Consolidated Financial Statements for the year ended 31 December 2012
Contents Auditors Report 3 Consolidated Statement of Financial Position 5 Consolidated Statement of Comprehensive Income 6 Consolidated Statement of Changes in Equity 7 Consolidated Statement of Cash Flows 9 Notes to the Consolidated Financial Statements 10
Consolidated Statement of Financial Position as at 31 December 2012 000 RUB Note ASSETS 31 December 2012 31 December 2011 Non-current assets Property, plant and equipment 13 13,967,635 15,082,467 Prepayments for non-current assets - 2,831 Goodwill 14 776,998 776,998 Other investments 15 163,790 378,903 Other non-current assets 96,103 82,959 Deferred tax assets 16 50,876 33,021 Total non-current assets 15,055,402 16,357,179 Current assets Inventories 65,597 62,666 Other investments 15 96,327 381,787 Current income tax receivable 132,181 80,404 Trade and other receivables 17 1,140,794 1,411,656 Prepayments 18 321,095 478,584 Cash and cash equivalents 19 842,378 760,304 Total current assets 2,598,372 3,175,401 Total assets 17,653,774 19,532,580 EQUITY AND LIABILITIES Equity 20 Charter capital 3,696,850 3,696,850 Additional paid-in capital 485,685 485,685 Foreign currency translation reserve (49,373) 17,274 Retained earnings 1,746,545 1,595,969 Total equity 5,879,707 5,795,778 Non-current liabilities Loans and borrowings 21 6,116,781 10,507,152 Derivative financial liability - 8,563 Deferred tax liabilities 16 321,145 406,076 Total non-current liabilities 6,437,926 10,921,791 Current liabilities Loans and borrowings 21 4,734,415 1,855,315 Trade and other payables 22 579,504 804,610 Derivative financial liability - 38,707 Current income tax liabilities 22,222 116,379 Total current liabilities 5,336,141 2,815,011 Total liabilities 11,774,067 13,736,802 Total equity and liabilities 17,653,774 19,532,580 The consolidated statement of financial position is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 10 to 41. 5
Consolidated Statement of Changes in Equity for the year ended 31 December 2012 000 RUB Note Equity attributable to the participants of the Company Share capital Additional paidin capital Translation reserve Retained earnings Balance at 1 January 2011 20 3,696,850 485,685 (37,754) (397,689) 3,747,092 Total comprehensive income for the year Profit for the year - - - 1,928,670 1,928,670 Other comprehensive income Foreign currency translation differences - - 55,028-55,028 Total other comprehensive income - - 55,028-55,028 Total comprehensive income for the year - - 55,028 1,928,670 1,983,698 Transactions with owners recorded directly in equity Correction of the cost of tangible fixed assets, net of deferred tax 13 - - - 64,988 64,988 Total contributions by and distributions to owners - - - 64,988 64,988 Balance at 31 December 2011 3,696,850 485,685 17,274 1,595,969 5,795,778 Total equity 7 The consolidated statement of changes in equity is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 10 to 41.
Consolidated Statement of Changes in Equity for the year ended 31 December 2012 000 RUB Note Equity attributable to the participants of the Company Share capital Additional paidin capital Translation reserve Retained earnings Balance at 1 January 2012 20 3,696,850 485,685 17,274 1,595,969 5,795,778 Total comprehensive income for the year Profit for the year - - - 2,455,205 2,455,205 Other comprehensive income Foreign currency translation differences - - (66,647) - (66,647) Total other comprehensive income - - (66,647) - (66,647) Total comprehensive income for the year - - (66,647) 2,455,205 2,388,558 Contributions by and distributions to owners Dividends paid 20 - - - (2,293,345) (2,293,345) Other transaction with participants 20 - - - (11,284) (11,284) Total contributions by and distributions to owners - - - (2,304,629) (2,304,629) Balance at 31 December 2012 3,696,850 485,685 (49,373) 1,746,545 5,879,707 Total equity 8 The consolidated statement of changes in equity is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 10 to 41.
Consolidated Statement of Cash Flows for the year ended 31 December 2012 000 RUB Note 2012 2011 Cash flows from operating activities Profit before income tax for the year 3,055,621 2,354,267 Adjustments for: Depreciation 8 1,151,550 1,037,468 (Gain)/loss on disposal of property, plant and equipment 10 (193,369) 21,875 Gain on disposal of subsidiaries (154,916) - Change in provision for bad debt 10 8,177 (4,383) Net finance costs 11 1,180,804 559,664 Cash from operating activities before changes in working capital and provisions 5,047,867 3,968,891 Change in inventories (6,078) (5,800) Change in trade and other receivables and prepayments 444,890 (110,456) Change in trade and other payables (151,902) 237,785 Cash flows from operations before income taxes and interest paid 5,334,777 4,090,420 Income tax paid (798,431) (203,844) Interest paid (1,218,406) (1,020,351) Net cash from operating activities 3,317,940 2,866,225 Cash flows from investing activities Proceeds from sale of property, plant and equipment 834,134 11,230 Acquisition of property, plant and equipment (970,515) (2,386,312) Interest received 151,814 18,537 Loans issued (124,565) (660,981) Proceeds from repayment of loans and finance lease receivable 711,801 594,204 Acquisition of subsidiaries, net of cash acquired - (1,333,878) Proceeds from disposal of subsidiaries 6 114,471 - Net cash from / (used in) investing activities 717,140 (3,757,200) Cash flows from financing activities Proceeds from borrowings 2,946,383 11,116,601 Repayment of borrowings (3,904,984) (8,660,497) Payment of finance lease liabilities (689,776) (980,563) Transactions with participants 20 (2,304,629) - Net cash (used in) / from financing activities (3,953,006) 1,475,541 Net increase in cash and cash equivalents 82,074 584,566 Cash and cash equivalents at 1 January 760,304 175,738 Cash and cash equivalents at 31 December 19 842,378 760,304 9 The consolidated statement of cash flows is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 10 to 41.
1 Background (a) (b) Organisation and operations The principal activity of (the Company ) and its subsidiaries (the Group ) is to provide railway transportation services mainly within the Russian Federation. The Group renders transportation services using its own and leased railway wagons and locomotives. The Company also uses rolling stock leased under short term operating lease agreements from subsidiaries of OAO Russian Railways and other companies on an as-needed basis. The Group s main suppliers are OAO Russian Railways, other Russian state owned railway enterprises, producers of wagons and leasing companies. The Company is a limited liability company incorporated in the Russian Federation on 23 December 1997. The Company is registered and located at 24, bld. 1, Radio Street, Moscow, Russian Federation. The Company is the subsidiary of the OJSC Far-Eastern Shipping Company (FESCO, the Parent Company). In December 2012 Summa Group and other investors acquired control over FESCO, the parent of the Group, who has the power to direct transactions of the Group at his own discretion and for his own benefit. At the reporting date the immediate parent company of the Group is FESCO and the ultimate beneficiary is Mr. Ziaudin Magomedov. Russian and Ukrainian business environment The Group s operations are primarily located in the Russian Federation and Ukraine. Consequently, the Group is exposed to the economic and financial markets of the Russian Federation and Ukraine which display characteristics of an emerging market. The legal, tax and regulatory frameworks continue development, but are subject to varying interpretations and frequent changes which together with other legal and fiscal impediments contribute to the challenges faced by entities operating in the Russian Federation. The consolidated financial statements reflect management s assessment of the impact of the Russian and Ukrainian business environment on the operations and the financial position of the Group. The future business environment may differ from management s assessment. 2 Basis of preparation (a) (b) Statement of compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRSs ). Basis of measurement The consolidated financial statements are prepared on the historical cost basis except for derivative financial instruments, which are measured at fair value. 10
(c) (d) Functional and presentation currency The national currency of the Russian Federation is the Russian Rouble ( RUB ), which is the Company s functional currency and the currency in which these consolidated financial statements are presented. The functional currency of the Ukrainian operations is the Ukrainian Grivna ( UAH ), Latvian operations Latvian Lat ( LVL ) and Cyprus operations US Dollar ( USD ). All financial information presented in RUB has been rounded to the nearest thousand. Use of estimates and judgments The preparation of consolidated financial statements in conformity with IFRSs requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from those estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. Information about critical judgments in applying accounting policies that have the most significant effect on the amounts recognised in the consolidated financial statements is included in the following notes: Note 7 revenue recognition Note 13 property, plant and equipment Note 14 impairment of goodwill Note 26 taxation contingencies 3 Significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, and have been applied consistently by Group entities. (a) (i) (ii) Basis of consolidation Subsidiaries Subsidiaries are entities controlled by the Group. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Group. Acquisitions from entities under common control Business combinations arising from transfers of interests in entities that are under the control of the shareholder that controls the Group are accounted for as if the acquisition had occurred at the beginning of the earliest comparative period presented or, if later, at the date that common control was established. The assets and liabilities acquired are recognised at the carrying amounts recognised previously in the Group s controlling shareholder s consolidated financial statements. 11
Any difference between the carrying amount of net assets and consideration paid is recognized in equity. (iii) (b) (i) (ii) Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised income and expenses arising from intragroup transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with equity accounted investees are eliminated against the investment to the extent of the Group s interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. Foreign currency Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the reporting period. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Foreign currency differences arising in retranslation are recognised in profit or loss, except for differences arising on the retranslation of available-for-sale equity instruments which are recognised in other comprehensive income. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to RUB at the exchange rates at the reporting date. The income and expenses of foreign operations are translated to RUB at exchange rates at the dates of the transactions. Foreign currency differences are recognised directly in other comprehensive income. When a foreign operation is disposed of, in part or in full, the relevant amount in the foreign currency translation reserve is transferred to profit or loss as part of the profit or loss on disposal of foreign operations. Foreign exchange gains and losses arising from a monetary item received from or payable to a foreign operation, the settlement of which is neither planned nor likely in the foreseeable future, are considered to form part of a net investment in a foreign operation and are recognised in other comprehensive income, and are presented within equity in the foreign currency translation reserve. 12
(c) (i) Financial instruments Non-derivative financial instruments Non-derivative financial instruments comprise investments in equity and debt securities, trade and other receivables, cash and cash equivalents, loans and borrowings, and trade and other payables. The Group initially recognises loans and receivables and deposits on the date that they are originated. All other financial assets (including assets designated at fair value through profit or loss) are recognised initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument. The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognised as a separate asset or liability. Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. The Group has the following non-derivative financial assets: financial assets at fair value through profit or loss, held-to-maturity financial assets, loans and receivables and available-for-sale financial assets. Held-to-maturity financial assets If the Group has the positive intent and ability to hold to maturity debt securities that are quoted in an active market, then such financial assets are classified as held-to-maturity. Held-to-maturity financial assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition held-to-maturity financial assets are measured at amortised cost using the effective interest method, less any impairment losses. Any sale or reclassification of a more than insignificant amount of held-to-maturity investments not close to their maturity would result in the reclassification of all held-to-maturity investments as available-for-sale, and prevent the Group from classifying investment securities as held-to-maturity for the current and the following two financial years. Loans and receivables Loans and receivables are a category of financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortised cost using the effective interest method, less any impairment losses. Loans and receivables comprise trade and other receivables. Cash and cash equivalents comprise cash balances and call deposits with original maturities of three months or less. Bank overdrafts that are repayable on demand and form an integral part of the Group s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. Available-for-sale financial assets Available-for-sale financial assets are non-derivative financial assets that are designated as available-for-sale and that are not classified in any of the previous categories. The Group s 13
investments in equity securities and certain debt securities are classified as available-for-sale financial assets. Such assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, they are measured at fair value and changes therein, other than impairment losses and foreign currency differences on available-for-sale equity instruments, are recognised in other comprehensive income and presented within equity in the fair value reserve. When an investment is derecognised or impaired, the cumulative gain or loss in other comprehensive income is transferred to profit or loss. Other Other non-derivative financial instruments are measured at amortised cost using the effective interest method, less any impairment losses. Investments in equity securities that are not quoted on a stock exchange are principally valued using valuation techniques such as discounted cash flow analysis, option pricing models and comparisons to other transactions and instruments that are substantially the same. Where fair value cannot be reliably measured, investments are stated at cost less impairment losses. (ii) (iii) (iv) Non-derivative financial liabilities The Group initially recognises debt securities issued and subordinated liabilities on the date that they are originated. All other financial liabilities (including liabilities designated at fair value through profit or loss) are recognised initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument. The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. The Group has the following non-derivative financial liabilities: loans and borrowings and trade and other payables. Such financial liabilities are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition these financial liabilities are measured at amortised cost using the effective interest method. Derivative financial instruments The Group holds derivative financial instruments to manage its exposure to interest rate movement on its bank borrowings. Derivatives are recognised initially at fair value; attributable transaction costs are recognised in profit or loss as incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are recognised immediately in the profit or loss. Guarantees The Group considers that financial guarantee contracts entered into by the Group to guarantee the indebtedness of parties under common control are insurance arrangements, and accounts for them as such. In this respect, the Group treats the guarantee contract as a contingent liability until such time as it becomes probable that the Group will be required to make a payment under the guarantee. 14
(v) (d) (i) (ii) (iii) Equity Incremental costs directly attributable to issue of participation rights are recognised as a deduction from equity, net of any tax effects. Property, plant and equipment Recognition and measurement Items of property, plant and equipment, except for land, are measured at cost less accumulated depreciation and impairment losses. The cost of property, plant and equipment at the date of transition to IFRSs, was determined by reference to its fair value at that date. Cost includes expenditure that is directly attributable to the acquisition of the asset. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment, and are recognised net within other income / other expense in profit or loss. Subsequent costs The cost of replacing part of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably. The carrying amount of the replaced part is derecognised. The costs of the day-to-day servicing of property, plant and equipment are recognised in profit or loss as incurred. Depreciation Depreciation is calculated over the depreciable amount, which is the cost of an asset, or other amount substituted for cost, less its residual value. If a component of an individual asset has a useful life that is different from the remainder of that asset, that component is depreciated separately. Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. Land is not depreciated. The estimated useful lives are as follows: Rolling stock Wheel-pair Machinery and equipment Buildings Office and other assets and equipment 15-30 years 5-8 years 5-20 years 30 years 3-5 years 15
Depreciation methods, useful lives and residual values are reviewed at each financial year end and adjusted if appropriate. (e) (f) (g) (i) Leased assets Leases in terms of which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Other leases are operating leases and the leased assets are not recognised on the Group s statement of financial position. Inventories Inventories are measured at the lower of cost and net realisable value. The cost of inventories is based on the average costing principle, and includes expenditure incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of production overheads based on normal operating capacity. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Impairment Non-derivative financial assets A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably. Objective evidence that financial assets (including equity securities) are impaired can include default or delinquency by a debtor, restructuring of an amount due to the Group on terms that the Group would not consider otherwise, indications that a debtor or issuer will enter bankruptcy, the disappearance of an active market for a security. In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment. Loans and receivables and held-to-maturity investment securities The Group considers evidence of impairment for receivables and held-to-maturity investment securities at both a specific asset and collective level. All individually significant receivables and held-to-maturity investment securities are assessed for specific impairment. All individually significant receivables and held-to-maturity investment securities found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Receivables and held-to-maturity investment securities that are not individually significant are collectively assessed for impairment by grouping together receivables and held-tomaturity investment securities with similar risk characteristics. 16
In assessing collective impairment the Group uses historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management s judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical trends. An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the asset s original effective interest rate. Losses are recognised in profit or loss and reflected in an allowance account against receivables. Interest on the impaired asset continues to be recognised through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss. (ii) (h) (i) Non-financial assets The carrying amounts of the Group s non-financial assets, other than inventories and deferred tax assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset s recoverable amount is estimated. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the cash-generating unit ). An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. Provisions A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognised as finance cost. Revenue Revenues are recognized in the accounting period in which the services are rendered the price is determinable and collectability is probable. The revenues are recognised net of value added tax. 17
Revenue from services rendered is recognised in profit or loss in proportion to the stage of completion of the transaction at the balance sheet date. The stage of completion is assessed by reference to the number of days completed out of the total estimated number of days in a particular transportation route. For other services the stage of completion is assessed by reference to surveys of work performed. Estimated losses on transportation in progress are recognised at the time such losses become evident. (i) Transportation services (operator s business) The Company also organizes transportation for clients and provides similar services using its own or leased wagons. Normally, a transportation tariff charged by the Russian Railway is re-charged to the counterparty (the Company acts as an agent). For this type of activity, the Company s revenue comprises operator s fee and revenue from rent of wagons. The costs of sales for this type of activity generally includes transportation fees charged by transportation organizations for transportation of empty wagons (those are not re-charged to the counterparty), depreciation, repairs and maintenance costs for owned and leased wagons and lease payments for wagons rented on the basis of operating leases. (ii) (iii) Revenues from operating lease of rolling stock Revenue earned by the Company from wagons leased out under operating leases is recognised on a straight line basis over the term of operating rent agreements. Transportation agency fee The Company is a legal intermediary for transportation organizations and pays transport fees on behalf of its clients. These fees, which are reimbursed by the Company s clients, are not included in sales or cost of sales. Consequently, only the Company s fees for intermediary activities are recognised as sales. Debtors and liabilities that occur in accordance with these activities are recognized as accounts receivable and accounts payable. (j) (i) (ii) Other expenses Lease payments Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease. Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Social expenditure In the normal course of business the Group contributes to the Russian Federation state pension scheme on behalf of its employees. Mandatory contributions to the Russian Federation State pension scheme are expensed when incurred. 18
(k) (l) (m) Finance income and costs Finance income comprises interest income on funds invested, dividend income and foreign currency gains. Interest income is recognised as it accrues in profit or loss, using the effective interest method. Dividend income is recognised in profit or loss on the date that the Group s right to receive payment is established. Finance costs comprise interest expense on borrowings, foreign currency losses, impairment losses recognised on financial assets. Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognised in profit or loss using the effective interest method. Foreign currency gains and losses are reported on a net basis. Income tax Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognised in profit or loss except to the extent that it relates to a business combination, or items recognised directly in equity or in other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax assets and liabilities, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously. In accordance with the tax legislation of the Russian Federation, tax losses and current tax assets of a company in the Group may not be set off against taxable profits and current tax liabilities of other Group companies. In addition, the tax base is determined separately for each of the Group s main activities, and therefore, tax losses and taxable profits related to different activities cannot be offset. A deferred tax asset is recognised for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. New Standards and Interpretations not yet adopted The following new Standards, amendments to Standards and Interpretations are not yet effective as at 31 December 2012, and have not been applied in preparing these consolidated financial statements. The Group plans to adopt these pronouncements when they become effective. IAS 27 (2011) Separate Financial Statements will become effective for annual periods beginning on or after 1 January 2013. The amended standard carries forward the existing accounting and disclosure requirements of IAS 27 (2008) for separate financial statements with 19
some clarifications. The requirements of IAS 28 (2008) and IAS 31 for separate financial statements have been incorporated into IAS 27 (2011). Early adoption of IAS 27 (2011) is permitted provided the entity also early-adopts IFRS 10, IFRS 11, IFRS 12 and IAS 28 (2011). IAS 28 (2011) Investments in Associates and Joint Ventures combines the requirements in IAS 28 (2008) and IAS 31 that were carried forward but not incorporated into IFRS 11 and IFRS 12. The amended standard will become effective for annual periods beginning of or after 1 January 2013 with retrospective application required. Early adoption of IAS 28 (2011) is permitted provided the entity also early-adopts IFRS 10, IFRS 11, IFRS 12 and IAS 27 (2011). Amendments to IFRS 7 Financial Instruments: Disclosures - Offsetting Financial Assets and Financial Liabilities contain new disclosure requirements for financial assets and liabilities that are offset in the statement of financial position or subject to master netting arrangements or similar agreements. The amendments are effective for annual periods beginning on or after 1 January 2013, and are to be applied retrospectively. IFRS 9 Financial Instruments will be effective for annual periods beginning on or after 1 January 2015. The new standard is to be issued in phases and is intended ultimately to replace International Financial Reporting Standard IAS 39 Financial Instruments: Recognition and Measurement. The first phase of IFRS 9 was issued in November 2009 and relates to the classification and measurement of financial assets. The second phase regarding classification and measurement of financial liabilities was published in October 2010. The remaining parts of the standard are expected to be issued during 2013. The Group recognises that the new standard introduces many changes to the accounting for financial instruments and is likely to have a significant impact on Group s consolidated financial statements. The impact of these changes will be analysed during the course of the project as further phases of the standard are issued. The Group does not intend to adopt this standard early. IFRS 10 Consolidated Financial Statements will be effective for annual periods beginning on or after 1 January 2013. The new standard supersedes IAS 27 Consolidated and Separate Financial Statements and SIC-12 Consolidation Special Purpose Entities. IFRS 10 introduces a single control model which includes entities that are currently within the scope of SIC-12 Consolidation Special Purpose Entities. Under the new three-step control model, an investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with that investee, has the ability to affect those returns through its power over that investee and there is a link between power and returns. Consolidation procedures are carried forward from IAS 27 (2008). When the adoption of IFRS 10 does not result a change in the previous consolidation or non-consolidation of an investee, no adjustments to accounting are required on initial application. When the adoption results a change in the consolidation or nonconsolidation of an investee, the new standard may be adopted with either full retrospective application from date that control was obtained or lost or, if not practicable, with limited retrospective application from the beginning of the earliest period for which the application is practicable, which may be the current period. Early adoption of IFRS 10 is permitted provided an entity also early-adopts IFRS 11, IFRS 12, IAS 27 (2011) and IAS 28 (2011). IFRS 12 Disclosure of Interests in Other Entities will be effective for annual periods beginning on or after 1 January 2013. The new standard contains disclosure requirements for entities that have interests in subsidiaries, joint arrangements, associates and unconsolidated structured entities. Interests are widely defined as contractual and non-contractual involvement that exposes an entity to variability of returns from the performance of the other entity. The expanded and new disclosure requirements aim to provide information to enable the users to evaluate the nature of risks associated with an entity s interests in other entities and the effects 20
of those interests on the entity s financial position, financial performance and cash flows. Entities may early present some of the IFRS 12 disclosures early without a need to early-adopt the other new and amended standards. However, if IFRS 12 is early-adopted in full, then IFRS 10, IFRS 11, IAS 27 (2011) and IAS 28 (2011) must also be early-adopted. IFRS 13 Fair Value Measurement will be effective for annual periods beginning on or after 1 January 2013. The new standard replaces the fair value measurement guidance contained in individual IFRSs with a single source of fair value measurement guidance. It provides a revised definition of fair value, establishes a framework for measuring fair value and sets out disclosure requirements for fair value measurements. IFRS 13 does not introduce new requirements to measure assets or liabilities at fair value, nor does it eliminate the practicability exceptions to fair value measurement that currently exist in certain standards. The standard is applied prospectively with early adoption permitted. Comparative disclosure information is not required for periods before the date of initial application. Amendment to IAS 1 Presentation of Financial Statements: Presentation of Items of Other Comprehensive Income. The amendment requires that an entity present separately items of other comprehensive income that may be reclassified to profit or loss in the future from those that will never be reclassified to profit or loss. Additionally, the amendment changes the title of the statement of comprehensive income to statement of profit or loss and other comprehensive income. However, the use of other titles is permitted. The amendment shall be applied retrospectively from 1 July 2012 and early adoption is permitted. Amendments to IAS 32 Financial Instruments: Presentation - Offsetting Financial Assets and Financial Liabilities specify that an entity currently has a legally enforceable right to set-off if that right is not contingent on a future event; and enforceable both in the normal course of business and in the event of default, insolvency or bankruptcy of the entity and all counterparties. The amendments are effective for annual periods beginning on or after 1 January 2014, and are to be applied retrospectively. Various Improvements to IFRSs have been dealt with on a standard-by-standard basis. All amendments, which result in accounting changes for presentation, recognition or measurement purposes, will come into effect for annual periods beginning after 1 January 2013. The Group has not yet analysed the likely impact of the improvements on its financial position or performance. The impact of these new standards has not been determined by the Group yet. 4 Determination of fair values A number of the Group s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and for disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability. (a) Trade and other receivables The fair value of trade and other receivables, excluding construction work in progress, is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date. This fair value is determined for disclosure purposes. 21
(b) Non-derivative financial liabilities Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date. For finance leases the market rate of interest is determined by reference to similar lease agreements. 5 Acquisition of subsidiaries On 20 December 2012 the Group obtained control over OOO FESCO Rail by acquiring 100% of shares and voting interest in OOO FESCO Rail. The acquisition was made from the parent company and has insignificant effect on the Group s assets and liabilities. The result of acquisition was recognized directly in equity. On 07 July 2011 the Group obtained control over MetizTrans Group railway operator by acquiring 100% of shares and voting interests in OOO MetizTrans, OOO Investconsulting and OOO TEK MetizTrans. The acquisition was made from a member of management of the Group. In the six months period to 31 December 2011 MetizTrans contributed revenue of RUB 552,053 thousand and profit of RUB 128,747 thousand to the Group results. It was not practicable to estimate what consolidated revenue and consolidated result for the year would have been if the acquisition of MetizTrans Group had occured on 1 January 2011 since the acquired companies did not prepare consolidated financial statements. The acquisition of the subsidiary had the following effect on the Group s assets and liabilities at the date of acquisition: Identifiable assets acquired and liabilities assumed: 000 RUB Non-current assets Property, plant and equipment 1,634,501 Current assets Inventories 11,274 Trade and other receivables 334,351 Cash and cash equivalents 112,472 Non-current liabilities Loans and borrowings (300,034) Finance lease liability (771,113) Deferred tax liabilities (33,194) Current liabilities Loans and borrowings (30,486) Finance lease liability (60,351) Trade and other payables (228,068) Total identifiable net assets 669,352 Total consideration transferred (1,446,350) Goodwill recognized as a result of acquisition 776,998 Cash acquired 112,472 Net cash outflow in the cash flow statement (1,333,878) 22
6 Disposal of subsidiary On 26 March 2012 the Group disposed of its investment in OAO Stroyopttorg, OOO TG-Leasing and TG-Finance Limited to FESCO. The disposal of the subsidiaries had the following effect on the Group s assets and liabilities at the date of disposal: Carrying amount at date of disposal of Stroyopttorg Carrying amount at date of disposal of TG- Leasing and TG- Finance 000 RUB 000 RUB Non-current assets Property, plant and equipment 146,004 - Investments - 833,650 Deferred tax assets - 4,306 Current assets Investments - 546,925 Inventories 3,148 Trade and other receivables 13,821 2,371 Cash and cash equivalents 2,566 152,913 Non-current liabilities Loans and borrowings (108,577) (1,063,668) Deferred tax liabilities (4,227) (50,784) Current liabilities Loans and borrowings (13,852) (262,946) Income tax payable (6,076) (74,289) Trade and other payables (6,217) (34) Net identifiable assets and liabilities 26,590 88,444 Consideration received, satisfied in cash 148,950 121,000 Cash disposed of 2,566 152,913 Net cash inflow/(outflow) 146,384 (31,913) 23
7 Revenue 2012 2011 000 RUB 000 RUB Transportation services (operator s business) 8,873,743 7,757,257 Operating lease of rolling stock 1,769,274 1,153,472 Transportation agency fees 10,090 19,270 Other sales 53,204 119,974 10,706,311 9,049,973 8 Cost of sales 2012 2011 000 RUB 000 RUB Railway infrastructure tariff (3,153,600) (2,608,925) Operating lease of rolling stock (591,615) (752,623) Depreciation (1,151,550) (1,037,468) Payroll expenses and social charges (849,393) (746,305) Rolling stock repair and maintenance costs (628,678) (496,800) Taxes other than on income (133,033) (124,094) Raw materials (81,524) (70,045) Communication costs (66,665) (65,622) Insurance (8,155) (8,274) Other operating expenses (15,955) (30,574) (6,680,168) (5,940,730) 9 Distribution and administrative expenses 2012 2011 000 RUB 000 RUB Office rent cost (79,281) (73,087) Management fee (20,741) (58,000) Other expenses (62,973) (66,889) (162,995) (197,976) 10 Other income and expenses 2012 2011 000 RUB 000 RUB Change in impairment allowance for doubtful debts (8,177) 4,383 Gain on disposal of subsidiaries 154,916 - Gain /(loss) on disposal of property, plant and equipment 193,369 (21,875) Other income 33,169 20,156 373,277 2,664 For the movement in the allowance for doubtful debts, see Note 23(c). 24
11 Finance income and finance costs Finance income comprised of the following items: 2012 2011 000 RUB 000 RUB Interest income on deposits and loans issued 117,482 30,267 Interest income on finance lease granted 40,948 48,257 Income on revaluation of derivative financial liability 44,434 23,708 Foreign exchange gain - 369,927 202,864 472,159 Finance costs comprised of the following items: 2012 2011 000 RUB 000 RUB Interest expense on loans and borrowings (763,153) (625,193) Interest charge on finance lease (557,069) (406,630) Foreign exchange loss (45,167) - Other finance costs (18,279) - (1,383,668) (1,031,823) 12 Income tax expense 2012 2011 000 RUB 000 RUB Current tax expense Current income tax expense (652,497) (261,861) Deferred tax expense Origination and reversal of temporary differences 52,081 (163,736) Total income tax expense (600,416) (425,597) Reconciliation of effective tax rate: 2012 2011 000 RUB 000 RUB Profit before income tax 3,055,621 2,354,267 Income tax expense at applicable tax rate (611,124) (470,853) Effect of income taxed at lower/(higher) rates (6,748) 1,469 Reduction in tax rate in Ukraine - 8,047 Recognition of previously unrecognized tax assets - 38,808 Non-taxable (non-deductible) differences 3,344 (19,924) Decrease/(increase) in provision for tax loss carry-forwards 14,112 16,856 (600,416) (425,597) 25