Group Ukrnafta. 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 2016

2 Contents Independent auditor s report Consolidated financial statements Consolidated statement of financial position...1 Consolidated statement of profit or loss and other comprehensive income...2 Consolidated statement of changes in equity...3 Consolidated statement of cash flows...4 Notes to the consolidated financial statements 1. Corporate information Operating environment Summary of significant accounting policies Significant management s estimates and judgements New accounting pronouncements Segment information Interest in subsidiaries, joint operations, ventures and associates Revenues and cost of sales Selling and distribution expenses General and administrative expenses Other operating expenses Payroll and depreciation, depletion and amortisation costs Finance income and costs Impairment losses and decrease in fair value Income tax Oil and gas properties Exploration and evaluation assets Other property, plant and equipment Inventory Accounts receivable Prepayments and other current assets Share capital and reserves Provisions Advances, accruals and other liabilities Accounts payable Non-interest bearing loans and borrowings Commitments, contingencies and operating risks Related party disclosures Financial risk management objectives and policies Fair value measurements Events after the reporting period...47

3

4

5

6

7 Consolidated Statement of Profit or Loss and Other Comprehensive income Notes Revenue 8 22,572,745 29,005,211 Cost of sales 8 (12,026,236) (11,641,284) Impairment of oil and gas properties, exploration and evaluation assets, other property, plant and equipment 14 (827,424) (913,484) Gross profit 9,719,085 16,450,443 Selling and distribution expenses 9 (1,295,630) (956,173) General and administrative expenses 10 (741,196) (589,401) Other operating expenses 11 (22,731,897) (18,928,609) Other operating income 147, ,212 Share of (loss)/profits of joint ventures (39,191) 40,018 Loss before foreign exchange differences, interest and tax (14,941,330) (3,760,510) Finance income 13 2,875,804 1,377,307 Finance costs 13 (275,302) (5,604,780) Net foreign exchange gain 192,876 1,544,156 Loss before tax (12,147,952) (6,443,827) Income tax benefit 15 3,205, ,429 Loss for the year (8,942,892) (5,690,398) Loss is attributable to: Equity holders of the Company (8,937,236) (5,691,543) Non-controlling interest (5,656) 1,145 Loss for the year (8,942,892) (5,690,398) Other comprehensive income/(loss) Items that will not be reclassified to profit or loss Change in estimate of asset retirement obligation 23 (115,071) 118,199 Income tax effect 20,712 (21,276) Increase in fair value of oil and gas properties, exploration and evaluation assets, other property, plant and equipment 16,18 6,470,697 5,079,519 Income tax effect 15 (1,164,725) (914,314) Decrease in fair value of oil and gas properties and other property, plant and equipment 14 (4,242,071) (3,149,388) Income tax effect , ,890 Remeasurement of post-employment benefit obligation 23 (138,099) (3,071) Income tax effect 15 24, Total other comprehensive income 1,619,874 1,677,112 Total other comprehensive loss is attributable to: (7,323,018) (4,013,286) Equity holders of the Company (7,317,362) (4,014,431) Non-controlling interest (5,656) 1,145 Total comprehensive loss for the year (7,323,018) (4,013,286) Loss per ordinary share for loss attributable to the owners of the Company, basic and diluted (in UAH per share) (164.91) (104.93) Notes on the pages 5-47 are an integral part of these consolidated financial statements 2

8 Consolidated Statement of Changes in Equity Issued and fully paid shares Attributable to the equity holders of the parent Retained Asset earnings/ revaluation (Accumulated reserve deficit) Noncontrolling interests Total equity Balance at 31 December ,010,972 13,531, ,805 15,106,727 (6,748) 15,099,979 (Loss)/Profit for the year - - (5,691,543) (5,691,543) 1,145 (5,690,398) Other comprehensive loss - 1,679,630 (2,518) 1,677,112-1,677,112 Total comprehensive income - 1,679,630 (5,694,061) (4,014,431) 1,145 (4,013,286) Dividends declared - - (1,264,609) (1,264,609) - (1,264,609) Change in investments in joint operations - - (132,206) (132,206) - (132,206) Transfer of revaluation reserve on disposed and retired oil and gas properties and other property, plant and equipment - (113,192) 113, Balance at 31 December ,010,972 15,098,388 (6,413,879) 9,695,481 (5,603) 9,689,878 Loss for the year - - (8,937,236) (8,937,236) (5,656) (8,942,892) Other comprehensive loss - 1,733,115 (113,241) 1,619,874-1,619,874 Total comprehensive income - 1,733,115 (9,050,477) (7,317,362) (5,656) (7,323,018) Change in investments in joint operations , , ,738 Transfer of revaluation reserve on disposed and retired oil and gas properties and other property, plant and equipment - (63,084) 63, Balance at 31 December ,010,972 16,768,419 (15,189,534) 2,589,857 (11,259) 2,578,598 Total Notes on the pages 5-47 are an integral part of these consolidated financial statements 3

9 Consolidated Statement of Cash Flows Notes Cash flows from operating activities Loss before income taxes (12,147,952) (6,443,827) Adjustments for non-cash items: Depreciation, depletion and amortisation 12 1,336,976 1,289,476 Expense for provisions 4,278,122 6,382,577 Effect of change in assumptions for asset retirement obligation and defined benefit obligation 43,966 62,162 Unrealised foreign exchange losses - 5,029 Share of profit of joint ventures 39,191 (40,018) Movement in allowance for impairment of accounts receivable and write-off of impaired prepayments 11 11,579,287 2,222,503 Impairment losses of oil and gas properties, exploration and evaluation assets and other property, plant and equipment, net , ,484 Loss on disposal of property plant and equipment 11-4,039 Write-down of inventories to net realisable value - 138,067 Finance cost ,302 5,604,780 Finance income 13 (2,875,804) (1,377,307) Movement in other non-current assets 8,270 (21,290) Other non-cash income and expenses 23,213 47,664 Operating cash before working capital changes 3,387,995 8,787,339 Working capital changes: Change in accounts and notes receivable (521,718) (4,228,167) Change in inventory (2,040,670) 1,136,014 Change in prepayments and other current assets (240,081) (4,226,507) Change in accounts payable (2,057,728) (4,711,565) Change in advances, accruals and other liabilities (203,613) 459,035 Change in rent tax, other taxes and similar charges payable 2,487,605 6,307,148 Cash generated from operations 811,790 3,523,297 Provisions utilised 23 (116,923) (80,816) Income tax paid (56,533) (464,381) Net cash flows generated by operating activities 638,334 2,978,100 Cash flows from investing activities Investment in exploration and evaluation assets - (51,548) Expenditures on oil and gas assets (207,900) (414,559) Expenditures on other property, plant and equipment, and intangible assets (189,778) (90,117) Cash contributions to investments in associates (18,268) - Receipts from interest received 17,046 - Proceeds on disposal of other property, plant and equipment 43,717 - Change in restricted cash 60,438 (48,538) Net cash used in investing activities (294,745) (604,762) Cash flows from financing activities Non-Interest bearing loans and borrowings received - 562,911 Repayment of interest-bearing loans and borrowings - (376,185) Repayment of non-interest-bearing loans and borrowings (361,911) - Interest paid - (14,666) Dividends paid 22 (23,300) (2,445,378) Net cash used in financing activities (385,211) (2,273,318) Net change in cash and cash equivalents (41,622) 100,020 Cash and cash equivalents, at 1 January 289, ,647 Cash and cash equivalents, at 31 December 248, ,667 Notes on the pages 5-47 are an integral part of these consolidated financial statements 4

10 1. Corporate information Public Joint Stock Company Ukrnafta (the Company or PJSC Ukrnafta ) was originally founded and started operations as a state owned entity, Production Association Ukrnafta. In 1994, the Company was incorporated and privatised and was registered as a joint stock company in accordance with the laws of Ukraine. The principal activities of the Company, its subsidiaries, associates, joint operations and joint ventures (together referred to as the Group ) are to conduct exploration and to extract and sell oil and gas, to operate gas-processing plants and petrol filling stations, and to perform related oilfield services in Ukraine. As at 31 December 2016 the Company was organised on the basis of six extraction divisions, three drilling and exploration divisions, three gas processing plants, a number of research, auxiliary and support units and 537 operating petrol filling stations. The principal activities of the Company are further described in Note 3. Additionally, the Company has subsidiaries, associates and participates in certain joint ventures and joint operations to explore and extract oil and gas (Note 4). All of the business and production facilities of the Company are located in Ukraine. In July 2015 the new Chairman of Management Board was appointed by the Shareholders Meeting. In addition, during September 2015 February 2016 the remaining members of Management Board were replaced by new executives. The shares of the Company are distributed amongst Ukrainian and foreign legal entities and individuals. 50% plus 1 share belongs to the state-owned company National Joint Stock Company Naftogaz of Ukraine ( Naftogaz ). The Government of Ukraine, represented by the Cabinet of Ministers of Ukraine oversees the state control of the Naftogaz. The Company is listed on the Ukrainian stock exchange. The address and domicile of the Company is 3-5, Nestorivsky Provulok, Kyiv, Ukraine. 2. Operating environment The ongoing political and economic instability in Ukraine which commenced at the end of 2013 and led to a deterioration of State finances, volatility of financial markets, illiquidity on capital markets, higher inflation and depreciation of the national currency against major foreign currencies has continued in 2016, though to a lesser extent as compared to The inflation rate in Ukraine during 2016 reduced to 12% (as compared to 43% in 2015), while GDP returned to growth of 1% (after 10% decline in 2015). Devaluation of Ukrainian hryvnia ( UAH ) during 2016 has been moderate. As at the date of this report the official exchange rate of Hryvnia against US dollar was UAH per USD 1, compared to UAH per USD 1 as of 31 December 2016 (31 December 2015: UAH per USD 1). In 2016 the National Bank of Ukraine ( NBU ) has made certain steps to ease the currency control restrictions introduced in In particular, the required share of foreign currency for mandatory sale was decreased from 75% to 65% starting from 9 June 2016 and to 50% starting from 5 April 2017 and the settlement period for export-import transactions in foreign currency was increased from 90 to 120 days starting from 28 July Also starting from 13 June 2016 the NBU allowed Ukrainian companies to pay dividends to non-residents with a limit of USD 5 million per month. The central bank of Ukraine prolonged these restrictions several times during and the current restrictions are effective until rescinded by the NBU (with minor exceptions, including mandatory conversion of foreign currency proceeds, which are set to expire on 16 June 2017). The IMF continued to support the Ukrainian government under the four-year Extended Fund Facility ( EFF ) Programme approved in March 2015, providing the fourth tranche of approximately USD 1 billion in April Further disbursements of IMF tranches depend on the continued implementation of Ukrainian government reforms, and other economic, legal and political factors. The banking system remains fragile due to its weak level of capital, low asset quality caused by the economic situation, currency depreciation, changing regulations and other factors. The conflict in the parts of Eastern Ukraine which started in spring 2014 has not been resolved to date. However, there was no substantial escalation of the conflict since the signing of ceasefire agreements in February The relationships between Ukraine and the Russian Federation remained strained. 5

11 2. Operating environment (Continued) On 1 January 2016, the agreement on the free trade area between Ukraine and the EU came into force. Just after that the Russian government implemented a trading embargo on many key Ukrainian export products. In response, the Ukrainian government implemented similar measures against Russian products. Despite certain improvements in 2016, the final resolution and the ongoing effects of the political and economic situation are difficult to predict but they may have further severe effects on the Ukrainian economy and the Group s business. 3. Summary of significant accounting policies 1) Basis of preparation These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board (IASB). The Group maintains its accounting records in accordance with IFRS. These consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of oil and gas properties, other property, plant and equipment measured using fair value revaluation model (excluding vehicles and other fixed assets which are measured at cost less impairment). The consolidated financial statements are presented in Ukrainian hryvnia and all values are rounded to the nearest thousands, except when otherwise indicated. The consolidated financial statements for the year to 31 December 2016 were authorised for issue on 25 April ) Basis of consolidation The consolidated financial statements comprise the financial statements of PJSC Ukrnafta, its subsidiaries, associates, joint ventures and joint operations as at 31 December Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date when such control ceases. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. All intra-group balances, transactions, unrealised gains and losses resulting from intragroup transactions and dividends are eliminated in full. 3) Subsidiaries Subsidiaries are those companies in which the Group, directly or indirectly, has an interest of more than 50% of voting rights or otherwise has the ability to use power to affect the amounts of Group s returns. The existence and effect of potential voting rights that are presently exercisable or presently convertible are considered when assessing whether the Group controls another entity. 4) Interests in joint ventures and joint operations The Group has interests in joint ventures and joint operations. Joint operations are contractual arrangements whereby two or more parties undertake an economic activity that is subject to joint control. The Group accounts for its interest in joint operations by accounting its assets, including its share of any assets held jointly; its liabilities, including its share of any liabilities incurred jointly; its revenue from the sale of its share of the output arising from the joint operation; its share of the revenue from the sale of the output by the joint operation; and its expenses, including its share of any expenses incurred jointly. Joint venture involves the establishment of a separate entity in which each venture has an interest. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. The Group recognises its interest in the joint ventures using the equity method of accounting. Under the equity method, the investment in the joint venture is carried in the statement of financial position at cost plus post acquisition changes in the Group s share of net assets of the joint venture. Goodwill relating to the joint venture is included in the carrying amount of the investment and is neither amortised nor individually tested for impairment. The consolidated statement of profit and loss and other comprehensive income ( OCI ) reflects the share of the results of operations of the joint venture. There were no changes recognised directly in equity or other comprehensive income for Joint ventures in

12 3. Summary of significant accounting policies (Continued) The share of profit of joint ventures is shown on the face of the statement of comprehensive income. This is the profit attributable to the Group and therefore is profit after tax and non-controlling interests in the subsidiaries of the joint ventures. The financial statements of the joint venture and joint operation are prepared for the same reporting period as the parent company. Where necessary, adjustments are made to bring the accounting policies in line with those of the Group. After application of the equity method, the Group determines whether it is necessary to recognise an additional impairment loss on the Group s investment in its joint ventures. The Group determines at each reporting date whether there is any objective evidence that the investment in the joint venture is impaired. If this is the case the Group calculates the amount of impairment as the difference between the recoverable amount of the joint venture and its carrying value and recognises the amount in the statement of comprehensive income. If the Group s share of losses of an associate or a joint venture equals or exceeds its interest in the associate or joint venture, it discontinues recognising its share of further losses. After the Group s interest is reduced to zero, additional losses are provided for, and a liability is recognised, only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate or joint venture. If the associate or joint venture subsequently reports profits, the Group resumes recognising its share of those profits only after its share of the profits equals the share of losses not recognised. 5) Associates Associates are entities over which the Group has significant influence (directly or indirectly), but not control, generally accompanying a shareholding of between 20 and 50 percent of the voting rights. Investments in associates are accounted for using the equity method of accounting and are initially recognised at cost. Dividends received from associates reduce the carrying value of the investment in associates. Other postacquisition changes in Group s share of net assets of an associate are recognised as follows: (i) the Group s share of profits or losses of associates is recorded in the consolidated profit or loss for the year as share of result of associates, (ii) the Group s share of other comprehensive income is recognised in other comprehensive income and presented separately, (iii); all other changes in the Group s share of the carrying value of net assets of associates are recognised in profit or loss within the share of result of associates. However, when the Group s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group s interest in the associates; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. 6) Foreign currency translation Items included in the consolidated financial statements of each of the Group s entities are measured using the currency of the primary economic environment in which the Group operates. The consolidated financial statements are presented in Ukrainian hryvnia, which is the functional currency of the Group, its joint operations, joint ventures, subsidiaries and associates and the Group s presentation currency. Transactions in foreign currencies are initially recorded in the functional currency rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the reporting date. All differences are taken to profit and loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. 7) Pre-license costs Pre-license costs are expensed in the period in which they are incurred. 8) Exploration and evaluation expenditure Oil and natural gas exploration and evaluation ( E&E ) expenditure is accounted using the successful efforts method. Under this method E&E expenditure is initially capitalised as an E&E asset until the exploration work is complete and the results have been evaluated. 7

13 3. Summary of significant accounting policies (Continued) Such expenditure includes employee remuneration, materials and fuel used, acquisition of rights to explore, topographical, geological, geochemical and geophysical studies, exploratory drilling, sampling and activities in relation to evaluating the technical feasibility and commercial viability of production. If the exploration for and evaluation of hydrocarbons in the specific area have not led to the discovery of commercially viable quantities of hydrocarbons, the exploration asset is tested for impairment. In general, the Group defines commercial reserves as proved developed reserves. If no reserves are found and the entity has decided to discontinue exploration and evaluation activities in the specific areas, the exploration and evaluation assets are written off. If extractable hydrocarbons are found and, subject to further appraisal activity, which may include the drilling of further wells (exploration or exploratory-type stratigraphic test wells), are likely to be capable of commercial development, the costs continue to be carried as an asset. All such carried costs are subject to technical, commercial and management review at least once a year to confirm the continued intent to develop or otherwise extract value from the discovery. When proved reserves of oil and natural gas are determined and development is sanctioned, the relevant expenditure is transferred to oil and gas properties after assessment and any recognition of impairment. Following the initial recognition at cost, exploration and evaluation assets are measured at cost less any impairment. 9) Development expenditure Expenditure on the construction, installation or completion of infrastructure facilities such as platforms, pipelines and the drilling of development wells is capitalised within oil and gas properties. 10) Oil and gas properties and other property, plant and equipment Following initial recognition at cost, items of oil and gas properties and other property, plant and equipment, except for vehicles and other fixed assets, are measured at fair values less depreciation, depletion and impairment charged subsequent to the date of the revaluation. Vehicles and other fixed assets are measured at cost less accumulated depreciation and any impairment losses. Valuations are performed frequently enough to ensure that the fair value of a revalued asset does not differ materially from its carrying amount. Fair value of specialised assets, representing the majority of assets being revalued, is determined using the depreciated replacement cost approach as adjusted for the amount of economic obsolescence. The fair value of non-specialised assets is determined using the market approach. Such valuation was performed as at 31 December When items of oil and gas properties and other property, plant and equipment are revalued the accumulated depletion and depreciation is eliminated against the gross carrying amount of the asset and the net amount restated to the revalued amount of the asset. Any revaluation surplus is credited to other comprehensive income and accumulated in asset revaluation reserve included in the equity section of the statement of financial position, except to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss, in which case the increase is recognised there. Any revaluation deficits are recognised in profit or loss, except where for deficits directly offsetting a previous surplus on the same asset, in which case the deficit is directly offset against the surplus in the asset revaluation reserve. Upon disposal, any revaluation reserve relating to the particular asset being disposed is transferred to retained earnings. The initial cost of an asset comprises its purchase price or construction cost, any costs directly attributable to bringing the asset into operation, the initial estimate of the decommissioning obligation, for qualifying assets and borrowing costs. The purchase price or construction cost is the aggregate amount paid and the fair value of any other consideration given to acquire the asset. Property, plant and equipment items are derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on disposal of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in profit and loss in the year of such disposal. The assets residual values, useful lives and methods of depreciation are reviewed and adjusted, if appropriate, at the end of each financial year. The estimated costs of dismantling oil and gas production facilities, including abandonment and site restoration costs are included as a component of oil and gas properties and depleted on a unit-of-production basis. 8

14 3. Summary of significant accounting policies (Continued) Certain social assets held by the Group are not recognised in these consolidated financial statements, as these assets are not expected to bring future economic benefits to the Group. Ongoing maintenance is expensed as incurred. Depreciation, depletion and amortisation Depreciation of property, plant and equipment and amortisation of intangibles assets, excluding oil and gas properties, is calculated on a straight line basis over the useful life of the assets. Depletion of oil and gas properties are calculated using the unit-of-production method for each field based upon proved developed reserves. Useful Lives Depreciation of property, plant and equipment, excluding oil and gas properties is calculated over the following useful lives of the assets: Petrol filling stations 8 to 33 years Buildings 20 to 50 years Machinery and equipment (including pipelines) Oil and gas processing equipment 5 to 35 years Vehicles, office and other equipment 5 years Major maintenance and repairs 3 to 35 years Expenditure on major maintenance refits or repairs comprises the cost of replacement assets or parts of assets, inspection costs and overhaul costs. Expenditure incurred to replace a component of an item of property, plant and equipment that is accounted for separately, is capitalised with the carrying amount of the replaced component being written off. Subsequent costs are included in the asset s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. Where part of the asset was not separately considered as a component, the replacement value is used to estimate the carrying amount of the replaced assets which is immediately written off. Inspection costs associated with major maintenance programmes are capitalised and amortised over the period to the next inspection. All other maintenance costs are expensed as incurred. 11) Intangible assets Intangible assets mainly represent computer software. Amortisation of intangible assets is calculated on a straight-line basis over the estimated useful life of each particular type of asset varying from 3 to 5 years. The amortisation period and the amortisation method for an intangible asset are reviewed at least at each financial year-end. The carrying values of intangible assets are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. 12) Other non-current assets Included in other non-current assets are intangible assets that represent rights to charge NJSC Naftogaz for natural gas, produced by the Group and physically transferred to the National Gas Transportation System of Ukraine. These intangible assets are initially recognised at cost. After initial recognition, intangible assets are carried at their cost less accumulated impairment losses, if any. These intangible assets have indefinite useful lives and are not amortised, but tested for impairment at least annually. 13) Impairment of non-financial assets The Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Group makes an estimate of the asset's recoverable amount. An asset's recoverable amount is the higher of an asset or cashgenerating units ( CGU ) fair value less costs of disposal and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing fair value less cost of disposal, the estimated future cash flows are discounted to their present value using a post-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs of disposal, an appropriate valuation model is used. For the purpose of oil and gas properties, assessment is made on a field-by-field basis, as fields are taken to be cash-generating units. 9

15 3. Summary of significant accounting policies (Continued) Notwithstanding this assumption, if it is evidential that certain, clearly identifiable, parts of the field (i.e. well) will not generate any future economic benefits, the impairment of part of the field may be assessed separately. For the purposes of assessing impairment of oil and gas properties, a reserves report is commissioned by the Group from an independent petroleum engineering company. Such a reserves report was commissioned by the Group as at 30 June In performing its impairment assessment, the Group took the definition of estimated future cash flows to be those which would be expected from the Group s proved developed reserves. The Group bases its impairment calculation on detailed budgets and forecast calculations which are prepared separately for each of the Group s cash generating units to which the individual assets are allocated. These budgets and forecast calculations are generally covering a period of five years or years till full depletion of reserves (for oil and gas properties). For longer periods, a long-term growth rate is calculated and applied to project future cash flow after the fifth year. Impairment losses are recognised in profit or loss, except where they relate to property previously revalued and the revaluation was taken to other comprehensive income ( OCI ), in which case the impairment is also recognised in other comprehensive income up to the amount of revaluation reserve previously recognised. An assessment is made at each reporting date as to whether there is any indication that previously recognised impairment loss may no longer exist or may have decreased. If such indication exists, the Group makes an estimate of the relevant recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the asset's recoverable amount since the last impairment loss was recognised. If that is the case the carrying amount of the asset is increased to its recoverable amount. Any increase in the carrying amounts resulting from revaluation are credited to other reserves in equity through other comprehensive income. Decreases that offset previously recognised increases of the same asset are charged against other reserves in equity through other comprehensive income; all other decreases are charged to the income statement. However, to the extent that an impairment loss on the same revalued asset was previously recognised in the income statement, a reversal of that impairment loss is also recognised in the income statement. 14) Financial instruments - key measurement terms Depending on their classification financial instruments are carried at fair value, cost, or amortised cost as described below. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The best evidence of fair value is price in an active market. An active market is one in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. Fair value of financial instruments traded in an active market is measured as the product of the quoted price for the individual asset or liability and the quantity held by the entity. This is the case even if a market s normal daily trading volume is not sufficient to absorb the quantity held and placing orders to sell the position in a single transaction might affect the quoted price. Amortised cost is the amount at which the financial instrument was recognised at initial recognition less any principal repayments, plus accrued interest, and for financial assets less any write-down for incurred impairment losses. Accrued interest includes amortisation of transaction costs deferred at initial recognition and of any premium or discount to maturity amount using the effective interest method. Accrued interest income and accrued interest expense, including both accrued coupon are not presented separately and are included in the carrying values of related items in the statement of financial position as current or non-current liabilities depending on maturity date. The effective interest method is a method of allocating interest income or interest expense over the relevant period, so as to achieve a constant periodic rate of interest (effective interest rate) on the carrying amount. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts (excluding future credit losses) through the expected life of the financial instrument or a shorter period, if appropriate, to the net carrying amount of the financial instrument. The effective interest rate discounts cash flows of variable interest instruments to the next interest repricing date, except for the premium or discount which reflects the credit spread over the floating rate specified in the instrument, or other variables that are not reset to market rates. Such premiums or discounts are amortised over the whole expected life of the instrument. The present value calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate. 10

16 3. Summary of significant accounting policies (Continued) 15) Financial assets Initial recognition The Group s principal financial instruments comprise receivables, prepayments for financial instruments, cash and cash equivalents and short-term deposits. Financial assets are recognised initially at fair value plus directly attributable transaction costs. Fair value at initial recognition is best evidenced by the transaction price. A gain or loss on initial recognition is only recorded if there is a difference between fair value and transaction price which can be evidenced by other observable current market transactions in the same instrument or by a valuation technique with the inputs including only data from observable markets. All regular way purchases and sales of financial assets and prepayments for financial assets are recognised on the trade date, which is the date that the Group commits to purchase the asset or date when prepayments for the asset is made. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace. As at 31 December 2016 and as at 31 December 2015 none of the Group s financial assets were classified as financial assets at fair value through profit or loss, available for sale or held-to-maturity investments. Trade and other receivables, prepayments for financial instruments Trade receivables and prepayments for financial instruments are initially recognised at fair value and subsequently measured at amortised cost using the effective interest rate method, less an allowance for any uncollectable amounts. Allowance is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the allowance is the difference between the carrying amount and the recoverable amount, being the present value of expected cash flows, discounted at the financial assets original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in profit or loss within other operating expenses. When a trade receivable or prepayment for financial instrument is uncollectible it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against other operating expenses. Gains and losses are recognised in profit or loss when the assets are derecognised as well as through the effective interest rate (EIR) amortisation process. Amortised cost is calculated by taking into account any discount or premium on acquisition and fee or costs that are an integral part of the EIR. The EIR amortisation is included in finance income and finance costs in the statement of profit or loss and other comprehensive income. Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call with banks, and other short-term highly liquid investments with original maturities of three months or less. Restricted balances are excluded from cash and cash equivalents for the purposes of the statement of cash flows. Restricted cash comprises deposits or bank accounts restricted in use as a result of the Group s commitment to withdraw the funds for designated purposes only. Balances restricted from being exchanged or used to settle a liability for at least twelve months after the reporting date are included in other non-current assets. Derecognition A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised when: The rights to receive cash flows from the asset have expired. The Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party; and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. 11

17 3. Summary of significant accounting policies (Continued) 16) Impairment of financial assets The Group assesses at each reporting date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset (an incurred loss event ) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. Assets carried at amortised cost For financial assets carried at amortised cost, the Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the assets carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The present value of the estimated future cash flows is discounted at the financial assets original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in profit or loss. Interest income continues to be accrued on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. The interest income is recorded as part of finance income in the statement of profit or loss and other comprehensive income. Financial asset together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realised or has been transferred to the Group. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a future write-off is later recovered, the recovery is credited to other operating expense. 17) Financial liabilities The Group classifies its financial liabilities as loans and borrowings. The Group determines the classification of its financial liabilities at initial recognition. The Group does not have any financial liabilities carried at fair value through profit or loss. All financial liabilities are recognised initially at fair value and in the case of loans and borrowings, plus directly attributable transaction costs. After initial recognition, all of the Group s financial liabilities are measured at amortised cost using the effective interest rate method. Gains and losses are recognised in profit or loss when the liabilities are extinguished as well as through the effective interest rate method (EIR) amortisation process. Amortised cost is calculated by taking into account any discount or premium on acquisition and fee or costs that are an integral part of the EIR. The EIR amortisation is included in finance cost in the statement of profit or loss and other comprehensive income. Derecognition of financial liabilities A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. 12

18 3. Summary of significant accounting policies (Continued) Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in the profit or loss. 18) Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the statement of financial position only when there is a legally enforceable right to offset the recognised amounts, and there is an intention to either settle on a net basis, or to realise the asset and settle the liability simultaneously. Such a right of set off (a) must not be contingent on a future event and (b) must be legally enforceable in all of the following circumstances: (i) in the normal course of business, (ii) in the event of default and (iii) in the event of insolvency or bankruptcy. 19) Inventories Inventories are recorded at the lower of cost and net realisable value. The cost of producing and refining crude oil is determined on first-in first-out (FIFO) basis. Costs comprise the following elements: Materials and supplies Crude oil, gas, condensate and processing products purchase cost on a first-in, first-out basis; depreciation, depletion, cost of direct materials, labour and a proportion of manufacturing overheads based on normal operating capacity Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and selling. 20) Leases Where the Group is a lessee in a lease which does not transfer substantially all the risks and rewards incidental to ownership from the lessor to the Group, the total lease payments are charged to profit or loss for the year on a straight-line basis over the lease term. The lease term is the non-cancellable period for which the lessee has contracted to lease the asset together with any further terms for which the lessee has the option to continue to lease the asset, with or without further payment, when at the inception of the lease it is reasonably certain that the lessee will exercise the option. When assets are leased out under an operating lease, the lease payments receivable are recognised as rental income on a straight-line basis over the lease term. General 21) Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. Where the Group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in profit or loss net of any reimbursement. When a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows. Asset retirement obligation An obligation for asset retirement costs (decommissioning) arises on the construction of certain oil and gas properties and exploration and evaluation assets. A provision for asset retirement is recognised in full when the related facilities are installed. The provision is calculated as the estimated expenditure expected to be incurred at the end of the producing life of the related asset, discounted to its present value. The cost of recognising the asset retirement provision is included as part of the cost of the relevant asset and is thus charged to profit and loss on a unit of production basis in accordance with the Group s policy for depletion and depreciation of oil and gas properties. Period charges for changes in the net present value of the asset retirement provision arising from discounting are included within finance costs. The estimated future costs of asset retirement are reviewed annually and adjusted as appropriate. 13

19 3. Summary of significant accounting policies (Continued) Changes in the estimated future costs or in the discount rate applied are treated as follows: a. changes in the liability alter the revaluation surplus or deficit previously recognised on that asset, so that: i. a decrease in the liability recognised in other comprehensive income and increase the revaluation surplus within equity, except that it is recognised in profit or loss to the extent that it reverses a revaluation deficit on the asset that was previously recognised in profit or loss; ii. an increase in the liability is recognised in profit or loss, except that it shall be recognised in other comprehensive income and reduce the revaluation surplus within equity to the extent of any credit balance existing in the revaluation surplus in respect of that asset. b. in the event that a decrease in the liability exceeds the carrying amount that would have been recognised had the asset been carried under the cost model, the excess is recognised immediately in profit or loss. c. the change in the revaluation surplus arising from a change in the liability is separately identified and disclosed as such in other comprehensive income. 22) Employee benefits Wages, salaries, contributions to the state pension and social insurance funds, paid annual leave and sick leave, bonuses and non-monetary benefits (such as health services and other social benefits) are accrued in the year in which the associated services are rendered by the employees of the Group. Defined Contributions Plan. The Group makes statutory unified social contributions to the Pension Fund of Ukraine in respect of its employees. The contributions are calculated as a percentage of current gross salary, and are expensed as incurred. Defined Benefit Plans. The Group participates in a mandatory State defined retirement benefit plan, which provides for early pension benefits for employees working in certain workplaces with hazardous and unhealthy working conditions. Under the collective agreements between the Group and its employees the Group also provides lump sum benefits upon retirement subject to certain conditions. The liability recognised in the statement of financial position in respect of defined benefit pension plans is the present value of the defined benefit obligation at the reporting date less adjustments for unrecognized past service costs. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using market yields on government bonds and that have terms to maturity approximating to the terms of the related pension liability. Since where are no long-term high quality corporate bonds in Ukraine, and no regular publications of yields on government bonds denominated in local currency, in prior periods the Group used yields on government bonds denominated in foreign currencies but adjusted for currency risks. In 2016 statistics over yields on government bonds denominated in UAH became available and thus to discount post-employment benefit obligations management applied an average between market rates on government bonds denominated in foreign currencies adjusted for currency risk and government bonds denominated in UAH of appropriate maturity. Past service costs are recognized immediately in consolidated statement of profit or loss and remeasurements are recognized in other comprehensive income. The cost of defined benefit pension plan and other long-term sponsored benefits to employees and the present value of the pension obligation are determined using actuarial valuations. An actuarial valuation include the determination of the discount rate, future salary increases, mortality rates and future pension increases. Due to the complexity of the valuation, the underlying assumptions and its long term nature, a defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date (Note 23). 23) Revenue recognition Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable, excluding discounts, rebates, and sales taxes or duty. Revenue from sale of oil and petroleum products is recognised at the point where all significant risks and rewards of ownership have been transferred to the buyer. This is normally defined as the point where a product is physically transferred into a vessel, pipe or other delivery mechanism. Revenues associated with the sale of petroleum products are recognised when the title passes to the customer. 14