НАК „НАФТОГАЗ УКРАЇНИ“. Річний звіт англійською (2017 рік) - 16

FINANCIAL STATEMENTS

ANNUAL REPORT 2017

245

244

requirements. As the practice 
of implementation of the new 
transfer pricing rules has not 
yet developed and wording of 
some clauses of the rules may be 
subject to various interpretations, 
the impact of challenge of the 
Group’s companies transfer pric-
ing positions by the tax authori-
ties cannot be reliably estimated.

Arbitral Tribunal requests. 

Gas Sales Arbitration.

The Gas Sales Arbitration was 
initiated by both Naftogaz and 
Gazprom on 16 June 2014 under 
the auspices of the Arbitration 
Institute of the Stockholm 
Chamber of Commerce. In 
its Request for Arbitration, 
Gazprom claimed payment of 
unpaid invoices for gas delivered 
under the Gas Sales Contract 
from November 2013 to May 
2014, while Naftogaz claimed a 
retroactive revision of the price 
under the Gas Sales Contract, 
and compensation for previous 
overpayments under the prices 
applied before the revision.

In addition, Gazprom has later 
added a claim for payment of gas 
which Gazprom did not deliver, 
but which Naftogaz allegedly 
nevertheless was obliged to pay 
for under the Contract (the “take 
or pay” claim).

On 31 May 2017 The Arbitral 
Tribunal rendered a separate 
award in the Gas Sales Arbitration. 
The separate award is final and 
legally binding, and sets all 
legal and factual issues required 
to resolve the parties’ claims 
except for certain elements 
and/or values of a numeric or 
quantifiable nature that had 
to be defined before the Final 
Award. The Tribunal in its award 
of 31 May 2017: (a) declared 
“take or pay” claim invalid from 
the date of the Contract and up 

to the date of the Final Award; 
(b) decided that Naftogaz is 
entitled to a market-reflective 
reduction of the sales price and 
to gas market indexation of the 
price formula, with retrospective 
effect from April 2014; (c) has 
declared invalid provisions 
in the Gas Sales Contract in 
respect of a destination clause, 
illegally prohibiting sales of the 
gas outside of Ukraine from 
the date of the Contract. The 
Tribunal has obliged the parties 
to determine the elements of gas 
price formula to be used for gas 
supplies starting from 27 April 
2014 through negotiations. Such 
negotiations took place during 
June-August 2017, but the parties 
failed to reach agreement on 
remaining issues, and thus, the 
Tribunal had to decide on such 
issues on its own. After additional 
oral hearings in October 2017, 
all remaining issues and any 
resulting monetary claims were 
left for the final award.

On 7 November 2017 Gazprom 
has challenged the separate 
award on Gas Sales Arbitration 
in the Court of Appeal of Svea 
(Sweden).

On 22 December 2017 the Arbi-
tral Tribunal rendered the Final 
Award in the Gas Sales Arbitration, 
stating the following:
•

 

Contract price for natural gas 
shall be calculated with 100% 
reference to the European 
hub price under the revised 
price formula.

•

 

Gazprom “take or pay” claim 
was fully rejected.

•

 

Annual contract quantity 
(“ACQ”) of gas that Naftogaz 
is obliged to purchase during 
2018–2019 was set at the 
level of 5.0 billion cubic 
metres. This Final Award also 
contains a quarterly distribu-
tion of gas deliveries in 2018.

•

 

The contractual annual vol-
ume of gas on “take or pay” 
terms (“MAQ”) was set as 80% 
of ACQ.

•

 

It is not responsibility of 
Naftogaz to pay for gas vol-
umes delivered to occupied 
territories of the Donetsk and 
Luhansk regions to the parties 
other than Naftogaz.

•

 

As a result, as set in the 
Final Award, and taking the 
obligation to pay for gas 
consumed but not paid for, 
Naftogaz was ordered to pay 
to Gazprom USD 2,019 million 
and late payment interest in 
amount equal to 0.03% on 
any amount overdue for each 
day of delay in payment after 
22 December 2017 until the 
payment has been made. 
Later, on 17 January 2018, the 
Arbitral Tribunal has amended 
this amount, and has set a 
net payable from Naftogaz 
to Gazprom at the level of 
USD 2,030 million plus respec-
tive late payment interest 
after 22 December 2017.

During January-February 
2018 Naftogaz and Gazprom had 
a number of negotiations to agree 
the gas supply process in 2018. 
Following the Final Award in this 
case, in February 2018 Naftogaz 
has made a prepayment for 
gas deliveries to be made in 
March 2018. However, Gazprom 
has returned this payment and 
refused to make gas supplies 
in March 2018. Such actions 
from Gazprom currently prevent 
Naftogaz from fulfilling the Final 
Award requirements in respect 
of offtaking MAQ volumes in 
2018, and could result in a new 
claim from Naftogaz in respect of 
compensation for losses against 
Gazprom. The Company considers 
Gazprom’s refusal to supply gas as 
a contractual violation and non-
compliance with the Tribunal’s 
Final Award.

Gas Transit Arbitration.

Naftogaz initiated the Gas Transit 
Arbitration on 13 October 2014 
under the auspices of the Arbi-
tration Institute of the Stockholm 
Chamber of Commerce. In its 
Statement of Claim, Naftogaz 
claimed a revision of the transit 
tariff with retroactive effect, com-
pensation for underpayments 
as a result of tariff revision, com-
pensation for underdeliveries, 
amendments to the Gas Transit 
Contract authorising Naftogaz to 
assign its rights and obligations 
under the Contract to “Ukrtrans-
gaz” PJSC or any other entity 
designated as transmission sys-
tem operator, and certain other 
adjustments to the Contract. As 
at 31 December 2017, Naftogaz’s 
maximum monetary claim stood 
at more than USD 12.5 billion 
including interest (up to USD 
10.6 billion excluding interest). 
Gazprom has submitted a coun-
terclaim in amount of approxi-
mately USD 7.0 million including 
interest (up to USD 5.3 million 
excluding interest), but has 
reserved the right to make addi-
tional counterclaims after receiv-
ing the award in the Gas Sales 
Arbitration.

Both the Gas Sales Arbitration 
and the Gas Transit Arbitration 
were initiated by Naftogaz fol-
lowing unsuccessful efforts to 
reach agreement with Gazprom 
in negotiations. The monetary 
claims in both Arbitrations have 
been updated on a continuous 
basis until the awards, inter alia in 
respect of interest calculations.

On 28 February 2018 the Arbitral 
Tribunal rendered the Final Award 
in the Gas Transit Arbitration, stat-
ing the following:
•

 

Naftogaz’s claim for mini-
mum contractual volume 
of gas transit (underdeliv-
eries) during 2009–2017 
was decided in favour of 

Naftogaz. As a result, the 
Tribunal awarded approx. 
USD 4,674 million to be paid 
in favour of Naftogaz by Gaz-
prom for its failure to deliver 
minimum gas transit con-
tract volumes. This amount 
represents compensation of 
losses in this respect, plus 
interest up to 28 Febru-
ary 2018.

•

 

Naftogaz also claimed com-
pensation of VAT that arises on 
damages awarded Naftogaz 
for underdeliveries, taking 
effect as at 1 January 2016. 
However, the Tribunal has 
rejected such claim from Naf-
togaz.

•

 

Naftogaz’s claim for underpay-
ments were not supported, 
as Naftogaz in its request for 
transit tariff revision in 2009 
did not follow the contractual 
requirements. At the same 
time, transit tariff was retro-
spectively revised in relations 
to the adjustment to the tran-
sit tariff as a result of the gas 
price made by the Tribunal in 
the Gas Sales Arbitration.

•

 

The Tribunal rejected Naf-
togaz claim in respect of the 
possibility to assign its rights 
and obligations under the 
Contract to “Ukrtransgaz” PJSC 
or any other entity designated 
as transmission system opera-
tor.

•

 

The Tribunal has also rejected 
Naftogaz claim in respect of 
adjustments to the Gas Transit 
Contract according to the EU 
competition and energy law, 
stating that it is not the role 
of the Tribunal to implement 
reforms in Ukraine but should 
be decided by the Ukrainian 
government.

Further, the Tribunal has per-
formed a set-off in respect of 
amounts owing between the 
parties pursuant to the Gas Sales 
Arbitration and Gas Transit Arbi-

tration, supporting a respective 
Naftogaz request. Consequently, 
a single amount of USD 2,560 mil-
lion payable by Gazprom in favour 
of Naftogaz was ordered by the 
Tribunal. This amount also bears 
a late payment interest. There 
was no settlement of this amount 
performed by the date of these 
separate financial statements. Tak-
ing that Gazprom has appealed 
the final award in the Gas Transit 
Arbitration, and the fact that the 
amount was not settled by the 
date of these separate financial 
statements, management follows 
a prudent approach and does 
not recognise the amount owed 
by Gazprom after the set-off, as 
decided by the Tribunal, as receiv-
able as at 31 December 2017.

As stated above, after both Final 
Awards were rendered, Gazprom 
representatives officially declared 
a refusal to resume deliveries to 
Ukraine as ordered by the Tribu-
nal in the Gas Sales Arbitration. 
Additionally, Gazprom refused 
to confirm its intention to settle 
outstanding amount as decided 
by the Tribunal in the Gas Transit 
Arbitration. Instead, Gazprom has 
officially suggested to amend 
both contracts or to terminate 
them, and thus to reverse the 
awards of the Tribunal. Gazprom 
actions violate and neglect the 
awards rendered by the Tribunal 
that are final and binding for Gaz-
prom. Naftogaz finds this position 
unacceptable and has rejected 
Gazprom’s proposals to make 
amendments to the contracts. 

Despite the fact that the Tribunal 
has rejected Naftogaz claim on 
VAT compensation of losses 
for underdeliveries after 1 Jan-
uary 2016, Naftogaz treats the 
amount awarded as a contractual 
price of services adjustments, 
that is subject to VAT under the 
Tax Code of Ukraine. As a result, 
Naftogaz has recognised respec-
tive VAT liabilities amounting to 

FINANCIAL STATEMENTS

ANNUAL REPORT 2017

247

246

UAH 4,751 million in March 2018, 

payable by 30 April 2018.

Claim to the Russian Federation 

regarding assets in Crimea. In 

October 2016, Naftogaz and its 

subsidiaries initiated Arbitration 

proceeding against the Russian 

Federation about reimbursement 

of losses caused by unlawful 

occupation of Group’s assets in 

Crimea by the Russian Federa-

tion. This arbitration proceeding 

was initiated under Agreement 

between the Cabinet of Ministers 

of Ukraine and the Government of 

the Russian Federation on mutual 

encouragement and protection of 

investments.

On 15 September 2017, Naftogaz 

and its subsidiaries have submitted 

the Statement of Claim to the 

Tribunal under the auspices of 

Permanent Court of Arbitration in 

the Hague. The amount of claim 

will be estimated following the 

Tribunals’ Partial Final Award, which 

is expected in the early 2019.

Legal proceedings. In the normal 

course of business, the Group is 

subject to claims. Where the risk 

of outflow of financial resources 

associated with such claims is 

assumed as probable, a respective 

liability is recognised as a com-

ponent 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 con-

solidated 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 3,569 million (2016: 

UAH 3,928 million). Management 

cannot reliably estimate amount 

of potential losses on these obli-

gations, if any.

Joint operations with Misen 

Enterprises AB, and “Kar-

patygaz” LLC. As a part of deter-

mining the validity of the joint 

arrangement, in July 2016, the 

Group initiated legal proceedings 

in the Stockholm Arbitration on 

termination or recognition as 

invalid of this agreement. Oral 

hearings under the case were 

held in November 2017 and Jan-

uary 2018. Management expects 

that, by late May 2018, the Arbi-

tration will pass a preliminary 

decision on all conceptual issues 

within the said proceedings. Also, 

in accordance with the Ukrainian 

legislation, within the criminal 

proceedings, an issue on the 

validity of entering into this joint 

arrangement is being investi-

gated. 

Irrespectively of the decision 

adopted by the Arbitration, it is 

expected that the joint arrange-

ment between the Group, Misen 

Enterprises AB, and LLC “Kar-

patygaz” will be terminated, and 

the assets of the joint arrange-

ment will be transferred into own-

ership of the Group. Consider-

ation to Misen Enterprises AB and 

LLC “Karpatygaz” for the transfer of 

their interests in the assets of the 

joint arrangement to the Group 

may reach up to USD 363 mil-

lion, depending on the decision 

adopted by the Arbitration, but 

the Management believes that 

the consideration will not exceed 

the carrying amount of the assets. 

Dispute with the non-controlling 

shareholders of “Ukrnafta” 

PJSC in respect of the validity 

and fulfilment of shareholders 

agreement. In January 2010 Naf-

togaz 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, appointment of the Exec-

utive Board and the Supervisory 

board members. Under the share-

holders agreement the Chairman 

of the Board is to be elected from 

among the candidates nominated 

by the non-controlling sharehold-

ers, 6 of 11 Ukrnafta Supervisory 

board members, including 

Chairman, are to be nominated 

by Naftogaz, and remaining 5 

members by the non-controlling 

shareholders.

Under the shareholders agree-

ment, any dispute arising in con-

nection with it is to be resolved 

exclusively by the London Court 

of International Arbitration and 

the shareholder agreement is 

governed by the English law. 

In April 2018 the London court 

of international arbitration came 

to the conclusion that the key 

provisions of the Joint agree-

ments between Naftogaz and the 

companies of non-controlling 

shareholders on corporate man-

agement of Ukrnafta are such that 

cannot be enforced because they 

contradict the imperative norms 

of the corporate legislation of 

Ukraine.

Uncertainty as to the ability of 

“Ukrnafta” PJSC to continue 

as a going concern. Following 

accumulated debts to the State 

Budget of UAH 26,920 million as 

at 31 December 2017 (31 Decem-

ber 2016: UAH 24,379 million), 

limited ability to collect accounts 

receivable and settle prepayments 

made to suppliers with gross 

amount of UAH 22,525 million as 

at 31 December 2017 (31 Decem-

ber 2016: UAH 22,680 million), 

Ukrnafta had insufficient funds 

to satisfy its working capital 

needs and settle its tax payments 

as they fall due. Consequently, 

as at 31 December 2017 and 

2016 Ukrnafta had a negative 

working capital and incurred net 

loss for the year ended 31 Decem-

ber 2016.

In 2017 Ukrnafta extended its 

oil and gas producing licenses 

that were suspended the State 

Fiscal Authority of Ukraine in 

2015–2017. Ukrnafta also applied 

to extend its producing licenses 

expiring in 2018. Management 

believes that these licenses will be 

successfully extended.

If Ukrnafta fails to restructure or 

otherwise ensure settlement of 

overdue accounts receivable, pre-

payments made, extend produc-

tion licenses and perform other 

measures to minimise amount of 

net current liabilities, this could 

lead to insufficient funds to settle 

accumulated tax liabilities in the 

short run, and this will lead to 

additional measures to ensure 

the going concern assumption, 

including negotiations in respect 

of export operations or partial sale 

of assets.

Despite the material uncertainties 

described above, and taking into 

account Ukrnafta’s positive cash 

flow for the year 2017 and man-

agement 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 consoli-

dated financial statements.

Possible transfer of the Com-

pany’s equity interest in the 

subsidiaries to the State. In 1998, 

upon creation of the Company, 

the Government of Ukraine con-

tributed 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 “Prydniprovs-

kiy” Long-Distance Pipeline that 

were reorganised in 2001 into 

JSC “Ukrtransnafta”, JSC “Ukrspet-

stransgaz”, “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 agen-

cies, 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 the 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 Group’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.

Capital commitments. Capital 

commitments for purchase of 

property, plant and equipment, 

and exploration and devel-

opment of oil and gas fields 

comprise UAH 11,573 million as 

at 31 December 2017 (31 Decem-

ber 2016: UAH 1,260 million). 

FINANCIAL STATEMENTS

ANNUAL REPORT 2017

249

248

24� 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 (Note 4), credit risk and 

liquidity risk. According to its 

risk management policy the 

Group identifies, assessed and 

develops actions to minimise 

the potential adverse effects 

on the Group’s financial 

performance for those risks.

Major categories of financial 

instruments:

In millions of Ukrainian hryvnias

Note

31 December 

2017

31 December 2016

(as restated, Note 3)

Other non-current assets

8

 6,118 

 5,832 

Trade accounts receivable

10

 58,988 

 49,209 

Prepayments made and other current assets

11

 1,531 

 1,598 

Сash and bank balances

12

 23,093 

 22,336 

Restricted cash

 1,591 

 680 

Total financial assets

 91,321 

 79,655 

In millions of Ukrainian hryvnias

Note

31 December 

2017

31 December  

2016

Borrowings

14

 (59,315)

 (70,844)

Trade accounts payable

 (8,137)

 (16,234)

Advances received and other current liabilities

16

 (3,381)

 (2,777)

Other long-term liabilities

 – 

 (4)

Total financial liabilities

 (70,833) 

 (89,859)

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 (с) assets and 

liabilities that are exposed to 

other price risk.

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’s exposure to foreign 

currency risk is as follows, based 

on carrying amounts of respective 

currency assets and liabilities:

In millions of Ukrainian hryvnias

31 December 2017

31 December 2016

USD

EUR

Others

USD

EUR

Others

Restricted cash

539

951

–

680

–

–

Cash and bank balances

18,246

2,718

88

14,998

2,740

67

Trade accounts receivable

7,086

–

–

6,642

–

–

Prepayments made and other 
current assets

3

–

–

684

7

–

Other non-current assets

–

307

–

–

245

–

Borrowings

(26,610)

(11,447)

–

(43,316)

(213)

–

Trade accounts payable 

(356)

(4,133)

(4)

(13,602)

(268)

(10)

Advances received and other 
current liabilities

(139)

(67)

–

(85)

–

1

Net (short)/long currency 

position

(1,231)

(11,671)

84

(33,999)

2,511

58

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.

In millions of Ukrainian hryvnias

At 31 December 2017

At 31 December 2016

Impact on

profit or loss

Impact on equity

Impact on

profit or loss

Impact on equity

USD strengthening by 10%

(123)

(123)

(3,400)

(3,400)

USD weakening by 10%

123

123

3,400

3,400

EUR strengthening by 10%

(1,167)

(1,167)

251

251

EUR weakening by 10%

1,167

1,167

(251)

(251)

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 attracts borrowings at 

both fixed and floating interest 

rates. As at 31 December 2017 

almost 34% of the Group’s bor-

rowings were provided at floating 

rates (31 December 2016: 12%). 

The risk of increase in market 

interest rates is monitored by 

the Treasury department of the 

Group. The key objective of man-

aging interest rate risk is to get 

financing at a minimum costs, 

and match the liquidity needs 

with the proceeds from borrow-

ings.

The borrowing activities are 

reviewed on an annual basis. 

Long-term investing activities and 

associated funding are considered 

separately, and are subject to the 

Government of Ukraine approval. 

The maturity dates of financial 

liabilities are further disclosed in 

this Note.

Re-pricing for fixed rate finan-

cial instruments occurs at their 

maturity. Re-pricing for floating 

rate financial instruments occurs 

continually.

If floating interest rates on USD 

and EUR denominated borrow-

ings had been 100 basis points 

higher as at 31 December 2017 

with all other variables remain-

ing constant, net profit for 2017 

would have been UAH 149 mil-

lion lower (2016: UAH 40 million 

lower).

Other price risk. The Group 

determines other price risk as 

risk of possible future losses as 

a result of price volatility during 

purchase and sale transactions. 

Both volatility in gas prices at the 

European gas hubs that impacts 

gas purchase prices, and gas 

sale and supply to customers at 

prices set by the NCREU within 

PSO imposed on the Company 

(Note 2) expose the Group to the 

price risk. To manage this risk and 

offset its negative impact on the 

Group’s financial position, the 

Group, amongst other measures, 

is actively taking part in gas mar-

ket reform in Ukraine and intro-

duce the principle of free pricing 

for all groups of customers. In gas 

supply for groups of customers at 

prices established independently 

by Naftogaz on a monthly basis 

price risk is not considered to be 

significant.

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 obliga-

tion. Exposure to credit risk arises 

as a result of the Group’s sales 

of products on credit terms and 

other transactions with coun-

terparties 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 

within public service obligations 

in respect of gas sales to certain 

gas market participants irrespec-

tive 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 receiv-

able. The main component of this 

provision is a specific loss com-

ponent that relates to individually 

significant exposures.

The maximum exposure to credit 

risk as at 31 December 2017 is 

UAH 91,321 million (31 Decem-

ber 2016: UAH 79,655 million).

The Group does not hold any col-

lateral as security.

Liquidity risk. Prudent liquidity 

management implies maintain-

ing sufficient cash and the avail-

ability of funding to meet exist-

ing obligations as they fall due. 

The Group’s objective is to main-

tain a balance between the con-

tinuity of funding and flexibility 

through the use of credit terms 

provided by suppliers and banks. 

FINANCIAL STATEMENTS

ANNUAL REPORT 2017

251

250

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 capi-

tal construction programs which 

are funded both through existing 

business cash flows and bor-

rowed 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 contrac-

tual maturity date. The amounts 

disclosed in the table are undis-

counted cash flows of principal 

and interest payments. 

The maturity analysis of financial 

liabilities as at 31 December 2017 

was as follows:

In millions of Ukrainian hryvnias

Up to 6 

months

6–12 

months

1–2 years

2–5 years Over 5 years

Total

Borrowings

25,759

23,067

6,321

11,918

159

67,224

Trade accounts payable

8,131

6

-

-

-

8,137

Advances received and other 
current liabilities

3,303

78

-

-

-

3,381

Total

37,193

23,151

6,321

11,918

159

78,742

The maturity analysis of financial liabilities as at 31 December 2016 was as follows:

In millions of Ukrainian hryvnias

Up to 6 

months

6–12 

months

1–2 years

2–5 years Over 5 years

Total

Borrowings

33,684

19,706

16,349

12,123

-

81,862

Other long-term liabilities

4

-

-

-

-

4

Trade accounts payable

16,234

-

-

-

-

16,234

Advances received and other 
current liabilities

2,775

1

1

-

-

2,777

Total

52,697

19,707

16,350

12,123

-

100,877

Gearing ratio. Consistent with 

others in the industry, the Group 

monitors capital on the basis of 

gearing ratio. This ratio is calcu-

lated as net debt divided by total 

capital under management. Net 

debt is calculated as total bor-

rowing (current and non-current 

as shown in the consolidated 

statement of financial position) 

less cash and cash equivalents. 

Total capital under management 

equals total equity as shown in 

the consolidated statement of 

financial position. 

The gearing ratio at the end of the 

reporting period was as following:

In millions of Ukrainian hryvnias

31 December 2017

31 December 2016

Total borrowings (Note 14)

 59,315 

 70,844 

Less: cash and cash equivalents (Note 12)

 (23,093)

 (21,853)

Total Net Debt

 36,222 

 48,991 

Total Equity

 440,519 

 455,589 

Gearing ratio

 0.08 

 0.11 

25� 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 property, plant and 

equipment
Property, plant and equipment 

are measured at fair value at the 

end of each reporting period. The 

following table provides infor-

mation about how the fair values 

of these assets are determined 

(in particular, the valuation tech-

niques and inputs used):

Assets

Fair value 

hierarchy

Valuation techniques and key inputs

Property, plant and 
equipment

3

The Group engages professional independent appraisers to determine the fair value 
of its property, plant and equipment by using a replacement cost method for the 
majority of groups. The fair value is determined as the cost of construction of these 
items at current prices less the economic obsolescence and physical tear and wear 
to date. The main parameter used in this valuation technique are current prices on 
construction.
For items for which there are market analogues (mainly buildings), the sales 
comparison method is used, the prices of market-based sales of comparable 
properties in the immediate proximity are adjusted with reference to differences in 
main parameters (such as floor space of the property). The main parameter used in 
this valuation technique is the price per square meter of a property. 

Property, plant and 
equipment

2

The fair value of cushion gas is determined by application of the market price of gas 
at the end of the reporting date to the volume of cushion gas. The main parameters 
used in this valuation technique are market prices for gas at the end of the reporting 
period. The market value of the cushion gas equals to the market price of gas 
less costs of its pumping and transportation to the point of sale.

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

using a fair value hierarchy:

31 December 2017

In millions of Ukrainian hryvnias

Level 2

Level 3

Total

Property, plant and equipment

150,040

324,021

474,061

Total

150,040

324,021

474,061

31 December 2016

In millions of Ukrainian hryvnias

Level 2

Level 3

Total

Property, plant and equipment

153,566

386,599

540,165

Total

153,566

386,599

540,165

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

FINANCIAL STATEMENTS

ANNUAL REPORT 2017

253

252

Details of the Group’s property, plant and equipment and information about the fair value hierarchy as at 

31 December 2017 are as follows:

Description Group of 

assets

Valuation 

technique

Unobservable 

inputs

Range of unobservable inputs 

Interrelationship 

between key

unobservable 

inputs and fair 

value measurement

Gas trans-

mission 

system and 

gas stor-

ages

Pipelines 
and related 
equipment
Buildings
Machinery 
and equip-
ment
Other fixed 
assets

Depreciated 
replacement 
cost meth-
od using the 
income ap-
proach for 
economic 
obsolescence 
determination

Period when 
transit revenues 
are received

2018–2019

The longer the 
period of income 
generation from 
transit, the higher 
the fair value

Applicable 
transit volumes

110 bcm p.a. (based on minimal 
contract volumes from transit 
contract with Gazprom)

If Gazprom refuses 
to transit less 
then 110 bcm 
p.a. in 2018–2019, 
Naftogaz will 
have the right to 
claim damages 
from Gazprom for 
underdeliveries. 
The longer the 
period of potential 
arbitration 
regarding such 
claims, the 
lower both the 
discounted 
value of such 
underdeliveries 
and the fair value.

Date of 
implementation 
of incentive 
tariff regulation 
system 

The RBA-based tariffs are valid 
for transportation services 
from 2016 (cross-border gas 
pipelines), but they are not 
recognised by Gazprom. 
Domestic entry tariffs (for 
local gas producers) are 
currently put on hold by a 
court decision, but begin to 
operate from 2019. The RBA-
based tariffs for storage begin 
to operate from 2021.

The later the 
introduction of 
incentive tariff / 
entry point fees, 
the lower the fair 
value

The level of 
return on the 
regulatory basis 
of assets for 
storage

11.89%

The higher the bid, 
the higher the fair 
value

Nominal 
WACC for USD-
denominated 
cash flow

11.89%

The higher the 
weighted average 
cost of capital, the 
lower the fair value

Description Group of 

assets

Valuation 

technique

Unobservable 

inputs

Range of unobservable inputs 

Interrelationship 

between key

unobservable 

inputs and fair 

value measurement

Gas ex-

traction 

assets

Pipelines 
and related 
equipment
Buildings
Machinery 
and equip-
ment
Other fixed 
assets

Depreciated 
replacement 
cost meth-
od using the 
income ap-
proach for 
economic 
obsolescence 
determination

Remaining 
period for natural 
gas extraction, 
years (based 
on proved 
and probable 
reserves 
determined by 
an independent 
expert)

0–50

The shorter the 
period, the lower 
the fair value due 
to lower remaining 
periods of the use 
of extraction assets

Natural gas 
selling price

Price for the period from 2018 to 
2020 is regulated for the volume 
of delivery under laying of special 
duties. Market price for the volume 
of delivery to the market is formed 
on the basis of forecast prices for 
natural gas in the German virtual 
gas trading point, plus cost of 
transportation to the Ukrainian 
western border and entrance fee. 
Market price for subsequent period 
is formed on the basis of forecast 
prices for natural gas in the German 
virtual gas trading point, less cost 
of transportation to the Ukrainian 
western border.

The higher the 
selling price, the 
higher the fair 
value

Long-term 
forecast of 
royalty rates 
(estimated for 
selling price)

Natural gas crude oil, deposits at 
depths up to 5000 m – 29%, over 
5000 m – 14%
Oil and gas condensate, deposits at 
depths up to 5000 m – 45%, over 
5000 m – 21%

The higher the rate, 
the lower the fair 
value

Nominal 
weighted 
average cost of 
capital for UAH 
denominated 
cash flows

18.70%

The higher the 
weighted average 
cost of capital, the 
lower the fair value

Oil trans-

mission 

system and 

storages

Pipelines 
and related 
equipment
Building
Machinery 
and 
equipment
Other fixed 
assets

Depreciated 
replacement 
cost method 
using the 
income 
approach for 
economic 
obsolescence 
determination

Cumulative 
factor of physical 
and functional 
depreciations

0.38–0.79

The higher the 
factor, the lower 
the fair value

Nominal WACC 
for UAH-
denominated 
cash flow

17.38%

The higher the 
weighted average 
cost of capital, the 
lower the fair value

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, the carrying 

amounts of financial assets and 

financial liabilities recognised 

in the consolidated financial 

statements approximate their fair 

values as at 31 December 2017 

and 2016.

FINANCIAL STATEMENTS

ANNUAL REPORT 2017

255

254

26� SUBSEQUENT EVENTS

Refusal of “Gazprom” PJSC 

from fulfilling the Final Award 

requirements rendered by the 

Arbitration Institute of the Stock-

holm Chamber of Commerce. On 

28 February 2018 the Tribunal ren-

dered the Final Award in respect 

of the Gas Transit Arbitration, and 

supported Naftogaz’s position 

in respect of Gazprom failure to 

deliver minimum contractual 

volume of gas transit (underde-

liveries) during 2009–2017. As 

a result, the Tribunal awarded. 

USD 4,674 million to be paid in 

favour of Naftogaz by Gazprom as 

a compensation of losses in this 

respect (Note 23). Additionally, 

according to the Final Award 

of the Tribunal in the Gas Sales 

Arbitration, Naftogaz is obliged 

to resume purchases of gas from 

Gazprom according to the current 

Gas Sales Contract. Following 

the Final Award in this case, in 

February 2018 Naftogaz has made 

a prepayment of USD 128 million 

for gas deliveries to be made in 

March 2018. However, Gazprom 

has returned this payment and 

refused to make gas supplies in 

March 2018, and has decreased 

pressure level in transmission 

gas lines at their side of the gas 

transmission system by 20%. As a 

result, the Company had to cover 

deficit in gas volumes from more 

expensive sources of supply at 

the Western border of Ukraine. As 

described in Note 23, such actions 

from Gazprom currently prevent 

Naftogaz from fulfilling the Final 

Award requirements in respect 

of offtaking minimum gas transit 

contract volumes in 2018.

On April 20, 2018 Gazprom has 

filed a Request for Arbitration 

to The Arbitration Institute of 

the Stockholm Chamber of 

Commerce requesting revision 

or, alternatively, setting aside 

of the Gas Transit and Gas Sales 

Contracts because of alleged 

imbalance between the parties’ 

obligations under the Contracts 

following Final Awards in both 

Transit and Sales Arbitration.

Recognition of the Arbitral Tribu-

nal Final Awards. The Company 

has received a legal right to set-

off the amounts owing between 

the parties pursuant to the Gas 

Sales Arbitration and Gas Transit 

Arbitration in February 2018, and 

further accounts for the amounts 

recognised as at 31 December 

2017 in current assets and current 

liabilities on a net basis in its state-

ment of financial position (Notes 

11, 16 and 23).

Dispute with the non-controlling 

shareholders of “Ukrnafta” 

PJSC in respect of the validity 

and fulfilment of shareholders 

agreement. In April 2018 the 

London court of international 

arbitration came to the 

conclusion that the key provisions 

of the Joint agreements between 

Naftogaz and the companies of 

non-controlling shareholders 

on corporate management of 

Ukrnafta are such that cannot be 

enforced because they contradict 

the imperative norms of the 

corporate legislation of Ukraine 

(Note 23). 

Prolongation of the PSO Resolu-

tion. The Cabinet of Ministers of 

Ukraine with its Resolution #228 

dated 28 March 2018 has pro-

longed the period of performing 

public service obligations by the 

Company (Note 2) up to 1 June 

2018.

Loans repayment. During Janu-

ary-April 2018 the Group repaid 

UAH 26,417 million of bank bor-

rowings. This amount includes 

redemption of financing facility 

from the European Bank for 

Reconstruction and Development 

concluded in October 2015 that 

was completed by the Company 

in January 2018.

27� SUMMARY OF SIGNIFICANT 

ACCOUNTING POLICIES

Statement of compliance. These 
consolidated financial statements 
have been prepared in accor-
dance with International Financial 
Reporting Standards (“IFRS”).

Basis of preparation of consoli-

dated financial statements. This 
consolidated financial statements 
have been prepared on the histor-
ical 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 consider-
ation 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 consis-
tently applied to all periods pre-
sented, unless otherwise stated.

Purchases classification and 

presentation. During 2016 
“Ukrtransgaz” PJSC purchased 
inventories and services in the 
amount of UAH 4,279 million and 
performed capital expenditures 
of UAH 1,872 million, included in 
property, plant and equipment. 
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 rel-
evant primary documents in the 
consolidated financial statements 

as at and for the year ended 
31 December 2016.

Functional and presentation 

currency. Items included in the 
financial statements of each of 
the Group’s entities are measured 
using the currency of the pri-
mary economic environment in 
which the Group operates (“the 
functional currency”). The con-
solidated financial statements are 
presented in Ukrainian hryvnias 
(“UAH”), which is the Company’s 
functional and the Group’s pre-
sentation currency. All amounts 
presented in the consolidated 
financial statements are pre-
sented 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. For-
eign 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. Trans-
lation at year end does not apply 
to non-monetary items including 
equity investments. 

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

In Ukrainian 

hryvnias

2017

2016

USD 1.00

28.07

27.19

EUR 1.00

33.50

28.42

During 2017 and 2016 in Ukraine 
there were certain restriction 
in respect of transactions with 
foreign currency, imposed by the 
National Bank of Ukraine (Note 
2). Foreign currency can be easily 

converted at a rate close to the 
National Bank of Ukraine rate. At 
present, UAH is not freely convert-
ible outside Ukraine.

Basis for consolidation. Subsid-
iaries are those companies over 
which the Group has control. 
The Group controls an entity 
when the Group has power over 
the investee; is exposed to, or has 
rights to, variable returns from its 
involvement with the investee 
and has the ability use its power 
to affect its returns. 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.

Intercompany transactions, bal-
ances and unrealised gains or 
losses on transactions between 
the Group companies are elim-
inated. Accounting policies of 
subsidiaries have been changed 
where necessary to ensure con-
sistency 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 elements of control listed 
above.

When the Group has 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 rele-
vant activities of the investee uni-
laterally and, thus, has the power 
over the investee.

The Group considers all relevant 
facts and circumstances in assess-
ing whether or not the Group’s 
voting rights in an investee are 
sufficient to give it power, includ-
ing:
•

 

The size of the Group’s hold-
ing of voting rights relative 
to the size and dispersion of 

FINANCIAL STATEMENTS

ANNUAL REPORT 2017

257

256

holdings of the other vote 

holders;

•

 

Potential voting rights held by 

the Group, other vote holders 

or other parties;

•

 

Rights arising from other con-

tractual arrangements; and

•

 

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 share-

holders’ meetings.

Business combinations. Acquisi-

tions 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 iden-

tifiable assets acquired and the 

liabilities assumed are recognised 

at their fair value, except that:
•

 

Deferred tax assets or liabil-

ities, 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 instru-

ments 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 Pay-

ments 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 Oper-

ations are measured in accor-

dance with that Standard.

Goodwill is measured as the 

excess of the sum of the consid-

eration transferred, the amount 

of any non-controlling interests 

in the acquiree, and the fair 

value of the acquirer’s previ-

ously 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 imme-

diately in profit or loss as a bar-

gain purchase gain.

Non-controlling interests that are 

present ownership interests and 

entitle their holders to a propor-

tionate 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-trans-

action 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 trans-

ferred by the Group in a business 

combination includes assets or 

liabilities resulting from a contin-

gent 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 adjust-

ments 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 consid-

eration 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 cor-

responding 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 acqui-

sition date that have previously 

been recognised in other com-

prehensive income are reclassified 

to profit or loss where such treat-

ment would be appropriate if that 

interest were disposed of.

If the initial accounting for a 

business combination is incom-

plete by the end of the reporting 

period in which the combination 

occurs, the Group reports provi-

sional amounts for the items for 

which the accounting is incom-

plete. Those provisional amounts 

are adjusted during the mea-

surement period (see above), or 

additional assets or liabilities are 

recognised, to reflect new infor-

mation 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-generat-

ing units (or groups of cash-gen-

erating 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 carry-

ing amount of any goodwill allo-

cated 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 impair-

ment loss for goodwill is rec-

ognised 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 attrib-

utable amount of goodwill is 

included in the determination of 

the profit or loss on disposal.

Transactions with non-con-

trolling interests. The Group 

treats transactions with non-con-

trolling interests as transactions 

with equity owners of the Group. 

For purchases from non-con-

trolling interests, the difference 

between any consideration paid 

and the relevant share acquired of 

the carrying amount of net assets 

of the subsidiary is recorded in 

equity. Gains or losses on dispos-

als 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 comprehen-

sive 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 previ-

ously recognised in other com-

prehensive income are reclassified 

to profit or loss.

If the ownership interest in an 

associate is reduced but signif-

icant 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. Asso-

ciates 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 asso-

ciate includes goodwill identified 

on acquisition, net of any accu-

mulated 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 compre-

hensive 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 associ-

ates have been changed where 

necessary to ensure consistency 

with the policies adopted by the 

Group.

Dilution of gains and losses aris-

ing on investments in associates 

are recognised in the consoli-

dated 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 rele-

vant activities require unanimous 

FINANCIAL STATEMENTS

ANNUAL REPORT 2017

259

258

consent of the parties sharing 
control.

The Group recognises its inter-
est 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 arrange-
ment whereby the parties that 
have joint control of the arrange-
ment 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 arrange-
ment, which exists only when 
decisions about the relevant 
activities require unanimous con-
sent of the parties sharing control.

When a group entity undertakes 
its activities under joint opera-
tions, the Group as a joint oper-
ator 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 Com-
pany entered into a concession 
agreement for oil exploration and 
development (“Concession Agree-
ment”) with the Arab Republic of 
Egypt and the Egyptian General 
Petroleum Corporation (“EGPC”) 
on 13 December 2006.

The Concession Agreement 
includes the following conditions:
•

 

Subject to the auditing pro-
visions 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 petro-
leum operations (“Cost Recov-
ery”). Petroleum products 
under the Concession Agree-
ment include crude oil or gas 
and liquefied petroleum gas 
(“LPG”).

•

 

Remaining 75% of the petro-
leum 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 Com-
pany 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 sub-
ject 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.

Segment reporting. Operating 
segments are reported in a man-
ner 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 manage-
ment 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 2017. 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 mate-
rials, direct labour and an appro-
priate proportion of production 
overheads. Сost of acquired and 
self-constructed qualifying assets 
includes borrowing costs.

Any increase in the carrying 
amounts resulting from revalua-
tions 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 impair-
ment 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.

Expenditure incurred to replace 
a component of an item of prop-
erty, plant and equipment that is 
accounted for separately, is capi-
talised with the carrying amount 
of the replaced component being 
derecognised. Subsequent costs 
are included in the asset’s carrying 
amount or recognised as a sep-
arate 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 ben-
efits are expected to be received 
from the continued use of the 
asset. Gains and losses on dis-
posal 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 or dis-
posed, the amounts included in 
revaluation reserve are transferred 
to retained earnings.

Property, plant and equipment 
includes cushion gas which is 
required to be held in the stor-
age facilities for the operating 
activities of the Group company 
in transportation of gas and gas 
storage segments, respectively.

Cushion gas is gas intended for 
maintaining pressure in under-
ground storage facilities of the 
Group and protecting them from 
flooding. Cushion gas is consid-
ered to be fully recoverable based 
on an engineering analysis, and at 
any time that the storage facility 
is closed will be available for sale 
or other use. Cushion gas is reval-
ued when there is an indication 
that its carrying amount as of the 
reporting date is materially differ-
ent from its fair value.

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

Exploration expenses. Explo-
ration 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 connec-
tion with exploration. They also 
include all impairments on explo-
ration wells where no proved 
reserves could be demonstrated.

Research and development 

expenses. Research and devel-
opment (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 recog-
nition 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 success-
ful efforts method of accounting. 

Expenditures at the pre-recon-
naissance stage of hydrocarbon 
reserves’ exploration and evalu-
ation, including the economic 
and technical feasibility studies 
for exploratory field development 
and advisory services, are rec-
ognised as expenses of the period 
when incurred.

Expenses directly related to obtain-
ing special rights to extraction 
of mineral resources reserves are 
capitalised in cost of licenses for 
exploration and recognised as 
intangible assets from the date of 
special rights. Subsequently, the 
relevant assets are accounted for 
using the requirements of IAS 38 
“Intangible Assets”.

Expenses arising at the stage of 
field development, including 
costs of drilling and trenching, 
leases and depreciation of 
property, plant, and equipment, 
are capitalised in construction 
in progress as exploration and 
evaluation assets. The assets 
created are reviewed for impair-
ment on an annual basis. In case 
the exploratory drilling does not 
give a result or it is probable that 
the expenses incurred will not 
generate revenue, the asset is 
partially or fully written off against 
expenses of the period.