• TO THE SHAREHOLDER OF PUBLIC JOINT STOCK COMPANY "NATIONAL JOINT STOCK COMPANY "NAFTOGAZ OF UKRAINE":

    We have audited the accompanying consolidated financial statements of Public Joint Stock company "National Joint Stock company "Naftogaz of Ukraine" (the "company") and its subsidiaries (collectively, the "group"), which comprise the consolidated statement of financial position as at 31 December 2015, and the consolidated statement of profit or loss, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information.

    Management's responsibility for the consolidated financial statements

    Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards (IFRS), and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

    Auditor's responsibility

    Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

    An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

    We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion.

    Basis for qualified opinion

    Matters that affect the current year or both years:

    1) Financial information of "Ukrnafta" PJSC

    As discussed in Note 22 to the consolidated financial statements, the group gained control over "Ukrnafta" PJSC and effective 22 July 2015 ("the date of control transfer") its financial information is consolidated into the group's financial statements. Until 22 July 2015 the group used equity method to account for its investment into "Ukrnafta" PJSC. As at the date of control transfer the group measured assets and liabilities of "Ukrnafta" PJSC as well as the group's investment into "Ukrnafta" PJSC at their fair values. We were unable to obtain sufficient and appropriate audit evidence regarding: 

    a. Recognition and measurement of prepayments made and trade accounts receivable and related finance costs;

    b. Classification of prepayments made as current assets;

    c. Quantities and valuation of inventories;

    d. Measurement of fair value of property, plant and equipment as at the date of control transfer.

    As a result, we were unable to confirm the following amounts related to "Ukrnafta" PJSC:

    Line item in the 2015 consolidated financial statements

    In addition, we were unable to obtain sufficient and appropriate audit evidence regarding substance of certain expenses incurred by "Ukrnafta" PJSC during the year ended 31 December 2014 with the group share of such expenses amounting to UAH 179 million included in the group's share of after-tax results in associates for the year ended 31 December 2014.

    2) Investments in associates and joint operations

    As discussed in Note 7 to the consolidated financial statements, the group has investments in associates and joint operations. These investments are accounted for using the equity method of accounting and proportional consolidation, respectively. We were unable to:

    a. Obtain sufficient and appropriate audit evidence regarding recoverability of trade and other receivables of "Ukrtatnafta" PJSC as at 31 December 2015 and 2014 with the group's share amounting to UAH 611 million and UAH 515 million included in the carrying amount of investments in associates, respectively;

    b. Obtain sufficient and appropriate audit evidence regarding the group's share in assets, liabilities, revenue and expenses of joint operations, where other parties in the joint arrangements with "Ukrgazvydobyvannya" PJSC are responsible for maintaining accounting records, since we were unable to obtain an access to their audited financial statements and financial information prepared in accordance with International Financial Reporting Standards as at 31 December 2015 and for the year then ended as presented below:

    Like item in the 2015 consolidated financial statements

    c. Determine the effect of the departure from uniform accounting policies of the group regarding use of the revaluation model for measurement of its property, plant and equipment by the "Ukrtatnafta" PJSC and by joint operations of "Ukrgazvydobuvannya" PJSC, Misen Enterprises AB and LLC "Carpatygaz".

    3) Purchases classification and presentation

    As discussed in Notes 17, 18 and 26, during the year ended 31 December 2015 and the first quarter of the year ended 31 December 2014, the group has incurred expenditures for:

    expenditures

    As stated in the Notes indicated above the substance of these expenditures may not reflect their legal form according to the primary documents and some of them are under investigation by the office of State Prosecutor of Ukraine or internal investigation of the group. We were unable to obtain sufficient and appropriate audit evidence to satisfy ourselves as to the amounts and nature of the above expenditures and their classification in the consolidated financial statements for the years ended 31 December 2015 and 2014. Consequently, we were unable to determine whether any adjustments to these amounts were necessary.  

    Matters related to prior periods that affect comparability of the current year and the corresponding figures.

    4) Revaluation of property, plant and equipment as at 31 December 2013

    As discussed in Note 26 to the consolidated financial statements, the group has adopted the revaluation model for measurement of property, plant and equipment, which requires revaluations to be carried out with sufficient regularity so that the carrying amount of property, plant and equipment as at the reporting date does not differ materially from its fair value. The group has revalued its property, plant and equipment as at 31 December 2014 and the revaluation demonstrated that the fair value of property, plant and equipment was materially different from its carrying amount before revaluation. Given the significant economic developments since previous revaluation as at 31 December 2009, including changes in natural gas transportation tariffs and costs, selling prices of the group's own produced natural gas and construction costs, we believe the difference between the fair value and carrying amount of property, plant and equipment was also material as at 31 December 2013. Since no revaluation of property, plant and equipment was performed as at that date, we were unable to obtain sufficient and appropriate audit evidence about the impact of this matter on the group's depreciation, depletion and amortisation expense, other comprehensive income, impairment of property, plant, and equipment and income tax expenses for the year ended 31 December 2014. Consequently, we were unable to determine whether any adjustments to these amounts were necessary. Our audit opinion on the consolidated financial statements for the year ended 31 December 2014 was modified accordingly.

    Our opinion on the consolidated financial statements for the year ended
    31 December 2015 is also modified because of the possible effect of this matter on the comparability of the current year's figures and the corresponding figures.

    5) Depletion of oil and gas assets for the year ended 31 December 2014

    As discussed in Note 26 to the consolidated financial statements, the group's oil and gas assets are depleted using a unit-of-production method in proportion to proved developed hydrocarbon reserves. Management engaged an independent expert to conduct a valuation of the group's hydrocarbon reserves as at 31 December 2014. Thus, such valuation was inconsistent with the valuation as at 31 December 2013 as the 2014 valuation involved an independent expert, while the 2013 valuation was based on internal management estimates only. Due to inconsistency of the valuations, we were unable to obtain sufficient and appropriate audit evidence about the impact of this matter on the group's depreciation, depletion and amortisation expense for the year ended 31 December 2014 and the carrying amount of property, plant and equipment as at 31 December 2013.

    Consequently, we were unable to determine whether any adjustments to these amounts were necessary. Our audit opinion on the consolidated financial statements for the year ended 31 December 2014 was modified accordingly. Our opinion on the consolidated financial statements for the year ended 31 December 2015 is also modified because of the possible effect of this matter on the comparability of the current year's figures and the corresponding figures.

    6) Loss of control over subsidiary and impairment of assets located in the Autonomous Republic of Crimea

    As discussed in Note 2 to the consolidated financial statements, in March 2014 the group lost control over one of its subsidiaries, JSC Chornomornaftogaz, the majority of whose assets are located on the territory of the Autonomous Republic of Crimea. As we were not provided with access to the financial information of this subsidiary as at 31 December 2013, we were not able to obtain sufficient and appropriate audit evidence about carrying value of the total assets and liabilities (net of intercompany balances) of this subsidiary as at that date. Additionally, we were not able to observe other assets of the group located on the territory of the Autonomous Republic of Crimea. The group deconsolidated the assets and liabilities of JSC Chornomornaftogaz and fully impaired the other assets located in Crimea during the year ended 31 December 2014. Since the carrying amounts of such assets and liabilities as at 31 December 2013 affect the determination of the loss from discontinued operations and operating expenses for the year ended 31 December 2014, we were unable to determine whether adjustments to the results of operations were necessary. Our audit opinion on the consolidated financial statements for the year ended 31 December 2014 was modified accordingly. Our opinion on the consolidated financial statements for the year ended 31 December 2015 is also modified because of the possible effect of this matter on the comparability of the current year's figures and the corresponding figures.

    7) Observation of the physical inventories counting as at 31 December 2013

    Because we were appointed auditors of the group after the reporting date, we were not able to observe the counting of the physical inventories or satisfy ourselves concerning those inventory quantities by alternative means, and consequently, as to the valuation of inventories of the group amounting of UAH 607 million as at 31 December 2013. Since these inventories affect the determination of the results of operations for the year ended 31 December 2014, we were unable to determine whether adjustments to the results of operations for respective years were necessary.

     

    QUALIFIED OPINION

    In our opinion, except for the possible effects of the matters described in the paragraphs 1-2b and 3-7 of the Basis for Qualified Opinion, and except for the effects of the matter described in the paragraph 2c of the Basis for Qualified Opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the group as at 31 December 2015, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

    EMPHASIS OF MATTERS

    The accompanying consolidated financial statements have been prepared assuming that the group will continue as a going concern. As discussed in Note 2 and Note 21 to the consolidated financial statements, the excess of the group's current liabilities over its current assets as at 31 December 2015 and 2014 amounted to UAH 6.392 million and UAH 17.840 million, respectively. For the years then ended the group incurred net losses in the amounts of UAH 36.323 million and UAH 88.433 million, respectively. Additionally, there is an uncertainty as to the outcome of significant ongoing litigations for the group. These conditions raise substantial doubt about the group's ability to continue as a going concern without continuing support from the Government of Ukraine. Management's plans concerning these matters are discussed in Note 2 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

    We draw your attention to Note 21 to the consolidated financial statements, which describes uncertainty with regard to claim in the Arbitration Institute of the Stockholm Chamber of Commerce issued by the company to JC "Gazprom" and counterclaim from
    JC "Gazprom" to the company.

    We also draw your attention to Note 2 to the consolidated financial statements, which describes that the impact of the continuing economic crisis and political turmoil in Ukraine and their final resolution are unpredictable and may adversely affect the Ukrainian economy and the operations of the group.

    We further draw your attention to Note 3 to the consolidated financial statements, which describes that the consolidated financial statements as at 31 December 2014 and for the year then ended were restated.

    Our opinion is not qualified in respect of these matters.


    29 July 2016
    PJSC Deloitte and Touche

     

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