12,594) 16, GEL Gross Impairment Net Neither past due nor impaired 15,255-15,255 Past due less than 30 days 308 (92) 216 Past due days 458 (206) 252 Past due days 572 (418) 154 Past due days 681 (650) 31 Past due more than 365 days 12,761 (12,761) - Total 30,035 (14,127) 15,908 The movements in provision for impairment of trade and other receivables were as follows: 000 GEL At 1 January (14,127) (12,417) Charge for the year (1,503) (1,710) Amounts written off during the year as uncollectible (note 19 (c)) 3,036 - At 31 December (12,594) (14,127) An impairment rate of 100% was applied to gross trade and other receivables from retail customers overdue by more than 365 days, with lower impairment rates applied for ageing categories of trade and other receivables that are overdue for shorter periods. The allowance account in respect of trade and other receivables is used to record impairment losses unless the Group is satisfied that no recovery of the amount owing is possible; at that point the amount is considered irrecoverable and is written off against the financial asset directly. Based on historic default rates, the Group believes that, apart from the above, no impairment allowance is necessary in respect of trade and other receivables not past due or past due by up to 30 days. Bank balances The cash and cash equivalents and restricted deposit are mainly held with Georgian banks with short term issuer default rating of B, based on Fitch Rating. The Group does not expect any counterparty to fail to meet its obligations. 23

24 (iii) Liquidity risk Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Group s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group s reputation. For this purpose the Group makes short-term forecasts for cash flows based on estimated financial needs determined by the nature of operating activities. As a rule these needs are envisaged for an annual and monthly basis. In order to manage its financial needs the Group receives cash flows on a daily basis from customers. This ensures that the Group has enough cash to meet its financial obligations. Typically the Group ensures that it has sufficient cash on demand to meet expected operational expenses for a period of 30 days, including the servicing of financial obligations; this excludes the potential impact of extreme circumstances that cannot reasonably be predicted, such as natural disasters. In addition, the Group maintains an unused credit line facility of approximately GEL 264 million with Bank of Georgia JSC. Legally, the withdrawal of the facility is subject to separate agreement between the Group and Bank of Georgia JSC. The following are the remaining contractual maturities of financial liabilities at the reporting date. The amounts are gross and undiscounted, and include estimated interest payments and exclude the impact of netting agreements. 31 December GEL Carrying amount Total On demand Less than 3 mths 3-12 mths 1-5 yrs Over 5 yrs Non-derivative financial liabilities Secured bank loans 82, ,482-7,430 17,525 80,527 - Trade and other payables 32,947 32,947 14,203 4,395 12,792 1,557 - Credit related commitments 35,000 35,000 35, , ,429 49,203 11,825 30,317 82, December GEL Non-derivative financial liabilities Carrying amount Total On demand Less than 3 mths 3-12 mths 1-5 yrs Over 5 yrs Secured bank loans 98, ,183-8,052 17,546 93,577 10,008 Trade and other payables 31,954 31,954 11,383 4,828 14,264 1,479 - Credit related commitments 20,022 20,022 20, , ,159 31,405 12,880 31,810 95,056 10,008 (iv) Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return. The Group does not apply hedge accounting in order to manage volatility in profit or loss. 24

25 Currency risk In September 2016 the Group converted a major part of its outstanding loans and borrowings denominated in US Dollars into Georgian Lari (see note 15 (a)). As at 31 December 2016 the Group's exposure to currency risk is mainly attributable to USD-denominated purchases. The Group s exposure to foreign currency risk was as follows: 000 GEL USD-denominated USD-denominated 31 December December 2015 Bank balances 229 4,805 Trade and other receivables 1,097 2,201 Due from related parties 804 1,473 Restricted deposit 2,664 - Trade and other payables (16,466) (20,924) Loans and borrowings (4,123) (90,449) Net exposure (15,795) (102,894) The following significant exchange rates have been applied during the year: in GEL Average rate Reporting date spot rate USD Sensitivity analysis A reasonably possible strengthening/ (weakening) of GEL, as indicated below, against the USD as at 31 December 2016 and 2015 would have affected the measurement of financial instruments denominated in USD and affected equity and profit or loss before taxes by the amounts shown below. The currency movements would have no direct impact on other comprehensive income or equity. The analysis assumes that all other variables, in particular interest rates, remain constant and ignores any impact of forecast sales and purchases. Strengthening Weakening 000 GEL Equity Profit or Profit or Equity (loss) (loss) 31 December 2016 USD (10% movement) - 1,580 - (1,580) 31 December 2015 USD (20% movement) - 20,579 - (20,579) Interest rate risk As at 31 December 2016 and 2015 the Group is not significantly exposed to interest rate risk as its financial assets and liabilities bear fixed interest rates. Fair value sensitivity analysis for fixed rate instruments The Group does not account for any fixed-rate financial instruments as fair value through profit or loss or as available-for-sale. Therefore a change in interest rates at the reporting date would not have an effect in profit or loss or in equity. F 25

26 18. Contingencies and commitments (a) Taxation contingencies The taxation system in Georgia is relatively new and is characterised by frequent changes in legislation, official pronouncements and court decisions, which are sometimes unclear, contradictory and subject to varying interpretation. In the event of a breach of tax legislation, no liabilities for additional taxes, fines or penalties may be imposed by the tax authorities after three years have passed since the end of the year in which the breach occurred. These circumstances may create tax risks in Georgia that are more significant than in other countries. Management believes that it has provided adequately for tax liabilities based on its interpretations of applicable Georgian tax legislation, official pronouncements and court decisions. However, the interpretations of the relevant authorities could differ and the effect on these consolidated financial statements, if the authorities were successful in enforcing their interpretations, could be significant. (b) Litigation In the ordinary course of business, the Group is subject to legal actions, litigations and complaints. Management believes that the ultimate liability, if any, arising from such actions or complaints will not have a material adverse effect on the financial condition or the results of future operations. (c) Credit related commitments In 2016 the Group guaranteed the indebtedness of the parent company in the amount of GEL 35,000 thousand (2015: three related party companies in the amount of GEL 20,022 thousand) The facility amounts represent the maximum accounting loss that would be recognized at the reporting dates if counterparties failed completely to perform as contracted. Therefore, the total outstanding contractual commitment does not necessarily represent future cash requirements, as the commitment may expire or terminate without being funded. As at 31 December 2016 and 2015 no events of default under the agreements occurred and management believes that the probability of any of the counterparties failing to meet their contractual obligations under the respective agreements was remote. Therefore, no provision was recognized for the arrangements. 19. Related parties (a) Parent and ultimate controlling party The Company s immediate and ultimate parent company is Rhinestream Holdings Limited. The Company is ultimately controlled by an individual, Giorgi Ramishvili. No publicly available financial statements are produced by the Company s parent company or ultimate controlling party. (b) Key management remuneration Key management received the following remuneration during the year: 000 GEL Salaries 1,982 2,071 Bonuses 3,093 1,851 5,075 3,922 26

27 (c) Other related party transactions 000 GEL Transaction value for the year ended 31 December Outstanding balance as at 31 December Loans issued: Parent company - 7,002-1,473 Other related party Professional fees: Entities under common control (60) Fuel and lubricants used: Entities under common control (34) (25) In 2016 the dividend payable of GEL 1,530 thousand was settled against the loan receivable from the parent company. In 2015 the payable to the shareholder for the reduction of the share capital of GEL 96,000 thousand (see note 14 (a)) was set off against the parent company loan. The loan receivable from other related party in amount of GEL 804 thousand bears interest rate of 12% and matures in The Group s exposure to credit and currency risks and a sensitivity analysis for loans receivable is disclosed in note 17. During 2016 interest income of GEL 110 thousand (2015: GEL 13,000 thousand) was recognised in profit and loss in respect of related party loans. During 2016 the Group sold trade receivables of GEL 3,036 thousand that were fully provisioned to an entity under common control for a cash consideration of GEL 27 thousand (2015: none). Credit related commitments In 2016 the Group guaranteed the indebtedness of related parties of GEL 35,000 thousand (2015: GEL 20,022 thousand) (see note 18 (c)). 20. Subsidiaries Subsidiary Country of incorporation 31 December December 2015 Ownership/voting Ownership/voting Qarva LLC Georgia 51% 51% WiMax Georgia LLC Georgia 100% 100% Georgia Media Network LLC Georgia - 85% Novus LLC Georgia 100% 100% NG Georgia Georgia 100% 100% (a) Significant business combinations On 30 June 2014, the Group acquired an 85% ownership in Georgia Media Network LLC, one of the Group's IPTV content providers, for a cash consideration of GEL 4,575 thousand. The Group did not incur any acquisition-related costs. The business combination was undertaken to gain control over the supply and development of the IPTV content and achieve cost-savings as a result of the vertical integration. 27

28 On 27 November 2015, the Group acquired a 100% ownership in VTEL Georgia LLC, a company providing wireless internet services in the regions of Georgia, for a cash consideration of GEL 6,451 thousand. On 4 December 2015 VTEL Georgia LLC was merged with the Company. The Group did not incur any acquisition-related costs. The purpose of the business combination was to gain control over the radio frequency spectrum licenses owned by VTEL Georgia LLC. (i) Identifiable assets acquired and liabilities assumed The following table summarises the recognised amounts of assets acquired and liabilities assumed at the acquisition dates: 000 GEL Recognised fair values on acquisition Georgia Media Network LLC VTEL Georgia LLC Non-current assets Property and equipment 2,149 1,624 Intangible and other non-current assets 2, Deferred tax asset - 4,560 Current assets Trade and other receivables Cash and cash equivalents Non-current liabilities Deferred tax liabilities (136) - Current liabilities Loans and borrowings (192) (70) Trade and other payables (2,290) (816) Total identifiable net assets 2,223 6,242 Measurement of fair values The valuation techniques used for measuring the fair value of material assets acquired were as follows. Assets acquired Property and equipment Intangible assets Valuation technique Market comparison technique and cost technique: The valuation model considers quoted market prices for similar items when available, and depreciated replacement cost when appropriate. Depreciated replacement cost reflects adjustments for physical deterioration as well as functional and economic obsolescence. Relief-from-royalty method and multi-period excess earnings method: The relief-fromroyalty method considers the discounted estimated royalty payments that are expected to be avoided as a result of the patents or trademarks being owned. The multi-period excess earnings method considers the present value of net cash flows expected to be generated by the customer relationships, by excluding any cash flows related to contributory assets. The fair value measurement for the acquired identifiable net assets has been categorised as a Level 3 fair value based on the inputs used in the valuation techniques above. The trade and other receivables at the acquisition date comprise gross contractual amounts due from the counterparty. None of the trade and other receivables were expected to be uncollectable. (ii) Goodwill Goodwill was recognised as a result of the acquisitions as follows: 28