• 1. THE ORGANISATION AND ITS OPERATIONS

    Public Joint Stock company "National Joint Stock company "Naftogaz of Ukraine" ("Naftogaz of Ukraine", the "Parent" or the "company") was founded in 1998 in accordance with the Resolution of the Cabinet of Ministers of Ukraine №747 dated 25 May 1998.

    Naftogaz of Ukraine and its subsidiaries (hereinafter collectively referred to as the "group") are beneficially owned by the State of Ukraine. The Government of Ukraine, as represented by the Cabinet of Ministers of Ukraine, controls the company through participation in the shareholders' meetings and the Supervisory Board meetings, as well as through the appointment of the Chairman of the Executive Board and the Executive Board members.

    Naftogaz of Ukraine is a vertically integrated oil and gas company engaged in full cycle of operations in gas and oil field exploration and development, exploratory drilling and production, gas and oil transportation and storage, supply of natural gas and liquefied petroleum gas ("LPG") to customers.

    The company holds stakes in various entities that form the national system of production, refinery, distribution, transportation, and storage of natural gas, condensate, and oil. The company is registered at 6 B. Khmelnytskoho Street, Kyiv, Ukraine.

    The group conducts its business and holds its production facilities mainly in Ukraine. The principal subsidiaries and joint operations are presented as follows:

     The principal subsidiaries and joint operations

    2. OPERATING ENVIRONMENT

    Emerging markets such as Ukraine are subject to different risks than more developed markets, including economic, political and social, legal and legislative risks. Laws and regulations affecting businesses in Ukraine continue to change rapidly, tax and regulatory frameworks are subject to varying interpretations. The future economic direction of Ukraine is heavily influenced by the fiscal and monetary policies adopted by the government, together with developments in the legal, regulatory, and political environment.

    In 2015, the Ukrainian hryvnia continued to devalue against major foreign currencies. The National Bank of Ukraine introduced a range of stabilisation measures aimed at limiting outflow of customer deposits from the banking system, improving liquidity of banks and supporting of the exchange rate of the Ukrainian hryvnia against major foreign currencies.

    In 2015, the economy of Ukraine displayed characteristics of being in recession. Since the end of 2013, Ukraine has been in a political and economic turmoil. As a result of a number of protests, the President was dismissed and newly formed Parliament majority coalition was formed. In February 2014, the new Prime Minister and new Government were appointed. Following the changes in the Government, the company's management had been changed in mid 2014, and new Executive Board was formed.

    Before 1 October 2015, the company was a guaranteed supplier of natural gas in Ukraine to certain groups of customers, and its ability to adjust prices to the end customers, together with increased prices for the imported gas, was limited, since such prices were regulated at each stage from exploration to supplies to end customers by the National Energy and Utilities Regulatory Commission ("NEURC", before 27 August 2014 — National Committee for Energy Regulation, NCRE). The domestic natural gas supply in Ukraine satisfies at about half of the total demand. Consequently, significant level of gas import is required to meet needs of domestic consumption. During 2015 and 2014, there were significant fluctuations in natural gas purchase prices in Ukrainian hryvnia equivalent due to destabilisation of the Ukrainian hryvnia against major foreign currencies.

    Starting from 1 October 2015, the Law of Ukraine "On Natural Gas Market" # 329-VIII dated 9 April 2015 ("the Law") became effective, which has legislatively launched the gas sector reform. The Law, on the one hand, stipulates for the state regulation of the monopoly market (transportation, distribution, storage, and LNG facility services) and, on the other hand, fosters the development of free fair competition in the natural gas commodity market. Thus, starting from 1 October 2015, the wholesale and retail gas markets introduced the principle of market pricing and free choice of gas suppliers, besides the Cabinet of Ministers of Ukraine imposed specific obligations on certain gas market participants.

    The Government and the company are undertaking significant measures on developing the open European natural gas market in fulfilment of the Memorandum on Economic and Financial Policies entered into within the framework of cooperation with the International Monetary Fund, provisions of the Coalition Agreement, the "Ukraine-2020" Sustainable Development Strategy, the company's Corporate Governance Action Plan, as well as the Plan for Implementation of the Gas Sector Reform approved by the Cabinet of Ministers of Ukraine. The implementation of the above measures regarding reforms in the gas market of Ukraine introduces conceptual modifications to the legal foundations and functioning tools of the gas market, certain aspects of financial and business operations of the company and will have a significant impact on the performance of the group as a whole.

    At the same time, the Government of Ukraine continues to control the group's operations through its ownership rights in the company. Such an impact may result in social and economic initiatives that may lead to an adverse effect on the group's operations. Management is unable to predict a potential impact of such initiatives on the group's consolidated financial position and its performance.

    State regulation of gas market in Ukraine

    Before 1 October 2015, state regulation of gas market in Ukraine was performed by the Cabinet of Ministers of Ukraine and the NEURC. State regulation covered both technical and financial aspects of the market functioning. Technical measures related to the effective use of gas resources, ensuring secure technical exploitation of the gas transportation system, maintaining correct and safe supply, distribution, and consumption of natural gas. Financial measures mainly related to tariff and price setting and maintaining the correct financial means for natural gas allocation among market participants.

    The Cabinet of Ministers of Ukraine had to approve annual forecast of gas supply and its distribution.

    NEURC performed regulation of tariffs and prices set at each stage from production to sales of gas, by setting appropriate prices and tariffs and approving procedures of calculating those prices and tariffs. Accordingly, NEURC approved the maximum sales price of natural gas for entities financed from the State and local budgets, the maximum sales price of natural gas for industrial customers and other entities (including heat generating entities, producing heat for households), retail sales prices of natural gas for households, tariffs for transportation services via transmission and distribution pipelines within Ukraine, tariffs for distribution and supply of natural gas under the regulated tariffs, tariffs for storage and pumping services. NEURC approved procedures of setting sales prices for natural gas for natural gas production entities, sales prices for natural gas for households, and setting transportation, distribution and storage tariffs for natural gas. Additionally, NEURC was responsible for protection of the customer rights in the area of tariff setting, security of supplies and quality of services.

    Starting from 1 October 2015, the Law changed model of the gas market to the principles of free, fair competition and ensuring a high level of protection of customer rights and interests.

    At the same time, the Cabinet of Ministers of Ukraine has issued Resolution # 758 dated 1 October 2015 (as amended), imposing public service obligations on the company during the transitional period from 1 October 2015 to 31 March 2017 in respect of gas purchase of domestic production from "Ukrgazvydobyvannya" PJSC and gas supply for the needs of households, heat generating entities and religious organisations.

    The following tariffs and prices were set:

    The following tariffs and prices

    According to the Law of Ukraine "On principles of natural gas market functioning" that was effective prior to 1 October 2015, the total volume of natural gas produced in Ukraine, net of natural gas used for technological purposes and other needs as stipulated by this law, by the entities owned 50% and more by the State, had to be sold for the purposes of the households via the company at regulated prices. If the demand of the households exceeded the domestic production volumes, it was satisfied by imports.

    As described above in this Note, according to the Resolution of the Cabinet of Ministers of Ukraine, starting from 1 October 2015 public service obligations were imposed on the company during the transitional period from 1 October 2015 to 31 March 2017 regarding purchase of gas of domestic production from "Ukrgazvydobyvannya" PJSC and the sale of natural gas for the needs of households, heat generating entities and religious organisations.

    Gas volumes consumed by households are reported via the gas meters. If no meters are available, the sales volume is reported at the average normal consumption rates set by the respective regulations.

    In 2015, households settled their debts on natural gas consumed via special purpose bank accounts. The list of banks creating such accounts is approved by the Cabinet of Ministers of Ukraine. According to that procedure, gas suppliers with public service obligations opened special purpose bank accounts to receive payments for natural gas consumed. Amounts accumulated on the special purpose bank accounts were allocated to current accounts of the transmission system operator, distribution system operators and gas supplier with public service obligations according to ratios calculated by the gas suppliers with specific obligations and approved by NEURC. Balances on the special purpose accounts could not be arrested or blocked.

    Heat generating companies also opened special purpose banks accounts for the settlement of debts for heat supplied. Cash received by heat generating entities on their special purpose bank accounts is then allocated, among others, to current bank accounts of the gas supplier with public service obligations according to ratios approved by NEURC monthly. The special purpose bank accounts of heat generating companies also could not be blocked or arrested.

    Compensation of price difference between sales tariffs and price of imported gas and other types of financial support by the State

    As described above, the company imports significant amount of natural gas to meet the domestic demand. The price of imported gas is significantly higher than the sales tariff set by NEURC and invoiced by the company to certain groups of domestic customers, namely households and heat generating companies. The negative difference had to be compensated by the State to the company, as prescribed by the Resolution of the Cabinet of Ministers of Ukraine No.605 dated 29 April 2006 ("compensation of price difference"). Historically, such compensation of price difference covered 70-75% of the price of imported gas. The timing and legal form of such compensation is not set in the Ukrainian legislation. The actual amount of price difference to be compensated in respective period is approved by the State as an expense in the Law on the State Budget for respective period.

    The company calculated the full amount of price difference accumulated during each year and submitted it to the Government. However, during the reporting periods and up to the date of these consolidated financial statements there were no formalised documents signed by the Government with exact amount of compensation of price difference due to the company. The company recognises income from the compensation actually received on a cash basis.

    The following information summarises the information on the price difference estimated by the company for compensation, and financial support provided by the Government to the company in 2014-2015 (unaudited):

    The following information summarises the information on the price difference estimated by the company

    Estimated price difference was calculated as a difference in fair import prices and NEURC sales tariffs of gas sold to regional gas distribution entities and heat generating companies for selling to households. As described in Note 21, the company has requested the Arbitral Tribunal to render an award in relation to the level of the natural gas import prices for 2010-2015. The price actually paid to JSC "Gazprom" ("Gazprom"), is considered to be higher than the fair price as claimed by the company. Had the company calculated the price difference at amounts actually paid to Gazprom, the estimated price difference for 2015 and 2014 would be UAH 21.476 million and UAH 19.400 million, respectively.

    Effective from 1 October 2015, the mechanism of compensation of losses arising from the difference in prices to the company has changed. In accordance with Para 7, Article 11 of the Law of Ukraine "On Natural Gas Market", a gas market player with public service obligations is eligible for compensation of economically justified expenditures incurred by such player, less any income obtained in the course of fulfilling such obligations plus adequate margin. The level of margin should be calculated following the relevant resolution by the Cabinet of Ministers of Ukraine. As at the date of these consolidated financial statements such resolution has not been adopted. The above information about estimated difference in prices for 2015 does not cover compensation of all economically justified expenditures incurred by the company subsequent to 1 October 2015 and compensation of adequate margin.

    Together with the compensation of price difference, the company obtained financial support from the State in the form of the State treasury bonds received in exchange of new share issue of the company (Note 13). The funds received were aimed to cover the liquidity gap of the company. It could be claimed that the amount of State treasury bonds received by the company in exchange of the new share issue partially covered compensation of the price difference, however, there is no legal support or documents confirming this statement, and there is no reconciliation act or similar document signed between the company and the Government of Ukraine, stating the outstanding amount of compensation of the price difference. As a result, the group's capital structure is not balanced, representing significant amount of share capital and accumulated losses. The State Budget for 2016 does not include State treasury bonds transfer to the company as a contribution to its share capital. As discussed further in this Note, there are a number of measures taken by the Government of Ukraine and the company aiming to gradually bring the retail gas and heating prices to market levels.

    Political instability and military actions in Eastern regions of Ukraine

    In early 2014, Ukraine has suffered from the armed aggression of the Russian Federation resulting in occupation of the Autonomous republic of Crimea ("Crimea") and occupation of the parts of Luhansk and Donetsk regions by terrorist formations armed, controlled, directed and financed by the Russian Federation as well as in the result of an overt intervention of regular military forces of the Russian Federation. Part of the group's assets is located in these regions.

    As a result of these actions, the group has reflected impairment of assets (property, plant and equipment, receivables and inventories) located at occupied territories of Luhansk and Donetsk regions as at 31 December 2015 amounting to UAH 1.645 million, including expenses of UAH 2.142 million included in other operating expense (Note 18) and UAH 497 million reversal of impairment of property, plant and equipment included in other operating income (31 December 2014: UAH 7.203 million, included in other operating expense).

    Following pseudo-referendum on the status of Crimea in March 2014, Crimean occupational authorities announced the nationalisation of the assets of Chornomornaftogaz, the company's subsidiary, located in Crimea. This led to a loss of control of the group over Chornomornaftogaz's assets in Crimea. The group had no access to financial statements, primary documents or any other financial information of Chornomornaftogaz for the period from 1 January 2014 to date of loss of control in 2014. Based on this fact, management of the group decided to account for loss of control based on Chornomornaftogaz's net assets as at 31 December 2013 and reflected respective loss on discontinued operations amounting to UAH 13.786 million in 2014.
    Management continues to pursue available legal and diplomatic routes aiming to recover damages and restore control over the group's assets in the affected regions.

    Going concern

    The excess of current liabilities over current assets as at 31 December 2015 amounted to UAH 6,392 million (31 December 2014: UAH 17,840 million); for the year then ended the group incurred net losses in the amount of UAH 36,323 million (2014: loss of UAH 88,433 million). 

    Management of the group believes that it is appropriate to prepare these consolidated financial statements on a going concern basis as the group and the Government of Ukraine has undertaken several initiatives aimed to improve the financial performance and liquidity of the group, including, but not limited by the following:

    1. Since the beginning of 2014, the Government of Ukraine has undertaken a number of measures aiming to gradually bring the retail gas and heating prices to cost recovery levels based on international gas prices. The Government announced its plans to change energy subsidy system by increasing the direct subsidies to final consumers (mainly households and heat producing entities) and reducing the extent of the price regulation. Successful implementation of these plans would significantly reduce the group's financial deficit in 2015-2016 and completely eliminate it by 2017. As mentioned above in this Note, retail prices for natural gas for households, maximum purchase price of natural gas for industrial customers and tariffs for storage were increased several times in 2014, 2015 and 2016. Additionally, following changes to the legislation in July 2015, the Parliament of Ukraine adopted changes to the current legislation that prohibits setting heat tariffs below the economically justified level. These measures should enhance liquidity and profitability of the heat generating entities, improving their ability to settle debts due to the group.

    2. Following Resolution of Cabinet of Ministers of Ukraine #315 dated 27 April 2016, the provisions of gas market player with public service obligations functioning were changed. According to those changes, starting from 1 May 2016 gas supplier with public service obligations is required to supply gas at prices commensurate with the market for household needs, heat generating entities for resale to households, and religious organisations.

    3. The Government of Ukraine and the group have been undertaking steps to diversify the sources of gas supplies primarily from European companies through gas transmission networks of Slovakia, Poland and Hungary. In addition, the group can reasonably expect that market prices for gas will go down following a substantial reduction of oil prices that occurred in the end of 2014 and onwards.

    4. During 2014 and 2015, the government of Ukraine has provided to the company State treasury bonds amounting to UAH 96.6 billion and UAH 29.7 billion, respectively, in exchange for the new share issue. The bonds received in 2014 and 2015 were sold for cash.

    5. The Parliament also cancelled the moratorium on the forced property sale in respect of entities with the State shareholding of 25 and more per cent, which had not settled their debts to the company and its subsidiary, Gaz Ukraiiny, for gas sold in past periods. This change allows the forced sale of property of such companies in order to settle their gas debts to the company and its subsidiary, Gaz Ukraiiny. The procedure for the forced property sale in such cases shall be approved by the Cabinet of Ministers of Ukraine. The company and its subsidiary, Gaz Ukraiiny, are entitled to claim debt settlements from such customers in the court following cancellation of the respective moratorium from 1 September 2015.

    Management believes that the combination of the above mentioned and other measures from the government of Ukraine will enable the group to continue as a going concern. These consolidated financial statements do not include any adjustments relating to recoverability and classification of the recorded assets amounts, or to the amounts and classification of liabilities that may be necessary if the group is unable to continue as a going concern.

    3. RESTATEMENT OF COMPARATIVE INFORMATION

    The group has issued the consolidated financial statements as at and for the year ended 31 December 2014 on 31 July 2015. Subsequently to that date, the group corrected figures previously reported, which had significant effect on the consolidated statement of financial position as at 31 December 2014. These corrections were made retrospectively in these consolidated financial statements as at and for the year ended 31 December 2014.

    Impact of such misstatements on the consolidated financial position as at 31 December 2013, consolidated statement of profit and loss and consolidated cash flows for the year then ended is not material, so the group does not present comparative information at that date and for respective periods.

    The effect of the retrospective corrections to the consolidated statement of financial position as at 31 December 2014 was as follows:

    The effect of the retrospective corrections to the consolidated statement of financial position

    The effect of the retrospective corrections to the consolidated statement of profit or loss for the year ended 31 December 2014 was as follows:

    The effect of the retrospective corrections to the consolidated statement of profit or loss for the year

    3.1. Consolidation of joint operations

    The group is involved in joint arrangements that were previously accounted for as joint ventures in consolidated financial statements as at and for the year ended 31 December 2014. According to IFRS 11 "Joint Arrangements" (IFRS 11), those joint arrangements have to be treated as joint operations. The group has recalculated the retrospective effect on its consolidated financial position and consolidated statement of profit and loss and consolidated statement of cash flows as at and for the year ended 31 December 2014.

    3.2. Reclassification of equity of Chornomornaftogaz JSC

    The group accounted for loss of control over Chornomornaftogaz's net assets as at 1 January 2014. However, the group did not reclassify revaluation reserve attributable to Chornomornaftogaz to accumulated deficit. The group has corrected this misstatement as at 1 January 2014.

    4. SEGMENT INFORMATION

    The Executive Board is the group's chief operating decision maker. Management has determined the operating segments used for disclosure by the group based on reports reviewed by the Executive Board for assessing the group's financial performance.

    Management assesses the performance of the operating segments based on the amount of net profit (loss) before income tax. Reportable segments are defined by management in accordance with the type of activity as follows:

    • Gas upstream.

    Natural gas production is mainly performed in Poltava, Kharkiv, Sumy, Dnipropetrovsk, Lviv and Zakarpattya regions. Exploration works are mainly performed in Carpathian and Dniprovs'ko-Donetsk regions. The group controls about 70% of all natural gas produced in Ukraine.

    • Oil and gas condensate upstream.

    Oil exploration is performed by "Ukrnafta" PJSC and "Ukrgazvydobyvannya" PJSC. Production of gas condensate is performed in the area of natural gas exploration.

    • Gas transmission and distribution.

    This segment is presented by the gas transmission and distribution pipelines operated by the group. Ukrainian gas transportation system is one of the largest in the world in terms of its transportation capacities. The total length of gas transmission pipelines in Ukraine is 38.5 thousand km. Over 40% of natural gas supplied from the Russian Federation to European countries was transported through Ukrainian transmission gas pipelines in 2015 and 2014.

    • Gas storage.

    Ukrainian gas transportation system includes 11 underground gas storage facilities located in mainland Ukraine. The total capacity of the underground gas storage system located in Ukraine is 31 billion cubic meters of gas.

    • Crude oil transportation.

    This segment is presented by the transmission oil pipelines operated by the group. The total length of oil transmission pipelines in Ukraine is 4.7 thousand km. Segment also includes oil storage, presented by 11 oil reservoirs with total capacity of 1.1 million tonnes of oil.

    • Crude oil and gas condensate refinery and petroleum products trading.

    This segment is presented by 8 oil and gas refineries. The refinery products mainly include gasoline and diesel fuel, and LPG.

    • Gas trading and supply.

    As described in the Note 2 above, the natural gas producers in Ukraine, owned 50% and more by the State, should sell total volume of natural gas produced, net of natural gas used for technological purposes and other needs as stipulated by the law, to the households via the company.

    • Other.

    Revenues of this segment include revenues from sales of chemical products, materials and services. Chemical production is performed by "Ukrnafta" PJSC.

    The accounting policies of the reportable segments are the same as the group's accounting policies described in Note 26.

    Segment information for the reportable business segments of the group for the year ended 31 December 2015 is as follows:

    Segment information for the reportable business segments of the group

    Management considers segments "Gas upstream", "Gas storage", and "Gas trading and supply" as regulated businesses as sales prices and tariffs and purchase prices in those types of business are regulated by the State (as described in Note 2). All other segments are considered as non-regulated businesses as they are fully or their major parts are independent of special price and tariff regulations by the State.

     All other segments are considered as non-regulated businesses as they are fully or their major parts are independent of special price and tariff regulations by the State.

    Segment information for the reportable business segments of the group for the year ended 31 December 2014 is as follows:

    Segment information for the reportable business segments of the group

    External customers concentration, exceeding 10% of total revenues During the years ended 31 December 2015 and 2014, the only external customer with concentration of revenue exceeding 10% of total revenues was Gazprom. Amount of revenue from Gazprom related to gas transmission in 2015 amounted to UAH 40.341 million (2014: UAH 16.831 million).

    Revenues, gross profit and receivables of the segment "Gas transmission and distribution" by main types of transportation services are as follows:

    Revenues, gross profit and receivables of the segment "Gas transmission and distribution" by main types of transportation services

    Revenues, gross (loss)/profit and accounts receivable of gas trading and supply segment by main groups of customers are as follows:

    Revenues, gross (loss)/profit and accounts receivable of gas trading and supply segment by main groups of customers

    Main selling prices and tariffs for the group"s sales of natural gas are set out in Note 2.

    Geographical information

    Geographical information

    Allocation of sales in the table above is made based on the country of residence of the group's customers.

    5. BALANCES AND TRANSACTIONS WITH RELATED PARTIES

    Parties are generally considered to be related if one party has the ability to control the other party, is under common control, or can exercise significant influence or joint control over the other party in making financial and operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form.

    As discussed in the Note 1, the group is ultimately controlled by the Government of Ukraine, and therefore, all state-controlled entities are considered as related parties under common control.

    Transactions with related parties are performed on terms that would not necessarily be available to unrelated parties.

    Transactions with state-controlled entities. The group performs significant transactions with the entities controlled, jointly controlled or significantly influenced by the government of Ukraine.

    These entities include State Savings Bank of Ukraine, Ukreximbank, heat generating entities and regional gas distribution entities.

    For the year ended 31 December 2015, about 25% of group's revenue (2014: 25%) were earned from transactions with the entities controlled, jointly controlled or influenced by the government of Ukraine. Outstanding trade accounts receivable related to these transactions as at 31 December 2015 and 2014 are about 30% and 27%, respectively, of the total trade accounts receivable balance.

    As at 31 December 2015 and 2014, about 90% and 65%, respectively, of cash and bank balances were placed in the banks controlled, jointly controlled or influenced by the Government of Ukraine and about 50% of borrowings were provided by these banks. About 35% of finance costs for the years ended 31 December 2015 and 2014 relate to borrowings from these banks.
    Amount of guarantees, provided by the government of Ukraine, as at 31 December 2015 and 2014 equaled to UAH 20.539 million and UAH 11.611 million, respectively (Note 14).

    In June 2015, the group concluded supplementary agreements for the amount of UAH 18.387 million, to borrowings agreements with the bank, which is its related party, that envisaged the increase in interest rates and revised repayment schedules of debt, with the postpone of final maturities until June 2020.

    Transactions with the State are further disclosed in Note 13.

    Key management remuneration. During 2015, key management personnel consisted on average of 4 Executive Board members (2014: 8 Executive Board members). Compensation to the key management personnel included into other operating expense consists of salary and additional current bonuses and comprises UAH 6 million for the year ended 31 December 2015 (2014: UAH 6 million). As at 31 December 2015, key management personnel consisted of 4 Executive Board members (2014: 5 Executive Board members).

    6. PROPERTY, PLANT AND EQUIPMENT

    Movements in the carrying amount of property, plant and equipment were as follows:

    Movements in the carrying amount of property, plant and equipment

    The group engaged independent appraisers to determine the fair value of its property, plant and equipment as at 31 December 2015. Fair value was determined with reference to depreciated replacement cost or market-based evidence, in accordance with International Valuation Standards.

    Taking into account the nature of the group's property, plant and equipment, fair value was determined using depreciated replacement cost for specialised assets, and using market-based evidence for non-specialised assets. Consequently, the fair value of main producing properties and equipment was primarily determined using depreciated replacement cost. This method considers the cost to reproduce or replace the property, plant and equipment, adjusted for physical, functional or economic depreciation, and obsolescence. The depreciated replacement cost was estimated based on internal sources and analysis of available market information for similar property, plant and equipment (published information, catalogues, statistical data etc), and industry experts and suppliers.

    As at 31 December 2015 gas producing licenses with carrying amount of UAH 335 million are included in oil and gas producing properties (31 December 2014: UAH 343 million).

    In 2015, the depreciation expense of UAH 19.735 million (2014: UAH 5.174 million) was included in cost of sales, UAH 479 million (2014: UAH 99 million) in other operating expense, and UAH 357 million (2014: UAH 423 million) were capitalised in the cost of property, plant and equipment.

    Reversal of impairment of property, plant and equipment is included in other operating income in consolidated statement of profit or loss.

    As at 31 December 2015 and 2014, the group has pledged its property, plant and equipment with carrying amount of UAH 24.003 million and UAH 15.689 million, respectively, to secure its borrowings (Note 14).

    Included in property, plant and equipment are capital expenditures of UAH 473 million, for which nature of expenditures could be different from their legal form according to primary documents (Note 26). These expenditures were presented on the basis of the relevant primary documents in the consolidated financial statements as at and for the year ended 31 December 2015. In respect of certain expenditures primary documents were withdrawn by the state prosecutor officials. In respect of certain expenditures management of the group has initiated a corporate investigation in 2016.

    Had the group's property, plant and equipment been measured on a historical cost basis, their carrying amount would have been as shown in the table below (unaudited):

    Had the group"s property, plant and equipment been measured on a historical cost basis, their carrying amount would have been as shown in the table below

    7.INVESTMENTS IN ASSOCIATES AND JOINT VENTURES

    The group's investments in associates and joint ventures were as follows:

    The group"s investments in associates and joint ventures

    Details of each of the group's associates and joint ventures as 31 December 2015 are as follows:

    Details of each of the group"s associates and joint ventures as 31 December 2015

    Details of each of the group's associates and joint ventures as 31 December 2014 are as follows:

    Details of each of the group"s associates and joint ventures as 31 December 2014

    All of the above associates are accounted for using the equity method in these consolidated financial statements.

    "Ukrnafta" PJSC

    As discussed further in Note 22, the investment in "Ukrnafta" PJSC was transferred from investment in associates to investments in subsidiary starting from 22 July 2015. Until that date, the investment in "Ukrnafta" PJSC was accounted for using the equity method in these consolidated financial statements.

    Summarised financial information for "Ukrnafta" PJSC as at 22 July 2015 is presented in Note 22.

    8. OTHER NON-CURRENT ASSETS

    OTHER NON-CURRENT ASSETS

    Accounts receivable on product sharing agreement.

    The company entered into a concession agreement for oil exploration and development with the Arab Republic of Egypt and Egyptian General Petroleum Corporation ("EGPC") on 13 December 2006. Under the terms of the concession agreement the company have the right to recover all exploration and development costs incurred in connection with the concession agreement (Note 26). The amount presented in the table above represents such costs claimed by the group for recovery, and which are expected to be refunded after one year since the reporting date.

    As at 31 December 2015 and 2014, included in other non-current assets are research and development expenditures amounting to UAH 906 million and UAH 525 million, respectively, that were incurred within the concession agreement for oil exploration and development with the EGPC on 13 December 2006, but not yet claimed for recovery (Note 26).

    Restructured accounts receivable of gas consumers.

    In May 2011, the Law of Ukraine "On certain matters on indebtedness for natural gas and electricity consumed" #3319-VI was approved. According to this Law, accounts receivable due from entities supplying natural gas under the regulated tariff that were originated in 2010, were restructured for the period from 1 to 20 years and are stated at amortised cost using effective interest rate which at the restructuring dates varied from 15% to 24% per annum.

    During the year ended 31 December 2015 the group recognised additional provision in respect of restructured accounts receivable of gas customers in the amount of UAH 102 million (2014: additional provision of UAH 95 million).

    Other.

    As at 31 December 2015, included in other non-current assets are gas volumes that will be pumped out from the underground gas storages during the period of more than one year. In 2015, the group has re-assessed downwards its need for cushion gas volumes in certain underground gas storages. Due to technical incapability to immediately pump out these volumes from underground storages, the group decided to make reclassification from property, plant and equipment to other non-current assets amounting to UAH 1.176 million (Note 6).

    9. INVENTORIES

    The group's inventories were as follows:

    The group"s inventorie

    Management estimates the necessity of write-down of inventories to their net realisable value taking into consideration indicators of economical, technical and physical obsolescence. In 2015 write-down adjustment amounted to UAH 4.922 million was included in cost of sales and UAH 2.679 million was included in other operating expense (2014: UAH 8.592 million included in cost of sales and UAH 3.893 million included in other operating expense). Amount included in cost of sales represents write down adjustment to imported gas subsequently sold for household needs at regulated prices.

    As at 31 December 2015 and 2014, inventories with carrying value of UAH 23.104 million and UAH 5.308 million, respectively, were pledged as collateral for borrowings
    (Note 14).

    10. TRADE ACCOUNTS RECEIVABLE

     TRADE ACCOUNTS RECEIVABLE

    Out of total carrying value of trade accounts receivable as at 31 December 2015 there are UAH 15.276 million of accounts receivable for gas supply (31 December 2014: UAH 12.150 million) (Note 4).

    Movements in provision for impairment of trade accounts receivable were as follows:

    Movements in provision for impairment of trade accounts receivable

    Analysis of credit quality of trade accounts receivable is as follows:

    Analysis of credit quality of trade accounts receivable

    11. PREPAYMENTS MADE AND OTHER CURRENT ASSETS

    The group's prepayments made and other current assets were as follows:

    The group"s prepayments made and other current assets

    Movements in provision for impairment of prepayments made and other current assets were as follows:

    Movements in provision for impairment of prepayments made and other current assets

    Movements in provision for impairment of prepayments made and other current assets

    12. CASH AND BANK BALANCES

    CASH AND BANK BALANCES

    Included in term deposits are bank deposits amounting to UAH 2.535 million (2014: UAH 1.221 million) with original maturity of more than three months and less than one year, which are excluded from cash and cash equivalents for the purpose of cash flow statement.

    13. SHARE CAPITAL

    As at 31 December 2015, the registered, issued and fully paid share capital of the company was UAH 164.607 million, comprising 160.450.481 ordinary shares with a par value of UAH 1.000 per share (31 December 2014: UAH 59.997 million, comprising 55.840.905 ordinary shares with a par value of UAH 1.000 per share).

    As at 31 December 2015 and 2014, share capital of the company has been adjusted for the effect of hyperinflation in accordance with IAS 29 "Financial Reporting in Hyperinflationary Economies" by UAH 4.156 million.

    During 2015 the company has completed a new share issue, started in 2014, of UAH 104.610 million to the government of Ukraine in return for the State treasury bonds with maturities in 2018-2024 with nominal coupon rates in a range of 12.5-14.3% per annum.

    Unregistered contributed capital

    In 2015, according to Resolutions of the Cabinet of Ministers of Ukraine, the government issued UAH 29.700 million of the State treasury bonds in exchange to the new share issue of the company. The State treasury bonds mature in 2020 and bear 14.5% coupon rate. As at 31 December 2015 the company has sold these State treasury bonds for cash at price equal to face value or above.

    As at 31 December 2015 new share issue was not registered and presented as unregistered contributed capital.

    Profit share payable to the state budget

    In accordance with the Budget Code of Ukraine and the Law of Ukraine "On Management of State-owned Enterprises", the company, being a state-owned enterprise, has to transfer to the state budget 30% of its net profits. For the year ended 31 December 2015, the obligatory share of profit amount paid to the State Budget amounted to UAH 2.822 million (2014: UAH 156 million).

    Distribution of profits

    Profits available for distribution to the owner in respect of any reporting period are determined by reference to the statutory financial statements prepared in accordance with IFRS or Ukrainian Accounting Standards. Under Ukrainian legislation, dividends are limited to the net profits of the reporting year or any other distributable reserves not exceeding retained earnings as set out in the statutory financial statements.

    During 2015, the group paid dividends amounting to UAH 29 million, taking total amount of mandatory budget contribution of profit share and dividends paid to UAH 2.851 million.

    14. BORROWINGS

    Borrowings of the group were as follows:

    Borrowings of the group

    The effective interest rates and currency denomination of borrowings were as follows:

    The effective interest rates and currency denomination of borrowings

    Pledges

    Total of the group's borrowings were secured as at 31 December 2015 and 2014.

    The group's borrowings were secured by the following pledges:

    The group"s borrowings were secured by the following pledges

    Guarantees.

    As at 31 December 2015, the group's borrowings were guaranteed by the State in the amount of UAH 20.539 million (31 December 2014: UAH 11.611 million).

    15. PROVISIONS

    Movements in provisions for the years were as follows:

    Movements in provisions for the years

    Provisions for litigations

    The group is involved into a number of litigations both as a plaintiff and as a defendant. Provision for litigations represents management assessment of the probable outflow of the group's resources arising from a negative (adverse) outcome of the court and arbitration procedures.

    Employee benefit obligations

    The group companies have certain obligations to its employees, prescribed by the collective agreements. Those benefits include lump sum benefits payable upon retirement and post-retirement benefit programs. Those employee benefits plans are not funded, and there are no plan assets.

    The principal actuarial assumptions used were as follows:

    The principal actuarial assumptions used were

    The sensitivity of the employee benefit obligations to changes in the principal assumptions is as follows:

    The sensitivity of the employee benefit obligations to changes in the principal assumptions

    The sensitivity analysis presented above may not be representative of the actual change in the employee benefit obligations as it is unlikely that the change in assumptions would occur in isolation of one another as some of the assumptions may be correlated.

    Furthermore, in presenting the above sensitivity analysis, the present value of the employee benefit obligations has been calculated using the projected unit credit method at the end of the reporting period, which is the same as that applied in calculating the obligation recognised in the consolidated statement of financial position.

    There were no changes in the methods and assumptions used in preparing the sensitivity analysis from prior years.

    Decommissioning provision

    In accordance with the legislation requirements, the group is obliged to restore the lands that underwent changes in the relief structure, environmental state of soils and parent rocks, as well as hydrological regime due to drilling, geological survey, constructing and other works. The decommissioning provision represents present value of decommissioning costs relating to oil and gas properties.

    The principal assumptions used in determining the decommissioning provision were as follows:

    The principal assumptions used in determining the decommissioning provision

    Other provisions

    As a result of non-payment and late payment by "Ukrnafta" PJSC of subsoil royalty (2014: subsoil tax), income tax, VAT and dividends, the group had accrued provision for possible fines, penalties and late payment interest.

    16. ADVANCES RECEIVED AND OTHER CURRENT LIABILITIES

    The group's advances received and other current liabilities were as follows:

    The group"s advances received and other current liabilities were

    As at 31 December 2015, taxes payable other than income tax include UAH 8.230 million of subsoil royalty payable. Subsoil royalty is calculated with reference to the volume of crude oil, gas condensate or natural gas produced, and volume of crude oil and natural gas transportation.

    As at 31 December 2015, there was no concentration of advances received (31 December 2014: UAH 2.306 million from single customer for natural gas transportation services via main gas pipelines through the territory of Ukraine).

    Dividends payable as at 31 December 2015 represent obligations to non-controlling shareholders of "Ukrnafta" PJSC of UAH 2.805 million.

    17. COST OF SALES

     COST OF SALES

    Subsoil royalty, included in taxes, other than on income, is calculated with reference to the volume of crude oil, gas condensate or natural gas produced, and volume of crude oil and natural gas transportation.

    Included in cost of sales for 2015 are expenses of UAH 745 million, for which their nature could be different from their legal form according to primary documents (Note 26). In respect of certain expenses primary documents were withdrawn by the state prosecutor officials. In respect of certain expenses management of the group has initiated a corporate investigation in 2016.

    Included in cost of sales are expenses incurred on works performed by contractors and inventory used in the amounts of UAH 334 million for the first quarter of 2014. Current management of the group does not have enough evidence to prove the nature of those expenditures, and recognises them as expense when incurred and as was evidenced by the primary documents. In respect of certain expenses criminal proceedings were initiated in 2014, and primary documents were withdrawn by the state prosecutor officials.

     

    18. OTHER OPERATING EXPENSE

    OTHER OPERATING EXPENSE

    During 2015, the group recognised losses incurred on occupied territories are write down on inventories of UAH 1.629 million, VAT written off of UAH 635 million, and reversal of provision for trade accounts receivable, prepayments made and other current assets of UAH 122 million.

    Both losses incurred on occupied territories in Crimea, Luhansk and Donetsk regions were recognised by the group as a result of the armed aggression of the Russian Federation including the occupation of Crimea and military invasion and occupation of Luhansk and Donetsk regions in early 2014 (Note 2).

    Included in research, development and exploration costs are expenditures on geological survey amounting to UAH 160 million for the first quarter of 2014. The group paid respective amounts to the contractors to perform those works and recognised them as expense when incurred and as it was evidenced by the primary documents. In respect of these expenses criminal proceedings were initiated in 2014 and primary documents were withdrawn by the state prosecutor officials.

    Included in other operating expenses are services on oil storate purchased by "Ukrtransnafta" PJSC in amount of UAH 222 million for 2015 and UAH 164 million for 2014. Management of the group believes that these costs are overstated as a result of subsidiary's management override of controls. Subsidiary's management was replaced in the first half of 2015 (Note 26).

     

    19. FINANCE COSTS

    FINANCE COSTS

    Interest expense on payment deferral represents interest on late payment to a gas supplier.

    20. INCOME TAX

    The components of income tax expense for the years ended 31 December were as follows:

    The components of income tax expense for the years ended 31 December

    The group is subject to taxation in Ukraine. In 2015 and 2014 Ukrainian corporate income tax was levied on taxable income less allowable expenses at the rate of 18%.

    Reconciliation between the expected and the actual taxation charge is provided below.

    Reconciliation between the expected and the actual taxation charge is provided below

    In 2015, amendments to the Tax Code of Ukraine (the "Code") came into effect regarding the determination of a corporate income tax payer. In accordance with those amendments, the taxable item shall be determined based on the before tax financial result in accordance with the accounting framework accepted at the entity (for the company, "IFRS") adjusted by the Code defined list of adjustments. The new version of the Code does not contain a full list of temporary differences available in the company before those amendments came into force. Thus, certain temporary differences were reversed.

    Parent and its subsidiaries are separate tax payers and, therefore, the deferred tax assets and liabilities are presented on an individual basis. The deferred tax liabilities and assets reflected in the consolidated statement of financial position after appropriate set off are as follows:

     The deferred tax liabilities and assets reflected in the consolidated statement of financial position after appropriate set of

    Net deferred tax liability as at 31 December 2015 related to the following:

    Net deferred tax liability as at 31 December 2015 related to the following:

    Net deferred tax liability as at 31 December 2014 related to the following:

    Net deferred tax liability as at 31 December 2014 related to the following

    As at 31 December 2015 and 2014, unrecognised deductible temporary differences and unused tax losses are as follows:

    As at 31 December 2015 and 2014, unrecognised deductible temporary differences and unused tax losses are as follows:

    According to provisions of the Tax Code of Ukraine tax losses accumulated by the group as at 31 December 2015 can be carried forward for unlimited periods of time.

    21. CONTINGENCIES, COMMITMENTS AND OPERATING RISKS

    Tax legislation.

    Ukraine's tax environment is characterised by complexity in tax administering, arbitrary interpretation by tax authorities of tax laws and regulations that, inter alia, can increase fiscal pressure on tax payers. Inconsistent application, interpretation, and enforcement of tax laws can lead to litigation which, as a consequence, may result in the imposition of additional taxes, penalties, and interest, and these amounts could be material. Facing current economic and political issues, the government has implemented certain reforms in the tax system of Ukraine by adopting the Law of Ukraine "On Amending the Tax Code of Ukraine and Certain Laws of Ukraine" which is effective from 1 January 2015, except for certain provisions which will take effect at a later date.

    Management believes that the group has been in compliance with all requirements of the effective tax legislation. In the course of regular business activities, the company enters into transactions which can be treated by tax authorities contrary to the way they are interpreted by the company. In the event a probability of outflow of financial resources related to such transactions is high, and its amount can be measured reliably, the company accrues a provision for such obligations. When the company's management estimates the probability of outflow of financial resources as likely, the company discloses contingent liabilities.

    In the ordinary course of business the group is engaged in transactions that may be interpreted differently by the group and tax authorities. Where the risk of outflow of financial resources associated with this is deemed to be probable and the amount is measured with sufficient reliability, the group provides for those liabilities. Where management of the group estimates the risk of financial resources outflow as possible, the group makes a disclosure of these contingent liabilities. As at 31 December 2015, management estimated possible tax exposures in total amount of UAH 10.728 million (2014: UAH 6.175 million):

    • Corporate income tax amounting to UAH 5.058 million (2014: UAH 3.122 million) and related penalties amounting to UAH 899 million (2014: UAH 863 million);

    • Value added tax amounting to UAH 2.433 million (2014: UAH 1.514 million) and related penalties amounting to UAH 786 million (2014: UAH 538 million);

    • Tax liabilities of "Ukrnafta" PJSC amounting to 1.198 million (2014: nil);

    • Other taxes amounting to UAH 354 million (2014: UAH: 138 million).

    Management believes that it is not likely that any significant settlement will arise from the above cases and, therefore, the group's consolidated financial statements do not include any amount of provision in this respect.

    The group conducts transactions with its subsidiaries.It is possible with evolution of the interpretation of tax law in Ukraine and changes in the approach of tax authorities under the new Tax Code, that such transactions could be challenged in the future. The impact of any such challenge cannot be estimated, however, management believes that it should not be significant.

    Starting from 1 September 2013, the Tax Code of Ukraine introduced new, based on the OECD transfer pricing guidelines, rules for determining and applying fair market prices, which significantly changed transfer pricing ("TP") regulations in Ukraine. The group exports refinery products and transportation services, performs intercompany transactions and is involved in transactions with related parties, which may potentially be in the scope of the new Ukrainian TP regulations. Part of the group's companies has submitted the controlled transaction reports within the required deadline. Another part of the group's companies has prepared all necessary documentation on controlled transactions as required by legislation and plans to submit the reports. Management believes that the group is in compliance with TP requirements.

    Arbitral Tribunal requests.

    In June 2014, the company has requested the Arbitration Institute of the Stockholm Chamber of Commerce to render an award in respect of the price determination according to the Agreement on gas purchase between the company and Gazprom. The company claims that the import prices for natural gas supplied during 2010-2015 are overstated. The import prices for natural gas, as prescribed by the Agreement on gas purchase, are calculated using the formula. The company claims that it has a contractual right to request revision of the contract price in order to bring it to market levels. As at 31 December 2015, management of the group believes that it has settled all its liabilities for natural gas supplied during 2010-2015, and requests a compensation of excessively paid amounts of more than USD 14 billion.

    In June 2015, Gazprom submitted its Statement of Defense and Counterclaim to the arbitration, updating and qualifying its claim for payments of USD 31.8 billion (USD 29.2 billion as claimed before) for natural gas which Gazprom did not deliver but the company allegedly was obliged to pay for pursuant to the current contract (so-called take-or-pay provision in the Agreement on gas purchase), including debts for 2013-2014. Management cannot predict the final outcomes of those claims, and does not recognise any obligation or related provisions in this respect.

    In October 2014, the company has also requested the Stockholm Arbitral Tribunal to render an award in respect of the natural gas transit charge through the territory of Ukraine according to the agreement on gas transit between the company and Gazprom. The actual transit charge was calculated for the certain volume of the natural gas transit from the Russian Federation via Ukraine ("basic transit volume"). Expenditures of the Ukrainian natural gas transmission pipelines operator "Ukrtransgaz" PJSC are mainly fixed costs, and thus, decrease in volume of transit should cause higher transit charge per unit. However, taking that the actual transit volumes in 2010-2014 were significantly lower than the basic transit volume, the natural gas transit charge has never been revised. The company requests a compensation for unpaid revenues from international transit of USD 8.2 billion. On 16 October 2015, Gazprom submitted Statement of Defence and Counterclaim requiring payment for the volumes of balancing gas which, according to Gazprom, was utilised by the company in the period from July 2014 to October 2015 for the total amount of USD 5.9 million and in an unspecified amount from 17 October 2015 until the date of payment in full. On 6 July 2016, Gazprom submitted its Statement of Rejoinder and Reply to Defence to Counterclaim, updating its interest claim from1 September 2014 to 6 July 2016 up to USD 1 million and reserving the right to make additional counterclaims after receiving the Award in the arbitration under the Agreement on gas purchase.

     
    Legal proceedings.

    From time to time and in the normal course of business, claims against the group arise. Where the risk of outflow of financial resources associated with such claims is assumed as probable, a respective liability is recognised as a component of provision for litigations (Note 15). Where management estimates the risk of outflow of financial resources associated with such claims as possible, or amount of outflow cannot be measured reliably, no provision is recognised, and respective amount is disclosed in the consolidated financial statements. Management believes that it has provided for all material losses in these consolidated financial statements.

    The group and certain natural gas suppliers have disputes in respect of volumes and/or prices for natural gas supplied to the group and other disputes. Management assesses its contingent liabilities under such disputes at the level of UAH 1.380 million (2014: UAH 4.681 million). Management cannot reliably estimate amount of potential losses on these obligations, if any.

    Dispute with the non-controlling shareholders of "Ukrnafta" PJSC in respect of the validity and fulfilment of shareholders agreement.

    In January 2010 Naftogaz and the non-controlling shareholders of "Ukrnafta" PJSC ("Ukrnafta") signed a shareholders agreement that included, among other, setting the procedure of electing the chairman of the board, the executive board, the supervisory board members and quorum for their meetings. Under the shareholders agreement the chairman of the board is to be elected from among the candidates nominated by the non-controlling shareholders, 6 of 11 Ukrnafta supervisory board members, including Chair, are to be nominated by Naftogaz, and remaining 5 members by the non-controlling shareholders. The supervisory board meetings are deemed to be quorate if 8 of 11 members are present. This was actually allowed by the Law of Ukraine "On Joint-Stock companies" effective before March 2015. However, as a result of subsequent amendments to the Law in March 2015, the quorum for the supervisory boards was lowered to the simple majority of votes.

    Under the shareholders agreement, any dispute arising in connection with it is to be resolved exclusively by the London Court of International Arbitration and the shareholder agreement is governed by the UK law. In June 2015, the non-controlling shareholders of Ukrnafta started an action before the London Court of International Arbitration claiming (1) to acknowledge the shareholders agreement valid and enforceable and (2) to oblige Naftogaz to stick to the provisions of the shareholders agreement even in those instances where the provisions of the shareholders agreement substantially reduce the right of Naftogaz as a majority shareholder in comparison with the scope of rights provided for by the Law.

    Uncertainty as to the ability of "Ukrnafta" PJSC to continue as a going concern.

    Following recent decline in oil prices, accumulated debts to the State Budget since 2014 of UAH 17.473 million as at 31 December 2015, limited ability to collect accounts receivable and settle prepayments made to suppliers with growth amount of UAH 17.144 million as at
    31 December 2015, Ukrnafta had insufficient funds to satisfy its working capital needs and settle its tax payments as they fall due. Consequently, as at 31 December 2015 Ukrnafta had a negative working capital and incurred a net loss for the year then ended.

    The State Fiscal Authority of Ukraine initiated the suspension of certain oil and gas producing licenses and arrested Ukrnafta's assets as a lien against overdue liabilities of Ukrnafta in respect of subsoil royalty and other taxes. These events limit Ukrnafta in its actions regarding sales of assets, however, do not affect its ability to continue its operating activities. In March 2016 Ukrnafta announced its intention to commence a pre-court financial rehabilitation (equivalent of "the Chapter 11" process) to legally restrict ability of past due creditors in payment enforcement. Financial rehabilitation plan, among other, assumes a 12-month period for Ukrnafta and its creditors, including the State Fiscal Authority of Ukraine as a primary creditor, to agree the restructuring of its obligations. The commencement of the financial rehabilitation plan is dependent on pre-approval by the Ukrnafta's Supervisory Board and approval by the Ukrnafta's General Shareholders" Meeting, Creditors Committee and respective court decision. None of the abovementioned approvals were obtained as of the date of these consolidated financial statements.

    Management of Ukrnafta and Ukrnafta's auditors have undertaken a rigorous assessment of going concern and liquidity position based on operating cash flow forecasts until June 2017. Significant judgment was involved in respect of oil and gas production volumes and selling prices. Despite the material uncertainties described above, and taking into account Ukrnafta's management actions in improving its liquidity, production and sales activities, management of the group believes that application of the going concern assumption in respect of Ukrnafta is appropriate for the purpose of these consolidated financial statements.

    Possible transfer of the company's equity interest in the subsidiaries to the State.

    In 1998, upon creation of the company, the Government of Ukraine contributed certain shares of joint-stock companies to the share capital of the company. These joint-stock companies included JSC Long-Distance Pipeline "Druzhba" and JSC "Prydniprovskiy" Long-Distance Pipeline that were reorganised in 2001 into JSC "Ukrtransnafta", JSC "Ukrspetstransgaz", "Chornomornaftogaz" National JSC, JSC "Ukrnafta" and fifty-four regional gas distribution entities.

    The Government of Ukraine may transfer ownership or control over all or part of the company's equity interest in those joint-stock companies and/or other state-owned oil and gas transportation and storage facilities to other companies or Government agencies, and those actions could have a material adverse effect to the company's operations.

     
    State property not subject to privatisation.

    In 1998, the company entered into an agreement "On use of State owned property not subject to privatisation" ("Agreement") with the State Property Fund of Ukraine, and received oil and gas transportation system into the operational control. The Agreement was signed for one year, and its term is prolonged automatically for one year, unless terminated by notice from either party, and is binding on the legal successor of each party. Historically, the agreement has been prolonged automatically, as neither party initiated its termination. As the State property not subject to privatisation forms an essential part of the group's business, the future operations and financial performance of the group depends on the prolongation of the Agreement. The company's management believes that the group will continue to operate with this property in the foreseeable future.

    Pursuant to the Agreement, the company is required, inter alia, to handle oil and gas transmission and distribution pipelines owned by the State of Ukraine, keep the state property in adequate operational condition, and transfer 50% share of profits received from using those assets to the State. The amount of such transfer could be reduced by the amount of capital investments in those assets. The Agreement does not provide a mechanism of such calculations, and historically there were no payments from the group to the State in respect of using such assets. The group believes that had the mechanism for calculating the state share in profits from using the assets been determined by the State, the capital investments performed by the group would be greater, and no payment in favour of the State would occur. Accordingly, no liability for such payment was recognised in these consolidated financial statements.

    Licenses.

    The State controls the oil and gas exploration and production activities in Ukraine via issuing respective licenses. According to the current legislation, separate licenses are issued for exploration, development and production activities for each oil and gas field. Separate licenses are issued for oil and gas transportation, supply and storage. Licenses are provided for the period from two to twenty years, and could be prolonged for the same period.

    Certain licenses for exploration, development and production activities were transferred as a contribution to joint operations. However, this is not allowed according to the current legislation and the State has the right to suspend such licenses. Currently no licenses of the group were suspended due to this reason and there are no litigations in respect of the matter. The group management believes that licenses will not be suspended due to this matter in the foreseeable future.

    Capital commitments.

    Capital commitments for purchase of property, plant and equipment, and exploration and development of oil and gas fields comprise UAH 144 million as at 31 December 2015 (31 December 2014: UAH 400 million).

    22. BUSINESS COMBINATION

    At 31 December 2015 and 2014, the group holds 50% + 1 share of voting rights in "Ukrnafta" PJSC.

    In March 2015, according to changes in the Law of Ukraine "On Joint-Stock companies", quorum of the General meetings of shareholders was lowered from 60%+1 share down to 50%+1 share. Following those changes, new supervisory board of "Ukrnafta" PJSC was appointed on 22 July 2015. Starting from that date the company has an unilateral ability to conduct legitimate General Meetings of Shareholders at "Ukrnafta" PJSC.

    Following such changes, management of the company believes that control over "Ukrnafta" PJSC was regained. Accordingly, the investment in "Ukrnafta" PJSC was transferred from investment in associates to investments in subsidiary starting from that date (Note 27). As a result of the revaluation of previously held interest to fair value at the date of acquisition, a UAH 1.430 million loss was recognised in the consolidated statement of profit or loss (Note 7), and previously recognised share in other comprehensive income amounting to UAH 116 million was transferred to accumulated deficit in the statement of changes in equity.

    The following table summarises the provisional amounts of fair values of the net assets acquired at the date of acquisition. Fair values of all assets and liabilities were determined by management. Management is still in process of determining the fair values of Ukrnafta's assets and liabilities.

    Management is still in process of determining the fair values of Ukrnafta"s assets and liabilities

    As at 22 July 2015, advances received and other current liabilities include dividends payable attributable to the owners of the non-controlling interest in amount of UAH 2.201 million.

    Revenue and net loss of "Ukrnafta" PJSC included in the consolidated financial statements from the date of acquisition amounted to UAH 10.494 million and UAH 4.498 million, respectively. If the acquisition had been completed on 1 January 2015, revenues of the group would be UAH 18.269 million higher and net loss of the group would be UAH 2.446 million higher.

    23. FINANCIAL RISK MANAGEMENT

    The group's activities expose it to a variety of financial risks: market risk (including currency risk and interest rate risk), concentration risk, credit risk and liquidity risk. The group reviews and agrees risk management policies to minimise the potential adverse effects on the group's financial performance for those risks.

    Major categories of financial instruments:

    Major categories of financial instruments

    Market risk.

    The group takes on exposure to market risks. Market risks arise from open positions in (a) foreign currencies, (b) interest bearing assets and liabilities and (c) equity investments, all of which are exposed to general and specific market movements.

     
    Currency risk.

    The group operates within Ukraine and its exposure to foreign currency risk is determined mainly by purchases of natural gas from foreign suppliers, which are denominated in USD. The group also receives borrowings in foreign currencies. The group does not hedge its foreign currency positions. 

     The group does not hedge its foreign currency positions

    The following table presents sensitivities of profit or loss and equity to reasonably possible changes in exchange rates applied at the reporting date, with all other variables held constant.

    The exposure was calculated only for monetary balances denominated in currencies other than the functional currency of the group's entities.

    The exposure was calculated only for monetary balances denominated in currencies other than the functional currency of the group"s entities

    Interest rate risk.

    The group normally has no significant interest bearing assets, and its income and operating cash flows are substantially independent of changes in market interest rate. The group's interest rate risk exposure arises from borrowings at variable interest rates. Borrowings at fixed rate expose the group to fair value interest rate risk. 

    The group predominantly attracts borrowings at fixed rates.

    The borrowing activities are reviewed on an annual budget. Long-term investing activities and associated funding are considered separately, and are subject on the Government of Ukraine approval.

    The maturity dates and effective interest rates of financial instruments are further disclosed in this Note.

    Concentration risk.

    The group is exposed to concentration risk on revenues from natural gas transportation, other current liabilities and trade accounts payable as 54 % of trade accounts payable as at 31 December 2015 (31 December 2014: 54% of all advances received (Note 16) and 50% of all trade accounts payable) comprise trade payables to a single supplier. Concentration on revenues from natural gas transportation is disclosed in Note 4.

    Credit risk.

    The group takes on exposure to credit risk, which is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. Exposure to credit risk arises as a result of the group's sales of products on credit terms and other transactions with counterparties giving rise to financial assets. The group's policy is that the customers that wish to pay on credit terms are subject to the solvency check. Significant outstanding balances are also reviewed on an ongoing basis. At the same time, the group must follow the state regulations as a guaranteed supplier of natural gas to the population and state-owned entities irrespective whether they are delinquent or not.

    The group establishes a provision for impairment that represents its estimate of incurred losses in respect of trade accounts receivable. The main component of this provision is a specific loss component that relates to individually significant exposures.

    The maximum exposure to credit risk as at 31 December 2015 is UAH 52.432 million (31 December 2014: UAH 24.315 million).

    The group does not hold any collateral as security.

    Liquidity risk.

    Prudent liquidity management implies maintaining sufficient cash and the availability of funding to meet existing obligations as they fall due. The group's objective is to maintain a balance between the continuity of funding and flexibility through the use of credit terms provided by suppliers and banks. Prepayments are commonly used to manage both liquidity and credit risks. The group analyses ageing of its assets and maturity of its liabilities and plans liquidity depending on their expected repayment. The group has capital construction programs which are funded both through existing business cash flows and borrowed funds. Borrowed funds are also used to finance the group's working capital needs.

    The following table analyses the group's financial liabilities into relevant maturity groupings based on the remaining period at the reporting date to the contractual maturity date. The amounts disclosed in the table are undiscounted cash flows of principal and interest payments. The maturity analysis of financial liabilities as at 31 December 2015 was as follows:

     The maturity analysis of financial liabilities as at 31 December 2015

    The maturity analysis of financial liabilities as at 31 December 2014 was as follows:

    The maturity analysis of financial liabilities as at 31 December 2014

    Gearing ratio.

    Consistent with others in the industry, the group monitors capital on the basis of gearing ratio. This ratio is calculated as net debt divided by total capital under management. Net debt is calculated as total borrowing (current and non-current as shown in the consolidated statement of financial position) less cash and cash equivalents. Total capital under management equals equity as shown in the consolidated statement of financial position.

    The gearing ratio at the end of the reporting period was as following:

    The gearing ratio at the end of the reporting period

    24. FAIR VALUE

    IFRS defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

    The estimated fair values have been determined by the group using available market information, where it exists, and appropriate valuation methodologies. However, judgement is necessarily required to interpret market data to determine the estimated fair value. Management has used all available market information in estimating the fair value. The estimates presented herein are not necessarily indicative of the amounts the group could realise in a market exchange from the sale of its full holdings of a particular instrument or pay in the transfer of liabilities.

    Fair value of the group's financial assets and financial liabilities measured at fair value on a recurring basis and fair value of property, plant and equipment.

    The group's available-for-sale investments and property, plant and equipment are measured at fair value at the end of each reporting period. The following table provides information about how the fair values of these assets are determined (in particular, the valuation techniques and inputs used):

     The following table provides information about how the fair values of these assets are determined

    The following table summarises property, plant and equipment recognised at fair value after initial recognition using a fair value hierarchy:

    The following table summarises property, plant and equipment recognised at fair value after initial recognition using a fair value hierarchy:

    There were no transfers between Level 2 and Level 3 during the year.

    Details of the group's property, plant and equipment and information about the fair value hierarchy as at 31 December 2015 are as follows:

    Details of the group"s property, plant and equipment and information about the fair value hierarchy as at 31 December 2015 are as follows:

    Fair value of financial assets and financial liabilities that are not measured at fair value on a recurring basis (but fair value disclosures are required).

    The group's management believes that, except for item included in the table below, the carrying amounts of financial assets and financial liabilities recognised in the consolidated financial statements approximate their fair values due to short-term nature:

    The group"s management believes that, except for item included in the table below, the carrying amounts of financial assets and financial liabilities recognised in the consolidated financial statements approximate their fair values due to short-term nature

    The following table provides information about how the fair value of borrowings is determined (in particular, the valuation techniques and inputs used):

    The following table provides information about how the fair value of borrowings is determined

    25. SUBSEQUENT EVENTS

    Change of gas transmission pricing system.

    Starting from 1 January 2016, a new system regulating tariffs for gas transmission was introduced. While previously the tariffs for gas transit were set by negotiations between two parties, now Ukraine implements the European system where the regulator (NEURC) sets transmission tariffs for entry/exit points. According to the Law of Ukraine "On Natural Gas Market", gas transmission tariffs are regulated by the State and are set by NEURC as the national energy regulator. Ukraine has changed its gas transmission pricing policy to harmonise Ukraine's legislation with the European energy regulations.

    The NEURC has set tariffs for all entry points at the same level of USD 12.47 per 1.000 cubic meters, net of VAT, and different tariffs for exit points, with the minimum at the level of USD 16.74 per 1,000 cubic meters, net of VAT, and the maximum at the level of USD 32.80 per 1.000 cubic meters, net of VAT.

    Currently the group applies gas transmission tariffs to Gazprom as set in the current agreement on gas transit, pending decision of the Arbitration Institute of the Stockholm Chamber of Commerce (see Note 21).  

    Approval of Corporate Governance Restructuring Plan.

    In July 2016, the Cabinet of Ministers of Ukraine has approved the Corporate Governance Restructuring Plan that describes steps and stages of the industry and group restructuring, including, but not limited to the following:

    • Transfer of gas upstream and gas supply assets from the Ministry of Energy and Coal Industry of Ukraine to other management government bodies;

    • Development of laws and regulations according to the requirements of the European energy regulations in respect of gas transportation and storage activities unbundling and gas transmission concession;

    • Transfer of gas transmission assets to new transmission system operator within 30 days after an award of the Arbitral Tribunal of the Arbitration Institute of the Stockholm Chamber of Commerce is rendered in respect of claims between the company and Gazprom (Note 21);

    Additionally, the Plan provides certain steps for gas storage activities reforming, including technical analysis of underground storage facilities to develop the most efficient business model for such activities, and creating a gas storage system operator under management of the Ministry of Energy and Coal Industry of Ukraine.

    Supervisory Board appointment.

    In April 2016, upon a formal decision of the Ministry of Economic Development and Trade, the new Supervisory Board of the company was formed. The Supervisory Board consists of five members: three independent directors and two representatives of the Ukrainian government.

    In addition to its other duties, the Supervisory Board established Audit, Ethics, Nomination and Remuneration Committees, and sets up and controls functions responsible for compliance, risk management and prevention of corruption.

    Unbundling.

    In July 2016, the Cabinet of Ministers of Ukraine approved the Resolution "On unbundling of activities of transportation and storage (injection, withdrawal) of natural gas", which stipules a plan for restructuring of Naftogaz aimed at unbundling of transmission and storage system operators. According to the approved plan, a new entity will be established — JSC "Main Gas Pipelines of Ukraine" (MGU) — to take over gas transmission activities. MGU will be controlled by the state through the Ministry of Energy and Coal Industry of Ukraine, which will manage its shareholding in MGU with no interference from other ministers or the Prime-Minister. Relevant legislative amendments will be put in place by the Parliament and the Government. The proposed plan suggests that gas transmission assets will be transferred to the new transmission system operator only after the final arbitration award on the claims between Naftogaz and Gazprom currently considered under the auspices of the Arbitration Institute of the Stockholm Chamber of Commerce (see Note 21).

    The approved plan also sets out a series of measures to ensure effective utilisation of underground gas storages owned by the state of Ukraine, including the operationalisation of a newly established company (JSC "Underground Gas Storage Facilities of Ukraine") following an in-depth storage-by-storage assessment of the optimal strategy for storage use and management in Ukraine. Likewise, gas storage assets are to be transferred to the new entity only after the delivery of final awards in the ongoing arbitration proceedings between Naftogaz and Gazprom. The necessary legal instruments and actions are to be executed during 2016-2017.

    It is envisaged that PJSC "Ukrtransgaz" will stay under the control of Naftogaz until the divestment of its non-core assets and resolution of all outstanding matters of dispute related to the entity.

    Profit share payable to the State Budget.

    In 2016, the General shareholders' meetings held in certain subsidiaries of the company, have declared and fully distributed profits and made relevant payments to the State Budget of Ukraine amounting to UAH 1.021 million.

     
    Legal claims.

    In 2016, the Kyiv Economic Court decided in favour of "Ukrtransnafta" PJSC in its claim against three private oil refineries which stored crude oil owned by the group. Agreements for oil tanks lease signed by the previous top management of "Ukrtransnafta" PJSC were declared invalid. At the date of these consolidated financial statements crude oil owned by the group is still stored at private oil refineries mentioned above.

    In July 2016, "Ukrgazvydobyvannya" PJSC filed a request for arbitration under the rules of the Arbitration Institute of the Stockholm Chamber of Commerce to terminate Joint Activity Agreement with Misen Enterprises AB (Carpatygaz LLC) and to collect losses. The group is currently estimating its request for compensation. Ukrgazvydobyvannya PJSC is also considering terminating all other joint arrangements.

    Litigation for assets recovery in Crimea.

    In February 2016, The group officially initiated negotiation process concerning the loss of assets in Crimea by sending a letter of complaint to the Russian Federation within the Bi-lateral Investment Treaty Framework. Six months negotiations period expires in August 2016. Such negotiation process is a prerequisite for a commencement of investment treaty arbitration.

    Loans repayment and prolongation.

    In 2016, the group obtained and fully repaid USD 300 million revolving credit line from the European Bank for Reconstruction and Development for gas purchase at the Western border of Ukraine. The credit line expires in 2018, and the group expects to use the funds to accumulate gas for the next heating seasons. As at the date of these consolidated financial statements, the outstanding balance of the second tranche received in July 2016 amounts to UAH 3.921 million.

    Additionally, subsequent to 31 December 2015 and up to the date of these consolidated financial statements, the group obtained borrowings in the amount of UAH 4.481 million and repaid loans amounting to UAH 14.914 million.

    The group has successfully prolonged the due date for loans totaling UAH 13,020 million from 2016 to 2017-2018.

    26. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    Statement of compliance.

    These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS").

    Basis of preparation.

    The consolidated financial statements have been prepared on the historical cost basis except for property, plant and equipment that are measured at revalued amounts at the end of each reporting period, as explained in the accounting policies below.

    Historical cost is generally based on the fair value of the consideration given in exchange for goods and services.

    Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique.

    These policies have been consistently applied to all periods presented, unless otherwise stated.

    Purchases classification and presentation.

    During 2015 "Ukrtransgas" PJSC purchased materials, works and services in the amount of UAH 520 million, included in cost of sales, and performed capital expenditures of UAH 316 million, included in property, plant and equipment. Management of the group has initiated a corporate investigation in respect of these transactions in 2016.

    During 2015 "Ukrgazvydobyvannya" PJSC purchased materials in the amount of UAH 225 million, included in cost of sales, and performed capital expenditures of UAH 157 million, included in property, plant and equipment. The source documents for these transactions were sequestered and are under investigation by the office of the State Prosecutor of Ukraine.
    During 2015 "Ukrtransnafta" PJSC purchased services on oil storage amounting to UAH 222 million, included in other operating expense.

    Nature of these expenses and expenditures could be different from their legal form according to primary documents. These expenses and expenditures were presented on the basis of the relevant primary documents in the consolidated financial statements as at and for the year ended 31 December 2015.

    Included in assets (mainly property, plant and equipment) and expenses for the first quarter 2014 are expenditures and expenses related to purchase of services and inventories (except for expenses related to purchase of natural gas and crude oil, and staff costs and related social charges) amounting to UAH 660 million and UAH 938 million, respectively. Classification and disclosure of these expenses and expenditures in the consolidated financial statements have been made on the basis of the relevant primary documents. However, given the information available to current management of the group, there are certain grounds to believe that the nature of these expenditures could be different from their legal form according to primary documents.

    Included in other operating expense are oil storage costs of UAH 164 million for 2014 related to the company's subsidiary "Ukrtransnafta" PJSC. Management of the group believes that these costs are overstated as a result of subsidiary's management override of controls. Subsidiary's management was replaced in the first half 2015.

    Functional and presentation currency.

    Items included in the financial statements of each of the group's entities are measured using the currency of the primary economic environment in which the group operates ("the functional currency"). The consolidated financial statements are presented in Ukrainian hryvnias ("UAH"), which is the company's functional and the group's presentation currency. All amounts presented in the consolidated financial statements are presented in UAH, rounded to the nearest million, if not otherwise stated.

    Transactions denominated in currencies other than the relevant functional currency are translated into the functional currency, using the exchange rate prevailing at the date of the transaction. Foreign exchange gains and losses, resulting from settlement of such transactions and from the translation of foreign currency denominated monetary assets and liabilities at year end, are recognised in the consolidated statement of profit or loss. Translation at year end does not apply to non-monetary items including equity investments. The effects of exchange rate changes on the fair value of equity securities are recorded as part of the fair value gain or loss.

    As at 31 December, the exchange rates used for translating foreign currency balances were:

    As at 31 December, the exchange rates used for translating foreign currency balances

    Exchange restrictions in Ukraine are limited to compulsory receipt of foreign receivables within 90 days of sales and to the compulsory conversion of 75% of proceeds in foreign currency to Ukrainian hryvnia in 2015, and 65% starting from 9 June 2016. Foreign currency can be easily converted at a rate close to the National Bank of Ukraine rate. At present, UAH is not freely convertible outside Ukraine.

     
    Basis for consolidation.

    Subsidiaries are those companies over which the group has control. The group controls an entity when the group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are consolidated from the date on which control is transferred to the group (acquisition date) and are deconsolidated from the date that control ceases.

    Inter-company transactions, balances and unrealised gains or losses on transactions between the group companies are eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the group.

    The company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above.
    When the group has more than a majority of the voting rights of an investee, it still considers whether the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally and, thus, has the power over the investee.

    The group considers all relevant facts and circumstances in assessing whether or not the group's voting rights in an investee are sufficient to give it power, including:

    • The size of the group's holding of voting rights relative to the size and dispersion of holdings of the other vote holders;

    • Potential voting rights held by the group, other vote holders or other parties;

    • Rights arising from other contractual arrangements; 

    • Any additional facts and circumstances that indicate that the group has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders' meetings.

    Business combinations.

    Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of the assets transferred by the group, liabilities incurred by the group to the former owners of the acquiree and the equity interests issued by the group in exchange for control of the acquiree. Acquisition-related costs are generally recognised in profit or loss as incurred.

    At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognised at their fair value, except that:

    • Deferred tax assets or liabilities, and assets or liabilities related to employee benefit arrangements are recognised and measured in accordance with IAS 12 Income Taxes and IAS 19 Employee Benefits respectively;

    • Liabilities or equity instruments related to share-based payment arrangements of the acquiree or share-based payment arrangements of the group entered into to replace share-based payment arrangements of the acquiree are measured in accordance with IFRS 2 Share-based Payments at the acquisition date; and

    • Assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations are measured in accordance with that Standard.

    Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer's previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If, after reassessment, the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the acquirer's previously held interest in the acquiree (if any), the excess is recognised immediately in profit or loss as a bargain purchase gain.

    Non-controlling interests that are present ownership interests and entitle their holders to a proportionate share of the entity's net assets in the event of liquidation may be initially measured either at fair value or at the non-controlling interests' proportionate share of the recognised amounts of the acquiree's identifiable net assets. The choice of measurement basis is made on a transaction-by-transaction basis. Other types of non-controlling interests are measured at fair value or, when applicable, on the basis specified in another IFRS.  

    When the consideration transferred by the group in a business combination includes assets or liabilities resulting from a contingent consideration arrangement, the contingent consideration is measured at its acquisition-date fair value and included as part of the consideration transferred in a business combination. Changes in the fair value of the contingent consideration that qualify as measurement period adjustments are adjusted retrospectively, with corresponding adjustments against goodwill. Measurement period adjustments are adjustments that arise from additional information obtained during the "measurement period" (which cannot exceed one year from the acquisition date) about facts and circumstances that existed at the acquisition date.

    The subsequent accounting for changes in the fair value of the contingent consideration that do not qualify as measurement period adjustments depends on how the contingent consideration is classified. Contingent consideration that is classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Contingent consideration that is classified as an asset or a liability is remeasured at subsequent reporting dates in accordance with IAS 39 Financial Instruments: Recognition and Measurement, or IAS 37 Provisions, Contingent Liabilities and Contingent Assets, as appropriate, with the corresponding gain or loss being recognised in profit or loss.

    When a business combination is achieved in stages, the group's previously held equity interest in the acquiree is remeasured to its acquisition-date fair value and the resulting gain or loss, if any, is recognised in profit or loss. Amounts arising from interests in the acquiree prior to the acquisition date that have previously been recognised in other comprehensive income are reclassified to profit or loss where such treatment would be appropriate if that interest were disposed of.

    If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the group reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period (see above), or additional assets or liabilities are recognised, to reflect new information obtained about facts and circumstances that existed at the acquisition date that, if known, would have affected the amounts recognised at that date.

    Goodwill.

    Goodwill arising on an acquisition of a business is carried at cost as established at the date of acquisition of the business less accumulated impairment losses, if any.

    For the purposes of impairment testing, goodwill is allocated to each of the group's cash-generating units (or groups of cash-generating units) that is expected to benefit from the synergies of the combination.

    A cash-generating unit to which goodwill has been allocated is tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata based on the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognised directly in profit or loss. An impairment loss recognised for goodwill is not reversed in subsequent periods.

    On disposal of the relevant cash-generating unit, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. 

     
    Transactions with non-controlling interests.

    The group treats transactions with non-controlling interests as transactions with equity owners of the group. For purchases from non-controlling interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity.

    When the group ceases to have control or significant influence, the retained interest in the entity is remeasured to its fair value, with the change in carrying amount recognised in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassified to profit or loss.

    If the ownership interest in an associate is reduced but significant influence is retained, only a proportionate share of the amounts previously recognised in other comprehensive income are reclassified to profit or loss where appropriate.

    Investments in associates. Associates are entities over which the group has significant influence but not control. Investments in associates are accounted for using the equity method of accounting. The group's investment in associate includes goodwill identified on acquisition, net of any accumulated impairment loss.

    The group's share of its associates' post-acquisition profits or losses is recognised in the consolidated statement of profit or loss, and its share of post-acquisition movements in other comprehensive income is recognised in other comprehensive income. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the group"s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. Unrealised gains on transactions between the group and its associates are eliminated.

    Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the group.

    Dilution gains and losses arising on investments in associates are recognised in the consolidated statement of profit or loss.

    Interest in joint ventures.

    A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control.

    The group recognises its interest in the joint venture using the equity method applied as described above in the paragraph Investment in associates.

    Interest in joint operations.

    A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. 

    When a group entity undertakes its activities under joint operations, the group as a joint operator recognises in relation to its interest in a joint operation:

    • Its assets, including its share of any assets held jointly;

    • Its liabilities, including its share of any liabilities incurred jointly;

    • Its revenue from the sale of its share of the output arising from the joint operation;

    • Its share of the revenue from the sale of the output by the joint operation; and

    • Its expenses, including its share of any expenses incurred jointly.

    The group accounts for the assets, liabilities, revenues and expenses relating to its interest in a joint operation in accordance with the IFRSs applicable to the particular assets, liabilities, revenues and expenses.

    When a group entity transacts with a joint operation in which a group entity is a joint operator (such as a sale or contribution of assets), the group is considered to be conducting the transaction with the other parties to the joint operation, and gains and losses resulting from the transactions are recognised in the group's consolidated financial statements only to the extent of other parties' interests in the joint operation.

    When a group entity transacts with a joint operation in which a group entity is a joint operator (such as a purchase of assets), the group does not recognise its share of the gains and losses until it resells those assets to a third party.

    Concession agreement (product sharing agreement).

    The company entered into a concession agreement for oil exploration and development ("Concession Agreement") with the Arab Republic of Egypt and Egyptian General Petroleum Corporation ("EGPC") on 13 December 2006.

    The Concession Agreement includes the following conditions:

    • Subject to the auditing provisions under the Concession Agreement, the company shall recover on a quarterly basis all exploration and development costs to the extent and out of 25% of all petroleum produced and saved from all production areas and not used in petroleum operations ("Cost Recovery"). Petroleum products under the Concession Agreement include crude oil or gas and LPG.

    • Remaining 75% of the petroleum produced is shared by the company and EGPC depending on the volume of production and the product type (crude oil or gas and LPG). The company's share varies from 15% to 19%.

    • EGPC shall become the owner of all the company's assets acquired and owned within the Concession Agreement, which assets were charged to Cost Recovery by the company in connection with the operations carried out by the company: land shall become the property of EGPC as soon as it is purchased; title to fixed and movable assets shall be transferred automatically and gradually from the company to EGPC as they become subject to the Cost Recovery.

    The development period under the Concession Agreement is limited to maximum 25 years from the date of commercial oil discovery or from the date of first gas deliveries, started in 2011.
    Accounting for all exploration and evaluation and other costs and incomes related to the product sharing agreement is similar to the accounting for a normal production process, as described in this Note.

    Segment reporting.

    Operating segments are reported in a manner consistent with the internal reporting provided to the group's chief operating decision maker. Segments whose revenue, results or assets are ten percent or more of all the segments are reported separately. Segments falling below this threshold can be reported separately at management decision.

    Property, plant and equipment.

    The group uses the revaluation model to measure property, plant and equipment, except construction in process which is carried at cost. Fair value was based on valuations made by external independent valuers. The frequence of revaluation depends on the movements in the fair values of the assets being revalued. The last independent valuation of the fair value of the group's property, plant and equipment was performed as at 31 December 2015. Subsequent additions to property, plant and equipment are recorded at cost. Cost includes expenditure directly attributable to acquisition of the items. The cost of self-constructed assets includes the cost of materials, direct labour and an appropriate proportion of production overheads. Сost of acquired and self-constructed qualifying assets includes borrowing costs.

    Any increase in the carrying amounts resulting from revaluations are credited to revaluation reserve in equity through other comprehensive income. Decreases that offset previsouly recognised increases of the same asset are charged against revaluation reserve in equity through other comprehensive income; all other decreases are charged to the consolidated statement of profit or loss. To the extent that an impairment loss on the same revalued asset was previously recognised in the consolidated statement of profit or loss, a reversal of that impairment loss is also recognised in the consolidated statement of profit or loss. Each year the difference between depreciation based on the revalued carrying amount of the asset charged to the consolidated statement of profit or loss and depreciation based on the asset's original cost is transferred from revaluation reserve to retained earnings.

    Expenditure incurred to replace a component of an item of property, plant and equipment that is accounted for separately, is capitalised with the carrying amount of the replaced component being derecognised. Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the consolidated statement of profit or loss during the financial period in which they are incurred. Property, plant and equipment are derecognised upon disposal or when no future economic benefits are expected to be received from the continued use of the asset. Gains and losses on disposal determined by comparing proceeds with carrying amount of property, plant and equipment are recognised in the consolidated statement of profit or loss. When revalued assets are sold, the amounts included in revaluation reserve are transferred to retained earnings.

    Property, plant and equipment includes technological oil and gas which is required to be held in the pipelines and storage facilities for the operating activities of the group companies in transportation of crude oil and gas storage segments, respectively.

    Construction in progress includes also prepayments for property, plant and equipment.

     
    Cushion gas and depreciation of cushion gas.

    Technological gas includes the cushion gas intended for maintaining pressure in underground storage facilities of the group and protecting them from flooding. Cushion gas is divided into the categories of recoverable and non-recoverable cushion gas, based on an engineering analysis and type of underground storage facility of whether the gas can be economically removed from the storage facility at any point during its life. Residual value of the portion of the cushion gas that is determined to be non-recoverable is considered to be zero. The portion of the cushion gas that is determined to be recoverable is also considered as a component of the storage facility, but at any time that the storage facility is closed, the recoverable gas, by definition, will be available for sale or other use. The non-recoverable cushion gas is depreciated to its residual value over the remaining life of the storage facility, which lies within 80 years. The recoverable portion of cushion gas is not depreciated. Both non-recoverable and recoverable portions of cushion gas are revalued when there is an indication that its carrying value as of the reporting date is materially different from their fair value.

    Exploration expenses.

    Exploration expenses comprise the costs associated with unproved reserves. These include geological and geophysical costs for the identification and investigation of areas with possible oil and gas reserves and administrative, legal and consulting costs in connection with exploration. They also include all impairments on exploration wells where no proved reserves could be demonstrated.

    Research and development expenses.

    Research and development (R&D) expenses include all direct and indirect materials, personnel and external services costs incurred in connection with the focused search for new development techniques and significant improvements in products, services and processes and in connection with research activities. Expenditures related to research activities is shown as R&D expenses in the period in which they are incurred. Development costs are capitalised if the recognition criteria according to IAS 38 Intangible Assets are fulfilled.

    Exploration and evaluation assets.

    Oil and gas exploration and evaluation expenditures are accounted for using the successful efforts method of accounting. Costs are accumulated on a field-by-field basis. Costs directy associated with an exploration well, and exploration and proprety leasehold acquisition costs, are capitalised as long as the following conditions are satisfied:

    • Sufficient oil and gas reserves have been discovered that would justify completion as a production well;

    • Sufficient progress is being made in assessing the economic and technical feasibility to justify beginning field development in the near future.

    If it is determined that commercial exploitation could not been achieved, these costs are charged to expense.

    Expenditures related to the following activities are initially measured at cost and capitalised within property, plant and equipment in the consolidated statement of financial position:

    • Acquisition of rights to explore;

    • Topographical, geological, geochemical and geophysical studies;

    • Exploratory drilling;

    • Trenching, sampling; and

    • Activities in relation to evaluating technical feasibility and commercial viability of extracting a mineral resource.

    Exploration and evaluation assets are carried forward during the exploration and evaluation stage and are not amortised but assessed for impairment in accordance with the indicators of impairment as set out in IFRS 6 Exploration for and Evaluation of Mineral Resources. In circumstances where a property is abandoned, the cumulative capitalised costs relating to the property are written off in the period. No amortisation is charged prior to the commencement of production.

    In circumstances where a property is identified as containing economically recoverable resources then the accumulated exploration and evaluation costs associated with that property are transferred to oil and gas producing properties and are presented within the property, plant and equipment in the consolidated statement of financial position.

    Depreciation and depletion.

    Depreciation is charged to the consolidated statement of profit or loss on a straight-line basis to allocate costs of individual assets to their residual value over their estimated useful lives. Depreciation commences on the date of acquisition or, in respect of self-constructed assets, from the time an asset is completed and ready for use.

    Oil and gas assets, including oil and gas producing properties are depleted using a unit-of-production method. The cost of producing wells is amortised over proved developed reserves. Licence acquisition, common facilities and future decommissioning costs are amortised over total proved and probable reserves.

    Other property, plant and equipment are depreciated on a straight line basis over its expected useful life. The typical useful lives of the group"s other property, plant and equipment are as follows:
    The typical useful lives of the group"s other property, plant and equipment

    Construction in progress and technological oil and gas are not depreciated.

    Intangible assets.

    Intangible assets have definite useful lives and primarily include capitalised computer software. Acquired computer software is capitalised on the basis of the costs incurred to acquire and bring it to use. Intangible assets are carried at cost less accumulated amortisation and impairment losses, if any. If impaired, the carrying amount of intangible assets is written down to the higher of value in use and fair value less costs to sell.

    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 the consolidated statement of profit or loss on a straight-line basis over the period of the lease. Finance leases are capitalised at the lease commencement at the lower of the fair value of the leased property and the present value of the minimum lease payments.

    Decommissioning liabilities.

    The group's assessment of the decommissioning liabilities is based on the estimated future costs expected to be incurred in respect of the decommissioning and site restoration, adjusted for the effect of the projected inflation for the upcoming periods and discounted using interest rates applicable to the provision. Estimated costs of dismantling and removing an item of property, plant and equipment are added to the cost of an item of property, plant and equipment when the item is acquired, and corresponding obligation is recognised. Changes in the measurement of an existing decommissioning liability, that result from changes in the estimated timing or amount of the outflows, or from changes in the discount rate used for measurement, are recognised in the consolidated statement of profit or loss or, to the extent of any revaluation balance existence in respect of the related asset, other reserves. Provisions in respect of decommissioning activities are evaluated and re-estimated annually, and are included in the consolidated financial statements at each reporting date at their expected present value, using discount rates which reflect the economic environment in which the group operates.

    Interest expense related to the provision is included in finance costs in profit or loss.

    Impairment of non-financial assets.

    Assets are reviewed for impairment whenever events and changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the assets carrying amount exceeds its recoverable amount. The recoverable amount is the higher of fair value less cost to sell and value in use. For purposes of assessing impairment, assets are grouped to the lowest levels for which there are separately identifiable cash flows (cash generating unit). Non-financial assets that have suffered impairment are reviewed for possible reversal of the impairment at each reporting date.

    An impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.

    When an impairment loss subsequently reverses, the carrying amount of the asset (or a cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

    Classification of financial assets.

    The group classifies its financial assets into the following measurement categories: (a) loans and receivables; (b) available-for-sale financial assets.

    Loans and receivables include financial receivables created by the group by providing money, goods or services directly to a debtor, other than those receivables which are created with the intention to be sold immediately or in the short term, or which are quoted in an active market. Loans and receivables comprise primarily loans, trade accounts receivable including purchased loans and promissory notes. All other financial assets are included in the available-for-sale category.

    Classification as debt or equity.

    Debt and equity instruments issued by the group are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument.

    Equity instruments.

    An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by a group entity are recognised at the proceeds received, net of direct issue costs.

    Repurchase of the company's own equity instruments is recognised and deducted directly in equity. No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of the company's own equity instruments.

    Financial liabilities.

    Financial liabilities are classified as either financial liabilities "at fair value through profit or loss (FVTPL)" or "other financial liabilities".

    Initial recognition of financial instruments.

    Financial assets and financial liabilities are initially measured at fair value.

    The group's principal financial instruments comprise available-for-sale investments, borrowings, cash and cash equivalents and short-term deposits. The group has various other financial instruments, such as trade receivables and trade payables, which arise directly from its operations.

    All purchases and sales of financial instruments that require delivery within the time frame established by regulation or market convention ("regular way" purchases and sales) are recorded at trade date basis, which is the date that the group commits to deliver a financial instrument. All other purchases and sales are recognised on the settlement date with the change in value between the commitment date and settlement date not recognised for assets carried at cost or amortised cost, and recognised in equity for assets classified as available-for-sale.

    Subsequent measurement of financial instruments.

    Subsequent to initial recognition, the group's financial liabilities, loans and receivables are measured at amortised cost. Amortised cost is calculated using the effective interest method and, for financial assets, it is determined net of any impairment losses. Premiums and discounts, including initial transaction costs, are included in the carrying amount of the related instrument and amortised based on the effective interest rate of the instrument.

    The face values of financial assets and liabilities with a maturity of less than one year, less any estimated credit adjustments, are assumed to be their fair values. The fair value of financial liabilities is estimated by discounting the future contractual cash flows at the current market interest rate available to the group for similar financial instruments.

    Gains and losses arising from a change in the fair value of available-for-sale assets are recognised directly in other comprehensive income. In assessing the fair value of financial instruments, the group uses a variety of methods and makes assumptions based on market conditions existing at the reporting date.

    When available-for-sale assets are sold or otherwise disposed of, the cumulative gain or loss recognised in other comprehensive income is included in the determination of net profit. When a decline in fair value of available-for-sale assets has been recognised in equity and there is objective evidence that the assets are impaired, the loss recognised in other comprehensive income is removed and included in the determination of net profit, even though the assets have not been derecognised.

    Interest income on available-for-sale debt securities is calculated using the effective interest method and recognised in the consolidated statement of profit or loss. Dividends on available-for-sale equity instruments are recognised in the consolidated statement of profit or loss when the group's right to receive payment is established and the inflow of economic benefits is probable. Impairment losses are recognised in the consolidated statement of profit or loss when incurred as a result of one or more events that occurred after the initial recognition of available-for-sale investments. A significant or prolonged decline in the fair value of an instrument below its cost is an indicator that it is impaired. The cumulative impairment loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that asset previously recognised in the consolidated statement of profit or loss, is removed from equity and recognised in the consolidated statement of profit or loss.

    Impairment losses on equity instruments are not reversed through the consolidated statement of profit or loss. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in the consolidated statement of profit or loss, the impairment loss is reversed through current period's consolidated statement of profit or loss.

    A provision for impairment of loans and receivables is established when there is objective evidence that the group will not be able to collect all amounts due according to the original terms. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered to be indicators that loans and receivables are impaired. The amount of the provision is the difference between the asset's carrying amount and the present value of estimated future cash flows. The carrying amount of the asset is reduced through the use of a provision account, and the amount of the loss is recognised in the consolidated statement of profit or loss. When receivables is uncollectible, it is written off against the provision account for receivables. Subsequent recoveries of amounts previously written off are credited in the consolidated statement of profit or loss.

    Derecognition of financial instruments.

    The group derecognises financial assets when (i) the assets are redeemed or the rights to cash flows from the assets have otherwise expired or (ii) the group has transferred substantially all the risks and rewards of ownership of the assets or (iii) the group has neither transferred nor retained substantially all risks and rewards of ownership but has not retained control. Control is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated third party without needing to impose additional restrictions on the sale. The group derecognises financial liabilities when, and only when, the group's obligations are discharged, cancelled or they expire. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in profit or loss.

    Income taxes.

    Income taxes have been provided for in the consolidated financial statements in accordance with Ukrainian legislation enacted or substantively enacted by the end of reporting date. The income tax charge comprises current tax and deferred tax and is recognised in the consolidated statement of profit or loss unless it relates to transactions that are recognised, in the same or a different period, in other comprehensive income or directly in equity.

    Current tax is the amount expected to be paid to or recovered from the taxation authorities in respect of taxable profits or losses for the current and prior periods. Taxes other than on income are recorded within operating expenses.  

    Deferred income tax is provided using the balance sheet liability method for tax losses carried forwards and temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. In accordance with the initial recognition exemption, deferred taxes are not recorded for temporary differences on initial recognition of an asset or a liability in a transaction other than a business combination if the transaction, when initially recorded, affects neither accounting nor taxable profit. Deferred tax liabilities are not recorded for temporary differences on initial recognition of goodwill and subsequently for goodwill which is not deductible for tax purposes. Deferred tax balances are measured at tax rates enacted or substantively enacted at the reporting date which are expected to apply to the period when the temporary differences will reverse or the tax losses carried forwards will be utilised. Deferred tax assets and liabilities are netted only within the individual companies of the group. Deferred tax assets for deductible temporary differences and tax losses carried forwards are recorded only to the extent that it is probable that future taxable profit will be available against which the deductions can be utilised.

    Inventories.

    Inventories are recorded at the lower of cost and net realisable value. The cost of inventories includes expenditures incurred in acquiring the inventories, production or coversion costs and other costs incurred in bringing them to their existing location and condition. Cost of manufactured inventories includes an appropriate share of production overheads based on normal operating capacity. The cost of inventories is determined on the first in first out basis for all inventories except for natural gas and weighted average cost for natural gas. Net realisable value is the estimated selling price in the ordinary course of business, less the cost of completion and selling expenses.

    Trade accounts receivable.

    Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment.

    Prepayments made and other current assets.

    Prepayments are carried at cost less provision for impairment. A prepayment is classified as non-current when the goods or services relating to the prepayment are expected to be obtained after one year, or when the prepayment relates to an asset which will itself be classified as non-current upon initial recognition.

    If there is an indication that the assets, goods or services relating to a prepayment will not be received, the carrying value of the prepayment is written down accordingly and a corresponding impairment loss is recognised in the consolidated statement of profit or loss.

    Promissory notes.

    Some purchases may be settled by promissory notes or bills of exchange, which are negotiable debt instruments. Purchases settled by promissory notes are recognised based on management's estimate of the fair value to be given up in such settlements. The fair value is determined with reference to observable market information.

    Cash and cash equivalents.

    Cash and cash equivalents include cash in hand, deposits held at call with banks, and other short-term highly liquid investments with original maturities of three months or less. Cash and cash equivalents are carried at amortised cost using the effective interest method. Restricted balances are excluded from cash and cash equivalents for the purposes of the consolidated cash flow statement. Balances restricted from being exchanged or used to settle a liability for at least twelve months after the reporting date are included in other non-current assets.  

    Share capital.

    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.

    Dividends and mandatory budget contribution of profit share.

    Dividends and mandatory budget contribution of profit share are recognised as a liability and deducted from equity at the reporting date only if they are declared before or on the reporting date. Dividends are disclosed when they are proposed before the reporting date or proposed or declared after the reporting date but before the consolidated financial statements are authorised for issue.

    Value added tax ("VAT").

    In Ukraine VAT is levied at two rates: 20% on sales and imports of goods, works and services within the country, and 0% on the export of goods and provision of works or services to be used outside Ukraine. A taxpayer's VAT liability equals the total amount of VAT collected within a reporting period, and arises on the earlier of the date of shipping goods or rendering services to a customer or the date of receiving payment from the customer. A VAT credit is the amount that a taxpayer is entitled to offset against his VAT liability in a reporting period. Rights to VAT credit arise when a VAT invoice is received, which is issued on the earlier of the date of payment to the supplier or the date goods are received or services are rendered. VAT related to sales and purchases is recognised in the consolidated statement of financial position on a gross basis and disclosed separately as an asset and liability. Where provision has been made for impairment of receivables, the impairment loss is recorded for the gross amount of the debtor, including VAT.

    Borrowings.

    Borrowings include bank borrowings and bonds.

    Borrowing costs.

    Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. All other borrowing costs are recognised in profit or loss in the period in which they are incurred.

    Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently carried at amortised cost using the effective interest method. Bank overdrafts are included into borrowings line item in the consolidated statement of financial position.

    Trade accounts payable.

    Trade accounts payable are recognised and initially measured under the policy for financial instruments mentioned above. Subsequently, instruments with a fixed maturity are re-measured at amortised cost using the effective interest method. Amortised cost is calculated by taking into account any transaction costs and any discount or premium on settlement.

    Advances received.

    Advances received are carried at amounts originally received. Amounts of advances received are expected to be realised through the revenue received from usual activities of the group.

    Provisions.

    Provisions are recognised when the group has a present obligation (legal or constructive) as a result of a past event and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.

    Where the group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain.

    The expense on any provision is presented in the consolidated statement of profit or loss net of any reimbursement. If the effect of time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in provision due to the passage of time is recognised as a finance cost.

    Other liabilities.

    Other financial liabilities are recognised initially at fair value, net of transaction costs incurred, and are subsequently stated at amortised cost using the effective interest method. Other non-financial liabilities are measured at cost.

     
    Contingent assets and liabilities.

    A contingent assets are not recognised in the consolidated financial statements but disclosed when an inflow of economic benefits is probable.

    Contingent liabilities are not recognised in the consolidated financial statements unless it is probable that an outflow of economic resources will be required to settle the obligation and it can be reasonably estimated. Contingent liabilities are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote.

    Revenue recognition.

    Revenue is measured at the fair value of the consideration received or receivable, and are shown net of value added tax and discounts. Revenue from the sale of goods is recognised when the goods are delivered and titles have passed, at which time all the following conditions are satisfied:

    • The group has transferred to the buyer the significant risks and rewards of ownership of the goods;

    • The group retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;

    • The amount of revenue can be measured reliably;

    • It is probable that the economic benefits associated with the transaction will flow to the group; 

    • The costs incurred or to be incurred in respect of the transaction can be measured reliably.

    If the goods are transported to a specified location, revenue is recognised when the goods are passed to the customer at the destination point.

    Revenue from sales of services is recognised when:

    • The amount of revenue can be measured reliably;

    • It is probable that the economic benefits associated with the transaction will flow to the group;

    • The stage of completion of the transaction at the reporting date can be measured reliably;

    • The costs incurred on the transaction and the costs to complete the transaction can be measured reliably.

    Revenue gross versus net presentation.

    When the group acts as a principal, revenue and cost of sales are reported on a gross basis. If the group sells goods or services as an agent, revenue is recorded on a net basis, representing the margin/commission earned. Whether the group is considered to be principal or agent in a transaction depends on analysis of both legal form and substance of the agreement the group enters in.

    Key indicators that group acts as an agent in a transaction are:

    • Another party and not the group is a primary obligor for delivering goods or services;

    • Absence or limited general inventory risk;

    • No exposure to significant risks and rewards associated with the sale of goods or services;

    • Earnings from a transaction are represented by fixed amount; and

    • Lack of discretion to select suppliers and ability to establish a selling price.

    Recognition of expenses.

    Expenses are recorded on an accrual basis. The cost of goods sold comprises the purchase price, transportation costs, commissions relating to supply agreements and other related expenses.

    Finance income and costs.

    Finance income and costs comprise interest expense on borrowings, losses on early repayment of loans, interest income on funds invested, income or loss on origination of financial instruments, unwinding of interest of the pension obligation and provisions, and foreign exchange gains and losses on borrowings and bonds.

    Interest income is recognised as it accrues, taking into account the effective yield on the asset.

    Sale and repurchase agreements and lending of securities.

    Sale and repurchase agreements ("repo agreements") which effectively provide a lender's return to the counterparty are treated as secured financing transactions. Securities sold under such sale and repurchase agreements are not derecognised. The securities are not reclassified in the consolidated statement of financial position unless the transferee has the right by contract or custom to sell or repledge the securities, in which case they are reclassified as repurchased receivables. The corresponding liability is presented within amounts due to other banks or other borrowed funds.

    Employee benefits: Defined Contributions Plan.

    The group makes statutory unified social contributions to the Pension Fund of Ukraine in respect of its employees. The contributions are calculated as a percentage of current gross salary and are expensed when incurred. Discretionary pensions and other post-employment benefits are included in labour costs in the consolidated statement of profit or loss.

    Employee benefits: Defined Benefit Plan. The group provides lump sum benefits, payments on reaching certain age, and other benefits as prescribed by the collective agreement. The liability recognised in the consolidated statement of financial position in respect of the defined benefit pension plan is the present value of the defined benefit obligation at the reporting date. The defined benefit obligation is calculated annually using the projected unit credit method.

    Present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating the terms of the related pension liability.

    Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to other comprehensive income in the period in which they arise. Past service costs are recognised immediately in the consolidated statement of profit or loss.

    27. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS


    In the application of the group's accounting policies, management is required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

    The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

    Critical judgements in applying accounting policies.

    The following are the critical judgements, apart from those involving estimations, that the group management has made in the process of applying the group's accounting policies and that have the most significant effect on the amounts recognised in the consolidated financial statements.

    Investment in "Ukrnafta" PJSC. The group holds 50%+1 share of voting rights in "Ukrnafta" PJSC. The rest is owned by limited number of investors. In March 2015, according to changes in the Law of Ukraine "On Joint-Stock companies", quorum of the General meetings of shareholders was lowered from 60%+1 share down to 50%+1 share. Following those changes and changes in the Supervisory Board of "Ukrnafta" PJSC in July 2015, the company has regained control over "Ukrnafta" PJSC starting from 22 July 2015. Accordingly, the investment in "Ukrnafta" PJSC is accounted for as investment in subsidiary starting from that date (Note 22). The company considers this change as a business combination and applied acquisition method of accounting, respectively.

    Key sources of estimation uncertainty.

    The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year.

    Employee benefit obligations.

    Management assesses post-employment and other employee benefit obligations using the projected unit credit method based on actuarial assumptions which represent management's best estimates of the variables that will determine the ultimate cost of providing post-employment and other employee benefits. The present value of the pension obligations depends on a number of factors that are determined on an actuarial basis using a number of assumptions. The major assumptions used in determining the net cost (income) for pensions include the discount rate and expected salary increases. Any changes in these assumptions will impact the carrying amount of pension obligations. Since there are no long-term, high quality corporate or government bonds issued in Ukrainian hryvnias, significant judgement is needed in assessing an appropriate discount rate. Key assumptions are presented in Note 15.

    Deferred tax asset recognition.

    The deferred tax asset, recognised in the consolidated statement of financial position, represents income taxes recoverable through future deductions from taxable profits. Deferred tax assets are recorded to the extent that realisation of the related tax benefit is probable. In determining future taxable profits and the amount of tax benefits that are probable in the future, management makes judgements and applies estimation based on historic taxable profits and expectations of future taxable income that are believed to be reasonable under the circumstances.

    Tax legislation.

    Ukrainian tax, currency and customs legislation continues to evolve. Conflicting regulations are subject to varying interpretations. Management believes its interpretations are appropriate and sustainable, but no guarantee can be provided against a challenge from the tax authorities (Note 21).

    Decommissioning costs.

    The decommissioning provision represents the present value of the decommissioning costs relating to oil and gas properties, which are expected to be incurred in the future (Note 15). These provisions were recognised, based on group's internal estimates. 

    Main estimates include future market prices for the necessary decommissioning costs, and are based on market conditions and factors. Additional uncertainties relate to the timing of the decommissioning costs, which depends on depletion of the fields, future oil and gas prices and as a result — expected point of time, when there are no further economic benefit in the production.

    Changes in these estimates can lead to the material changes in the provisions recognised in the consolidated statement of financial position.

    Depreciation and depletion of the oil and gas assets.

    Oil and gas assets are depleted using a unit-of-production method. The cost of producing wells is amortised over proved developed reserves. Licence acquisition, common facilities and future decommissioning costs are amortised over total proved reserves. Changes in estimates regarding the volumes of production, proved developed reserves and total proved reserves either downward or upward, can result in the change of related assets utilisation accounting. A reduction in proved developed reserves, as result of future inspections and production will increase depreciation, depletion and amortisation expenses. 

    Impairment of property, plant and equipment.

    Management reviews the carrying amounts of assets to determine whether there are any indicators that those assets are impaired. Latest review was performed during the revaluation of property, plant and equipment performed as at 31 December 2015 (Note 6).

    In making the assessment for general impairment, assets that do not generate independent cash flows are allocated to an appropriate cash-generating unit. The assessment of whether there are any indicators of a potential impairment are based on various assumptions including market conditions, asset utilisation and the ability to utilise the asset for alternative purposes. If an indication of impairment exists, the group estimates the recoverable value (greater of fair value less cost to sell and value in use) and compares it to the carrying value, and records impairment to the extent the carrying value is greater than the recoverable amount. The value in use is based on estimated future cash flows that are discounted to their present value. The estimated future cash flows require management to make a number of assumptions including customer demand, production capacities, future growth rates and the appropriate discount rate. Any change in these estimates may result in impairment in future periods. 

    The group did not identified any indicators of impairment as at 31 December 2015.

    Useful lives of other property, plant and equipment.

    The group's property, plant and equipment, except oil and gas assets are depreciated using straight-line method over their estimated useful lives, which are based on management's business plans and operational estimates.

    The factors that could affect the estimation of the useful life of the asset and its residual value include the following:

    •  Changes in technology;

    •  Changes in maintenance technology;

    •  Changes in regulations and legislation; and

    •  Unforeseen operational issues.

    Any of the above could affect the prospective depreciation of property, plant and equipment and their carrying and residual values. The group reviews the estimated useful lives of property, plant and equipment at the end of each annual reporting period. The review is based on the current condition of the assets and the estimated period during which they will continue to bring economic benefit to the group. Any change in estimated useful life or residual value is recorded on a prospective basis from the date of the change. Latest review of useful lives was performed during the revaluation of property, plant and equipment performed as at 31 December 2015 (Note 6).

    Impairment of trade accounts receivable.

    Management estimates the likelihood of the collection of trade accounts receivable based on an analysis of individual accounts. Factors taken into consideration include an ageing analysis of trade accounts receivable in comparison with the payment history, credit terms allowed to customers and available market information regarding the counterparty's ability to pay. Should actual collections be less than management's estimates, the group would be required to record an additional impairment expense.

    Inventory valuation.

    Inventory are stated at lower of cost or net realisable value. In assessing the net realisable value of its inventories, management bases its estimates on various assumptions including current market prices.

    At each reporting date, the group evaluates its inventories for excess quantities and obsolescence and, if necessary, records an allowance to reduce inventories for obsolete and slow-moving goods. This allowance requires assumptions related to future inventories use. These assumptions are based on inventories ageing and forecasted demand. Any changes in the estimates may impact the amount of the allowances for inventory that may be required.

    28. ADOPTION OF NEW OR REVISED STANDARDS AND INTERPRETATIONS


    Adoption of new and revised International Financial Reporting Standards

    The following standards have been adopted by the group for the first time for the financial year beginning on or after 1 January 2015:

    •  Amendments to IAS 19 "Employee Benefits" — Defined benefit plans: Employee contributions;

    •  Annual Improvements to IFRSs 2010-2012 Cycle;

    •  Annual Improvements to IFRSs 2011-2013 Cycle.

    The adoption of amendments to standards did not have any effect on the financial position or performance reported in the consolidated financial statements and had not resulted in any changes to the group's accounting policies and the amounts reported for the current or prior years.

    Standards and Interpretations in issue, but not yet effective.

    At the date of authorisation of these consolidated financial statements, the following Standards and Interpretations, as well as amendments to Standards were in issue but not yet effective:

     the following Standards and Interpretations, as well as amendments to Standards were in issue but not yet effective

    Management is currently evaluating the impact of the adoption of Amendments to IAS 1: Disclosure Initiative, Amendments to IFRS 10 and IAS 28: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture, Amendments to IFRS 11, Amendments resulting from Annual Improvements Cycles, IFRS 15 Revenue from contracts with customers and IFRS 9 Financial Instruments.

    For other Standards and Interpretations management anticipates that their adoption in future periods will not have a material effect on the consolidated financial statements of the group in future periods.



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