MegaFon. Consolidated financial statements. For the year ended 31 December 2012

Transcription

1 Consolidated financial statements For the year ended 31 December 2012

2 Contents... 2 Consolidated statement of comprehensive income... 4 Consolidated statement of financial position... 5 Consolidated statement of changes in equity... 6 Consolidated statement of cash flows... 7 Notes to the consolidated financial statements General Basis of preparation Basis of consolidation Significant accounting policies First-time adoption of IFRS Significant accounting judgments, estimates and assumptions Standards issued but not yet effective Equity Business combinations Investments in associates and joint ventures Segment information Income taxes Earnings per share Property and equipment Intangible assets Impairment test Financial assets and liabilities Non-financial assets and liabilities Inventory Trade and other receivables Cash and cash equivalents Provisions Trade and other payables Long-term incentive programme Share-based compensation Sales and marketing expenses General and administrative expenses Related parties Financial risk management Commitments, contingencies and uncertainties Pro forma results of operations (unaudited) Events after the reporting date... 83

3 Ernst & Young LLC Sadovnicheskaya Nab., 77, bld. 1 Moscow, , Russia Tel: +7 (495) (495) Fax: +7 (495) ООО «Эрнст энд Янг» Россия, , Москва Садовническая наб., 77, стр. 1 Тел: +7 (495) (495) Факс: +7 (495) ОКПО: Independent auditors report The Board of Directors and Shareholders of OJSC MegaFon We have audited the accompanying consolidated financial statements of OJSC MegaFon and its subsidiaries ( the Group ), which comprise the consolidated statement of financial position as of 31 December 2012 and the consolidated statements of comprehensive income, changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Management s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. A member firm of Ernst & Young Global Limited

4 Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as at 31 December 2012, and its financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards. Other matter OJSC MegaFon has previously issued its consolidated financial statements as of 31 December 2012, 2011 and 2010 and for the years then ended, prepared in conformity with accounting principles generally accepted in the United States of America. We have audited and reported on those consolidated financial statements separately in accordance with auditing standards generally accepted in the United States of America and issued our audit report dated 28 February 2013, in which we expressed an unqualified opinion on those consolidated financial statements. 4 April 2013

5 Consolidated statement of comprehensive income (In millions of Rubles, except per share amounts) Years ended 31 December Note Revenues Wireless services 241, , ,656 Wireline services 17,938 15,194 7,496 Sales of equipment and accessories 13,324 8,420 5,182 Total revenues 272, , ,334 Operating expenses Cost of services 54,555 47,618 41,632 Cost of equipment and accessories 12,399 11,252 6,775 Sales and marketing expenses 26 19,747 21,841 19,471 General and administrative expenses 27 68,486 61,049 49,847 Depreciation 14 45,508 41,036 34,533 Amortisation 15 6,046 5,407 4,122 Loss on disposal of non-current assets 1, Total operating expenses 208, , ,472 Operating profit 63,882 53,328 58,862 Finance costs 17 (7,718) (1,139) (1,278) Finance income 1,193 3,591 4,008 Share of profit of associates and joint ventures Other non-operating income Gain/(loss) on financial instruments, net 17 6,348 (51) (203) Foreign exchange loss, net (8,196) (105) (700) Profit before tax 55,913 55,654 60,707 Income tax expense 12 11,466 12,271 11,866 Profit for the year 44,447 43,383 48,841 Other comprehensive income Foreign currency translation difference, net of tax of nil 88 (39) (8) Net movement on cash flow hedges, net of tax of nil 17 (261) Other comprehensive loss for the year, net of tax (173) (39) (8) Total comprehensive income for the year, net of tax 44,274 43,344 48,833 Profit for the year Attributable to equity holders of the Company 44,393 43,377 48,789 Attributable to non-controlling interest Total comprehensive income for the year Attributable to equity holders of the Company 44,198 43,347 48,783 Attributable to non-controlling interest 76 (3) 50 Earnings per share, Rubles Basic, profit for the year attributable to ordinary equity holders of the Company Diluted, profit for the year attributable to ordinary equity holders of the Company The accompanying notes are an integral part of these consolidated financial statements. 4

6 Consolidated statement of financial position (In millions of Rubles) As of 1 As of 31 December January Note Assets Non-current assets Property and equipment , , , ,436 Intangible assets, other than goodwill 15 16,991 18,487 18,168 16,075 Goodwill 9, 15 23,950 15,393 7, Investments in associates and joint ventures 10 35,662 Non-current non-financial assets 18 1, Other non-current financial assets 17 2, Deferred tax assets 12 2,573 2,954 1,909 1,174 Total non-current assets 296, , , ,740 Current assets Inventory 19 5,277 4,551 3,081 1,219 Current non-financial assets 18 5,990 6,069 8,054 7,517 Prepaid income taxes 12 5,066 6,957 6,975 3,238 Trade and other receivables 20 12,515 10,262 7,364 4,133 Other current financial assets 17 23,449 87,515 64,737 50,721 Cash and cash equivalents 21 2,387 2,887 2,667 12,550 Total current assets 54, ,241 92,878 79,378 Total assets 351, , , ,118 Equity and liabilities Equity Equity attributable to equity holders of the Company 8 117, , , ,885 Non-controlling interests Total equity 117, , , ,387 Non-current liabilities Loans and borrowings ,575 35,731 20,256 18,819 Other non-current financial liabilities ,921 3,279 1,295 Non-current non-financial liabilities 18 1,843 1,857 1,978 1,628 Provisions 22 5,724 5,032 4,379 4,061 Deferred tax liabilities 12 12,333 9,709 7,438 1,303 Total non-current liabilities 145,976 55,250 37,330 27,106 Current liabilities Trade and other payables 23 23,247 24,917 20,655 15,373 Loans and borrowings 17 20,457 7,429 12,182 7,823 Other current financial liabilities 17 23,282 2,952 1, Current non-financial liabilities 18 20,513 15,629 12,209 11,693 Income taxes payable Total current liabilities 87,516 51,299 46,907 35,625 Total equity and liabilities 351, , , ,118 The accompanying notes are an integral part of these consolidated financial statements. 5

7 Consolidated statement of changes in equity (In millions of Rubles) Note Ordinary shares Number of shares Amount Attributable to equity holders of the Company Treasury shares Number of shares Amount Capital surplus Retained earnings Other capital reserves (Note 8) Total Noncontrolling interests Total equity As of 1 January ,000, , , , ,387 Net profit 48,789 48, ,841 Other comprehensive loss (6) (6) (2) (8) Total comprehensive income 48,789 (6) 48, ,833 Acquisitions Purchase of non-controlling interests (15) (15) (56) (71) Dividends paid to noncontrolling interests (147) (147) As of 31 December ,000, , ,580 (20) 230, ,216 Net profit 43,377 43, ,383 Other comprehensive loss (30) (30) (9) (39) Total comprehensive income 43,377 (30) 43,347 (3) 43,344 Purchase of non-controlling interests (3) (3) (37) (40) As of 31 December ,000, , ,957 (53) 273, ,520 Net profit 44,393 44, ,447 Other comprehensive loss (195) (195) 22 (173) Total comprehensive income 44,393 (195) 44, ,274 Dividends paid 8 (151,863) (151,863) (151,863) Purchase of treasury shares 8 89,279,700 (63,883) (63,883) (63,883) Sale of treasury shares in IPO 8 (26,839,411) 19,205 (3,033) 16,172 16,172 Settlement of IPO-related written put option liability, net 17 (6,348) (6,348) (6,348) Sale of treasury shares upon exercise of stock options 25 (7,750,000) 5,545 (638) (140) 4,767 4,767 Share-based compensation expense Retirement of treasury shares 8 (200) (200) Dividends paid to noncontrolling interests (81) (81) As of 31 December ,000, ,690,089 (39,133) 12, ,468 (73) 117, ,873 The accompanying notes are an integral part of these consolidated financial statements. 6

8 Consolidated statement of cash flows (In millions of Rubles) Years ended 31 December Note Operating activities Profit before tax 55,913 55,654 60,707 Non-cash adjustment to reconcile profit before tax to net cash flows: Depreciation 14 45,508 41,036 34,533 Amortisation 15 6,046 5,407 4,122 Loss on disposal of non-current assets 1, (Gain)/loss on financial instruments, net 17 (6,348) Net foreign exchange loss 8, Share of profit of associates and joint ventures 10 (213) Change in impairment allowance for receivables 20, 27 1,319 1,437 1,182 Finance costs 7,718 1,139 1,278 Finance income (1,193) (3,591) (4,008) Other non-operating income, net (191) (30) (18) Working capital adjustments: Increase in inventory (724) (1,414) (1,606) Increase in trade and other receivables (1,650) (3,870) (1,927) (Increase)/decrease in current non-financial assets (890) 1,018 (3,724) Increase in trade and other payables 985 5,984 3,069 Increase in current non-financial liabilities 4, Change in VAT, net 4,020 2,375 (519) Income tax paid (13,675) (10,914) (11,858) Interest received 3,941 1,550 4,195 Interest paid, net of interest capitalised 17 (5,630) (114) (158) Net cash flows from operating activities 109,410 97,295 86,613 Investing activities Purchase of property, equipment and intangible assets (46,674) (73,332) (63,860) Proceeds from sale of property and equipment Acquisition of subsidiaries, net of cash acquired 9 (8,257) (10,825) (10,418) Payment of deferred and contingent consideration 17 (1,490) (491) Purchase of interests in associates, joint ventures and related put option 10 (16,673) Net change in short-term and long-term demand deposits 58,313 (18,948) (15,286) Net cash flows used in investing activities (14,260) (103,147) (88,821) Financing activities Proceeds from borrowings, net of fees paid ,545 21,226 13,520 Repayment of borrowings 17 (116,795) (14,365) (20,105) Dividends paid to equity holders of the Company 8 (151,863) Purchase of treasury shares 8 (63,883) Payment of liability for marketing related licences 15 (369) (385) (329) IPO proceeds, net of transaction fees 8 16,384 Proceeds from exercise of stock options 25 4,768 Dividends paid to non-controlling interests (81) (147) Acquisition of non-controlling interests (40) (100) Net cash flows (used in)/from financing activities (95,294) 6,436 (7,161) Net (decrease)/increase in cash and cash equivalents (144) 584 (9,369) Net foreign exchange difference (356) (364) (514) Cash and cash equivalents at beginning of year 2,887 2,667 12,550 Cash and cash equivalents at end of year 2,387 2,887 2,667 The accompanying notes are an integral part of these consolidated financial statements. 7

9 Notes to the consolidated financial statements (In millions of Rubles, unless otherwise indicated) 1. General Open Joint Stock Company MegaFon (, and together with its consolidated subsidiaries ) is a company incorporated under the laws of the Russian number Its registered office is at 30 Kadashevskaya Embankment, Moscow, , Russian Federation. MegaFon is a leading universal telecommunications operator in Russia and provides a broad range of voice, data and other telecommunications services to retail customers, businesses, government clients and other telecommunications services providers. In Russia, MegaFon has constructed and continues to operate a nationwide wireless communications network that operates on the dual band GSM 900/1800 standard. In May 2007, the Group was awarded a licence that expires on 21 May 2017, for the provision of 3G wireless telephony services based on IMT-2000/UMTS standards throughout the entire territory of Russia. In July 2012, the Group was awarded a licence which expires in July 2022 for the provision of fourthstandard throughout the entire territory of Russia. As of 31 December 2012, the Group is providing and expanding 3G services in almost all of the regions in which it operates throughout Russia and has commenced providing 4G/LTE services in Moscow, and in certain other cities throughout (Note 28). The Group also holds licences for local and longdistance telephony services, data transmission, broadband access services, and communication channels leasing covering the whole territory of Russia. The Group has its own land-line and leased satellite transmission network capacities. shares on the Moscow Exchange and its ordinary shares represented by Global Depositary As of 31 December 2012, the Group is controlled by Garsdale Services Investment Limited indirectly owns 50% of the issued share capital plus 100 ordinary shares of the Company. Garsdale is indirectly owned by USM Holdings Limited, a nonpublic entity, which is ultimately controlled by Mr Alisher Usmanov. 2. Basis of preparation These consolidated financial statements have been prepared in accordance with International he International Accounting Standards date these consolidated financial statements were prepared. These are the Group IFRSs, and accordingly IFRS 1, First-time Adoption of International Financial Reporting Standards, has been applied. An explanation of how the transition to IFRSs has affected the reported financial position, financial performance and cash flows of the Group is provided in Note 5. 8

10 2. Basis of preparation (continued) The consolidated financial statements have been prepared on a historical cost basis, unless disclosed otherwise. The accompanying consolidated financial statements are presented in millions of Rubles, except for per share amounts which are in Rubles or unless otherwise indicated. The consolidated financial statements were authorised for issue by the on 4 April Chief 3. Basis of consolidation The consolidated financial statements comprise the financial statements of the Company and its subsidiaries as of 31 December Subsidiaries are 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 intragroup balances and transactions are eliminated upon consolidation. 4. Significant accounting policies Business combinations and goodwill The Group applies the acquisition method of accounting and recognises the assets acquired, the liabilities assumed and any non-controlling interest in the acquired company at the acquisition date, measured at their fair values as of that date. Determining the fai judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, licence and other asset useful lives and market multiples, among other items. Results of subsidiaries acquired and accounted for by the acquisition method have been included in operations from the relevant date of acquisition. Any contingent consideration to be transferred by the Group is recognised at fair value at the acquisition date. Subsequent changes in the fair value of the contingent consideration classified as an asset or liability that is a financial instrument within the scope of IAS 39, Financial Instruments: Recognition and Measurement, are recognised in accordance with IAS 39 in the statement of comprehensive income. If the contingent consideration is not within the scope of IAS 39, it is measured in accordance with the appropriate IFRS. Contingent consideration that is classified as equity is not remeasured and subsequent settlement is accounted for within equity. Goodwill represents the excess of the consideration transferred plus the fair value of any noncontrolling interest in the acquired company at the acquisition date over the fair values of the identifiable net assets acquired, and is not amortised, but tested for impairment at least annually. 9

11 4. Significant accounting policies (continued) Acquisition related costs are expensed as incurred and included in general and administrative expenses. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is allocated from the acquisition date to each of the cash-generating units ( CGUs ), or groups of CGUs, that is expected to benefit from the synergies of the combination. Each CGU or any group of CGUs to which the goodwill is allocated represents the lowest level within the entity at which the goodwill is monitored for internal management purposes. Associates and joint ventures Investments in associates and joint ventures which are jointly controlled entities are accounted for using the equity method of accounting and are initially recognised at cost. The share of the profits and losses of these companies is included in the share of profit of associates and joint ventures line in the accompanying consolidated statements of comprehensive income with a corresponding adjustment to the carrying amount of the investment. In May 2011, the IASB issued IFRS 11, Joint Arrangements, which eliminates proportionate consolidation as an option of accounting for jointly-controlled entities to converge with US GAAP. As a result, joint ventures are accounted for using the equity method. The standard is effective for annual periods beginning on or after 1 January Early adoption is permitted as long as the entity also adopts IFRS 10, Consolidated Financial Statements, IFRS 12, Disclosure of Interests in Other Entities, revised IAS 27, Separate Financial Statements, and revised IAS 28, Investments in Associates and Joint Ventures, all as of the same date. The package of new and revised standards introduces a new model of control and treatment of joint ventures and also new disclosure requirements. The Group chose to early adopt the package of standards from 1 January Accordingly, it did not consider the option of proportionate consolidation when accounting for its investment in Euroset (Note 10) and used equity method accounting instead. The adoption of the standards did not otherwise have a significant impact on the Group financial statements. Unrealised gains on transactions between the Group and its associates are eliminated only 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. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group. Foreign currency transactions and translation The Group functional currency of OJSC MegaFon and its principal subsidiaries. Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or fair value measurement where items are remeasured to their fair value. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities 10

12 4. Significant accounting policies (continued) denominated in foreign currencies are recognised in the foreign exchange gain/(loss), net line in profit or loss. The assets and liabilities of foreign operations are translated into Rubles at the rate of exchange prevailing on the reporting date and their income statements are translated at exchange rates prevailing on the dates of the transactions. The exchange differences arising on the translation are recognised in other comprehensive income. Revenue recognition Revenue is measured at the fair value of the consideration received or receivable, and represents amounts receivable for the sale of goods and services in the ordinary course of the Group's activities, net of value added taxes, returns and discounts. The Group recognises revenue when the amount of revenue can be reliably measured, when it is probable that future economic benefits will flow to the entity and when specific criteria have been met for each of the Group's activities as described below. The Group bases its estimate of return on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement. Revenues earned by the Group are recognised on the following bases: Wireless revenue The Group earns wireless revenues for usage of its cellular system, which include airtime charges from contract and prepaid subscribers, monthly contract fees, interconnect fees from other wireless and wireline operators, roaming charges, data transfer charges, and charges for value added s wireline operators that was earned from rendering traffic termination from other operators. Roaming revenues include revenues from customers who roam outside their selected home coverage area and revenues from other mobile carriers for roaming by their customers using the network of the Group. VAS include SMS, MMS, provision of content and media and commissions for mobile payments. The revenue from provision of content is presented net of related costs when the Group acts as an agent of the content providers while gross revenues and related costs are recorded when the Group is a primary obligor in the arrangement. Service revenue is generally recognised when the services are rendered. The Group defers revenue resulting from fees paid by customers upon initial connection. Such deferred revenues are subsequently recognised over the estimated average customer lives under tariff plans, which are periodically reassessed by management. Loyalty programme The Group operates a loyalty programme which allows customers to accumulate awards for usage of the Group products, subject to a minimum number of awards being obtained. The portion of consideration 11

13 4. Significant accounting policies (continued) recieved is allocated to the awards based on their fair value irrespective of the fair values of the other components and deferred until the unused award credits are redeemed or expired. The Group estimates the fair value of awards to a customer by applying a statistical analysis. Multiple elements arrangements The Group enters into multiple element arrangements in which a customer may purchase a combination of equipment (e.g. USB modems, handsets) and telecommunication services (e.g. airtime, data, and other services). The Group allocates consideration received from subscribers to the separate units of accounting based on their relative fair value. Revenues allocated to the delivered equipment and related costs are recognised in the accompanying consolidated statements of comprehensive income at the time of sale provided that other conditions for revenue recognition are met. Amounts allocated to telecommunication services are deferred and recognised as revenue over the period of rendering the services. Roaming rebates The Group enters into roaming discount agreements with a number of wireless operators. According to the agreements the Group is committed to provide and entitled to receive a discount that is generally dependent on the volume of roaming traffic generated by the respective subscribers. The Group uses actual traffic data to estimate the amounts of rebates to be received or granted. Such estimates are adjusted and updated on regular basis. The Group accounts for discounts received as a reduction of roaming expenses and rebates granted as reduction of roaming revenue. The Group takes into account the terms of the various roaming discount agreements in order to determine the appropriate presentation of the amounts receivable from and payable to its roaming partners in its consolidated statement of financial position. Amounts of rebates earned from and given to roaming partners are included in trade and other receivables and payables (Notes 20, 23), respectively, in the accompanying consolidated statement of financial position. Wireline revenue The Group earns wireline revenues for usage of its fixed-line network, which include payments from individual, corporate and government subscribers for local and long-distance telecommunications and data transfer services. Charges are based upon usage (e.g., minutes of traffic processed), period of time (e.g., monthly service fees) or other established fee schedules. Wireline revenues also include interconnection charges from wireless and wireline operators for terminating calls on the Group recognised when the services are rendered. Billings received in advance of service being rendered are deferred and recognised as revenue as the service is rendered. Sales of equipment and accessories Revenue from the sale of equipment and accessories is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer, usually on delivery of the goods. 12

14 4. Significant accounting policies (continued) Dealer commissions Dealer commissions are expensed as incurred (Note 26). During the year ended 31 December 2012, the Group introduced changes to its third party dealer arrangements for provisions of post-sales services and revenue sharing. As a result, dealer commissions are recognised as the services are performed, generally during a six-month period from the date a new subscriber is activated. Advertising costs Advertising costs are expensed as incurred (Note 26). Government pension funds The Group contributes to the local state pension funds and social funds on behalf of its employees. The contributions are expensed as incurred. Contributions for the years ended 31 December 2012, 2011 and 2010 were 4,308, 3,572 and 1,839, respectively. Taxes Current income tax The tax expense for the year comprises current and deferred tax. Tax is recognised in in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. The current income tax is calculated on the basis of the tax laws enacted or substantively enacted at the reporting date in the country in which the Company and its subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. If applicable tax regulation is subject to interpretation, it establishes a provision where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax Deferred income tax is recognised using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of transaction affects neither accounting, nor taxable profit or loss. Deferred income tax is determined using tax rates and laws that have been enacted or substantively enacted by the reporting date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. 13

15 4. Significant accounting policies (continued) Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except for deferred income tax liability where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Value-added tax Value added t accrual basis when invoices are issued to customers. VAT incurred on purchases may be offset, subject to certain restrictions, against VAT related to revenues, or can be reclaimed in cash from the tax authorities under certain circumstances. Management periodically reviews the recoverability of VAT receivables and believes the amount reflected in the consolidated financial statements is fully recoverable within one year (Note 18). Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The CODM, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the CEO. Property and equipment Property and equipment is stated at cost, less accumulated depreciation and impairment, if any. Cost includes all costs directly attributable to bringing the asset to the location and condition for its intended use. Depreciation is recorded on a straight-line basis over the estimated useful life of the asset. The estimated useful lives are as follows: Telecommunications network Buildings and structures Vehicles, office and other equipment 3 to 20 years 7 to 49 years 3 to 7 years Leasehold improvements are depreciated over the shorter of the lease term or the estimated useful lives of the assets. The lease term includes renewals when such renewals are reasonably assured., useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each reporting date. Repair and maintenance costs are expensed as incurred. The cost of major renovations and other subsequent expenditure is included in the carrying amount of the asset 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. 14

16 4. Significant accounting policies (continued) The present value of the expected cost for the decommissioning of an asset after its use is included in the cost of the respective asset. Refer to Significant accounting policies Provisions and Note 22 for further information about the recorded decommissioning provision. At the time of retirement or other disposition of property, or equipment, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is recorded in profit or loss. Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset during the construction phase that necessarily takes a substantial period of time are capitalised as part of property, plant and equipment until the asset is ready for use. All other borrowing costs are expensed in the period they are occured. Borrowing costs consist of interest and other costs that the Group incurs in connection with the borrowing of funds. Leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to profit or loss on a straight-line basis over the period of the lease. Intangible assets Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value as of the date of acquisition. Following initial recognition, intangible assets are carried at cost, less accumulated amortisation and impairment, if any. Intangible assets consist principally of operating licences, frequencies, software, marketing related licences and customer base. The useful lives of intangible assets are assessed as either finite or indefinite. The Group does not have intangible assets with indefinite useful lives, other than goodwill. All intangible assets, except for GSM 900/1800 standard wireless licences (Note 15), are amortised on a straight-line basis over the following estimated useful lives: Operating licences Frequencies Software Marketing related intangible assets Customer base Numbering capacity and other intangible assets 10 years 10 to 12 years 2 to 5 years 4 to 5 years 4 to 19 years 1 to 10 years The Group continues to evaluate the amortisation periods to determine whether events or circumstances warrant revised amortisation periods. Additionally, the Group considers whether the carrying value of such assets should be impaired based on the expected future economic benefits. 15

17 4. Significant accounting policies (continued) Impairment of non-financial assets Assets, including goodwill, that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to depreciation or amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the or CGU carrying amount exceeds its recoverable amount. The recoverable amount is fair value less costs to sell and value in use. The recoverable amount is determined for each individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Impairment losses relating to continuing operations, including impairment on inventories, are recognised in profit or loss in the expense categories which are consistent with the function of the impaired asset. For assets other than goodwill, an assessment is made at each reporting date to determine whether there is an indication that previously recognised impairment losses no longer exist or le amount. A previously recognised impairment loss is reversed only if there has been a change in was recognised. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in profit or loss unless the asset is carried at a revalued amount, in which case the reversal is treated as a revaluation increase. Goodwill impairment reviews are undertaken annually as of 1 October or more frequently if events or changes in circumstances indicate potential impairment. Impairment is determined for goodwill by assessing the recoverable amount of each CGU (or group of CGUs) to which the goodwill relates. When the recoverable amount of the CGU is less than its carrying amount, an impairment is recognised immediately as an expense and is not subsequently reversed. Non-current assets held for sale Non-current assets are classified as assets held for sale and stated at the lower of carrying amount and fair value less costs to sell if their carrying amount is recovered principally through a sale transaction rather than through a continuing use and the sale is considered highly probable. Inventory Inventory, which primarily consists of telephone handsets, portable electronic devices, accessories, USB modems and SIM-cards, is stated at the lower of cost and net realisable value. Cost is determined using the weighted-average cost method. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs necessary to make the sale. 16

18 4. Significant accounting policies (continued) Cash and cash equivalents Cash and cash equivalents comprise cash on hand and deposits in banks with original maturities of three months or less. Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. Treasury shares wn issued equity instruments that are reacquired (treasury shares) are recognised at cost and deducted from equity. No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of the Group between the carrying amount and the consideration, received upon re-issue is recognised in equity, net of tax. Earnings per share of the Group by the weighted-average number of ordinary shares outstanding for the period. Diluted earnings per share are computed by dividing adjusted net profit available to shareholders by the weighted-average number of ordinary shares outstanding during the period increased to include the number of additional ordinary shares that would be issued on the conversion of all the potentially dilutive securities into ordinary shares. Potentially dilutive securities include outstanding stock options and convertible debt instruments. Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and the amount can be reliably estimated. Provisions are not recognised for future operating losses. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. Any increase in the provision due to passage of time is recognised as finance costs. Decommissioning liabilities The Group has certain legal obligations related to rented sites for base stations and masts, which include requirements to restore the real estate upon which the base stations and masts are located. Decommissioning costs are determined by calculating the present value of the expected costs to settle the obligation using estimated cash flows, and are recognised as part of the cost of the particular asset. The cash flows are discounted at the current pre-tax rate that reflects the 17

19 4. Significant accounting policies (continued) risks specific to the decommissioning liability. The unwinding of the discount is expensed in profit or loss as finance costs. The estimated future costs of decommissioning are reviewed annually and adjusted as appropriate. Changes in the estimated future costs or in the discount rate applied are added to or deducted from the cost of the asset. Other long-term employee benefits The Group operates other long-term employee benefits programme (Note 24) which is accounted for in accordance with IAS 19, Employee benefits. These benefits are unfunded. The amount recognised as a liability for other long-term employee benefits is the present value of the defined benefit obligation at the end of the reporting period. To determine the present value of the defined benefit obligation and the related current service cost, the Group attributes the cost of benefits to years of service on a pro-rata basis. Remeasurements of the defined benefit liability are recognised in profit or loss when they occur. Share-based compensation The Group evaluates and records the cost of equity instruments, such as stock options under the CEO long-term incentive plan, in the statement of comprehensive income as compensation expense. The cost of the equity instruments is measured based on the fair value of the instruments determined as of the grant date and recognised over the vesting period, which ends on the date on which the CEO becomes fully entitled to the award (Note 25). Financial instruments Initial recognition and measurement Financial assets and financial liabilities within the scope of IAS 39 are recognised initially at fair value plus transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability, except for a financial asset or financial liability accounted for at fair value through profit or loss, in which case transaction costs are expensed. Subsequent measurement of financial assets and liabilities The subsequent measurement of financial assets and liabilities depends on their classification as described below: Fair value through profit and loss Derivatives, including separated embedded derivatives, are classified as held for trading and accounted for at fair value through profit and loss unless they are designated as effective hedging instruments. Financial assets and liabilities accounted for at fair value through profit and loss are carried in the consolidated statement of financial position at fair value with changes in fair value being recognised in profit or loss. 18

20 4. Significant accounting policies (continued) Loans and receivables (assets) and loans and borrowings (liabilities) Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, loans and receivables and loans and borrowings are subsequently measured at amortised cost using the effective interest method. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The amortisation based on EIR is included in profit or loss. Derecognition of financial assets A financial asset is derecognised when the rights to receive cash flows from the asset have expired; or 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 - (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. Impairment of financial assets A financial asset or a group of financial assets is impaired and impairment losses are incurred if there is objective evidence of impairment as a result of a past event that occurred subsequent to the initial recognition of the asset. The Group assesses at each reporting date whether there is objective evidence that a financial asset or group of assets may be impaired. For assets carried at amortis present value of estimated future cash flows at the original EIR (excluding future expected credit losses that have not yet been incurred). 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. Financial assets 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 write-off is later recovered, the recovery is credited to the relevant costs in profit or loss. Derecognition of financial liabilities A financial liability is derecognised when the obligation under the liability is discharged, cancelled or expires. Fair value of financial instruments The fair value of financial instruments that are traded in active markets at each reporting date is determined by reference to quoted market prices or dealer price quotations, without any deduction for transaction costs. For financial instruments not traded in an active market, the fair value is determined using appropriate valuation techniques, which include u length market transactions; reference to the current fair value of another instrument that is substantially the same; a discounted cash flow analysis or other valuation models. 19

21 4. Significant accounting policies (continued) The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique: Level 1: Level 2: Level 3: quoted (unadjusted) prices in active markets for identical assets or liabilities; other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly; techniques which use inputs that have a significant effect on the recorded fair value that are not based on observable market data. Derivative financial instruments and hedge accounting Derivative financial instruments which include currency and interest rate swaps are initially recognised in the consolidated statement of financial position at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. Fair values are obtained from quoted market prices and discounted cash flow models as appropriate. Derivatives are included within financial assets at fair value through profit or loss when fair value is positive and within financial liabilities at fair value through profit or loss when fair value is negative. Certain derivatives embedded in other financial instruments are treated as separate derivatives when their economic risks and characteristics are not closely related to those of the host contract and the combined instrument is not measured at fair value with changes in fair value recognised in profit or loss. The Group has derivatives which it designated as cash flow hedges and derivatives which it did not designate as hedges (Note 17). At the inception of a hedge relationship, the Group formally designates and documents the hedge relationship to which the Group wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. Such hedges are expected to be highly effective in achieving offsetting changes in cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognised in other comprehensive income. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss. For derivative instruments that are not designated as hedges or do not qualify as hedged transactions, the changes in the fair value are reported in the profit or loss. The Group uses derivatives to manage interest rate and foreign currency risk exposures. The Group does not hold or issue derivatives for trading purposes. In May 2011, the IASB issued IFRS 13, Fair Value Measurement. The new IFRS 13 sets new fair value measurement and disclosure requirements. IFRS 13 is effective for annual periods beginning on or after 1 January The Group chose to early adopt the package of standards from 1 January The adoption of the standards did not have a significant impact on the Group 20

22 5. First-time adoption of IFRS The date of transition to IFRS is 1 January For periods up to and including the year ended 31 December 2012, the Group prepared its financial statements in accordance with accounting principle Accounting policies described in Note 4 were applied when preparing the consolidated financial statements for the year ended 31 December 2012, comparative information and the opening statement of financial position as of the date of transition to IFRS. Disclosed below is a reconciliation from US GAAP to IFRS as well as the elections taken by the Group in its adoption of IFRS. As a first-time adopter of IFRS, the Group applied IFRS 1, First-Time Adoption of International Financial Reporting Standards. The standard contains a number of voluntary and mandatory exemptions from the requirement to retrospectively apply IFRS effective at 31 December The Group has taken the following exemptions: Business combinations The Group has not applied IFRS 3, Business combinations, retrospectively to business combinations occurred before the date of transition to IFRS. As a result, assets recognised and liabilities assumed in past business combinations under US GAAP have remained unchanged at the date of transition. Provisions Decommissioning liabilities The Group has elected to use the IFRS 1 exemption relating to recognition of historical changes in the measurement of decommissioning liabilities and therefore is measuring the decommissioning liabilities in accordance with IFRIC 1, Changes in Existing Decommissioning, Restoration and Similar Liabilities, as of 1 January Had the Group not opted to apply this exemption, then the carrying amounts of the related assets may have been different. Borrowing costs The Group has applied the transitional provisions in IAS 23, Borrowing costs, and capitalises borrowing costs on qualifying assets as of the date of transition, and where the construction was commenced as of and after the date of transition to IFRS. Borrowing costs capitalised under US GAAP prior to the date of transition have not been adjusted. Had the Group not opted to apply this exemption, then the amounts of capitalised interest in property and equipment may have been different. Estimates The estimates as of the transition date are consistent with those made under US GAAP after adjustments made to reflect any differences in accounting policies, except for marketing related licences amortisation methods (Note F below). 21