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 itsintended use. Depreciation is recorded on a straight-line basis over the estimated useful life of the asset.
Depreciation expenses are based on management’s estimates of residual value, the depreciation method used and the useful lives of property and equipment. Estimates may change due to technological developments, competition, changes in market conditions and other factors, and may result in changes in estimated useful lives and depreciation charges. The actual economic lives of long-lived assets may be different from the estimated useful lives. A change in estimated useful lives is accounted for prospectively as a change in accounting estimate.
The estimated useful lives are as follows:
Telecommunications network 3 to 20 years
Buildings and structures 7 to 50 years
Vehicles, office and other equipment 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 certain.
The assets’ residual values, 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.
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. Please refer to Note 3.8 for further information about the provision for decommissioning liabilities.
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.
The Group, jointly with other operators, plans, develops and uses telecommunication networks. The activities are accounted for as joint operations. Accordingly, the Group records its share of the jointly held assets and its share of the jointly incurred expenses.
Finance leases, that is, leases that transfer substantially all the risks and benefits incidental to ownership of the leased item to the Group, are capitalised at the commencement of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognised in finance costs in profit or loss.
A leased asset is depreciated over the lesser of the lease term or the useful life of the asset.
The Group has entered into long-term leases of telecommunication assets. The Group has determined that, based on an evaluation of the terms and conditions of the arrangements, such as the lease term constituting a major part of the economic life of the asset, it obtains all the significant risks and rewards of ownership of these assets. Accordingly, it accounts for the contracts as finance leases.
At the commencement of the lease term the Group recognises finance leases as assets and liabilities at the present value of the minimum lease payments. In determining the present value of the minimum lease payments, assumptions and estimates are made in relation to discount rates, the expected costs for services and taxes to be paid by and reimbursed to the lessor, and long-term inflation forecasts where the lease agreements include provisions to adjust the lease payments for inflation.
Capitalised 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 and equipment until the asset is ready for use. All other borrowing costs are expensed in the period in which they occur. Borrowing costs consist of interest, related foreign exchange differences, and other costs that the Group incurs in connection with the borrowing of funds.
The Group tests long-lived assets, other than goodwill, for impairment when circumstances indicate there may be a potential impairment.
An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of (1) an asset’s fair value less costs to sell and (2) 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 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 have decreased. If such indication exists, the Group estimates the asset’s recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss 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.
Estimating recoverable amounts of assets is based on management’s evaluations, including estimates of applicable market rates, if the market approach is used, or future cash flows, discount rates, terminal growth rates, and assumptions about future market conditions, if the income approach is used.
Property and equipment is as follows:
|Vehicles, office and
|Cost as of|
|1 January 2015||378,167||68,757||26,748||26,242||499,914|
|Acquisitions (Note 5.3)||320||||3||14||337|
|Put into use||53,562||5,583||2,378||(61,523)|||
|31 December 2015||425,162||74,866||28,509||22,539||551,076|
|Acquisitions (Note 5.3)||3||||||||3|
|Put into use||56,980||2,215||2,059||(61,254)|||
|31 December 2016||463,713||76,334||28,179||18,640||586,866|
|Depreciation as of|
|1 January 2015||(228,930)||(25,055)||(21,274)||||(275,259)|
|Charge for the year||(41,226)||(4,636)||(3,094)||||(48,956)|
|31 December 2015||(263,278)||(29,923)||(23,458)||||(316,659)|
|Charge for the year||(44,941)||(4,958)||(2,984)||||(52,883)|
|31 December 2016||(290,945)||(34,458)||(24,308)||||(349,711)|
|Net book value:|
|31 December 2015||161,884||44,943||5,051||22,539||234,417|
|31 December 2016||172,768||41,876||3,871||18,640||237,155|
Included in construction in-progress are advances to suppliers of network equipment of 1,659 and 1,293 as at 31 December 2016 and 2015, respectively.
Assets purchased under certain contracts with deferred payment terms in the amount of 736 (2015: 1,351) are pledged as security for the related liabilities.
The carrying value of buildings and structures held under finance leases at 31 December 2016 was 3,701 (2015: 3,182). Leased assets are pledged as security for the related finance lease liabilities.
Capitalised borrowing costs
Capitalised borrowing costs were 1,755 and 1,499 for the years ended 31 December 2016 and 2015, respectively. The rate used to determine the amount of borrowing costs eligible for capitalisation was 8.8% and 7.0% for the years ended 31 December 2016 and 2015, respectively.
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 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 assetsare amortised on a straight-line basis over the following estimated useful lives:
4G operating licences 20 years
Other operating licences 10 to 20 years
Frequencies 10 to 12 years
Software 2 to 5 years
Customer base 4 to 19 years
Other intangible assets 1 to 10 years
Amortisation expenses are based on management’s judgment as to the amortisation method to be used and its estimates of the useful lives of the intangible assets. Estimates may change due to technological developments, competition, changes in market conditions and other factors, and may result in changes in estimated useful lives and amortisation charges. Critical estimates of useful lives of intangible assets are impacted by estimates of average customer relationship based on churn, remaining licence period and expected developments in technology and markets. The actual economic lives of the assets may be different from the estimated useful lives. A change in estimated useful lives is accounted for prospectively as a change in accounting estimate.
Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. See Note 3.1 for further description of accounting policies for impairment testing of nonfinancial assets.
Intangible assets, other than goodwill, are as follows:
|Cost as of|
|1 January 2015||42,879||19,066||7,088||14,676||3,552||10,819||98,080|
|Acquisitions (Note 5.3)||||||||17||425||16||458|
|31 December 2015||42,879||26,117||7,908||14,322||4,192||8,549||103,967|
|31 December 2016||42,879||28,279||8,535||15,797||4,194||8,023||107,707|
|Amortisation as of|
|1 January 2015||(2,668)||(16,602)||(2,532)||(9,785)||(1,753)||(7,313)||(40,653)|
|Charge for the year||(2,143)||(510)||(906)||(2,480)||(588)||(686)||(7,313)|
|31 December 2015||(4,811)||(17,213)||(3,134)||(10,396)||(2,341)||(4,272)||(42,167)|
|Charge for the year||(2,144)||(652)||(1,430)||(2,395)||(474)||(786)||(7,881)|
|31 December 2016||(6,955)||(17,784)||(4,072)||(11,065)||(2,815)||(3,721)||(46,412)|
|Net book value:|
|31 December 2015||38,068||8,904||4,774||3,926||1,851||4,277||61,800|
|31 December 2016||35,924||10,495||4,463||4,732||1,379||4,302||61,295|
|Weighted-average remaining amortisation period, years||18||14||3||2||4||5||8|
Operating licences and frequencies provide the Group with the exclusive right to utilise certain radio frequency spectrum to provide wireless communication services.
Operating licences primarily consist of
- several 2G licences,
- a nationwide 3G licence,
- a nationwide 4G licence to use 2.5–2.7 GHz spectrum (10x10 MHz band), and
- a nationwide 4G licence to use 2.5–2.7 GHz spectrum (30x30 MHz band).
These licences are integral to the wireless operations of the Group and any inability to extend existing licences on the same or comparable terms could materially affect the Group’s business. While operating licences are issued for a fixed period, renewals of these licences previously had occurred routinely and at nominal cost. The Group believes that there are currently no legal, regulatory, contractual, competitive, economic or other factors that could result in delays in licence renewal, or even an outright refusal to renew.
Nationwide 3G and 4G (10x10 MHz band) licences were obtained by PJSC MegaFon at nominal cost in 2007 and 2012, respectively, but require the Company to meet certain conditions, including capital commitments and coverage requirements (Note 5.7).
In August 2015 MegaFon acquired 900/1,800 MHz band spectrum in the Samara, Astrakhan and Yaroslavl regions and the Chuvash Republic through the purchase of 100% of the shares of JSC SMARTS-Samara, CJSC Astrakhan GSM, CJSC Yaroslavl GSM and CJSC SMARTS-Cheboksary (together “SMARTS”), the subsidiaries of Russian regional mobile operator JSC SMARTS. The Group’s management concluded that the assets and activities of the acquired companies are not capable of being conducted and managed as a business, accordingly the acquisition of SMARTS was accounted for as an acquisition of assets. The purchase price totaled 5,745 at the date of acquisition, consisting of cash consideration of 5,505 and a deferred payment with a fair value of 240 which was paid within six months from the date of acquisition.
In October 2015 the Company successfully bid for 1800 MHz band spectrum in the Republic of Dagestan and the Karachay-Cherkess Republic pursuant to a frequency distribution auction conducted by the Federal Service for Supervision of Communications, Information Technology, and Mass Media of the Russian Federation (“Roskomnadzor”). The total consideration for the spectrum was 1,260.
Goodwill represents the excess of the consideration transferred plus the fair value of any non-controlling interest in the acquired company at the acquisition date over the fair values of the identifiable net assets acquired. Goodwill is not amortised, but tested for impairment at least annually (Note 3.2.3).
After initial recognition, goodwill is measured at cost less any accumulated impairment losses.
The changes in the carrying value of goodwill, net of accumulated impairment losses of nil, for the years ended 31 December 2016 and 2015 are as follows:
|Balance at beginning of year||33,909||32,292|
|Acquisitions (Note 5.3)||40||1,641|
|Goodwill impairment (Note 3.2.3)||(3,400)|||
|Measurement period adjustments||||(24)|
|Balance at end of year||30,549||33,909|
Goodwill is not subject to amortisation and is tested annually for impairment as of 1 October or more frequently whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
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. The Group has allocated goodwill to the following CGUs: 1) integrated telecominucation services group of CGUs, 2) broadband internet CGU and 3) GARS Holding Limited (“GARS”) CGU.
An impairment loss of associated goodwill is recognised for the amount by which the CGU’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of (1) a CGU’s fair value less costs to sell and (2) value in use. The recognised impairment loss is not subsequently reversed.
Estimating recoverable amounts of assets and CGUs is based on management’s evaluations, including determining the appropriate CGUs and estimates of applicable multiples, if the market approach is used, or future cash flows, discount rates, terminal growth rates, and assumptions about future market conditions, if the income approach is used. Allocation of the carrying value of the assets being tested between individual CGUs also requires management’s judgment.
The Group considers the relationship between market capitalisation and its book value, among other factors, when reviewing for indicators of impairment. As of 31 December 2016, the market capitalisation of the Group was not below the book value of its equity.
Goodwill acquired through business combinations has been allocated to related CGUs and groups of CGUs as follows:
|Integrated telecommunication services (group of CGUs)||25,384||25,384|
|Broadband internet CGU||3,567||6,927|
|Total allocated goodwill||30,549||32,311|
|GARS (Note 5.3)||||1,598|
In assessing whether goodwill has been impaired, the carrying values of the CGUs (including goodwill) were compared with their estimated recoverable amounts.
As a result of the annual test, a 3,400 impairment loss has been recognised in respect of goodwill allocated to Broadband internet CGU in 2016, which reflects the rapid decline in returns in the retail broadband segment and revised management forecasts caused by the current challenging economic environment and competitive pressures.
The investment in the Euroset joint venture (Note 3.3) and the net assets of the Company’s own retail network have been allocated to the integrated telecommunication services group of CGUs.
Management has determined that the cash flows of Euroset and the Company’s own retail network should not be considered to be independent of those from the integrated telecommunication services group of CGUs, because of the level of the Company’s control over those retail assets and the extent of their integration with the Company’s other operations.
The recoverable amount of the integrated telecommunication services group of CGUs has been determined based on its fair value less costs to sell (Level 3). The fair value was estimated at 4 times operating income before depreciation and amortization and impairment loss (“Adjusted OIBDA”), a multiple which is at the lower end of the range of Adjusted OIBDA multiples observed in the market for acquisitions of similar businesses. The fair value was then reduced by 5% as an estimate of costs to sell the business.
Management believes that any change in any of these key assumptions which can currently be reasonably anticipated would not cause the aggregate carrying amount of the integrated telecommunication services group of CGUs to exceed the aggregate recoverable amount of this unit.
The recoverable amount of the broadband internet CGU, 11,040 as at 31 December 2016, has been determined by taking the mid-point between the lowest estimate for value arrived at using discounted cash flow (“DCF”) projections and a higher value arrived at based on quotes for peer companies’ shares.
The adjustment upwards of the DCF valuation is intended to reflect implementation of the Group’s strategies in respect of the broadband business and its further integration with the telecommunication services group of CGUs which are not reflected in the DCF projections.
Сash flow projections included the financial budgets approved by senior management covering 2017 and budget projections for a further seven-year period. The extended forecast period has been used for testing to take into account better growth rates expected to occur after the unfavourable economic environment foreseen for the next two years.
The calculation of value in use based on DCF projections for the broadband internet unit is particularly sensitive to the following assumptions: average monthly revenue per user (“ARPU”), discount rates, market share in Moscow, salary growth index and the ratio of capital expenditures (“CAPEX”) to revenues. The key assumptions used in the forecast are as follows:
|Range of (decrease)/growth of ARPU for retail customers during the forecast period by||(1.0%)-0%||1.0%-5.0%|
|Pre-tax discount rate||12.8%||12.8%|
|Market share in Moscow (in terms of retail customer base)||6.4%-6.7%||6.6%-6.9%|
|Annual salary growth rate during the forecast period||4.8%-5.6%||5.9%-8.2%|
|CAPEX/Revenue ratio target in the long-term||10.5%||10.5%|
Revenue growth is projected based on market share dynamics, ARPU growth and other factors.
The discount rate represents the current market assessment of the risks specific to the CGU, taking into consideration the time value of money and individual risks to the underlying assets that have not been incorporated in the cash flow estimates. The discount rate calculation is based on the specific circumstances of the Group and its operating segments and is derived from its weighted average cost of capital (“WACC”). The WACC takes into account both debt and equity. The cost of equity is derived from the expected return on investment by the Group’s investors. The cost of debt is based on the interest-bearing borrowings the Group is obliged to service. Segment-specific risk is incorporated by applying individual beta factors. The beta factors are evaluated annually based on publicly available market data.
Annual salary growth is projected based on inflation estimates and management’s forecasted employment strategies.
After taking into account all of the factors mentioned above, management concluded that the carrying value of the broadband internet CGU exceeded its recoverable amount. As a result of this analysis, management has recognised an impairment charge of 3,400 in the current year which reduced goodwill carrying amount from 6,967 to 3,567 as at 31 December 2016.
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 Group’s share of the profits and losses of these companies is included in the ‘Share of loss of associates and joint ventures’ line in the accompanying consolidated income statement with a corresponding adjustment to the carrying amount of the investment.
Unrealised gains on transactions between the Group and its associates or joint ventures are eliminated only to the extent of the Group’s interest in the associates or joint ventures. Unrealised losses are also eliminated to the extent of the Group’s interest unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates or joint ventures have been changed where necessary to ensure consistency with the policies adopted by the Group.
For associates and joint ventures accounted for using the equity method, at each reporting date the Group determines whether there is objective evidence that the investment in the associate or joint venture is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between the recoverable amount of the Group’s investment in the associate or joint venture and its carrying value, then recognises its share of the loss as ‘Share of loss of associates and joint ventures’ in profit or loss.
Investments in associates and joint ventures are as follows:
|Investee||% equity interest||31 December|
|LLC Euroset-Retail (Euroset), joint venture||50.000||31,705||34,174|
|JSC Sadovoe Koltso (Garden Ring), joint venture||49.999||13,520||13,529|
|Other investments - associates||9||182|
On 9 October 2015 MegaFon acquired 49.999% of the shares of Glanbury Investments Limited (“Glanbury”), which holds 100% of the shares of JSC Sadovoe Koltso (“Garden Ring”), which owns and operates an office building in the center of Moscow.
Under the transaction, the Group was required to pay approximately $282 million (17,550 at the exchange rate as of the date of acquisition) for its share in Glanbury and loans receivable from Garden Ring transferred from the seller as part of the deal (Note 3.4). By 31 December 2015 the Group had paid $252 million (15,759 at the exchange rates as of the payment dates) to the seller,
including purchase of Garden Ring debt of $63.6 million (3,960 at the exchange rates as of the payment date), and the remaining portion of the consideration was paid in October 2016 together with interest charged at 2.5% per annum.
Simultaneously MegaFon has entered into a joint venture agreement for the operation of the building with Sberbank Investments Limited, a subsidiary of PJSC Sberbank (“Sberbank”), which owns another 49.999% in Glanbury, and with Woodsworth Investments Limited, an independent real estate developer, which owns the remaining 0.002% in Glanbury.
MegaFon has signed a ten-year lease agreement with Garden Ring for a part of the building. This building will become the new corporate headquarters of the Group, permitting the consolidation of the Group’s operations in Moscow into a single location. See Note 5.7 for the applicable lease commitments. The remaining part of the building is mostly leased by Sberbank.
The Garden Ring joint venture is accounted for using the equity method in the consolidated financial statements.
The reconciliation of summarised financial information of Garden Ring to the carrying amount of the Group’s interest in the joint venture is presented below:
|Cash and cash equivalents||1,227||1,630|
|Other current assets||98||770|
|Non-current financial liabilities||(24,761)||(22,350)|
|Other non-current liabilities||(5,882)||(5,714)|
|Current financial liabilities||(737)||(4,437)|
|Total identifiable net assets||19,176||19,194|
|The Groups share in the joint venture||49.999%||49.999%|
|The Groups share of identifiable net assets||9,588||9,597|
|Excess of the consideration transferred over the Groups share in the fair value of identifiable net assets||3,932||3,932|
|Carrying amount of the Groups interest||13,520||13,529|
The composition of the Group’s share of profit/(loss) of the joint venture accounted for using the equity method is as follows:
|Year ended 31 December|
|Profit/(loss) and total comprehensive income/(loss) of Garden Ring||353||(65)|
|Amortisation of the Groups purchase price allocation adjustments and application of the Groups accounting policies||(372)||(57)|
|Loss and total comprehensive loss of the joint venture||(19)||(122)|
|The Groups share in the joint venture||49.999%||49.999%|
|The Groups share of the loss and total comprehensive loss of Garden Ring||(9)||(61)|
Euroset is a retail chain, whose primary activities are sales of mobile phones, audio devices, other portable gadgets and accessories, and provision of customer subscription and payment collection services for major telecommunication operators in Russia.
The Euroset joint venture is accounted for using the equity method in the consolidated financial statements. The primary reason for the investment in Euroset was to realise benefits from synergies related to a reduction of subscriber acquisition costs of the Group due to implementation of a revenue sharing model, procurement savings and the opportunity for prominent marketing of MegaFon services in Euroset outlets (Note 3.2.3).
The reconciliation of the summarised financial information of Euroset to the carrying amount of the Group’s interest in the joint venture is presented below:
|Cash and cash equivalents||10,999||8,363|
|Other current assets||16,818||18,733|
|Non-current financial liabilities||(5,470)||(1,340)|
|Other non-current liabilities||(4,549)||(5,365)|
|Current financial liabilities||(3,951)||(8,690)|
|Other current liabilities||(21,340)||(18,352)|
|Total identifiable net assets||23,381||28,319|
|The Groups share in the joint venture||50%||50%|
|The Groups share of identifiable net assets||11,691||14,160|
|Excess of the consideration transferred over the Groups share in the fair value of identifiable net assets||20,014||20,014|
|Carrying amount of the Groups interest||31,705||34,174|
The composition of the Group’s share of the profit/(loss) of the joint venture accounted for using the equity method is as follows:
|Year ended 31 December|
|(Loss)/profit of Euroset||(1,663)||1,481|
|Amortisation of the Groups purchase price allocation adjustments and application of the Groups accounting policies||(3,272)||(2,604)|
|Loss of the joint venture||(4,935)||(1,123)|
|Other comprehensive loss of Euroset||(3)||(54)|
|Total comprehensive loss of the joint venture||(4,938)||(1,177)|
|The Groups share in the joint venture||50%||50%|
|The Groups share of the loss and total comprehensive loss of Euroset||(2,469)||(588)|
Total summarised profit and loss information of Garden Ring and Euroset is as follows:
|Year ended 31 December|
|Depreciation and amortisation||(5,953)||(4,979)|
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 or loss. Derivatives, including separated embedded derivatives, are classified as held for trading and accounted for at fair value through profit or loss unless they are designated as effective hedging instruments.
Financial assets and liabilities accounted for at fair value through profit or loss are carried in the consolidated statement of financial position at fair value with changes in fair value being recognised in profit or loss, in the ‘foreign exchange gain/(loss)’, ‘finance costs’ or ‘gain/(loss) on financial instruments’ lines, depending on the nature of the changes.
· 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 rate (“EIR”) 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.
De-recognition of financial assets
A financial asset is de-recognised 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 party under a ‘pass-through’ arrangement; and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
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 an 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 amortised cost, the impairment loss is the difference between the asset’s carrying amount and the 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.
De-recognition of financial liabilities
A financial liability is de-recognised when the obligation under the liability is discharged, cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the de-recognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised within profit or loss.
Financial assets are as follows:
|Trade and other receivables (Note 3.5)||19,352||21,156|
|Other financial assets:|
|Financial assets at fair value through profit or loss:|
|Cross-currency swap not designated as hedge||||1,456|
|Total financial assets at fair value through profit or loss||||1,456|
|Financial assets at fair value through OCI:|
|Cross-currency swap designated as cash flow hedge||435||1,903|
|Total financial assets at fair value through OCI||435||1,903|
|Loans and receivables at amortised cost:|
|Short-term bank deposits in Rubles||||12|
|Short-term bank deposits in US dollars||5,095||20,224|
|Loans receivable from Garden Ring (Notes 3.3, 5.2) and Strafor||7,340||4,061|
|Total loans and receivables at amortised cost||15,206||27,716|
|Total other financial assets||15,641||31,075|
|Other current financial assets||(10,842)||(26,973)|
|Other non-current financial assets||4,799||4,102|
|Total financial assets||34,993||52,231|
|Total current financial assets||(30,194)||(48,129)|
|Total non-current financial assets||4,799||4,102|
Other deposits consist of cash advances received under certain contracts with customers and held in Company bank accounts as well as cash reserved for deferred and contingent consideration settlements under the sale and purchase agreement with the sellers of GARS (Note 5.3).
In February 2016 the Group granted Strafor Commercial Ltd (“Strafor”) a loan in the amount of $43.8 million (2,657 at the exchange rate as of 31 December 2016). The loan is repayable in February 2018 with interest at 7% paid annually. The loan was granted after performance of all necessary credit checks and satisfactory assessment of refinancing risks. The loan is secured by a pledge of 50% of the shares of Strafor and 50% of the shares of North Financial Overseas Corp., both companies being related to the Svyaznoy group, a telecommunications retailer in Russia, and was granted in the context of the Group’s long term relations with the retailer. In February 2017 Strafor made an early repayment of $15 million (910 at the exchange rate as of 31 December 2016) out of the loan due in February 2018, together with interest.
Financial liabilities are as follows:
|Trade and other payables||43,581||45,961|
|Financial liabilities at amortised cost:|
|Loans and borrowings:|
|Bank loans and borrowings||179,115||182,107|
|Total loans and borrowings||235,113||219,680|
|Total current loans and borrowings||(39,389)||(47,037)|
|Total non-current loans and borrowings||195,724||172,643|
|Other financial liabilities at amortised cost:|
|Finance lease obligations (Notes 3.1, 5.7)||4,173||3,504|
|Deferred and contingent consideration (Notes 3.3, 5.3)||284||3,209|
|Long-term accounts payable||335||1,048|
|Due to employees and related social charges, non-current||||109|
|Total financial liabilities at amortised cost||239,905||227,550|
|Other financial liabilities at fair value:|
|Financial liabilities at fair value through profit or loss:|
|Сross-currency swap not designated as hedge||||7|
|Total financial liabilities at fair value through profit or loss||||7|
|Financial liabilities at fair value through OCI:|
|Foreign currency forwards and cross-currency swap designated as cash flow hedges||5,399||15|
|Interest rate swaps designated as cash flow hedges||||41|
|Total financial liabilities at fair value through OCI||5,399||56|
|Total other financial liabilities||10,191||7,933|
|Other current financial liabilities||(3,538)||(2,900)|
|Other non-current financial liabilities||6,653||5,033|
|Total financial liabilities||288,885||273,574|
|Total current financial liabilities||(86,508)||(95,898)|
|Total non-current financial liabilities||202,377||177,676|
GARS earn-out settlement
In May 2016 the Group paid $5 million (325 at the exchange rate as of the payment date) previously being held in escrow to the sellers of GARS in full settlement of the contingent consideration payable to such sellers under the GARS sale and purchase agreement based upon operating results (Note 5.3). The final settlement approximated the estimate of the amount which would be paid made at 31 December 2015. The remaining deferred consideration of $4.3 million (261 at the exchange rate as of 31 December 2016) is due to be paid in September 2017.
Cash and cash equivalents comprise cash on hand and deposits in banks with original maturities of three months or less.
Cash and cash equivalents are as follows:
|Cash at bank and on hand in|
|Short-term bank deposits in|
|Total cash and cash equivalents||31,922||17,449|
Principal amounts outstanding under loans and borrowings are as follows:
|Interest Rate||Maturity||31 December|
|Bank loans and borrowings:|
|Ruble loans fixed rates||7.39%-11.82%||2017-2023||127,203||96,893|
|US dollar loans floating rates||LIBOR+0.955%-LIBOR+4.2%||2017||38,661||68,745|
|US dollar loans fixed rates||1.92%-2.29%||2017-2022||7,347||14,047|
|Euro loans floating rates||EURIBOR+0.56%- EURIBOR+2.05%||2017-2024||8,103||3,433|
|Total bank loans and borrowings||181,314||183,118|
|Ruble bonds||8.00%-11.40%||2019-2026 with a
In July 2016 the Group negotiated the extension of the tenor of two ruble loans. The maturity date for a 29,500 loan, previously payable in 2018, has been extended to 2022, and the maturity date for a 37,700 loan has been extended to 2023 from 2020.
Also in July 2016 the Group signed a new credit facility agreement for the total amount of up to 30,000 maturing in 2022, which has subsequently been fully drawn.
On 12 April 2016 and 11 October 2016 the Group re-purchased 1,636,213 and 114,424, respectively, Series 05 Ruble denominated bonds at their nominal value of 1,000 Rubles under a mandatory put options exercisable by the bond holders following coupon rate resets on 23 March 2016 and on 21 September 2016, respectively.
The Group initially issued 10,000,000 Series 05 Ruble denominated bonds in October 2012. In October 2014 the Group re-purchased 8,249,296 Series 05 Ruble denominated bonds at their nominal value of 1,000 Rubles pursuant to a mandatory put option following a coupon rate reset on 24 September 2014.
The re-purchased bonds are kept in treasury and may be further placed in the market should the Group decide to do so. The remaining 67 Series 05 Ruble denominated bonds will continue trading in the market with a coupon rate of 0.1% per annum for a period of six months, after which the rate will be subject to further reset and the bonds will be subject to a further put option.
On 12 May 2016, the Group placed its Series BO-001P-01 Ruble denominated exchange bonds, in an aggregate principal amount of 10,000. The bonds have a term of 3 years following placement. The coupon rate was set at 9.95% per annum, payable semi-annually.
On 10 June 2016, the Group placed its Series BO-001P-02 Ruble denominated exchange bonds, in an aggregate principal amount of 10,000. The bonds have a term of 10 years following placement with two call options exercisable by the Group on the fifth and seventh anniversary of the placement date. The coupon rate was set at 9.90% per annum for the first five years after the placement. The coupon rate for the two years after the first call option will be determined based upon the two-year Russian government bonds (“OFZ”) yield plus 100 basis points. The coupon rate for the three years after the second call option will be determined based upon the three-year OFZ yield plus 100 basis points. The coupon will be paid quarterly.
Proceeds from the bonds are being used for general corporate purposes.
The majority of the Company’s financing facilities contain restrictive covenants, which, among other things, with certain permitted exceptions, limit the Group’s ability to incur debt, encumber or dispose of assets, undertake mergers and acquisitions, lend to unrelated parties and make material changes in the nature of the business without prior consent from the required majority of lenders. In addition, these financing facilities require the Group to meet various financial covenants.
Derivative financial instruments, which include foreign currency forwards, cross-currency swaps 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 re-measured at their fair value. Fair values are obtained from quoted market prices and DCF 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 being 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. 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 OCI. 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.
The Group had the following outstanding interest rate swaps, cross-currency swaps and foreign currency forwards stated at their notional amounts:
|31 December 2016||31 December 2015|
|Foreign currency forwards:|
|designated as cash flow hedges||US Dollar||466||28,266|||||
|Total foreign currency forwards||28,266|||
|designated as cash flow hedge||US Dollar||15||910||46||3,353|
|not designated as cash flow hedges||US Dollar||||225||16,399|
|Total cross-currency swaps||910||19,752|
|Interest rate swaps:|
|designated as cash flow hedge||US Dollar||||||217||15,816|
|Total interest rate swaps||||15,816|
Foreign currency forwards designated as cash flow hedges
During the year ended 31 December 2016 the Group entered into a number of US dollar forward purchase agreements that limit the exposure from changes in US dollar exchange rates on certain long-term debts. The forwards have been designated and qualified as cash flow hedges of foreign currency risk. There has been no ineffective portion in the reporting period. The hedges are expected to affect consolidated income statement within the next eighteen months from 31 December 2016.
Cross-currency swap designated as a cash flow hedge
At 31 December 2016 the Group had a fixed-to-fixed rate cross-currency swap agreement in place that limits the exposure from changes in US dollar exchange rates on certain long-term debt. The swap has been designated and qualified as a cash flow hedge of foreign currency risk. There has been no ineffective portion in the reporting period. The hedge is expected to be settled and affect consolidated income statement in February 2017.
Cash flow hedges of interest rate risk
During the year ended 31 December 2016 the Group settled all of its interest rate swaps that limited the exposure from changes in interest rates on certain floating rate debt.
The table below presents the effect of the Group’s derivative financial instruments designated as cash flow hedges on the consolidated income statement and consolidated statement of other comprehensive income for the years ended 31 December:
|Foreign currency forwards:|
|Amount of loss recognised in cash flow hedge reserve||(5,887)|||
|Amount of loss reclassified from accumulated cash flow hedge reserve into foreign exchange loss, net||3,736|||
|Deferred tax on movements in OCI||430|||
|Amount of (loss)/gain recognised in cash flow hedge reserve||(316)||825|
|Amount of loss/(gain) reclassified from accumulated cash flow hedge reserve into foreign exchange loss, net||245||(1,067)|
|Amount of loss reclassified from accumulated cash flow hedge reserve into finance costs||28||58|
|Deferred tax on movements in OCI||9||37|
|Interest rate swaps:|
|Amount of gain/(loss) recognised in cash flow hedge reserve||3||(35)|
|Amount of (gain)/loss reclassified from accumulated cash flow hedge reserve into finance costs||(170)||216|
|Deferred tax on movements in OCI||33||(36)|
|Total in OCI||(1,889)||(2)|
Derivatives not designated as hedging instruments
During the year the Group settled two cross-currency swaps as well as entered into and settled a number of foreign currency forwards that had not been designated as hedging instruments.
Gains and losses on other financial intruments are recognised in profit or loss as follows:
|Change in fair value of financial instruments measured through profit or loss:|
|Cross-currency swaps not designated as hedges||(159)||1,502|
|Foreign-currency forwards not designated as hedges||(76)|||
|Total (loss)/gain on financial instruments, net||(235)||1,502|
The fair value of financial instruments recorded in the consolidated statement of financial position and/or disclosed in the notes 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 using recent arm’s length market transactions, reference to the current fair value of another instrument that is substantially the same, a DCF analysis, or other valuation models.
The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values. The judgments include considerations of inputs such as liquidity risk, credit risk and volatility. Changes in assumptions about these factors could affect the reported fair value of financial instruments.
The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:
Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities;
Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly;
Level 3: techniques which use inputs that have a significant effect on the recorded fair
value that are not based on observable market data.
Set out below is a comparison by class of the carrying amounts and fair values of the Group’s financial instruments that are carried in the consolidated financial statements:
|Carrying amount||Fair value|
|31 December||31 December|
|Financial assets at fair value through profit or loss:|
|Cross-currency swaps not designated as hedges||Level 2||||1,456||||1,456|
|Financial assets at fair value through OCI:|
|Cross-currency swap designated as cash flow hedge||Level 2||435||1,903||435||1,903|
|Loans and receivables at amortised cost:|
|Short-term bank deposits||Level 2||5,095||20,236||5,095||20,236|
|Loans receivable from Garden Ring (Note 3.3, 5.2) and Strafor||Level 2||7,340||4,061||7,340||4,061|
|Other deposits||Level 2||2,771||3,419||2,534||3,178|
|Total financial assets||15,641||31,075||15,404||30,834|
|Financial liabilities at amortised cost:|
|Loans and borrowings||Level 2||179,115||182,107||186,775||185,841|
|Ruble bonds||Level 1||55,998||37,573||55,411||35,696|
|Deferred and contingent consideration||Level 3||284||3,209||284||3,209|
|Finance lease obligations||Level 3||4,173||3,504||4,173||3,504|
|Long-term accounts payable||Level 3||335||1,048||384||1,200|
|Financial liabilities at fair value through profit or loss:|
|Cross-currency swap not designated as hedge||Level 2||||7||||7|
|Financial liabilities at fair value through OCI:|
|Interest-rate swaps designated as cash flow hedges||Level 2||||41||||41|
|Foreign currency forwards and cross-currency swap designated as cash flow hedges||Level 2||5,399||15||5,399||15|
|Due to employees and related social charges, non-current||Level 3||||109||||109|
|Total financial liabilities||245,304||227,613||252,426||229,622|
Management has determined that cash, short-term deposits, trade receivables, trade payables, bank overdrafts and other current liabilities approximate their carrying amounts largely due to the short-term maturities of these instruments.
The Group, using available market information and appropriate valuation methodologies, where they exist, has determined the estimated fair values of its financial instruments. However, judgment is necessarily required to interpret market data to determine the estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Group could realise in a current market exchange.
The GARS escrow account (included in ‘Other deposits’ in the “Fair values” table above) holds cash reserved for deferred and contingent consideration settlements under the sale and purchase agreement with the sellers of GARS (Note 5.3). The fair value of the account approximates its carrying value.
The fair value of loans receivable from Garden Ring and Strafor approximates their carrying value.
The fair value of the Group’s other deposits relating to cash received under certain contracts with customers is determined by using a DCF method using a discount rate that reflects the bank deposit rates the Group would get in the market as at the end of the reporting period.
The fair values of the Group’s loans and borrowings and other liabilities carried at amortised cost, except for market quoted bonds, are determined by using a DCF method using a discount rate that reflects the issuer’s borrowing rate as at the end of the reporting period. The own nonperformance risk as at 31 December 2016 and 2015 was assessed to be insignificant.
The Group, in connection with its current activities, is exposed to various financial risks, such as foreign currency risks, interest rate risks and credit risks. The Group manages these risks and monitors their exposure on a regular basis (Note 5.4).
The fair values of foreign currency forwards, cross-currency swaps and interest rate swaps are based on a forward yield curve and represent the estimated amount the Group would receive or pay to terminate these agreements at the reporting date, taking into account foreign exchange spot and forward rates, current interest rates, creditworthiness, nonperformance risk, and liquidity risks associated with current market conditions.
The following tables summarise the valuation of financial assets and liabilities measured at fair value on a recurring basis by the fair value hierarchy:
|31 December 2016|
|Total as of 31 December 2016||435||435||(5,393)||(6)||(5,399)|
|31 December 2015|
|Total as of 31 December 2015||3,359||3,359||||(63)||(63)|
During the years ended 31 December 2016 and 31 December 2015 there were no transfers between levels of the fair value hierarchy.
The ageing analysis of trade and other receivables that are not impaired is as follows:
|Neither past due nor impaired||16,539||17,675|
|Past due but not impaired:|
|Less than 30 days||1,093||2,159|
|30 - 90 days||1,217||1,037|
|More than 90 days||503||285|
|Total trade and other receivables||19,352||21,156|
The following table summarises the changes in the impairment allowance for trade and other receivables for the years ended 31 December:
|Balance at beginning of year||2,217||1,522|
|Change in the impairment allowance||2,038||1,643|
|Accounts receivable written off||(1,477)||(948)|
|Balance at end of year||2,778||2,217|
Inventory, which primarily consists of telephone handsets, portable electronic devices, accessories and USB modems, 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.
The amount of inventory write-down to net realisable value and other inventory losses recognised in ‘Cost of revenue’ line in the consolidated income statement for the year ended 31 December 2016 is 1,652 (2015: 2,004).
Value added tax (“VAT”) related to revenues is generally payable to the tax authorities on an 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.
Current non-financial assets are as follows:
|Prepayments for services||2,373||3,994|
|Prepaid taxes, other than income tax||172||163|
|Prepayments for inventory||221||39|
|Total current non-financial assets||5,051||6,649|
Non-current non-financial assets are as follows:
|Deferred costs, non-current||2,560||2,441|
|Total non-current non-financial assets||3,039||2,894|
Current non-financial liabilities are as follows:
|Advances from customers||12,044||12,809|
|Current portion of deferred revenue||1,425||1,677|
|Taxes payable, other than income tax||1,475||1,542|
|Other current liabilities||36||57|
|Total current non-financial liabilities||18,186||20,567|
Non-current non-financial liabilities are as follows:
|Other non-current liabilities||91||58|
|Total non-current non-financial liabilities||2,605||2,435|
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.
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 upon their being decommissioned. 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 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 estimated liability resulting from revisions of the estimated future costs or in the discount rate applied are added to or deducted from the cost of the asset, except where a reduction in the provision is greater than the unamortised capitalised cost, in which case the capitalised cost is reduced to nil and the remaining adjustment is recognised in the consolidated income statement.
In determining the fair value of the provision, assumptions and estimates are made in relation to discount rates, the expected cost to dismantle and remove the asset from the site, including long-term inflation forecasts, and the expected timing of those costs.
The following table describes the changes to the decommissioning provision for the years ended 31 December:
|Balance at beginning of year||4,603||4,958|
|Revisions in estimated cash flows||(1,288)||(1,097)|
|Unwinding of discount||483||602|
|Balance at end of year||3,888||4,603|
Revisions in estimated cash flows during the years ended 31 December 2016 and 2015 in the table above mainly relate to a decrease in expected decommissioning costs per item, which reduced buildings and structures cost in property and equipment (Note 3.1) by 330 (2015: 314) anddepreciation expense in profit or loss by 958 (2015: 783).