Public Joint-Stock Company Ukrtelecom. International Financial Reporting Standards Consolidated Financial Statements and Independent Auditor s Report

Transcription

1 International Financial Reporting Standards Consolidated Financial Statements and Independent Auditor s Report 31 December 2014 These consolidated financial statements contain 50 pages

2 Contents INDEPENDENT AUDITOR S REPORT CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheet (Statement of Financial Position) 1 Consolidated Income Statement and Statement of Comprehensive Income 3 Consolidated Statement of Cash Flows (direct method) 5 Consolidated Statement of Changes in Equity 7 Notes to the Consolidated Financial Statements 1 Reporting entity 9 2 Basis of preparation11 3 Significant accounting policies, new standards and interpretations 18 4 Segment information26 5 Property, plant and equipment and construction in progress27 6 Discontinued operations 30 7 Trade accounts receivable31 8 Other current receivables 33 9 Other long-term and current financial investments Equity34 11 Long-term provisions Loans and borrowings Trade and other accounts payables38 14 Current provisions38 15 Revenue Cost of revenue Administrative expenses39 18 Selling expenses39 19 Other operating expenses Other operating income Finance costs Finance income Income tax expense41 24 Financial risk and capital management42 25 Commitments Contingencies47 27 Related parties48 28 Subsequent events49

3 Jim pwc Independent Auditor's Report To the Shareholders and Supervisory Board of Public Joint Stock Company Ukrtelecom We have audited the accompanying consolidated financial statements of Public Joint Stock Company Ukrtelecom (the "Company") (EDRPOU Code , located 18 Shevchenko Blvd, Kyiv, 01601, Ukraine, registered in Kyiv on 15 December 1993) and its subsidiaries (the Group), which comprise the consolidated balance sheet (statement of financial position) as at 31 December 2014 and the consolidated income statement and statement of comprehensive income, consolidated statements of changes in equity and cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information Management's Responsibility for the Financial Statements Management 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 financial statements that are free from material misstatement, whether due to fraud or error Auditor's Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit We conducted our audit in accordance with International Standards on Auditing Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the 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, as well as evaluating the overall presentation of the financial statements We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion Basis for qualified Opinion Accounting for government infrastructure assets The balance sheet of the Group includes the items of government infrastructure assets classified as asset held for sale as at 31 December 2014 (2013: as property, plant and equipment) with the net book value of UAH 799,173 thousand In March 2011 as a part of the privatisation of the Company, LLC ESU, the acquirer of the Company assumed an obligation to separate operationally the government infrastructure assets from the Group's operating network and transfer them to the Government of Ukraine for free The assets have not been transferred as of the date of issue of these consolidated financial statements The net book value of the government infrastructure assets at the date of privatisation and as at 1 January 2013 was insignificant, as majority of these assets were already fully depreciated As discussed in Note 2 and Note 5 to the consolidated financial statements, starting from 31 December 2013 the Company adopted a change of the accounting policy for the subsequent measurement of plant, property and equipment from the cost model to the revaluation model The government infrastructure assets were valued using depreciated replacement cost at UAH 799,173 thousand without adjusting downwards to reflect the economic benefits that could be derived from those assets Due to the fact that there are no incremental benefits that could be derived from these assets other than the economic benefits already reflected in the revalued amount of all other items of property, plant and equipment, in our view, the revalued amount of government infrastructure asset should be set at nil at 31 December 2014 and 31 December 2013 As the result, assets held for sale as at 31 December 2014; property, plant and equipment as at 31 December 2013, and revaluation gain recognised in other comprehensive income of year ended 31 December 2013 are overstated by UAH 799,173 thousand In addition, as at 31 December 2014 and 2013, deferred tax assets are understated by UAH 143,852 thousand and revaluation reserve is overstated by UAH 655,321 thousand LLC AF "PricewaterhouseCoopers (Audit)", 75 Zhylyanska Str, nit), 01032, Ukraine T: , F: a, wwwpwccom/ua

4 Jim pwc Qualified Opinion In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion paragraph, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as at 31 December 2014, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards Emphasis of matter - uncertainty in the financial statements with respect to the political and economic uncertainties in Ukraine and its consequent impact on going concern We draw your attention to Note 1 to the consolidated financial statements As disclosed in Note 1, the operations of the Group have been affected and may continue to be affected for the foreseeable future by the continuing political and economic uncertainties in Ukraine The uncertainties impact the Group's assessment of the fair value of property, plant and equipment, recoverable amounts of inventory, trade and other receivables Further, these may affect the Group's ability to renegotiate its current borrowings As at year end the Group's current liabilities exceed its current assets by UAH 1,775,916 thousand This, along with other matters as described in Note 1, indicates the existence of a material uncertainty which may cast significant doubt about the ability of the Group to continue as a going concern Our opinion is not qualified in respect of this matter IF92-eeZ 24 April ,14 Kyiv, Ukraine Julia Paranich General Director Limited Liability Company Audit Firm "PricewaterhouseCoopers (Audit)" Certificate of Registration as an Auditing Entity No 0152 Issued: 26 January 2001 Extended to 4 November 2015 Contract on provision of audit services of 7 November 2014 Timeframe of the services provision: 10 November April 2015 Julia Paranich Audit certificate N Issued on 22 June 2001 LLC AF "PricewaterhouseCoopers (Audit)", 75 Zhylyanska Str, Kyiv, 01032, Ukraine T: , F: , wwwpwccom/ua

5 Consolidated Balance Sheet (Statement of Financial Position) Date (year, month, day) Entity PJSC Ukrtelecom EDRPOU Location Ukraine KOATUU Form of ownership Public Joint-Stock Company KOPFG 230 State administration authority SPODU Principal activity Telecommunications KVED 6110 Average number of employees Measurement unit: thousand UAH Address 18 Taras Shevchenko Blvd, Kyiv Prepared in accordance with (put "v" where appropriate): National Accounting Standards International Financial Reporting Standards V Assets Consolidated Balance Sheet (Statement of Financial Position) Line Code Form No1 DKUD Code December 1 January December 2013 (as restated) 2014 (as restated) I Non-current assets Intangible assets: , ,012 historical cost , ,495 accumulated amortization 1002 (456494) (405,096) (399,483) Construction in progress ,218 12, ,297 5 Property, plant and equipment: , ,605,605 cost or valuation ,529,198 5,896,120 5,200,931 5 accumulated depreciation 1012 (19,529,538) - (595,326) 5 Investment property: ,382 10, cost or valuation ,546 4,125 accumulated depreciation 1017 (5,128) (5,801) (2,989) Long-term biological assets Long-term financial investments: accounted for on an equity basis other financial investments , Long-term receivables Deferred tax assets ,312 Other non-current assets ,269 15, Total non-current assets ,401,532 5,963,356 5,062,191 II Current assets Inventories: , , ,473 production supplies ,246 89,856 90,576 finished goods merchandise ,878 29,475 24,833 Current biological assets Trade accounts receivable , , Taxes and other receivables: advances paid ,290 39,379 budget ,185 6, including income tax ,118 6,837 accrued income ,216 11,742 3,198 receivables from subsidiary Other current receivables , , Current financial investments ,019 62,917-9 Cash and cash equivalents , ,697 78,489 Deferred expenses ,822 73,044 49,065 Other current assets ,198 6,026 5,624 Total current assets ,043,774 1,561,868 1,281,464 Ill Assets held for sale and disposal groups , ,303 1,080,360 6 Total assets ,799,960 7,901,527 7,424,015 Note The accompanying notes are an integral part of these financial statements 1

6 Consolidated Balance Sheet (Statement of Financial Position) Equity and Liabilities Approved for issue and signed Line Code 1 January 2013 (as restated) 31 December 2013 (as restated) 31 December I Equity Registered share capital ,681,562 4,681,562 4,681, Revaluation surplus , ,701,576 5,648,029 Additional capital , , ,358 Reserves , , Accumulated deficit 1420 (4,440,569) (6,980,175) (7,016,518) Unpaid capital Capital withdrawals Total equity ,887,067 4,037,145 3,950,243 II Non-current liabilities and provisions Deferred tax liabilities Long-term borrowings Other long-term financial liabilities ,239 41,541 22, Long-term provisions , Target financing Total non-current liabilities and , , ,276 provisions Ill Current liabilities and provisions Short-term borrowings , ,855 1,097, Promissory notes issued Current portion of long-term borrowings , ,132,516 1,005, Trade and other accounts payable , , , Taxes and other payables: budget , ,008 including income tax , social charges (salary related) ,596 36,579 25,566 salaries ,443 76,741 52,384 advances received ,612 58,044 56,576 payables to shareholders ,900 1,899 1,899 payables to subsidiary Current provisions , , , Deferred income ,940 3, Other current liabilities ,826 40,199 41,484 Total current liabilities ,575,780 3,273,853 3,057,380 IV Liabilities associated with assets held for sale and disposal groups Note , , ,116 6 Total equity and liabilities _ 1, mow, 7,799,960 7,901,527 7,424,015 Director /Ogi2o/C Chief Accountant The accompanying notes are an integral part of these financial statements 2

7 Consolidated Statement of Comprehensive Income for the year ended 31 December 2014 Entity Location State administration authority Form of ownership Principal activity Prepared in accordance with (put "v" where appropriate): National Accounting Standards International Financial Reporting Standards Measurement unit: PJSC Ukrtelecom Ukraine Public Joint-Stock Company Telecommunications thousand UAH Date (year, month, day) EDRPOU KOATUU SPODU KOPFG KVED V Consolidated Income Statement and Statement of Other Comprehensive Income Item Form No2 I INCOME STATEMENT Line Code DKUD Code Reporting Period Prior period (as restated) Revenue , Cost of revenue 2050 (4140,745) (7225,344) 16 Gross: profit loss (853143) Other operating income , Administrative expenses 2130 (748,542) (798,956) 17 Selling expenses 2150 (588,091) (668,602) 18 Other operating expenses 2180 (360,286) (187,344) 19 Financial result of operations: profit ,849 - loss 2195 (2,462,112) Equity earnings Finance income ,197 55, Other income ,103 19,723 Finance costs 2250 (840509) (418,180) 21 Losses on equity investments 2255 (91) (107) Other expenses 2270 (33,873) (55,704) Financial result from continuing activities before tax: profit loss 2295 (4,324) (2,860,975) Income tax benefit /(expense) , , Loss from discontinued operations after tax 2305 (218,103) (137,855) 6 Net financial result of operations: profit loss 2355 (1,3861 (2,484830) Note The accompanying notes are an integral part of these financial statements 3

8 Public Joint-Stock Company Ukrtelecom Consolidated Statement of Comprehensive Income for the year ended 31 December 2014 (continued) II OTHER COMPREHENSIVE INCOME Item Line Code Reporting Period Prior period (as restated) Note Revaluation gain/(loss) on non-current assets Revaluation of financial instruments Currency translation reserve Share of comprehensive loss of equity accounted investees Other comprehensive income (loss) ,988 36,603 3,202,005-5 Other comprehensive income (loss) before tax ,591 3,212,500 Income tax attributed to other comprehensive income 2455 (6,589) (514,000) Other comprehensive income (loss) after tax Total comprehensive income ,002 31,616 2,698, ,670 10, Line 2445 "Other comprehensive income (loss)" in amount of UAH 36,603 thousand (2013: UAH 10,495 thousand) is represented by the actuarial gain from post-employment long-term benefit obligations (Note 11) Line 2400 "Revaluation gain (loss) on non-current assets" in 2013 year includes UAH 799,173 thousand of revaluation surplus related to government infrastructure assets Line 2455 "Income tax attributed to other comprehensive income" includes UAH 143,852 thousand of deferred tax liability recognised on revaluation of government infrastructure assets More details are disclosed in Note 5 All items of other comprehensive income, except for currency translation reserve, will not be subsequently reclassified to profit or loss III NATURE OF OPERATING EXPENDITURES Line Code Item Reporting period Prior period (as restated) 2013 Note Materials, utilities and other expenditures Salaries and related charges Social charges Depreciation and amortization Other operating expenses , , , ,985 1,500, ,949 2,259, , ,668 4,227,668 Total ,837,664 8,880,246 IV EARNINGS PER SHARE Item 1 Average annual number of ordinary shares Adjusted average annual number of ordinary shares Basic earnings (loss) per ordinary share, UAH Diluted earnings (loss) per ordinary share, UAH Dividend per ordinary share, UAH Basic and diluted earnings (loss) per ordinary share from continued operations, UAH Basic and diluted earnings (loss) per ordinary share from discontinued operations, UAH, --,-- Prior period (as restated) 2013 Line Code Reporting Period ,726,248,000 18,726,248,000 (00001) (00001) ,248,000 18,726,248,000 (01327) (01327) (01253) (00117) (00074) Note Approved for issue and signed Director Chief Accountant IC' q/20/ ,1212,f The accompanying notes are an integral part of these financial statements 4

9 Public Joint-Stock Company Ukrtelecom Consolidated Statement of Cash Flows for the year ended 31 December 2014 Date (year, month, day) PJSC Ukrtelecom Entity Ukraine Location Public Joint-Stock Company Form of ownership Telecommunications Principal activity Prepared in accordance with (put "v" where appropriate): National Accounting Standards International Financial Reporting Standards Measurement unit: thousand UAH EDRPOU KOATUU KOPFG KVED v DKUD Code Consolidated Cash Flow Statement (Direct method) Form No3 Item 1 Line Code 2 Reporting Period Prior period (as restated) I Cash flows from operating activities Proceeds from: ,639, ,724 54, , , ,718 6,837, ,174 63, , ,004 67,662 Settlements for goods and services Payments to employees Social charges Other taxes and duties payable Advances to suppliers Reversal of advances from customers Other expenditures (1,284,650) (1,851,082) (807,022) (1,191,655) (122,153) (2,459) (200,488) (1,491005) (1,808,474) (843,382) (1,263134) (123,775) (1,408) (244,871) Net cash flows from operating activities II Cash flows from investing activities Disposals: ,617,206 1,420,414 financial investments non-current assets ,670 1,633 17,265 1, , ,534 6, ,631 financial investments non-current assets Expenses on derivatives Other payments (10,000) (168,566) (1,483,985) (39,965) (338,679) (374,344) Net cash flows from investing activities 3295 (793,245) (540,311) Sale of goods and services Return of taxes and duties: VAT Target financing Prepayments from customers Return of advances Interests on current bank accounts Penalties, fines and forfeits Operating lease Other proceeds Expenditures from: Receipts: Interest Dividends Derivatives Other proceeds Acquisitions: The accompanying notes are an integral part of these financial statements 5

10 Public Joint-Stock Company Ukrtelecom Consolidated Statement of Cash Flows for the year ended 31 December 2014 (continued) Item Line Code Reporting period Prior period (as restated) Ill Cash flows from financing activities Proceeds from issuance of equity Borrowings received Other proceeds Repurchase of treasury shares Repayment of borrowings Dividends paid Interest paid Finance lease Other payments ,189,941 69,992 (3,051,091) (435,763) (439) (135,752) 2,442,821 40,277 (2,515,294) (1) (421,518) (37,701) (78,768) Net cash flows from financing activities 3395 (1,363,112) (570,184) 3400 Net cash flows for the period Cash and cash equivalents at the beginning of the 3405 year Effect of change in exchange rates on cash and cash 3410 equivalents 1, "N, Cash and cash equivalents at the year-epro zi1-1-n 3415 (539151) 309, , ,770 50, , ,697 - Approved for issue and signed 24 /0V/20rr Director (signa Chief Accountant - (sig ature 4\ ,11 Zors- name Line 3190 "Other expenditures" in amount of UAH 200,488 thousand (2013: UAH 244,871 thousand) in "Cash flows from operating activities" includes cash outflows from rent paid, foreign currency purchase transactions, payments under collective agreement, insurance payments and other cash outflows Line 3250 "Other proceeds" in "Cash flows from investing activities" includes UAH 795,094 thousand of proceeds from loan settled by direct shareholder LLC "ESU" (2013: UAH 187,000 thousand), and other cash inflows Line 3290 "Other payments" in "Cash flows from investing activities" includes UAH 1,016,409 thousand of cash outflows for loan granted to direct shareholder LLC "ESU" (2013: UAH 374,100 thousand), and UAH 278,013 thousand of net cash outflows for loan granted to discontinuing operations LLC "Trimob" (2013: nil) and net outflows from other operations with LLC "Trimob" UAH 13,924 thousand (2013: net cash inflow UAH 52,477 thousand) Line 3390 "Other payments" in "Cash flows from financing activities" includes UAH 86,525 thousand of repaid loans to suppliers (2013: UAH 69,376 thousand), and other cash outflows The accompanying notes are an integral part of these financial statements 6

11 el O 03 > To" co ICO c -- I (86,90; 3,950,24 4,037,14 (1,386 33, ,811,84 244,64' (1,019, a (7) 0 0 o CD,- ipital irawals _I I 0 0 0, %II N " " " " ' 71 c 7,, 0 0 t, c 0 0, 17:- (7,016,518) cm co v, cl a) a: CD " " ' " ' " 222,812 it) W (6,980,175) (1,386) (1019,349) 8 H 7 Accumulated deficit i t 0c C 5 7 C) Reserves DKUDCode 7' To I " ' a) N, e" ' -C ' ) E Y 8 0 C -o _oe o_ D 7th a CL 2 0 o_ L, 0 V- CD -?' 2 0 c co 0 cl LI j u i 011 C co 0 a) co p, t - 0 z c O co e E -e CL _13 :3 to '13 0 E co cn - E' (3 (13 0 5E t c 2 z tt' u) LE (0 T 0 a) 2 z 4 a) :-:- t-> rn co 2 as u) >,,- 8 _c = oc CL,2u)E C 0 _c :,- v ca 0_ 3 c11) ce 8 el c cn Tti a; o)cro a 0 o_ -2 5 c ;,: c co _ Z ,_ CA CD > al 0 - -' C Edit cocoa) 7 a) a) Erlai'c E -, Tt 0 It 2:3-0 O 0 0 "") C Q) ,aim 6 a) E '5 no E D 5:2-3 ZI u a) g m Va 1-4 g cc t Lii_icnu_o_o_z 2 n oo 0 0 0, 4,681, ,1 1 I (53,547) I (53,547) 358 5,648,029I 414, 278, , ,681, W CO W V 0 c Cl) 0 U) 1 C4 10 o RI gl F4 Tr Tr Tr Tr Tr 5 Chief Accountant co 80 co _, a) Approvedfor issue and signed -0 -o G0 0 1:3 0 E Item O 0 o -- equi, ty (Note 10) Total changes Inequity t31 December 2014 Balance as a 0, o c _se 0 0 1p, hares (participatory interest) s: Repurcha se of treasury s hares (participatory interest) f treasury s Reverse repurchase o Annulmentof treasury s hares (participatory interest) E c E c',---) O ca (loss) hareholders ( dividends) Retained earnings distributed: Distributions tos Reinvestment in authorized capital Allocations to reserves Shareholders/contributions: Eq uity contributions 0 0-0,,, r0 o c-u) nce as at31 December 2013 > C CO 0_?c,' L 0 thousand UAH 0 co co 0, csi i's 80 8sr cs 8 '8, 8 8 c71 i'sr, n a- cr v Tr Tr Tr Tr Tr Tr Tr Tr olicy Restatements: Change of accounting p Correction of errors (Note 2) CN/ w W =0 0 _1 0,,,, W co oc! co, ai - co o (a ri cv 1 Balance as at 31 December 2013 (as originally presented) Tr 'Tr, Registered Revaluation Additional share surplus capital capital Consolidated Statement of Changes in Equity 5 0 d= 0 0

12 0 ) 0 CD,('),- k " CO "- 7 _ ) ot,,,0 co a I co CO (0 C O E D D 2 eg O 0 c co c u In o CC! 11 DI 02 ei -4CO Cn M c!,- (63,592) ( ) (6,980,175) --- ) ) ) ) Accumulated deficit I Capital withdrawals wit hdrawals > 3 0 (4,440569) (2484,830) (0 0 CD CD, -V) 0 CO - I ct 3,887,067 (2484,830) ,037,14 C I I >, 0 i- 0 0 carecconw woon0> 0WXU) YY ol N N N N N Z (I) o L 0, `-- (1) as m a) o cc) 0_ D 8 C 0 q3 (13 c)e -t 0 0 o 0 2 c -2 Cl) 4-1:3 1:3 E to '3 03 -, :0 0 %) Q o- -5 z LI: co Cl) 44" Ozzc,c)c)c, :-)- = o c iii co C 0 ca 2 o c 3 > 0cg ca c W 76 c O U) 0_ I E cn < D -o a 17:1 0 = a to Cb C L L N, E 0 c o 0 0 >-, :g 3 )co ": a) 2 '5' a) cl 0 c t a 0 o _a 0,3 I 8O cli c 76 co a o ca 4= :E co o) '0 12,a a ij o 'E p2 z8 S -E = r-3 ti; a),> 0, o 1-1- C T5 C 8 To 0 '- < g E 5 -, C-0 '4ED -Tei co o RI O L-, CO Z VI ID P r ) a o E, c0 a i1 (1 -, a s a) c'-)t; a),1,5 c0, 0 L E - - W _I 0 U- 0_ 0_ Z E E 2 411, ,684 4,681,562 5,701, ,370 CO 4,681, O " CD L000wooat000LooLoowoloa 0 0 s 0) 01 0 s 0 0 ct at CO CD f` 0) 0) 0 op o D cm o -,- csi cv csi DI DI N Csl 01 C4 DI Cal CO O' act '7 at,:t 1 7 0' at '7 7 7 act at ct '7 'V 4' r ChiefAccountant -0 0 co c o at CO CC 0) CO ( C)I Approvedfor issue and signed a) I 7,- t -) 'a -9 a) a) -0 E 0 o 0) a) c 01 0) C, Total changes in equity Balance asat 31December 2013 c) 0 a) 0 J a TD E o 0 a _ o, L 0 al -c) u? 'E -- a = 5 ) E Qj co c) -o E a) 8 -o 2 co a as 0 1 Balance asat31december 2012 (as originally presented) Restatements Change of accounting policy Correction o f errors ( Note 2) Other changes Restated balance as at 01 January 2013 Net profit (loss) for t he period Other comprehensive income ( loss) Retained earnings distributed: Distributions toshareholders ( dividends) Reinvestment inauthorized capital Allocations toreserves Shareholders/contributions: Equity contributions Capita l repayment Capital withdrawals: Repurchase o f treasury shares (participatory interest) I Reverse repurchase o ftreasury shares (participatory interest) Annulment of treasury shares (participatory interest) Equity divestment Other changes inequity ( Note 10) 00-1, 0 c0 (0 3 4,681, ,8r Registered share capital Revaluation Additional surplus capital Other additional capital The accompanying notes areanintegral part o f these financial statements i;

13 1 Reporting entity Organisation and operations Public Joint-Stock Company Ukrtelecom (the Company ) is the Ukraine s largest provider of fixed line telephony and internet services that operates telecommunication assets previously owned by the State of Ukraine On 11 May 2011 as a part of the Ukrainian privatisation program LLC ESU ( ESU ), a subsidiary of Austrian company Epic, acquired a 92791% stake in the Company On 30 September 2013 Ukrainian financial and industrial group System Capital Management (SCM) acquired a 100% stake of ESU As at 31 December 2014 and 2013 the Company s shares are owned by LLC ESU (92791%), other legal entities (5911%) and individuals (1298%) The consolidated financial statements for the year ended 31 December 2014 comprise the Company and its subsidiaries LLC TriMob and Ukrtel GmbH (together referred to as the Group ) The Group is beneficially owned by Mr Rinat Akhmetov, through various entities commonly referred to as SCM Related party transactions are detailed in Note 27 The Group provides fixed line communication services including installation and maintenance of subscriber access lines, local, intercity and international switching and transmission services and data transmission, as well as other related services including Internet, ISDN, Frame Relay, audiotext and other computer communication services In 2007 the Group started to deploy a mobile network using its IMT-2000 CDMA (UMTS/WCDMA) mobile license (commonly referred to as a 3G mobile license) During the year 2011 shareholders of the Group have declared their intention to dispose the mobile segment Since 31 December 2011, the Group classified its mobile segment as a discontinued operation As at 31 December 2014 mobile segment is represented solely by subsidiary LLC TriMob (Note 6) The Company s legal address is 18, Taras Shevchenko Boulevard, Kyiv, Ukraine, Ukrainian regulatory and business operating environment Tariffs are set by the National Commission on Regulation of Communications and Information ( NCRCI ), the Ukrainian telecommunications market regulator, in particular, for publicly accessible fixed line communication services (Note 15) Tariffs for domestic fixed line communication traffic may not necessarily reflect the costs of providing telecommunication services and required capital expenditures for network development This fact, together with other political, economic, tax and legal uncertainties in Ukraine, has and may continue to have implications on future profitability of the Group and, accordingly, on the ability of the Group to recover the carrying value of its non-current assets Government influence on the Group s operations is also exercised through the Ministry of Infrastructure In addition, the state regulates the Group through NCRCI which issues, extends, reissues and cancels licenses for rendering telecommunication services/using radio-frequency resources and permissions to use number resources NCRCI also regulates tariffs for publicly accessible fixed line communication services, fees for provision of telecommunication channels for use set by the operators that hold a monopolistic or dominating position on the market, charges for traffic transfer to telecommunication networks of operators that have a significant advantage on a certain traffic transfer services market or hold a monopolistic or dominating position on the telecommunications services market, and telecommunications operators fees for provision of cable ducts for use Ukraine's political and economic situation has deteriorated significantly since the Government's decision not to sign the Association Agreement and the Deep and Comprehensive Free Trade Agreement with the European Union in late November 2013 Political and social unrest combined with rising regional tensions has deepened the ongoing economic crisis and has resulted in a widening of the state budget deficit and a depletion of the National Bank of Ukraine s foreign currency reserves and, as a result, a further downgrading of the Ukrainian sovereign debt credit ratings In February 2014, following the devaluation of the national currency, the National Bank of Ukraine introduced certain administrative restrictions on currency conversion transactions and also announced a transition to a floating foreign exchange rate regime In March 2014, various events in Crimea led to the accession of the Republic of Crimea to the Russian Federation This event resulted in a significant deterioration of the relationship between Ukraine and the Russian Federation On 24 September 2014 the Group lost control over assets related to Sevastopol branch located in Crimea On 16 October 2014 Supervisory Board approved decision on liquidation of Sevastopol branch As at that date assets of Sevastopol branch were presented by property, plant and equipment with net book value UAH 70,071 thousand, trade and other accounts receivables, gross UAH 30,916 thousand Upon the loss of control all assets were fully impaired Sevastopol branch had no significant third parties obligations Subsequent to reporting date the Group also ceased control over Crimean branch located in Simferopol (Note 28) 9

14 1 Reporting entity (continued) The political situation in Eastern Ukraine also deteriorated in 2014 resulting in armed conflict and military activity in some parts of the Donetsk and Lugansk regions The armed conflict in the region put further pressure on relations between Ukraine and the Russian Federation Escalating political tensions have had an adverse effect on the Ukrainian finance markets, resulting in a hampering of the ability of Ukrainian companies and banks to obtain funding from the international capital and loan markets This has contributed to a significant devaluation of the Hryvnya against major currencies The Group has acting operations in two branches located in Donetsk and Lugansk region, where there has been armed conflict These represent 7% of property, plant and equipment, 11% of gross trade receivables as at 31 December 2014 and 7% of revenue for the year ended 31 December 2014 Sales volumes and activity at these branches has been negatively impacted by the situation, primarily in the second half of 2014 The negative impact has been caused by disruptions in infrastructure and the ability of some customers to pay for the services provided Despite the challenges management still has control over these assets and oversees their operations As of the date of this report the official NBU exchange rate of Ukrainian Hryvnia (UAH) against US dollar (USD) was UAH per USD 1, compared to per USD 1 as at 31 December 2014 The final resolution and the effects of the political and economic crisis are difficult to predict but may have further severe effects on the Ukrainian economy and the Group s business including the application of relevant estimates and judjements when preparing the financial statements (Note 2) Whilst management believes it is taking appropriate measures to support the sustainability of the Group s business in the current circumstances, a continuation of the current unstable business environment could negatively affect the Group s results and financial position in a manner not currently determinable These consolidated financial statements reflect management s current assessment of the impact of the Ukrainian business environment on the operations and the financial position of the Group The future business environment may differ from management s assessment Going concern Management prepared these financial statements on a going concern basis In making this judgement management considered the Group s financial position, current intentions, profitability of operations and access to financial resources, and analysed the impact of the situation in the financial markets on the operations of the Group While management believes that going concern assumption is appropriate, there is a material uncertainty related to events or conditions which may cast significant doubt on the entity's ability to continue as a going concern As of 31 December 2014 the Group s current liabilities exceeded its current assets by UAH 1,775,916 thousand, primarily due to material amount of short-term borrowings including UAH 890,860 thousand of bonds Though the bonds are placed for more than 12 months, they are classified as current, since, according to the terms of placement, the bondholders have a right to demand early repayment of the nominal amount of all or part of the bonds annually within a certain time period as indicated in the prospectus of bond issue UAH 1,305,847 thousand out of total borrowings including future interest expense, in particular UAH 821,049 thousand of bank borrowings and UAH 430,730 thousand of bonds repayable during the first quarter of 2015 These issues may cast significant doubts on Group s ability to settle the liabilities Management believes it is taking appropriate measures to support the liquidity and the ability of the Group to continue as a going concern As at 31 December 2014, the Group has USD revolving credit lines with availability of USD 70,000 thousand being UAH 1,103,802 thousand at exchange rate as at reporting date As at 31 December 2014, unused balance on these credit lines is UAH 437,968 thousand In addition, the Group has UAH revolving credit line and overdraft facility with availability of UAH 488,000 thousand in total As at 31 December 2014, unused balance on these facilities is UAH 63,438 thousand in total (Note 24) In January and February 2015 the Group obtained UAH 230,851 thousand and UAH 284,154 thousand of borrowings on its revolving credit lines The maturities of these borrowings are April and September 2015 respectively These funds were used to repay the borrowings due within the first quarter 2015 In January 2015 the Group also settled the balance payable on overdraft facility in the amount of UAH 113,992 thousand with maturity less than one month as at 31 December 2014 At the end of 2014 management commenced discussions with some lenders for renewal of loan facility agreements ending in 2014 and successfully renegotiated them prior to 31 December 2014 and in early 2015 On 18 March 2015 management agreed with one of the bond s holders a new one year extention period until March 2016 for its UAH 400,000 thousand bonds stock Despite these positive developments the Group did not finalise its discussions and did not obtain a binding agreements to extend the terms beyond a one year horizon for the outstanding loans and bonds Management remains in discussions with its lenders and acknowledges that a positive decision on liquidity issues in 2015 are dependent on the willingness of the Group s bond holders not to demand repayment and to continue their support to the Group by restructuring of the payments due in 2015 to future periods 10

15 1 Reporting entity (continued) As discussed the UAH has devalued significantly during 2014, resulting in devaluations of 97% against the US Dollar and 74% against the Euro After the year end the UAH has continued to decline against these currencies The Group s business is concentrated in Ukraine, the majority of its revenue is generated in Ukraine and denominated in UAH (2014: 89%, 2013: 93%), though, the Group receives foreign currencies from sales to foreign operators Strong foreign currency inflow provides extra security and minimizes negative forex exposures on the Group s liabilities Based on positive developments in renegotiations of the borrowings terms, Group s strong operating cash flows and flexibility in managing its investing cash flows, expected sales proceeds from the disposal of mobile segment as detailed in Note 6, management considers that the application of the going concern assumption for the preparation of these consolidated financial statements is appropriate Corporate governance The Group s corporate governance bodies comprise the General Meeting of Shareholders, the Supervisory Board, the Director The General Meeting is the Group s highest decision-making body in respect of any matters related to its business The Annual General Meeting is convened every year and held no later than on the 30 th day of April following the reporting year All other General Meetings are deemed extraordinary The Supervisory Board protects the Shareholders rights and oversees the Director within its competence as defined by the Charter, Regulation on the Supervisory Board and Ukrainian law The Supervisory Board decides on the matters as stipulated by Ukrainian law and the Charter, including those delegated by the General Meeting No matters within the sole competence of the Supervisory Board shall be decided upon by any corporate governance bodies of the Group other than the General Meeting except as in the cases provided by Ukrainian law The Director, who is the Group s Chief Executive Officer, is the sole member of executive body of the Group The Director is in charge for the Group s day-to-day activities, acting on behalf and in the best interests of the Group without any power of attorney within the powers granted by the Charter As at 31 December 2014 and 2013, the Group had no internal audit function responsible for internal control and reporting directly to the General Meeting of Shareholders or the Supervisory Board 2 Basis of preparation Statement of compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) under the historical cost convention, as modified by the revaluation of premises and equipment The principal accounting policies applied in the preparation of these consolidated financial statements are set out below These policies have been consistently applied to all the periods presented, unless otherwise stated (refer to section Changes in presentation in Note 2) New and amended standards adopted by the Group are disclosed in Note 3 For presentation of primary financial statements, the Company uses the format prescribed by the current Ukrainian legislation (ie Forms 1-4) applicable for annual financial statements submitted for statutory reporting purposes Functional and presentation currency The national currency of Ukraine is the Ukrainian hryvnia (UAH), which is the functional currency of the Company and its subsidiaries and the currency in which these consolidated financial statements are presented All financial information presented in UAH is rounded to the nearest thousands, except when otherwise indicated Use of estimates and judgments and construction in progress The preparation of consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses Actual results may differ from 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 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: 11

16 2 Basis of preparation (continued) Valuation of property, plant and equipment As at 31 December 2013 property, plant and equipment have been revalued to market value The valuation was carried out by an independent firm of appraisers, who hold a recognised and relevant professional qualification and who have recent experience in the valuation of assets of similar categories Fair values of specialised assets owned by the Group and representing the main part of property, plant and equipment were determined by using depreciated replacement cost approach (Level 3) as no market values were available for such items The fair value of other than specialised property, plant and equipment was determined by reference to market values (Level 2) of those items at the valuation date When performing valuation using these methods, the key estimates and judgements applied by the independent valuers, in discussion with the Group s internal valuation team and technicians, are as follows: choice of information sources for construction costs analysis (actual costs recently incurred by the Group, specialised reference materials and hand-books, estimates for cost of construction of various equipment etc); determination of comparatives for replacement cost of certain equipment, as well as corresponding adjustments required to take into account differences in technical characteristics and condition of new and existing equipment; and selection of market data when determining market value where it is available The fair values obtained using depreciated replacement cost are validated using discounted cash flow models (income approach, Level 3), and are adjusted if the values obtained using income approach are lower than those obtained using depreciated replacement cost (ie there is economic obsolescence) Changes in the above estimates and judgements could have a material effect on the fair value of property, plant and equipment, which, however, is impracticable to quantify due to wide variety of assumptions and assets being valued (Note 5) Impairment of property, plant and equipment The Group assesses at each reporting date whether there is any indication that an asset may be impaired If any such indication exists, the Group estimates the recoverable amount of the asset This requires an estimation of the value in use/fair value less costs of disposal of the cash generating units to which the item is allocated Estimating the value in use/fair value less costs of disposal requires the Group to make an estimate of the expected future cash flows and also to choose a suitable discount rate in order to calculate the present value of those cash flows Management identifies the three cash-generating units within the Group The Group assesses at each reporting date whether there is any indication that an impairment loss recognised in prior may no longer exist or may have decreased If any such indication exists, the Group estimates the recoverable amount of that asset Additional information is disclosed in Note 5 Allowances of accounts receivable and inventories The Group makes allowances for doubtful accounts receivable (Note 7) Significant judgment is used to estimate doubtful accounts In estimating doubtful accounts such factors are considered as current overall economic conditions, industry-specific economic conditions, historical and anticipated customer performance Changes in the economy, industry, or specific customer conditions may require adjustments to the allowance for doubtful accounts recorded in the financial statements Inventory is carried at lower of cost and net realisable value Estimates of inventory allowance are based on the calculation of turnover ratios Allowance for inventory is recorded within other operating expenses Assets classified as held for sale and discontinued operations The Group classifies its non-current assets (or disposal groups) as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use For this to be the case, the management should assess whether the asset (or disposal group) is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (or disposal groups) and its sale is highly probable In addition, the sale should be expected to qualify for recognition as a completed sale within one year from the date of classification Events or circumstances may extend the period to complete the sale beyond one year An extension of the period required to complete a sale does not preclude an asset (or disposal group) from being classified as held for sale if the delay is caused by events or circumstances beyond the Group s control and there is sufficient evidence that the Group remains committed to its plan to sell the asset (or disposal group) Significant judgment is used to conclude that all these criteria are met as at reporting date Management belives that the assets classified as held for sale and disposal groups comply with all these criteria Had a different judjement been applied, all assets classified as held for sale and all liabilities associated with these assets would have been consolidated into respective financial statement line items 12

17 2 Basis of preparation (continued) Pension obligations under defined benefit plan The Group collects information relating to its employees in service and pensioners receiving pension benefits and uses the actuarial valuation method for measurement of the present value of post-employment benefit obligations and related current service cost These calculations require the use of demographic assumptions about the future characteristics of current and former employees who are eligible for benefits (mortality, both during and after employment, rates of employee turnover, disability and early retirement, etc) as well as financial assumptions (discount rate and future projected salary) More details are provided in Note 11 Taxes Uncertainties exist with respect to the interpretation of complex tax regulations, changes in tax laws, and the amount and timing of future taxable income Differences arising between the actual results and the assumptions made, or future changes to such assumptions, could necessitate future adjustments to tax income and expense already recorded Deferred tax assets are reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised The estimation of that probability includes judgments based on the expected performance Further details on taxes are disclosed in Note 23 Value-added tax recoverable is reviewed at each reporting date and reduced to the extent that it is no longer probable that refund or VAT liabilities will be available The Group considers that the amount due from the state will be either recovered in cash or will be reclaimed against the VAT liabilities related to sales Changes in presentation (i) Restatement of prior periods Revaluation and impairment of property, plant and equipment and construction in progress The consolidated financial statements for the year ended 31 December 2013 contained an error because no impairment test was performed as at 31 December 2013 despite the existence of impairment indicators In 2014 the management carried out the impairment test as at 31 December 2013 together with revaluation of property, plant and equipment and construction in progress As the results of these two, impairment and revaluation, could not be separated, with effect from 31 December 2013, the Group changed its accounting policy in respect of all its property, plant and equipment and construction in progress from the cost model to the revaluation model, under which these assets are carried at fair value at the date of the revaluation less any accumulated depreciation and impairment losses The management believes that the new policy provides reliable and more relevant financial information to the users of the financial statements At the date of issue of the consolidated financial statements for the year ended 31 December 2013 the valuation had not beed not finalised and property plant and equipment and construction in progress were recognised using the cost model at the carrying value of UAH 6,492,642 thousand and UAH 190,278 thousand, respectively The audit report for the 2013 financial statements was qualified in respect of non-performing of the impairment test for property, plant and equipment and construction in progress The fair value of the property plant and equipment and construction in progress as at 31 December 2013 assessed by independent appraiser using the replacement cost method, adjusted by results of adequate profitability test using discounted cash flow technique was determined to be UAH 5,896,120 thousand and UAH 12,811 thousand respectively (further disclosure on valuation is provided in Note 5) These values include assets that were reclassified in 2014 to assets held for sale and for which no profitability test was applied (refer to Note 5 and Note 6) The timing of recognition of excess of carrying value before revaluation over the fair value of assets was questioned by management as there had been no significant adverse developments in the Group s profitability and operations and risks attached to cause such significant decrease in 2013 financial statements solely As a result, management reviewed the test for impairment of property, plant and equipment performed for the purposes of preparation of 2012 financial statements Upon the review it was identified that the discounted cash flow model used to derive the fair value less costs of disposal of the Group had an unreasonably low cash out flows on investing activities This was considered an error and an impairment of UAH 1,135,994 thousand was recognised as of 1 January 2013 and allocated to each separate item of property, plant and equipment proportionately to previously recognised carrying value Due to the recognition of the impairment loss, the depreciation for the year 2013 was recalculated accordingly, decreasing the depreciation by UAH 115,907 thousand and included as correction of errors in the table below The carrying value of property plant and equipment as of 31 December 2013 adjusted for the error discussed above was further adjusted to reflect the change in accounting policy from cost to revaluation model of accounting As a result, the carrying amount of property, plant and equipment was increased by UAH 407,967 thousand and construction in progress was decreased by UAH 163,318 thousand, respectively 13