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Group Ukrnafta

International Financial Reporting StandardsConsolidated Financial Statements andIndependent Auditor’s Report

31 December 2016

Group Ukrnafta

Contents

Independent auditor’s report

Consolidated financial statements

Consolidated statement of financial position..................................................................................................1Consolidated statement of profit or loss and other comprehensive income ....................................................2Consolidated statement of changes in equity.................................................................................................3Consolidated statement of cash flows ...........................................................................................................4

Notes to the consolidated financial statements1. Corporate information..........................................................................................................................52. Operating environment........................................................................................................................53. Summary of significant accounting policies..........................................................................................64. Significant management’s estimates and judgements........................................................................185. New accounting pronouncements......................................................................................................236. Segment information .........................................................................................................................247. Interest in subsidiaries, joint operations, ventures and associates......................................................278. Revenues and cost of sales ..............................................................................................................289. Selling and distribution expenses ......................................................................................................2910. General and administrative expenses................................................................................................3011. Other operating expenses .................................................................................................................3012. Payroll and depreciation, depletion and amortisation costs ................................................................3013. Finance income and costs.................................................................................................................3114. Impairment losses and decrease in fair value ....................................................................................3115. Income tax ........................................................................................................................................3216. Oil and gas properties .......................................................................................................................3317. Exploration and evaluation assets .....................................................................................................3318. Other property, plant and equipment .................................................................................................3419. Inventory...........................................................................................................................................3520. Accounts receivable..........................................................................................................................3521. Prepayments and other current assets ..............................................................................................3622. Share capital and reserves................................................................................................................3723. Provisions .........................................................................................................................................3824. Advances, accruals and other liabilities .............................................................................................4125. Accounts payable..............................................................................................................................4126. Non-interest bearing loans and borrowings........................................................................................4127. Commitments, contingencies and operating risks ..............................................................................4128. Related party disclosures ..................................................................................................................4229. Financial risk management objectives and policies............................................................................4430. Fair value measurements..................................................................................................................4631. Events after the reporting period........................................................................................................47

Group UkrnaftaConsolidated Statement of Profit or Loss and Other Comprehensive incomeAll amounts in thousands of Ukrainian hryvnia, unless otherwise stated

Notes on the pages 5-47 are an integral part of these consolidated financial statements 2

Notes 2016 2015

Revenue 8 22,572,745 29,005,211Cost of sales 8 (12,026,236) (11,641,284)Impairment of oil and gas properties, exploration and evaluation

assets, other property, plant and equipment 14 (827,424) (913,484)

Gross profit 9,719,085 16,450,443

Selling and distribution expenses 9 (1,295,630) (956,173)General and administrative expenses 10 (741,196) (589,401)Other operating expenses 11 (22,731,897) (18,928,609)Other operating income 147,499 223,212Share of (loss)/profits of joint ventures (39,191) 40,018

Loss before foreign exchange differences, interest and tax (14,941,330) (3,760,510)

Finance income 13 2,875,804 1,377,307Finance costs 13 (275,302) (5,604,780)Net foreign exchange gain 192,876 1,544,156

Loss before tax (12,147,952) (6,443,827)

Income tax benefit 15 3,205,060 753,429

Loss for the year (8,942,892) (5,690,398)

Loss is attributable to:

Equity holders of the Company (8,937,236) (5,691,543)Non-controlling interest (5,656) 1,145

Loss for the year (8,942,892) (5,690,398)

Other comprehensive income/(loss)Items that will not be reclassified to profit or lossChange in estimate of asset retirement obligation 23 (115,071) 118,199Income tax effect 20,712 (21,276)Increase in fair value of oil and gas properties, exploration and

evaluation assets, other property, plant and equipment 16,18 6,470,697 5,079,519Income tax effect 15 (1,164,725) (914,314)Decrease in fair value of oil and gas properties and other property,

plant and equipment 14 (4,242,071) (3,149,388)Income tax effect 15 763,573 566,890Remeasurement of post-employment benefit obligation 23 (138,099) (3,071)Income tax effect 15 24,858 553

Total other comprehensive income 1,619,874 1,677,112

Total other comprehensive loss is attributable to: (7,323,018) (4,013,286)

Equity holders of the Company (7,317,362) (4,014,431)Non-controlling interest (5,656) 1,145

Total comprehensive loss for the year (7,323,018) (4,013,286)

Loss per ordinary share for loss attributable to the owners of theCompany, basic and diluted (in UAH per share) (164.91) (104.93)

Group UkrnaftaConsolidated Statement of Changes in EquityAll amounts in thousands of Ukrainian hryvnia, unless otherwise stated


Attributable to the equity holders of the parent Non-control-

linginterests

Totalequity

Issued andfully paid

shares

Assetrevaluation

reserve

Retainedearnings/(Accumu-

lated deficit) Total

Balance at 31 December 2014 1,010,972 13,531,950 563,805 15,106,727 (6,748) 15,099,979

(Loss)/Profit for the year - - (5,691,543) (5,691,543) 1,145 (5,690,398)Other comprehensive loss - 1,679,630 (2,518) 1,677,112 - 1,677,112

Total comprehensive income - 1,679,630 (5,694,061) (4,014,431) 1,145 (4,013,286)

Dividends declared - - (1,264,609) (1,264,609) - (1,264,609)Change in investments in joint

operations - - (132,206) (132,206) - (132,206)

Transfer of revaluation reserve ondisposed and retired oil and gasproperties and other property,plant and equipment - (113,192) 113,192 - - -

Balance at 31 December 2015 1,010,972 15,098,388 (6,413,879) 9,695,481 (5,603) 9,689,878

Loss for the year - - (8,937,236) (8,937,236) (5,656) (8,942,892)Other comprehensive loss - 1,733,115 (113,241) 1,619,874 - 1,619,874

Total comprehensive income - 1,733,115 (9,050,477) (7,317,362) (5,656) (7,323,018)

Change in investments in jointoperations - - 211,738 211,738 - 211,738

Transfer of revaluation reserve ondisposed and retired oil and gasproperties and other property,plant and equipment - (63,084) 63,084 - - -

Balance at 31 December 2016 1,010,972 16,768,419 (15,189,534) 2,589,857 (11,259) 2,578,598

Group UkrnaftaConsolidated Statement of Cash FlowsAll amounts in thousands of Ukrainian hryvnia, unless otherwise stated


Notes 2016 2015

Cash flows from operating activitiesLoss before income taxes (12,147,952) (6,443,827)Adjustments for non-cash items:

Depreciation, depletion and amortisation 12 1,336,976 1,289,476Expense for provisions 4,278,122 6,382,577Effect of change in assumptions for asset retirement obligation

and defined benefit obligation 43,966 62,162Unrealised foreign exchange losses - 5,029Share of profit of joint ventures 39,191 (40,018)Movement in allowance for impairment of accounts receivable and

write-off of impaired prepayments 11 11,579,287 2,222,503Impairment losses of oil and gas properties, exploration and

evaluation assets and other property, plant and equipment, net 14 827,424 913,484Loss on disposal of property plant and equipment 11 - 4,039Write-down of inventories to net realisable value - 138,067Finance cost 13 275,302 5,604,780Finance income 13 (2,875,804) (1,377,307)Movement in other non-current assets 8,270 (21,290)Other non-cash income and expenses 23,213 47,664

Operating cash before working capital changes 3,387,995 8,787,339

Working capital changes:Change in accounts and notes receivable (521,718) (4,228,167)Change in inventory (2,040,670) 1,136,014Change in prepayments and other current assets (240,081) (4,226,507)Change in accounts payable (2,057,728) (4,711,565)Change in advances, accruals and other liabilities (203,613) 459,035Change in rent tax, other taxes and similar charges payable 2,487,605 6,307,148

Cash generated from operations 811,790 3,523,297

Provisions utilised 23 (116,923) (80,816)Income tax paid (56,533) (464,381)

Net cash flows generated by operating activities 638,334 2,978,100

Cash flows from investing activitiesInvestment in exploration and evaluation assets - (51,548)Expenditures on oil and gas assets (207,900) (414,559)Expenditures on other property, plant and equipment, and intangible

assets (189,778) (90,117)Cash contributions to investments in associates (18,268) -Receipts from interest received 17,046 -Proceeds on disposal of other property, plant and equipment 43,717 -Change in restricted cash 60,438 (48,538)

Net cash used in investing activities (294,745) (604,762)

Cash flows from financing activitiesNon-Interest bearing loans and borrowings received - 562,911Repayment of interest-bearing loans and borrowings - (376,185)Repayment of non-interest-bearing loans and borrowings (361,911) -Interest paid - (14,666)Dividends paid 22 (23,300) (2,445,378)

Net cash used in financing activities (385,211) (2,273,318)

Net change in cash and cash equivalents (41,622) 100,020Cash and cash equivalents, at 1 January 289,667 189,647

Cash and cash equivalents, at 31 December 248,045 289,667

Group UkrnaftaNotes to the Consolidated Financial Statements - 31 December 2016All amounts in thousands of Ukrainian hryvnia, unless otherwise stated

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1. Corporate information

Public Joint Stock Company “Ukrnafta” (the “Company” or “PJSC Ukrnafta”) was originally founded andstarted operations as a state owned entity, Production Association “Ukrnafta”. In 1994, the Company wasincorporated and privatised and was registered as a joint stock company in accordance with the laws ofUkraine.

The principal activities of the Company, its subsidiaries, associates, joint operations and joint ventures(together referred to as the “Group”) are to conduct exploration and to extract and sell oil and gas, to operategas-processing plants and petrol filling stations, and to perform related oilfield services in Ukraine. As at31 December 2016 the Company was organised on the basis of six extraction divisions, three drilling andexploration divisions, three gas processing plants, a number of research, auxiliary and support units and 537operating petrol filling stations. The principal activities of the Company are further described in Note 3.Additionally, the Company has subsidiaries, associates and participates in certain joint ventures and jointoperations to explore and extract oil and gas (Note 4). All of the business and production facilities of theCompany are located in Ukraine.

In July 2015 the new Chairman of Management Board was appointed by the Shareholders Meeting. Inaddition, during September 2015 – February 2016 the remaining members of Management Board werereplaced by new executives.

The shares of the Company are distributed amongst Ukrainian and foreign legal entities and individuals.50% plus 1 share belongs to the state-owned company National Joint Stock Company “Naftogaz of Ukraine”(“Naftogaz”). The Government of Ukraine, represented by the Cabinet of Ministers of Ukraine oversees thestate control of the Naftogaz.

The Company is listed on the Ukrainian stock exchange.

The address and domicile of the Company is 3-5, Nestorivsky Provulok, Kyiv, Ukraine.

2. Operating environment

The ongoing political and economic instability in Ukraine which commenced at the end of 2013 and led to adeterioration of State finances, volatility of financial markets, illiquidity on capital markets, higher inflation anddepreciation of the national currency against major foreign currencies has continued in 2016, though to alesser extent as compared to 2014–2015.

The inflation rate in Ukraine during 2016 reduced to 12% (as compared to 43% in 2015), while GDP returnedto growth of 1% (after 10% decline in 2015).

Devaluation of Ukrainian hryvnia (“UAH”) during 2016 has been moderate. As at the date of this report theofficial exchange rate of Hryvnia against US dollar was UAH 26.67 per USD 1, compared to UAH 27.19 perUSD 1 as of 31 December 2016 (31 December 2015: UAH 24.00 per USD 1). In 2016 the National Bank ofUkraine (“NBU”) has made certain steps to ease the currency control restrictions introduced in 2014–2015.In particular, the required share of foreign currency for mandatory sale was decreased from 75% to 65%starting from 9 June 2016 and to 50% starting from 5 April 2017 and the settlement period for export-importtransactions in foreign currency was increased from 90 to 120 days starting from 28 July 2016. Also startingfrom 13 June 2016 the NBU allowed Ukrainian companies to pay dividends to non-residents with a limit ofUSD 5 million per month.

The central bank of Ukraine prolonged these restrictions several times during 2015 – 2016 and the currentrestrictions are effective until rescinded by the NBU (with minor exceptions, including mandatory conversionof foreign currency proceeds, which are set to expire on 16 June 2017). The IMF continued to support theUkrainian government under the four-year Extended Fund Facility (“EFF”) Programme approved in March2015, providing the fourth tranche of approximately USD 1 billion in April 2017. Further disbursements of IMFtranches depend on the continued implementation of Ukrainian government reforms, and other economic,legal and political factors.

The banking system remains fragile due to its weak level of capital, low asset quality caused by theeconomic situation, currency depreciation, changing regulations and other factors.

The conflict in the parts of Eastern Ukraine which started in spring 2014 has not been resolved to date.However, there was no substantial escalation of the conflict since the signing of ceasefire agreements inFebruary 2015. The relationships between Ukraine and the Russian Federation remained strained.


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2. Operating environment (Continued)

On 1 January 2016, the agreement on the free trade area between Ukraine and the EU came into force. Justafter that the Russian government implemented a trading embargo on many key Ukrainian export products.In response, the Ukrainian government implemented similar measures against Russian products.

Despite certain improvements in 2016, the final resolution and the ongoing effects of the political andeconomic situation are difficult to predict but they may have further severe effects on the Ukrainian economyand the Group’s business.

3. Summary of significant accounting policies

1) Basis of preparation

These consolidated financial statements have been prepared in accordance with International FinancialReporting Standards (“IFRS”) as issued by the International Accounting Standards Board (IASB).

The Group maintains its accounting records in accordance with IFRS.

These consolidated financial statements have been prepared under the historical cost convention, asmodified by the revaluation of oil and gas properties, other property, plant and equipment measured usingfair value revaluation model (excluding vehicles and other fixed assets which are measured at cost lessimpairment). The consolidated financial statements are presented in Ukrainian hryvnia and all values arerounded to the nearest thousands, except when otherwise indicated.

The consolidated financial statements for the year to 31 December 2016 were authorised for issue on25 April 2017.

2) Basis of consolidation

The consolidated financial statements comprise the financial statements of PJSC “Ukrnafta”, its subsidiaries,associates, joint ventures and joint operations as at 31 December 2016.

Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtainscontrol, and continue to be consolidated until the date when such control ceases. The financial statements ofthe subsidiaries are prepared for the same reporting period as the parent company, using consistentaccounting policies. All intra-group balances, transactions, unrealised gains and losses resulting from intra-group transactions and dividends are eliminated in full.

3) Subsidiaries

Subsidiaries are those companies in which the Group, directly or indirectly, has an interest of more than 50%of voting rights or otherwise has the ability to use power to affect the amounts of Group’s returns. Theexistence and effect of potential voting rights that are presently exercisable or presently convertible areconsidered when assessing whether the Group controls another entity.

4) Interests in joint ventures and joint operations

The Group has interests in joint ventures and joint operations. Joint operations are contractual arrangementswhereby two or more parties undertake an economic activity that is subject to joint control.

The Group accounts for its interest in joint operations by accounting its assets, including its share of anyassets held jointly; its liabilities, including its share of any liabilities incurred jointly; its revenue from the saleof its share of the output arising from the joint operation; its share of the revenue from the sale of the outputby the joint operation; and its expenses, including its share of any expenses incurred jointly.

Joint venture involves the establishment of a separate entity in which each venture has an interest. A jointventure is a joint arrangement whereby the parties that have joint control of the arrangement have rights tothe net assets of the arrangement.

The Group recognises its interest in the joint ventures using the equity method of accounting. Under theequity method, the investment in the joint venture is carried in the statement of financial position at cost pluspost acquisition changes in the Group’s share of net assets of the joint venture. Goodwill relating to the jointventure is included in the carrying amount of the investment and is neither amortised nor individually testedfor impairment.

The consolidated statement of profit and loss and other comprehensive income (“OCI”) reflects the share ofthe results of operations of the joint venture. There were no changes recognised directly in equity or othercomprehensive income for Joint ventures in 2016.


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3. Summary of significant accounting policies (Continued)

The share of profit of joint ventures is shown on the face of the statement of comprehensive income. This isthe profit attributable to the Group and therefore is profit after tax and non-controlling interests in thesubsidiaries of the joint ventures.

The financial statements of the joint venture and joint operation are prepared for the same reporting periodas the parent company. Where necessary, adjustments are made to bring the accounting policies in line withthose of the Group.

After application of the equity method, the Group determines whether it is necessary to recognise anadditional impairment loss on the Group’s investment in its joint ventures. The Group determines at eachreporting date whether there is any objective evidence that the investment in the joint venture is impaired. Ifthis is the case the Group calculates the amount of impairment as the difference between the recoverableamount of the joint venture and its carrying value and recognises the amount in the statement ofcomprehensive income.

If the Group’s share of losses of an associate or a joint venture equals or exceeds its interest in theassociate or joint venture, it discontinues recognising its share of further losses. After the Group’s interest isreduced to zero, additional losses are provided for, and a liability is recognised, only to the extent that theGroup has incurred legal or constructive obligations or made payments on behalf of the associate or jointventure. If the associate or joint venture subsequently reports profits, the Group resumes recognising itsshare of those profits only after its share of the profits equals the share of losses not recognised.

5) Associates

Associates are entities over which the Group has significant influence (directly or indirectly), but not control,generally accompanying a shareholding of between 20 and 50 percent of the voting rights. Investments inassociates are accounted for using the equity method of accounting and are initially recognised at cost.Dividends received from associates reduce the carrying value of the investment in associates. Other post-acquisition changes in Group’s share of net assets of an associate are recognised as follows: (i) the Group’sshare of profits or losses of associates is recorded in the consolidated profit or loss for the year as share ofresult of associates, (ii) the Group’s share of other comprehensive income is recognised in othercomprehensive income and presented separately, (iii); all other changes in the Group’s share of the carryingvalue of net assets of associates are recognised in profit or loss within the share of result of associates.

However, 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 hasincurred obligations or made payments on behalf of the associate.

Unrealised gains on transactions between the Group and its associates are eliminated to the extent of theGroup’s interest in the associates; unrealised losses are also eliminated unless the transaction providesevidence of an impairment of the asset transferred.

6) Foreign currency translation

Items included in the consolidated financial statements of each of the Group’s entities are measured usingthe currency of the primary economic environment in which the Group operates. The consolidated financialstatements are presented in Ukrainian hryvnia, which is the functional currency of the Group, its jointoperations, joint ventures, subsidiaries and associates and the Group’s presentation currency.

Transactions in foreign currencies are initially recorded in the functional currency rate ruling at the date of thetransaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at thefunctional currency rate of exchange ruling at the reporting date. All differences are taken to profit and loss.Non-monetary items that are measured in terms of historical cost in a foreign currency are translated usingthe exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in aforeign currency are translated using the exchange rates at the date when the fair value was determined.

7) Pre-license costs

Pre-license costs are expensed in the period in which they are incurred.

8) Exploration and evaluation expenditure

Oil and natural gas exploration and evaluation (“E&E”) expenditure is accounted using the “successfulefforts” method. Under this method “E&E” expenditure is initially capitalised as an E&E asset until theexploration work is complete and the results have been evaluated.


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Such expenditure includes employee remuneration, materials and fuel used, acquisition of rights to explore,topographical, geological, geochemical and geophysical studies, exploratory drilling, sampling and activitiesin relation to evaluating the technical feasibility and commercial viability of production.

If the exploration for and evaluation of hydrocarbons in the specific area have not led to the discovery ofcommercially viable quantities of hydrocarbons, the exploration asset is tested for impairment. In general, theGroup defines commercial reserves as proved developed reserves.

If no reserves are found and the entity has decided to discontinue exploration and evaluation activities in thespecific areas, the exploration and evaluation assets are written off.

If extractable hydrocarbons are found and, subject to further appraisal activity, which may include the drillingof further wells (exploration or exploratory-type stratigraphic test wells), are likely to be capable ofcommercial development, the costs continue to be carried as an asset. All such carried costs are subject totechnical, commercial and management review at least once a year to confirm the continued intent todevelop or otherwise extract value from the discovery. When proved reserves of oil and natural gas aredetermined and development is sanctioned, the relevant expenditure is transferred to oil and gas propertiesafter assessment and any recognition of impairment.

Following the initial recognition at cost, exploration and evaluation assets are measured at cost less anyimpairment.

9) Development expenditure

Expenditure on the construction, installation or completion of infrastructure facilities such as platforms,pipelines and the drilling of development wells is capitalised within oil and gas properties.

10) Oil and gas properties and other property, plant and equipment

Following initial recognition at cost, items of oil and gas properties and other property, plant and equipment,except for vehicles and other fixed assets, are measured at fair values less depreciation, depletion andimpairment charged subsequent to the date of the revaluation. Vehicles and other fixed assets are measuredat cost less accumulated depreciation and any impairment losses.

Valuations are performed frequently enough to ensure that the fair value of a revalued asset does not differmaterially from its carrying amount. Fair value of specialised assets, representing the majority of assetsbeing revalued, is determined using the depreciated replacement cost approach as adjusted for the amountof economic obsolescence. The fair value of non-specialised assets is determined using the marketapproach. Such valuation was performed as at 31 December 2016.

When items of oil and gas properties and other property, plant and equipment are revalued the accumulateddepletion and depreciation is eliminated against the gross carrying amount of the asset and the net amountrestated to the revalued amount of the asset. Any revaluation surplus is credited to other comprehensiveincome and accumulated in asset revaluation reserve included in the equity section of the statement offinancial position, except to the extent that it reverses a revaluation decrease of the same asset previouslyrecognised in profit or loss, in which case the increase is recognised there. Any revaluation deficits arerecognised in profit or loss, except where for deficits directly offsetting a previous surplus on the same asset,in which case the deficit is directly offset against the surplus in the asset revaluation reserve. Upon disposal,any revaluation reserve relating to the particular asset being disposed is transferred to retained earnings.

The initial cost of an asset comprises its purchase price or construction cost, any costs directly attributable tobringing the asset into operation, the initial estimate of the decommissioning obligation, for qualifying assetsand borrowing costs. The purchase price or construction cost is the aggregate amount paid and the fairvalue of any other consideration given to acquire the asset.

Property, plant and equipment items are derecognised upon disposal or when no future economic benefitsare expected from its use or disposal. Any gain or loss arising on disposal of the asset (calculated as thedifference between the net disposal proceeds and the carrying amount of the asset) is included in profit andloss in the year of such disposal. The assets’ residual values, useful lives and methods of depreciation arereviewed and adjusted, if appropriate, at the end of each financial year.

The estimated costs of dismantling oil and gas production facilities, including abandonment and siterestoration costs are included as a component of oil and gas properties and depleted on a unit-of-productionbasis.


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Certain social assets held by the Group are not recognised in these consolidated financial statements, asthese assets are not expected to bring future economic benefits to the Group. Ongoing maintenance isexpensed as incurred.

Depreciation, depletion and amortisation

Depreciation of property, plant and equipment and amortisation of intangibles assets, excluding oil and gasproperties, is calculated on a straight line basis over the useful life of the assets. Depletion of oil and gasproperties are calculated using the unit-of-production method for each field based upon proved developedreserves.

Useful Lives

Depreciation of property, plant and equipment, excluding oil and gas properties is calculated over thefollowing useful lives of the assets:

Petrol filling stations 8 to 33 yearsBuildings 20 to 50 yearsMachinery and equipment (including pipelines) 3 to 35 yearsOil and gas processing equipment 5 to 35 yearsVehicles, office and other equipment 5 years

Major maintenance and repairs

Expenditure on major maintenance refits or repairs comprises the cost of replacement assets or parts ofassets, inspection costs and overhaul costs. Expenditure incurred to replace a component of an item ofproperty, plant and equipment that is accounted for separately, is capitalised with the carrying amount of thereplaced component being written off. Subsequent costs are included in the asset’s carrying amount orrecognised as a separate asset, as appropriate, only when it is probable that future economic benefitsassociated with the item will flow to the Group and the cost of the item can be measured reliably. Where partof the asset was not separately considered as a component, the replacement value is used to estimate thecarrying amount of the replaced assets which is immediately written off. Inspection costs associated withmajor maintenance programmes are capitalised and amortised over the period to the next inspection. Allother maintenance costs are expensed as incurred.

11) Intangible assets

Intangible assets mainly represent computer software. Amortisation of intangible assets is calculated on astraight-line basis over the estimated useful life of each particular type of asset varying from 3 to 5 years.The amortisation period and the amortisation method for an intangible asset are reviewed at least at eachfinancial year-end. The carrying values of intangible assets are reviewed for impairment when events orchanges in circumstances indicate that the carrying value may not be recoverable.

12) Other non-current assets

Included in other non-current assets are intangible assets that represent rights to charge NJSC “Naftogaz”for natural gas, produced by the Group and physically transferred to the National Gas Transportation Systemof Ukraine. These intangible assets are initially recognised at cost. After initial recognition, intangible assetsare carried at their cost less accumulated impairment losses, if any. These intangible assets have indefiniteuseful lives and are not amortised, but tested for impairment at least annually.

13) Impairment of non-financial assets

The Group assesses at each reporting date whether there is an indication that an asset may be impaired. Ifany indication exists, or when annual impairment testing for an asset is required, the Group makes anestimate of the asset's recoverable amount. An asset's recoverable amount is the higher of an asset or cash-generating units (“CGU”) fair value less costs of disposal and its value in use and is determined for anindividual asset, unless the asset does not generate cash inflows that are largely independent of those fromother assets or groups of assets.

Where the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is consideredimpaired and is written down to its recoverable amount. In assessing fair value less cost of disposal, theestimated future cash flows are discounted to their present value using a post-tax discount rate that reflectscurrent market assessments of the time value of money and the risks specific to the asset. In determining fairvalue less costs of disposal, an appropriate valuation model is used. For the purpose of oil and gasproperties, assessment is made on a field-by-field basis, as fields are taken to be cash-generating units.


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Notwithstanding this assumption, if it is evidential that certain, clearly identifiable, parts of the field (i.e. well)will not generate any future economic benefits, the impairment of part of the field may be assessedseparately.

For the purposes of assessing impairment of oil and gas properties, a reserves report is commissioned bythe Group from an independent petroleum engineering company. Such a reserves report was commissionedby the Group as at 30 June 2016. In performing its impairment assessment, the Group took the definition ofestimated future cash flows to be those which would be expected from the Group’s proved developedreserves.

The Group bases its impairment calculation on detailed budgets and forecast calculations which are preparedseparately for each of the Group’s cash generating units to which the individual assets are allocated. Thesebudgets and forecast calculations are generally covering a period of five years or years till full depletion ofreserves (for oil and gas properties). For longer periods, a long-term growth rate is calculated and applied toproject future cash flow after the fifth year.

Impairment losses are recognised in profit or loss, except where they relate to property previously revaluedand the revaluation was taken to other comprehensive income (“OCI”), in which case the impairment is alsorecognised in other comprehensive income up to the amount of revaluation reserve previously recognised.

An assessment is made at each reporting date as to whether there is any indication that previouslyrecognised impairment loss may no longer exist or may have decreased. If such indication exists, the Groupmakes an estimate of the relevant recoverable amount. A previously recognised impairment loss is reversedonly if there has been a change in the estimates used to determine the asset's recoverable amount since thelast impairment loss was recognised. If that is the case the carrying amount of the asset is increased to itsrecoverable amount. Any increase in the carrying amounts resulting from revaluation are credited to otherreserves in equity through other comprehensive income. Decreases that offset previously recognisedincreases of the same asset are charged against other reserves in equity through other comprehensiveincome; all other decreases are charged to the income statement. However, to the extent that an impairmentloss on the same revalued asset was previously recognised in the income statement, a reversal of thatimpairment loss is also recognised in the income statement.

14) Financial instruments - key measurement terms

Depending on their classification financial instruments are carried at fair value, cost, or amortised cost asdescribed below.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderlytransaction between market participants at the measurement date. The best evidence of fair value is price inan active market. An active market is one in which transactions for the asset or liability take place withsufficient frequency and volume to provide pricing information on an ongoing basis. Fair value of financialinstruments traded in an active market is measured as the product of the quoted price for the individual assetor liability and the quantity held by the entity. This is the case even if a market’s normal daily trading volumeis not sufficient to absorb the quantity held and placing orders to sell the position in a single transaction mightaffect the quoted price.

Amortised cost is the amount at which the financial instrument was recognised at initial recognition less anyprincipal repayments, plus accrued interest, and for financial assets less any write-down for incurredimpairment losses. Accrued interest includes amortisation of transaction costs deferred at initial recognitionand of any premium or discount to maturity amount using the effective interest method. Accrued interestincome and accrued interest expense, including both accrued coupon are not presented separately and areincluded in the carrying values of related items in the statement of financial position as current or non-currentliabilities depending on maturity date.

The effective interest method is a method of allocating interest income or interest expense over the relevantperiod, so as to achieve a constant periodic rate of interest (effective interest rate) on the carrying amount.The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts(excluding future credit losses) through the expected life of the financial instrument or a shorter period, ifappropriate, to the net carrying amount of the financial instrument. The effective interest rate discounts cashflows of variable interest instruments to the next interest repricing date, except for the premium or discountwhich reflects the credit spread over the floating rate specified in the instrument, or other variables that arenot reset to market rates. Such premiums or discounts are amortised over the whole expected life of theinstrument. The present value calculation includes all fees paid or received between parties to the contractthat are an integral part of the effective interest rate.


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15) Financial assets

Initial recognition

The Group’s principal financial instruments comprise receivables, prepayments for financial instruments,cash and cash equivalents and short-term deposits. Financial assets are recognised initially at fair value plusdirectly attributable transaction costs. Fair value at initial recognition is best evidenced by the transactionprice.

A gain or loss on initial recognition is only recorded if there is a difference between fair value and transactionprice which can be evidenced by other observable current market transactions in the same instrument or bya valuation technique with the inputs including only data from observable markets.

All regular way purchases and sales of financial assets and prepayments for financial assets are recognisedon the trade date, which is the date that the Group commits to purchase the asset or date whenprepayments for the asset is made. Regular way purchases or sales are purchases or sales of financialassets that require delivery of assets within the period generally established by regulation or convention inthe marketplace.

As at 31 December 2016 and as at 31 December 2015 none of the Group’s financial assets were classifiedas financial assets at fair value through profit or loss, available for sale or held-to-maturity investments.

Trade and other receivables, prepayments for financial instruments

Trade receivables and prepayments for financial instruments are initially recognised at fair value andsubsequently measured at amortised cost using the effective interest rate method, less an allowance for anyuncollectable amounts. Allowance is established when there is objective evidence that the Group will not beable to collect all amounts due according to the original terms of receivables. Significant financial difficultiesof the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default ordelinquency in payments are considered indicators that the trade receivable is impaired. The amount of theallowance is the difference between the carrying amount and the recoverable amount, being the presentvalue of expected cash flows, discounted at the financial assets original effective interest rate. The carryingamount of the asset is reduced through the use of an allowance account and the amount of the loss isrecognised in profit or loss within other operating expenses. When a trade receivable or prepayment forfinancial instrument is uncollectible it is written off against the allowance account. Subsequent recoveries ofamounts previously written off are credited against other operating expenses.

Gains and losses are recognised in profit or loss when the assets are derecognised as well as through theeffective interest rate (EIR) amortisation process. Amortised cost is calculated by taking into account anydiscount or premium on acquisition and fee or costs that are an integral part of the EIR. The EIR amortisationis included in finance income and finance costs in the statement of profit or loss and other comprehensiveincome.

Cash and cash equivalents

Cash and cash equivalents includes cash in hand, deposits held at call with banks, and other short-termhighly liquid investments with original maturities of three months or less. Restricted balances are excludedfrom cash and cash equivalents for the purposes of the statement of cash flows. Restricted cash comprisesdeposits or bank accounts restricted in use as a result of the Group’s commitment to withdraw the funds fordesignated purposes only. Balances restricted from being exchanged or used to settle a liability for at leasttwelve months after the reporting date are included in other non-current assets.

Derecognition

A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets)is derecognised when:

The rights to receive cash flows from the asset have expired.

The Group has transferred its rights to receive cash flows from the asset or has assumed an obligationto pay the received cash flows in full without material delay to a third party; and either (a) the Grouphas transferred substantially all the risks and rewards of the asset, or (b) the Group has neithertransferred nor retained substantially all the risks and rewards of the asset, but has transferred controlof the asset.


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16) Impairment of financial assets

The Group assesses at each reporting date whether there is any objective evidence that a financial asset ora group of financial assets is impaired. A financial asset or a group of financial assets is deemed to beimpaired if, and only if, there is objective evidence of impairment as a result of one or more events that haveoccurred after the initial recognition of the asset (an incurred ‘loss event’) and that loss event has an impacton the estimated future cash flows of the financial asset or the group of financial assets that can be reliablyestimated.

Evidence of impairment may include indications that the debtors or a group of debtors is experiencingsignificant financial difficulty, default or delinquency in interest or principal payments, the probability that theywill enter bankruptcy or other financial reorganisation and where observable data indicate that there is ameasurable decrease in the estimated future cash flows, such as changes in arrears or economic conditionsthat correlate with defaults.

Assets carried at amortised cost

For financial assets carried at amortised cost, the Group first assesses whether objective evidence ofimpairment exists individually for financial assets that are individually significant, or collectively for financialassets that are not individually significant. If the Group determines that no objective evidence of impairmentexists for an individually assessed financial asset, whether significant or not, it includes the asset in a groupof financial assets with similar credit risk characteristics and collectively assesses them for impairment.Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be,recognised are not included in a collective assessment of impairment.

If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measuredas the difference between the assets carrying amount and the present value of estimated future cash flows(excluding future expected credit losses that have not yet been incurred). The present value of the estimatedfuture cash flows is discounted at the financial assets original effective interest rate.

The carrying amount of the asset is reduced through the use of an allowance account and the amount of theloss is recognised in profit or loss. Interest income continues to be accrued on the reduced carrying amountand is accrued using the rate of interest used to discount the future cash flows for the purpose of measuringthe impairment loss. The interest income is recorded as part of finance income in the statement of profit orloss and other comprehensive income. Financial asset together with the associated allowance are written offwhen there is no realistic prospect of future recovery and all collateral has been realised or has beentransferred to the Group. If, in a subsequent year, the amount of the estimated impairment loss increases ordecreases because of an event occurring after the impairment was recognised, the previously recognisedimpairment loss is increased or reduced by adjusting the allowance account. If a future write-off is laterrecovered, the recovery is credited to other operating expense.

17) Financial liabilities

The Group classifies its financial liabilities as loans and borrowings. The Group determines the classificationof its financial liabilities at initial recognition. The Group does not have any financial liabilities carried at fairvalue through profit or loss.

All financial liabilities are recognised initially at fair value and in the case of loans and borrowings, plusdirectly attributable transaction costs. After initial recognition, all of the Group’s financial liabilities aremeasured at amortised cost using the effective interest rate method.

Gains and losses are recognised in profit or loss when the liabilities are extinguished as well as through theeffective interest rate method (EIR) amortisation process. Amortised cost is calculated by taking into accountany discount or premium on acquisition and fee or costs that are an integral part of the EIR. The EIRamortisation is included in finance cost in the statement of profit or loss and other comprehensive income.

Derecognition of financial liabilities

A financial liability is derecognised when the obligation under the liability is discharged or cancelled orexpires.


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Where an existing financial liability is replaced by another from the same lender on substantially differentterms, or the terms of an existing liability are substantially modified, such an exchange or modification istreated as a derecognition of the original liability and the recognition of a new liability, and the difference inthe respective carrying amounts is recognised in the profit or loss.

18) Offsetting financial instruments

Financial assets and liabilities are offset and the net amount reported in the statement of financial positiononly when there is a legally enforceable right to offset the recognised amounts, and there is an intention toeither settle on a net basis, or to realise the asset and settle the liability simultaneously. Such a right of setoff (a) must not be contingent on a future event and (b) must be legally enforceable in all of the followingcircumstances: (i) in the normal course of business, (ii) in the event of default and (iii) in the event ofinsolvency or bankruptcy.

19) Inventories

Inventories are recorded at the lower of cost and net realisable value. The cost of producing and refiningcrude oil is determined on first-in first-out (FIFO) basis.

Costs comprise the following elements:

Materials and supplies purchase cost on a first-in, first-out basis;Crude oil, gas, condensate andprocessing products

depreciation, depletion, cost of direct materials, labour and aproportion of manufacturing overheads based on normaloperating capacity

Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs ofcompletion and selling.

20) Leases

Where the Group is a lessee in a lease which does not transfer substantially all the risks and rewardsincidental to ownership from the lessor to the Group, the total lease payments are charged to profit or lossfor the year on a straight-line basis over the lease term. The lease term is the non-cancellable period forwhich the lessee has contracted to lease the asset together with any further terms for which the lessee hasthe option to continue to lease the asset, with or without further payment, when at the inception of the lease itis reasonably certain that the lessee will exercise the option.

When assets are leased out under an operating lease, the lease payments receivable are recognised asrental income on a straight-line basis over the lease term.

21) Provisions

General

Provisions are recognised when the Group has a present legal or constructive obligation as a result of pastevents and it is probable that an outflow of resources embodying economic benefits will be required to settlethe obligation and a reliable estimate can be made of the amount of the obligation. Where there are anumber of similar obligations, the likelihood that an outflow will be required in settlement is determined byconsidering the class of obligations as a whole. Where the Group expects some or all of a provision to bereimbursed, for example under an insurance contract, the reimbursement is recognised as a separate assetbut only when the reimbursement is virtually certain. The expense relating to any provision is presented inprofit or loss net of any reimbursement. When a provision is measured using the cash flows estimated tosettle the present obligation, its carrying amount is the present value of those cash flows.

Asset retirement obligation

An obligation for asset retirement costs (decommissioning) arises on the construction of certain oil and gasproperties and exploration and evaluation assets. A provision for asset retirement is recognised in full whenthe related facilities are installed. The provision is calculated as the estimated expenditure expected to beincurred at the end of the producing life of the related asset, discounted to its present value. The cost ofrecognising the asset retirement provision is included as part of the cost of the relevant asset and is thuscharged to profit and loss on a unit of production basis in accordance with the Group’s policy for depletionand depreciation of oil and gas properties. Period charges for changes in the net present value of the assetretirement provision arising from discounting are included within finance costs. The estimated future costs ofasset retirement are reviewed annually and adjusted as appropriate.


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Changes in the estimated future costs or in the discount rate applied are treated as follows:

a. changes in the liability alter the revaluation surplus or deficit previously recognised on that asset, sothat:i. a decrease in the liability recognised in other comprehensive income and increase the revaluation

surplus within equity, except that it is recognised in profit or loss to the extent that it reverses arevaluation deficit on the asset that was previously recognised in profit or loss;

ii. an increase in the liability is recognised in profit or loss, except that it shall be recognised in othercomprehensive income and reduce the revaluation surplus within equity to the extent of any creditbalance existing in the revaluation surplus in respect of that asset.

b. in the event that a decrease in the liability exceeds the carrying amount that would have beenrecognised had the asset been carried under the cost model, the excess is recognised immediately inprofit or loss.

c. the change in the revaluation surplus arising from a change in the liability is separately identified anddisclosed as such in other comprehensive income.

22) Employee benefits

Wages, salaries, contributions to the state pension and social insurance funds, paid annual leave and sickleave, bonuses and non-monetary benefits (such as health services and other social benefits) are accrued inthe year in which the associated services are rendered by the employees of the Group.

Defined Contributions Plan. The Group makes statutory unified social contributions to the Pension Fund ofUkraine in respect of its employees. The contributions are calculated as a percentage of current grosssalary, and are expensed as incurred.

Defined Benefit Plans. The Group participates in a mandatory State defined retirement benefit plan, whichprovides for early pension benefits for employees working in certain workplaces with hazardous andunhealthy working conditions. Under the collective agreements between the Group and its employees theGroup also provides lump sum benefits upon retirement subject to certain conditions.

The liability recognised in the statement of financial position in respect of defined benefit pension plans is thepresent value of the defined benefit obligation at the reporting date less adjustments for unrecognized pastservice costs. The defined benefit obligation is calculated annually by independent actuaries using theprojected unit credit method. The present value of the defined benefit obligation is determined by discountingthe estimated future cash outflows using market yields on government bonds and that have terms to maturityapproximating to the terms of the related pension liability. Since where are no long-term high qualitycorporate bonds in Ukraine, and no regular publications of yields on government bonds denominated in localcurrency, in prior periods the Group used yields on government bonds denominated in foreign currencies butadjusted for currency risks. In 2016 statistics over yields on government bonds denominated in UAH becameavailable and thus to discount post-employment benefit obligations management applied an averagebetween market rates on government bonds denominated in foreign currencies adjusted for currency riskand government bonds denominated in UAH of appropriate maturity.

Past service costs are recognized immediately in consolidated statement of profit or loss andremeasurements are recognized in other comprehensive income.

The cost of defined benefit pension plan and other long-term sponsored benefits to employees and thepresent value of the pension obligation are determined using actuarial valuations. An actuarial valuationinclude the determination of the discount rate, future salary increases, mortality rates and future pensionincreases. Due to the complexity of the valuation, the underlying assumptions and its long term nature, adefined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewedat each reporting date (Note 23).

23) Revenue recognition

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group andthe revenue can be reliably measured. Revenue is measured at the fair value of the consideration receivedor receivable, excluding discounts, rebates, and sales taxes or duty.

Revenue from sale of oil and petroleum products is recognised at the point where all significant risks andrewards of ownership have been transferred to the buyer.

This is normally defined as the point where a product is physically transferred into a vessel, pipe or otherdelivery mechanism. Revenues associated with the sale of petroleum products are recognised when the titlepasses to the customer.


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Revenue from sale of gas (Note 8) is recognised in the period when an agreement as to quantity and price isreached and revenue can be reliably measured and is legally chargeable. Until that date risks and rewards ofownership of the gas are retained with the Group, despite the fact that the asset is physically pumped forstorage to the gas transportation and storage system. Consequently, the date of the revenue recognitionmay significantly differ from the date of physical transfer of gas.

The Group assesses its revenue arrangements against specific criteria in order to determine if it is acting asprincipal or agent. The Group has concluded that it is acting as a principal in all of its revenue arrangements,except when contracts to buy or sell non-financial items entered into under agent arrangements in which theGroup does not have exposure to the significant risks and rewards associated with selling goods (Note 8)and which do not meet the expected own-use requirements.

Sale of services

Revenues from services are recognised when such services are rendered and revenue can be reliablymeasured.

Non-cash settlement of revenue

A portion of Group’s sales consideration has a form of non-cash settlements. These transactions aregenerally in the form of direct settlements by dissimilar goods and services from the final customer (barter).

Sales and purchases that are expected to be settled by mutual settlements or other non-cash settlementsare recognised based on management’s estimate of the fair value to be received or given up in non-cashsettlements. The fair value is determined with reference to the market information.

Non-cash transactions have been excluded from the cash flow statement.

24) Income taxes

Income taxes have been accrued in the consolidated financial statements in accordance with legislationenacted or substantively enacted at the reporting dates. The income tax charge comprises current tax anddeferred tax and is recognised in profit or loss, unless it relates to transactions that are recognised in thesame or a different period in other comprehensive income or directly in equity.

Current tax

Current tax is the amount expected to be paid to, or recovered from, the taxation authorities in respect oftaxable profits or losses for the current and prior periods. Taxable profits or losses are based on estimates iffinancial statements are authorised prior to filing relevant tax returns. Taxes other than on income arerecorded within operating expenses.

Deferred tax

Deferred income tax is provided using the liability method on temporary differences at the reporting datebetween the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred tax liabilities are recognised for all taxable temporary differences, except:

where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability ina transaction that is not a business combination and, at the time of the transaction, affects neither theaccounting nor taxable profit; and

in respect of taxable temporary differences associated with interests in joint ventures, where the timingof the reversal of the temporary differences can be controlled and it is probable that the temporarydifferences will not reverse in the foreseeable future.

Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unusedtax losses, to the extent that it is probable that taxable profit will be available against which the deductibletemporary differences, and the carry-forward of unused tax losses can be utilised except:

where the deferred income tax asset relating to the deductible temporary difference arises from theinitial recognition of an asset or liability in a transaction that is not a business combination and, at thetime of the transaction, affects neither the accounting profit nor taxable profit or loss; and

in respect of deductible temporary differences associated with interests in joint ventures, deferred taxassets are recognised only to the extent that it is probable that the temporary differences will reversein the foreseeable future and taxable profit will be available against which the temporary differencescan be utilised.


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The carrying amount of deferred income tax assets is reviewed at each reporting date and reduced to theextent that it is no longer probable that sufficient taxable profit will be available to allow all or part of thedeferred income tax asset to be utilised. Unrecognised deferred income tax assets are reassessed at eachreporting date and are recognised to the extent that it has become probable that future taxable profit willallow the deferred tax asset to be recovered. Deferred income tax assets and liabilities are measured at thetax rates that are expected to apply to the year when the asset is realised or the liability is settled, based ontax rates (and tax laws) that have been enacted or substantively enacted at the reporting date.

Deferred tax relating to items recognised directly in equity is recognised in other comprehensive income.

Deferred tax assets and deferred tax liabilities are netted if a legally enforceable right exists to set off currenttax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the sametaxation authority.

Production taxes

The Group’s activity on the extraction of hydrocarbons is subject to the following production taxes: rent tax,subsoil tax. The production taxes are calculated based on the extracted volumes and included into expensesin the period of extraction of the related hydrocarbons.

25) Contingencies

Contingent liabilities are not recognised in the consolidated financial statements unless it is consideredprobable that an outflow of economic resources will be required to settle the obligation and that the outflowcan be reasonably estimated (Note 27). They are disclosed unless the possibility of an outflow of resourcesembodying economic benefits is remote.

26) Prepayments for goods and services

Prepayments are carried at cost less provision for impairment. Prepayments to acquire assets aretransferred to the carrying amount of the asset once the Group has obtained control of the asset and it isprobable that future economic benefits associated with the asset will flow to the Group. Other prepaymentsare written off to profit or loss when the goods or services relating to the prepayments are received. If thereis an indication that the assets, goods or services relating to a prepayment will not be received, the carryingvalue of the prepayment is written down accordingly and a corresponding impairment loss is recognised inprofit or loss for the year.

27) Share capital

Ordinary shares are classified as equity. Costs directly attributable to the issue of new shares are shown inequity as a deduction, net of tax, from the proceeds.

28) Earnings per share

Basic earnings per share are calculated by dividing the profit or loss attributable to owners of the Group bythe weighted average number of ordinary shares in issue during the year, excluding treasury shares.

29) Change of investments in joint operations

The Company has investments in joint operations. According to the contractual arrangements the share inassets and liabilities of these joint operations is lower than share in net profit for the period to be distributedbetween participants. Respective difference between share in net assets and result for the period isrecognized as a change of investments in joint operations directly in equity.

30) Dividends

Dividends are recorded as a liability and deducted from equity in the period in which they are declared.Under the Law of Ukraine No. 185-V dated 21 September 2006 (as amended on 24 December 2015), for acompany with a State shareholding, if no shareholder meeting is held before 30 April of the year following areporting year, the minimum of 30% of the Company’s net profit for the previous year should be allocated asdividends on the State-owned shares and paid directly to the State before 1 July of the year following thereporting year. Refer to Note 22. Any dividends declared after the reporting period and before the financialstatements are authorised for issue are disclosed in the financial statements.


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31) Value added tax

VAT is levied at three rates: 20% applies to the supply of goods and services where supply takes place inUkraine, including when supply is made without explicit consideration and the import of goods into Ukraine(unless expressly exempt by the Law); 0% applies to the export of goods; 7% applies to the supply ofpharmaceutical drugs and medical equipment where supply takes place in Ukraine and the import of thesegoods into Ukraine. Output VAT on the sale of goods and services is accounted for on the date thegoods/services are delivered to a customer or the date the payment is received from the customer,whichever is earlier. On such date a VAT invoice is issued and should be registered in the Unified Registerof Tax Invoices in the prescribed deadline. Input VAT is accounted for on the date when the goods/servicesare received or prepayment is made, whichever is earlier, or the date of import (for imported goods).Entitlement to an input tax credit must be evidenced by VAT invoice registered in the Unified Register of TaxInvoices or duly executed import customs declaration.

VAT related to sales and purchases is recognised in the statement of financial position on a net basis anddisclosed as an asset or liability to the extent it has been recorded in VAT declarations. Where provision hasbeen made for impairment of receivables, the impairment loss is recorded for the gross amount of thedebtor, including VAT.

32) Finance costs

Finance costs comprise interest expense on borrowings, interest cost on asset retirement obligation, definedbenefit plans and expense on amortization of discounts. All interest and other costs incurred in connectionwith borrowings are expensed using the effective interest method.

33) Finance income

Finance income comprises interest income on bank deposits, notional interest income on financial assetscarried at amortized cost.

34) Borrowings

Borrowings are initially recognized at fair value, net of transaction costs and subsequently carried atamortised cost using the effective interest method. Any difference between the proceeds (net of transactioncosts) and the redemption value is recognised in the profit or loss over the period of the borrowings using theeffective interest method.

Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlementof the liability for at least twelve months after the reporting date.

35) Changes in presentation

Where necessary, corresponding figures have been adjusted to conform to the presentation of the currentyear amounts due to new disclosure line added.

The effect of reclassifications for presentation purposes in cost of sales disclosure lines was as followsfor 2015:

As reportedfor 2015

Change inpresentation

As revisedfor 2015

Cost of purchased goods for resale - 513,738 513,738Raw materials and supplies 2,054,606 (513,738) 1,540,868

The reclassification does not affect the amount of cost of sales but enhance overall presentation of thedisclosure.


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4. Significant management’s estimates and judgements

Significant management’s estimates and judgements. In the application of the accounting policies set outin Note 3 the Group makes estimates and assumptions which affect the reported amounts of assets andliabilities. Estimates and judgements are continuously evaluated and are based on management’sexperience and other factors, including expectations of future events that are believed to be reasonableunder the circumstances. Actual results may differ from these estimates. Management also makes certainjudgements apart from those involving estimations, in the process of applying the accounting policies.Judgements which have the most significant effect on the amounts recognised in the consolidated financialstatements and estimates which can cause a significant adjustment to the carrying amount of assets andliabilities within the next financial year, include:

Going Concern

Following the continuing negative operating results, accumulated tax debt since 2014, inability to reachagreement on the price of gas physically transferred to the national gas transportation system of Ukrainesince 2006, inability to collect accounts receivables for sales of crude oil and petroleum products in 2015 and2016, inability to receive petroleum products prepaid in 2015, the Group had insufficient funding to satisfy itsworking capital requirements and settle its tax payments as they fall due. Consequently as of 31 December2016 the Group had net current liabilities of UAH 18,208,217 thousand (31 December 2015:UAH 7,499,084 thousand), incurred a net loss of UAH 8,942,892 thousand for the year ended31 December 2016 (31 December 2015: UAH 5,690,398 thousand).

As a result of the significant overdue obligations for rent tax and income tax, in 2015 and February 2016 theState Fiscal Service of Ukraine suspended several oil and gas licenses and arrested assets of the Group asa lien against these overdue obligations.

The tax arrest did not allow the Group to sell or pledge related assets, however the arrest did not affect theGroup’s ability to continue production and sell its own oil and gas products. In 2016 the Group was able torenew the licenses which were suspended in 2015–2016 for its subsidiary and joint venture and submitteddocuments for the prolongation of the licenses which will expire by mid of 2017 for its own fields.

In 2016 the Group won a number of legal cases confirming the ownership over the gas pumped into the statestorage and obliging the State Fiscal Service of Ukraine to accept natural gas of 2,061 million cubic meterswith value of UAH 13,607,913 thousand as a pledge against the Group's tax liabilities.

The Group continues to produce and sell crude oil, LPG, gas and petroleum products at its network of gasstations, generating positive operating cash flows, which satisfy its current working capital needs.Management have undertaken a rigorous assessment of going concern and liquidity taking into accountoperating cash flow forecasts until December 2018. Judgements with regard to the forecasted prices forcrude oil, LPG and gas, production volumes, licenses prolongation, outcome of the current litigationprocesses initiated by and against the Group, acceptance of gas as a pledge by the State Fiscal Service ofUkraine and willingness of the main creditors and debtors to reach agreement on settlement of payments,getting an approval of the financial rehabilitation plan by the Shareholder’s Meeting and its anticipatedresults were required for the preparation of the cash flow projections.

If restructuring or repayment of overdue receivables, reimbursement of prepayments, licenses prolongation,usage of the gas as a pledge for the tax debt or other factors to alleviate net current liabilities position is notachieved, the Group does not anticipate that it would have funds available to repay accumulated tax debtwithin short period of time, and would need to take alternative actions including negotiation of export salesand partial sale of Group’s assets in order to be able to continue as a going concern.

Management acknowledges that prior to successful execution of the financial rehabilitation plan or agreeingon repayment or restructuring of its tax obligations and prolongation of its licenses there is a materialuncertainty which may cast significant doubt about the Group’s ability to continue as a going concern and,therefore, that the Group may be unable to realize its assets and discharge its liabilities in the normal courseof business. Despite the material uncertainties relating to the facts described above, management is takingactions to prolong licenses get repayment of its accounts receivable and prepayments, restructuring its taxliabilities and get an approval of a financial rehabilitation plan by all the parties and thus believes thatapplication of the going concern assumption for the preparation of this consolidated financial statements isappropriate.


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4. Significant management’s estimates and judgements (Continued)

Tax and other regulatory compliance risks

Ukrainian legislation and regulations regarding taxation and other operational matters, including currencyexchange control and custom regulations, continue to evolve. Legislation and regulations are not alwaysclearly written and are subject to varying interpretations by local, regional and national authorities, and otherGovernmental bodies. Instances of inconsistent interpretations are not unusual. Management believes thatits interpretation of the relevant legislation is appropriate and that the Group has complied with all regulationsand paid or accrued all taxes and withholdings that are applicable.

The Group is involved in a number of lawsuits with the tax authorities. The Group has identified possible taxcontingencies, which based on management best estimates are not required to be accrued. Suchcontingencies are described in Note 27.

The Group is a defendant in a number of lawsuits with tax authorities and its counterparties. Provision forfine and penalties represents management’s assessment of exposure to any negative outcome of thelawsuits.

Estimation of oil and gas reserves

Commercial reserves used in the calculation of depletion and for impairment test purposes are determinedusing estimates of oil and gas in place, recovery factors and future oil and gas prices. Management basestheir estimate of oil and gas reserves upon a report provided by independent engineers (the “reservesreport”). Such a reserve report was produced as at 30 June 2016. Management assesses that this reservereport represents a best estimate of the Group’s reserves and uses this for the basis of impairment analysis.

Commercial reserves are proved developed oil and gas reserves, which are defined as the estimatedquantities of crude oil, natural gas and natural gas liquids which geological, geophysical and engineeringdata demonstrate with a specific degree of certainty to be recoverable in future years from known reservoirsand which are considered commercially producible.

Future development costs are estimated using assumptions as to number of wells required to produce thecommercial reserves, the cost of such wells and associated production facilities and other capital costs.

Proved developed reserves estimates are attributed to future development projects only where there is asignificant commitment to project funding and execution and for which applicable governmental andregulatory approvals have been secured or are reasonably certain to be secured. Furthermore, estimates ofproved developed reserves only include volumes for which access to market is assured with reasonablecertainty. All proved developed reserves estimates are subject to revision, either upward or downward,based on new information, such as from development drilling and production activities or from changes ineconomic factors, including product prices, contract terms or development plans. In general, changes in thetechnical maturity of hydrocarbon reserves resulting from new information becoming available fromdevelopment and production activities have tended to be the most significant cause of periodic revisions.

Estimates of oil and gas reserves are inherently imprecise, require the application of judgment and aresubject to future revision. Accordingly, financial and accounting measures (such as the discounted cashflows, depreciation, depletion and amortisation charges, asset retirement provisions, revaluation andimpairment of fixed assets) that are based on proved developed reserves may also change.

In general, estimates of reserves for undeveloped or partially developed fields are subject to greateruncertainty over their future life than estimates of reserves for fields that are substantially developed anddepleted.

Changes to the Group’s estimates of proved developed reserves affect the amount of depreciation,depletion, amortisation and impairment recorded in the consolidated financial statements for property, plantand equipment related to hydrocarbon production activities. These changes can for example be the result ofproduction and revisions. A reduction in proved developed reserves will increase depreciation, depletion andamortisation charges (assuming constant production). The level of estimated commercial reserves is also akey determinant in assessing whether the carrying value of any of the Group’s development and productionassets has been impaired.


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Revaluation of property, plant and equipment and oil and gas assets

On an annual basis management of the Group carries out an analysis to assess whether the carryingamount of oil and gas properties and other property, plant and equipment (except for vehicles and other fixedassets, which are carried at cost) differ materially from that which would be determined using fair value at theend of the reporting period. The analysis is based on price indices, developments in technology, cost ofconstruction, movements in exchange rates since the date of latest revaluation, profitability of underlyingbusinesses and other relevant factors. Where the analysis indicates that the fair values of items of propertyplan and equipment differ materially from the carrying amounts, further revaluation is performed.

In December 2016 Management engaged an independent appraiser to perform a fair valuation of theGroup’s oil and gas assets and other property, plant and equipment. The appraiser performed a full valuationof CGUs, including the calculation of depreciated replacement cost and performance of an impairment testfor highly specialized production assets, and calculation of fair value based on market approach for assets,which have market analogues. Fair value of filling stations and related equipment was assessed based on anincome approach. CGU was represented by a field for oil and gas properties, gas processing plant, eachfilling station and one CGU for drilling and tamping divisions.

As the Group’s oil and gas assets and the majority of property, plant and equipment, related to oil and gasextraction and processing (buildings, machinery, equipment and pipelines, oil and gas processingequipment), is of specialised nature, its fair value is determined using depreciated replacement cost(Level 3). The market for similar property, plant and equipment is not active in Ukraine and does not providesufficient number of sales of comparable assets to allow using a market-based approach for determining fairvalue. Consequently, the fair value of wells, structures, plant and machinery was primarily determined usingdepreciated replacement cost. This method considers the cost to reproduce or replace the property, plantand equipment, adjusted for physical, functional or economic depreciation, and obsolescence. Thedepreciated replacement cost was estimated based on internal sources and analysis of Ukrainian andinternational markets for similar property, plant and equipment. Various market data was collected frompublished information, catalogues, statistical data etc., and industry experts and suppliers.

The fair values obtained using depreciated replacement cost are validated using discounted cash flowmodels (income approach, Level 3), and are adjusted if the values obtained using income approach arelower than those obtained using depreciated replacement cost (i.e. there is economic obsolescence).

The change in the fair value of oil and gas assets is mainly driven by the decrease of rent tax rate in Ukrainestarting from 1 January 2017, increase of oil and gas prices and increase/decrease in estimation ofhydrocarbons for certain fields due to updated mineral reserves assessment performed by independentappraised at 30 June 2016.

The fair value of filling stations and related equipment was determined using income approach (Level 3)based on expected sales in subsequent periods. Sales were projected based on declined throughput in 2017with slight increase in the following years and growing prices. Fair value decreased compared to carryingvalue due to decrease of throughput at particular filling stations.

When performing valuation using these methods, the key judgments and estimates applied by the valuatorswere as follows:

cost of drilling for the new oil and gas wells depending on geographical location and geologicalconditions;future projection of crude oil and natural gas prices;choice of information sources for construction costs analysis (budgeted costs planned by the Group,specialised reference materials and hand-books, estimates for cost of construction of variousequipment);ability to obtain discounts on purchases of big volumes of petroleum products;determination of comparative market data for replacement cost of certain equipment, as well ascorresponding adjustments required to take into account differences in technical characteristics andcondition of new and existing equipment; andselection of market data when determining market value where it is available.

The results of this revaluation of property, plant and equipment are disclosed further in Note 16 and Note 18.

Changes in these judgments could have a material effect on the fair value of property, plant and equipment.


21


Impairment indicators

The recoverable amounts of cash-generating units and individual assets for oil and gas assets and otherproperty, plant and equipment were determined based on fair values less costs of disposal, using discountedcash flow model.

The calculation of fair value less cost of disposal is most sensitive to the following assumptions:

Proved developed mineral reserves for a particular field;Future rent tax rates being actual rates starting from 1 January 2017 according to the Tax Code ofUkraine;Projected crude oil, natural gas and condensate prices;Future production volumes;Discount rates;Capital investments;Forecasts UAH to USD exchange rate; andForecasts inflation and salary growth rates.

Estimated production volumes are based on detailed data for each production field and take into accountdevelopment plans for the fields agreed by management as part of the long-term planning process. Thefuture cash flows are adjusted for risks specific to the asset and discounted using a post-tax discount rate.This discount rate is derived from the Group’s post-tax weighted average cost of capital. Cash flows includedinto the model are also post-tax. These calculations require the use of estimates and assumptions. TheGroup monitors internal and external indicators of impairment relating to its tangible and intangible assets.

The results of impairment of property, plant and equipment are disclosed further in Note 14.

Depletion of oil and gas assets

Oil and gas properties are depreciated using the units-of-production (UOP) method over proved developedmineral reserves.

Actual production in the future may be different from current forecast production based on proved reserves,such as might result from significant changes in any of the factors or assumptions used in estimatingreserves. Such differences may impact the UOP rate of depreciation in future years.

These factors could include:Changes in proved developed reserves;The effect on proved developed reserves of differences between actual commodity prices andcommodity price assumptions;Licenses prolongation;Unforeseen operational issues.

Other non-current assets

Other non-current assets are intangible assets of UAH 3,979,370 thousand (2015: UAH 3,987,640 thousand)that represent the right to charge Naftogaz for the natural gas produced by the Group in Ukraine andphysically transferred to the national gas transportation system of Ukraine during 2006-2014.

The right to charge Naftogaz was initially recognised as an intangible assets as the Group acted as aservices provider of gas to the public under the terms by substance representing concession arrangements.The Group has not recognised any revenue in respect of these transfers as no sales agreements for the gashave yet been concluded between the Group and Naftogaz due to disagreement on regulated prices by theState were significantly below the market prices.

The intangible asset has been recognised at the cost of inventories physically transferred but legally notsold. After initial recognition, intangible assets are carried at their cost less accumulated impairment losses, ifany. These intangible assets have indefinite useful lives and are not amortised, but tested for impairment atleast annually.

Due to the inability of the two sides to agree on a price for the sale, the Group and Naftogaz have not beenable to conclude the relevant gas sales agreements. Although Naftogaz has initiated a number of legalclaims to oblige the Group to conclude agreements to sell the extracted gas to it, none of the claims weresatisfied by the courts in 2016 and up to the date of issue of these consolidated financial statements.


22


During 2015-2016 the Group won a number of court cases against Naftogas and the State Fiscal Service ofUkraine. In 2015 the Supreme Commercial Court of Ukraine ruled in favour of the Group with respect to thedispute between the Group and Naftogaz confirming the Group’s right to take back the gas from the state-owned gas storage of 2,061 million cubic meters out of total 10,536 million cubic meters in dispute. As of31 December 2016 this gas was not taken back from state-owned gas storages. In 2016 the Companyapplied to the court to force State Fiscal Service of Ukraine to accept gas of 2,061 million cubic meters as apledge for its tax debt.

Further, in 2017 the Highest Administrative Court of Ukraine required the State Fiscal Service of Ukraine toinclude the natural gas of 2,061 million cubic meters amounting to a value of UAH 13,607,913 thousand as atax pledge against the Group’s tax liabilities. Taking into consideration these facts, management believesthat the recoverable amount of intangible assets is higher than its carrying value as at 31 December 2016.

Considering the successful resolution of the case in relation to disputable 2,061 million cubic meters by thecourt the Management Board believes it has grounds to support their position in the courts for the remainingvolumes of gas. Therefore, the Group accounts for this intangible asset in the consolidated financialstatements as of 31 December 2016 at the cost to extract and produce the natural gas physically transferredbut legally not sold.

The Management Board expects to recover this asset either in monetary or physical form or transfer to theState Fiscal Service of Ukraine as a tax pledge, however, significant uncertainty exists regarding the timingand nature of this settlement as well the outcome of the ongoing legal disputes between the Group andNaftogaz.

Revenue gross versus net presentation

When the Group acts as a principal, revenue and cost of sales are reported on a gross basis. As disclosed in

crude oil back. In addition, export sales of carbomide, domestic retail sales of petroleum products (fromMay 2015 till May 2016) were contracted under agency arrangements.

The Group assesses its revenue arrangements against specific criteria in order to determine if it is acting asa principal or an agent. 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 a principal or an agentin a transaction depends on an analysis of both the legal form and substance of the agreement between theGroup and its business partners; such judgments impact the amount of reported revenue and cost of salesbut do not impact net income or cash flows. Features indicating that the Group is acting as an agent inexport sales and domestic sales include: limited or no inventory risk; no exposure to significant risks andrewards associated with the sale of goods or services and predetermined amount the Group earnings, beinga fixed fee per transaction; the Group does not have discretion in selecting suppliers and does not havelatitude in establishing selling prices.

Revenue arising from the sale of crude oil at auctions and the subsequent purchase of this back isrecognised on a net basis. This is presented on a net basis and agent fees are recognised in cost of sales.Agent fees are recognised from export agency arrangements after deduction from revenue all related sellingand other costs of agency and commission income from retail sales is presented by fixed margin on salesvolumes.

.


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5. New accounting pronouncements

The following new standards and amendments to the standards, which are relevant to the Group’s financialstatements are effective for the first time for financial periods beginning on or after 1 January 2016, but donot have a material impact on these consolidated financial statements:

Amendments to IAS 1: Disclosure Initiative (issued on 18 December 2014 and effective for annualperiods beginning on or after 1 January 2016);Annual Improvements to IFRS 2012–2014 Cycle (issued on 25 September 2014 and effective forannual periods beginning on or after 1 January 2016);Amendments to IAS 16 and IAS 38: Clarification of Acceptable Methods of Depreciation andAmortisation (issued on 12 May 2014 and effective for annual periods beginning on or after 1January 2016);Sale or Contribution of Assets between an Investor and its Associate or Joint Venture - Amendmentsto IFRS 10 and IAS 28 (issued on 11 September 2014).

Certain new standards and interpretations have been issued that are mandatory for the annual periodsbeginning on or after 1 January 2017 or later, and which the Group has not early adopted:

IFRS 9 “Financial Instruments: Classification and Measurement” (amended in July 2014 and effectivefor annual periods beginning on or after 1 January 2018). Key features of the new standard are:

Financial assets are required to be classified into three measurement categories: those to bemeasured subsequently at amortised cost, those to be measured subsequently at fair value throughother comprehensive income (FVOCI) and those to be measured subsequently at fair value throughprofit or loss (FVPL).Investments in equity instruments are always measured at fair value. However, management canmake an irrevocable election to present changes in fair value in other comprehensive income,provided the instrument is not held for trading. If the equity instrument is held for trading, changes infair value are presented in profit or loss.Most of the requirements in IAS 39 for classification and measurement of financial liabilities werecarried forward unchanged to IFRS 9. The key change is that an entity will be required to present theeffects of changes in own credit risk of financial liabilities designated at fair value through profit orloss in other comprehensive income.IFRS 9 introduces a new model for the recognition of impairment losses – the expected credit losses(ECL) model. There is a ‘three stage’ approach which is based on the change in credit quality offinancial assets since initial recognition. In practice, the new rules mean that entities will have torecord an immediate loss equal to the 12-month ECL on initial recognition of financial assets that arenot credit impaired (or lifetime ECL for trade receivables). Where there has been a significantincrease in credit risk, impairment is measured using lifetime ECL rather than 12-month ECL. Themodel includes operational simplifications for lease and trade receivables.

IFRS 16 "Leases" (issued in January 2016 and effective for annual periods beginning on or after1 January 2019). The new standard sets out the principles for the recognition, measurement, presentationand disclosure of leases. All leases result in the lessee obtaining the right to use an asset at the start of thelease and, if lease payments are made over time, also obtaining financing. Accordingly, IFRS 16 eliminatesthe classification of leases as either operating leases or finance leases as is required by IAS 17 and, instead,introduces a single lessee accounting model. Lessees will be required to recognise: (a) assets and liabilitiesfor all leases with a term of more than 12 months, unless the underlying asset is of low value; and (b)depreciation of lease assets separately from interest on lease liabilities in the income statement. IFRS 16substantially carries forward the lessor accounting requirements in IAS 17. Accordingly, a lessor continues toclassify its leases as operating leases or finance leases, and to account for those two types of leasesdifferently.

IFRS 15, Revenue from Contracts with Customers (issued on 28 May 2014 and effective for theperiods beginning on or after 1 January 2018). The new standard introduces the core principle thatrevenue must be recognised when the goods or services are transferred to the customer, at the transactionprice. Any bundled goods or services that are distinct must be separately recognised, and any discounts orrebates on the contract price must generally be allocated to the separate elements. When the considerationvaries for any reason, minimum amounts must be recognised if they are not at significant risk of reversal.

Costs incurred to secure contracts with customers have to be capitalised and amortised over the periodwhen the benefits of the contract are consumed.


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5. New accounting pronouncements (Continued)

Amendments to IFRS 15, Revenue from Contracts with Customers (issued on 12 April 2016 andeffective for annual periods beginning on or after 1 January 2018). The amendments do not change theunderlying principles of the Standard but clarify how those principles should be applied. The amendmentsclarify how to identify a performance obligation (the promise to transfer a good or a service to a customer) ina contract; how to determine whether a company is a principal (the provider of a good or service) or an agent(responsible for arranging for the good or service to be provided); and how to determine whether the revenuefrom granting a licence should be recognised at a point in time or over time. In addition to the clarifications,the amendments include two additional reliefs to reduce cost and complexity for a company when it firstapplies the new Standard.

Recognition of Deferred Tax Assets for Unrealised Losses - Amendments to IAS 12 (issued inJanuary 2016 and effective for annual periods beginning on or after 1 January 2017). The amendmenthas clarified the requirements on recognition of deferred tax assets for unrealised losses on debtinstruments. The entity will have to recognise deferred tax asset for unrealised losses that arise as a result ofdiscounting cash flows of debt instruments at market interest rates, even if it expects to hold the instrumentto maturity and no tax will be payable upon collecting the principal amount. The economic benefit embodiedin the deferred tax asset arises from the ability of the holder of the debt instrument to achieve future gains(unwinding of the effects of discounting) without paying taxes on those gains.

Disclosure Initiative - Amendments to IAS 7 (issued on 29 January 2016 and effective for annualperiods beginning on or after 1 January 2017). The amended IAS 7 will require disclosure of areconciliation of movements in liabilities arising from financing activities.

The Group is still assessing the impact of the new standards on its consolidated financial statements,however, it does not expect them to have significant impact to the financial statements, except for IFRS 16where it is expected that a number of leases currently accounted as operating leases will need to becapitalised. Management particularly assessing the potential impact of two new standards, being IFRS 15and IFRS 9, impact for IFRS 16 will be assessed as at 31 December 2017 that will be comparative periodsubject to change when the standard will be adopted. The Group has carefully considered IFRS 15 and hasinitially concluded that there is no impact on the vast majority of its revenue transactions, being the sale ofcrude oil, natural gas, LPG, ammonia or petroleum products to the customers. The Group has also carefullyconsidered IFRS 9 and also believes that the impact of this standard implementation is not significant.

6. Segment information

Operating segments are components that engage in business activities that may earn revenues or incurexpenses, whose operating results are regularly reviewed by the chief operating decision maker (CODM)and for which discrete financial information is available. The CODM is the person or group of persons whoallocates resources and assesses the performance for the entity. The functions of the CODM are performedby the Management Board of the Group.

(a) Description of products and services from which each reportable segment derives its revenue

For management purposes, the Group is organised into business units based on the main types of activitiesand has two operating segments as follows:

Retail distribution of petroleum products – retail distribution of petroleum products via its petrol fillingstations. As at 31 December 2016 the Group owns 537 operating petrol filling stations (2015: 537petrol filling stations); and

Oil, gas and other products – exploration, development, production, processing and distribution ofcrude oil, condensate, natural gas and petroleum products.

(b) Factors that management used to identify the reportable segments

The Group’s segments are strategic business units that focus on different customers. They are managedseparately because each business unit focuses on different activity of oil and gas industry.

Management has determined the operating segments based on reports regularly reviewed by theManagement Board for the purposes of assessing performance.


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6. Segment information (Continued)

(c) Measurement of operating segment profit or loss, assets and liabilities

The CODM reviews financial information prepared based on International Financial Reporting Standardsadjusted to meet the requirements of internal reporting.

Such financial information prepared for internal reporting purposes does not differ from InternationalFinancial Reporting Standards.

The CODM monitors the operating results of its business units separately for the purpose of makingdecisions about resource allocation and performance assessment. Segment performance is evaluated basedon segment profit or loss and is measured consistently with operating profit or loss in the consolidatedfinancial statements. However, some other operating expenses, financial costs and financial income andincome taxes are managed on a group basis and are not allocated to operating segments.

(d) Information about reportable segment profit or loss, assets and liabilities

Segment information for the reportable segments for the year ended 31 December 2016 is set out below:

2016Retail distribution ofpetroleum products

Oil, gas and otherproducts Total

Revenue from external customers 5,783,396 16,481,979 22,265,375Commission income 304,667 2,703 307,370

Segment loss (227,474) (10,500,701) (10,728,175)

Provision for fines and penalties (4,173,964)Interest income 44,797Interest expense (88)Other finance income, net 2,555,793Net foreign exchange result 192,876Share of profits of joint ventures (39,191)

Loss before income tax (12,147,952)

Income tax benefit 3,205,060

Loss for the year (8,942,892)

Material non-cash itemsRetail distribution ofpetroleum products


Net movement in provision for impairment of tradeand other receivables - (11,579,287) (11,579,287)

Depreciation, depletion and amortisation (398,258) (938,718) (1,336,976)Impairment and decrease in fair value of non-

current assets (105,124) (1,176,823) (1,281,947)Reversal of impairment losses 39,792 414,731 454,523Rent tax expenses - (6,334,144) (6,334,144)

There were no inter-segmental revenues in 2016 and 2015.

Reconciliation of assets and liabilities for the reportable segments is set out below:

31 December 2016Retail distribution ofpetroleum products


Segment assets 5,308,689 24,077,313 29,386,002Other financial assets 2,432Prepaid income tax 11,353Cash and cash equivalents and restricted cash 248,045Deferred tax assets 3,506,336

Total assets 5,308,689 24,077,313 33,154,168


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Segment liabilities 131,552 27,663,239 27,794,791Accrued dividends 2,780,779

Total liabilities 30,575,570

2015Retail distribution ofpetroleum products


Revenue from external customers 5,114,940 23,380,762 28,495,702Commission income 355,540 153,969 509,509

Segment profit/(loss) (440,646) 3,175,508 2,734,862

Provision for fines and penalties (6,385,199)Interest income 19,122Interest expense (14,666)Net foreign exchange result 1,544,156Other finance costs, net (4,191,911)

Other unallocated expenses (150,191)

Loss before income tax (6,443,827)

Income tax benefit 753,429

Loss for the year (5,690,398)

Material non-cash itemsNet movement in provision for impairment of trade and

other receivables - (2,222,503) (2,222,503)Depreciation, depletion and amortisation (138,573) (1,150,903) (1,289,476)Impairment of non-current assets, net (74,452) (839,032) (913,484)Rent tax expenses - (9,811,982) (9,811,982)

Reconciliation of assets and liabilities for the reportable segments is set out below:



Segment assets 5,608,352 29,206,787 34,815,139Other financial assets 55,175Prepaid income tax 30,499Cash and cash equivalents and restricted cash 407,473

Total assets 35,308,286

Segment liabilities 106,303 22,193,102 22,299,405Other financial assets 53,581Prepaid income tax 461,343Cash and cash equivalents and restricted cash 2,804,079

Total liabilities 25,618,408

(e) Analysis of revenues by products and services

The Group’s revenues are analysed by products and services. Refer to Note 8.

(f) Geographical information

Majority of revenues and assets are attributable to Ukraine. The Group has no material revenues and non-current assets from outside Ukraine.


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(g) Customers concentration

The Group’s revenue by major customers above 10% is presented as follows:

2016 2015

Segment Oil, gas and other products Oil, gas and other productsCustomer A 9,381,224 -Customer B 2,358,961 3,601,733Customer C - 4,645,113Customer D - 2,531,925Customer E - 2,309,048Customer F - 1,600,318

Total 11,740,185 14,688,137

7. Interest in subsidiaries, joint operations, ventures and associates

The Group is involved in a number of joint operations, subsidiaries, associate and joint venture forexploration and development of oil and gas in Ukraine.

Information on ownership interest of the Group in these joint arrangements, associates and subsidiaries ispresented below.

Entity name Method of accountingOwnership interest, %

2016 2015

35/809 Joint operation 93% 93%35/78/141 Joint operation 79% 79%999/97 Joint operation 49.90% 49.90%35/4 Joint operation 49.90% 49.90%35/4 Addendum #4 Joint operation 49.90% 49.90%410/95 Joint operation 83.43% 83.43%5/56 Joint operation 80% 80%35/176 Joint operation 20% 20%Ukrcarpatoil Ltd Subsidiary 100% 100%35/21 Subsidiary 93% 93%35/71 Subsidiary 93% 93%”Boryslav Oil and Gas Company” Associate 25.10% 25.10%SP Kashtan Petroleum Ltd Joint venture 55% 55%

Summarised financial results and balances of the equity-accounted joint venture agreements and associatesare presented below:

2016 2015Sales and other operating revenues 52,642 465,322Subsoil tax (33,171) (219,390)Cost of sales and other operating costs (231,413) (96,864)Other operating income 655 -Finance income 1 2,351Finance costs (44) -Profit before income tax (211,330) 151,419Income tax (1,202) (27,456)Profit for the year (212,532) 123,963

Current assets 50,896 486,188Including cash and cash equivalents 7 4,874Non-current assets 34,521 99,142Total assets 85,417 585,330Current liabilities 220,015 375,422Non-current liabilities 51 385Total liabilities 220,066 375,807

Profit for the year indicated above is distributed based on the profit sharing interest of participants in the jointventures.


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7. Interest in subsidiaries, joint ventures and associates (Continued)

The carrying value of the Group’s investment in joint venture SP Kashtan Petroleum Ltd and in associate”Boryslav Oil and Gas Company” is nil (31 December 2015: UAH 33,992 thousand and UAH 12,926thousand). The unrecognised share of loss of this joint venture is UAH 113,599 thousand for 2016 and inassociate in UAH 13,091 thousand. Cumulatively, the unrecognised share of losses of this joint venture andassociate is UAH 126,690 thousand.

8. Revenues and cost of sales

Revenue

2016 2015Wholesale distributionCrude oil and gas condensate 11,148,553 14,393,248Ammonia 2,323,646 3,598,366Liquefied petroleum gas 1,070,266 1,282,290Natural gas 874,324 2,895,026Petroleum product 802,430 868,516Services 262,761 343,316

Retail salesRetail distribution of petroleum products 5,736,917 5,027,834Commission income from retail sales 304,667 355,540Other revenue 46,479 87,106

Other salesAgent fees 2,702 153,969

22,572,745 29,005,211

Crude oil and gas condensate

The Group sells crude oil at exchange auctions in accordance with the Law of Ukraine # 2665-III on “Oil andgas” dated 12 July 2001 (last amended on 12 July 2015) requiring obligatory sale of crude oil solely onexchange auctions by the entities owned by the State of not less the 50% of the share capital. Organizingand conducting exchange auctions crude oil, gas condensate and LPG are regulated by the Order of theCabinet of Ministers of Ukraine dated 16 October 2014 (last amended 1 September 2015).

In 2016 the Group sold 1,455 thousand tons of crude oil amounted to UAH 11,040,098 thousand(2015: 1,543 thousand tons amounted to UAH 13,407,167 thousand).

Ammonia

The Group operates ammonia production facilities under operating lease agreement. In 2016 the Group sold499 thousand tons of ammonia (2015: 484 thousand tons).

Natural gas

The Group sold 159,460 thousand cubic meters of natural gas in 2016 (2015: 499,727 thousand cubicmeters) due to decreased purchases from third parties and slight slow down in gas extraction.

Liquefied petroleum gas

In 2016 the Group sold 132 thousand tons of Liquefied petroleum gas (2015: 153 tonnes).

Petroleum product

In 2016 petroleum products amounting to UAH 802,430 thousand were sold solely by Joint operation 999/97.In 2015 petroleum products were sold by both PJSC “Ukrnafta” and Joint Operation 999/97.

Retail distribution of petroleum products

The Group operates 537 petrol filling stations across Ukraine. From May 2015 to May 2016 the Group actedas an agent in a petroleum products commission sales arrangement with a refinery plant and recognisedonly fixed commission on retail sales.


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8. Revenues and cost of sales (Continued)

Commission income from retail sales

The Group sold its own petrol and petrol owned by the third parties its own petrol filling stations. The thirdparties compensates variable and fixed costs plus fixed margin negotiated on a monthly basis. In 2016 suchsales had gross value of UAH 2,628,865 thousand (2015: UAH 6,036,635 thousand).

In addition, since March 2016 the Group has been providing services for petroleum products storage andselling. As the petroleum products did not belong to the Group, revenue for the storage and selling serviceswas disclosed on net basis within commission income from retail sales.

Agent fees

Revenue from providing agency services includes the net result from the export of carbamide andagricultural products with a gross value of UAH 274,800 thousand (in 2015 export of carbamide andferroalloys: gross value of UAH 6,868,197 thousand) where the Group acted as an agent in the relatedtrading arrangements. The net result is stated after deduction of related selling and other costs of agency.

Information on related party balances and transactions is disclosed in Note 28.

Cost of sales

2016 2015Cost of purchased petroleum products (retail) 5,236,663 5,695,585Cost of purchased goods for resale 1,740,702 513,738Payroll and related taxes (Note 12) 1,411,970 1,539,535Raw materials and supplies 1,321,425 1,511,457Depreciation and depletion (Note 12) 921,995 1,129,382Electricity, energy and fuel expenses 832,319 736,712Transportation of oil and gas 381,952 326,767Loss from changes in estimates for site restoration provision (Note 23) 43,966 45,751Other operating costs 135,244 142,357

12,026,236 11,641,284

Information on related party transactions is disclosed in Note 28.

The cost of purchases goods for resale is mainly attributable to the cost of petroleum products sold. In 2016Joint operation 999/97 sold petroleum products of cost of UAH 1,662,478 thousand for UAH 770,537thousand.

9. Selling and distribution expenses

2016 2015Depreciation (Note 12) 401,558 145,830Payroll and related taxes (Note 12) 400,130 357,655Transportation and insurance costs 231,314 10,421Professional, marketing and agent fees 51,770 68,817Taxes other than income tax 42,195 29,221Cash collection costs 39,837 40,865Electricity, energy and fuel expenses 36,049 29,097Operating lease expenses 19,496 15,660Storage costs 5,732 183,720Other selling expenses 67,549 74,887

1,295,630 956,173

The change in depreciation charge classified as selling and distribution expenses relates to the impact of therevaluation of filling stations and equipment as at 31 December 2015 increasing the depreciable base ofassets and the related revision of useful life of related assets.


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10. General and administrative expenses

2016 2015Payroll and related taxes (Note 12) 547,151 408,597Professional fees 71,856 26,410Utilities 16,901 17,099Depreciation and amortisation (Note 12) 13,423 14,264Legal fees 11,628 24,612Bank charges 10,096 9,729Other expenses 70,141 88,690

741,196 589,401

11. Other operating expenses

Other operating expenses2016 2015

Movements for allowance in accounts receivable andprepayments (Note 20 and 21) 11,579,287 2,222,503

Rent tax 6,334,144 9,811,982Expense for provision for fines and penalties (Note 23) 4,173,964 6,385,199VAT on sale below cost 205,836 -Payroll and related taxes (Note 12) 134,002 78,897Charity, social assets maintenance and other social costs 70,819 89,959Research and development expenses 19,341 29,735Impairment of investments 18,268 -Decrease in the carrying value of inventory 16,694 -Loss on disposal of property, plant and equipment - 4,039Other expenses 179,542 306,295

22,731,897 18,928,609

Rent tax

Rent tax is calculated on the basis of quantities of crude oil, condensate or natural gas produced forcommercial purposes. In 2016, rates for rent tax for crude oil and condensate ranged from UAH 1,131 toUAH 4,656 per ton depending on the depth of the underlying well (2015: from UAH 1,541 to UAH 4,248 perton). After changes in legislation, adopted in 2016, the rates for rent tax for natural gas ranged from UAH 643to UAH 1,742 per thousand cubic meter of natural gas for wells, operated by the Group (2015: from UAH1,596 to UAH 4,895 per thousand cubic meter) and from UAH 3,217 to UAH 4,205 per thousand cubic meterof natural gas for wells, operated by the Group's Joint operations (2015: from UAH 3,420 to UAH 5,340 perthousand cubic meter). In December 2016 further changes to rent tax were introduced (Note 27).

12. Payroll and depreciation, depletion and amortisation costs

In addition to the presentation of expenses by function the following analyses of payroll and related taxes,depreciation, depletion and amortisation are presented in order to reconcile total costs to the costs chargedto the consolidated statement of profit or loss and comprehensive income:

Payroll and related taxes2016 2015

Total payroll costs 2,217,790 1,958,441Social security and other related charges 452,196 640,631

2,669,986 2,599,072Less amounts taken to property, plant and equipment as own work capitalised (176,733) (214,388)

2,493,253 2,384,684

Presented as:

2016 2015Cost of sales (Note 8) 1,411,970 1,539,535General and administrative expenses (Note 10) 547,151 408,597Selling and distribution expenses (Note 9) 400,130 357,655Other operating expenses (Note 11) 134,002 78,897

2,493,253 2,384,684


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12. Payroll and depreciation, depletion and amortisation costs (Continued)

Depreciation, depletion and amortisation

2016 2015On oil and gas properties (Note 16) 667,668 695,491On other property, plant and equipment (Note 18) 676,027 603,677On intangible assets 2,325 8,690

1,346,020 1,307,858Less amounts taken to property, plant and equipment as own work

capitalised (9,044) (18,382)

1,336,976 1,289,476

Presented as:

2016 2015Cost of sales – depreciation and depletion line (Note 8) 921,995 1,129,382Selling and distribution expenses (Note 9) 401,558 145,830General and administrative expenses (Note 10) 13,423 14,264

1,336,976 1,289,476

13. Finance income and costs

Finance income

2016 2015Unwinding of discounts on accounts receivable, prepayments for financial

instruments and non-interest bearing borrowings 2,831,007 1,358,185Interest income 44,797 19,122

2,875,804 1,377,307

Finance costs

2016 2015Unwinding of discounts on asset retirement obligation, defined benefit

obligations and financial instruments 275,214 160,401Interest expense 88 14,666Losses less gains on origination of accounts receivable, prepayments for

financial instruments and non-interest bearing borrowings - 4,964,846Interest expense on restructured taxes - 464,867

275,302 5,604,780

Unwinding of discounts on accounts receivable, prepayments for financial instruments

In 2016, the Group recognised gain on unwinding of discounts on accounts receivable and prepayments forfinancial instruments of UAH 2,831,007 thousand (2015: gain of UAH 1,358,185 thousand. In 2015 theGroup recognised net loss on initial recognition of prepayments for financial instruments and accountsreceivable and non-interest bearing borrowings obtained of UAH 4,964,846 thousand.

14. Impairment losses and decrease in fair value

2016 2015Recognised as

expense/(income)

Recognisedin OCI

Recognised asexpense/(income)

Recognisedin OCI

Impairment and decrease in the fair value of:Oil and gas properties (Note 16) 519,459 2,401,165 549,648 2,133,026Exploration and evaluation assets (Note 17) 87,149 - 54,065 -Construction in progress 150,653 - 6,866 -Other property, plant and equipment 524,686 1,840,906 426,051 1,016,362

Reversal of impairment losses:Exploration and evaluation assets (Note 17) - - (67) -Construction in progress - - - -Oil and gas properties (265,393) - (66,494) -Other property, plant and equipment (189,130) - (56,585) -

827,424 4,242,071 913,484 3,149,388


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14. Impairment losses and decrease in fair value (Continued)

In 2016 decrease in the fair value of fixed assets classified as oil and gas properties in amount ofUAH 2,920,624 thousand (2015: decrease in fair value in amount of UAH 2,682,674 thousand) wasrecognised due to decrease in estimate of proved developed reserves on certain fields and decrease ofextraction in a number of fields (Note 16). This was recognised in the statement of profit or loss and othercomprehensive income as decrease in fair value of oil and gas properties. In addition, decrease in fair valueof filling stations and related equipment, buildings, machinery, equipment and pipelines, oil and gasprocessing equipment in amount of UAH 2,365,592 thousand (2015: 1,376,477 thousand) was recognised instatement of profit and loss and other comprehensive income as decrease in fair value. In 2016 no physicaland economical impairment of vehicles and other fixed assets, which are carried at cost was recognised(2015: 65,936 thousand recognised in the statement of profit and loss).

15. Income tax

2016 2015Current income tax charge 762,788 815,640Deferred tax benefit relating to origination and reversal of temporary

differences (3,967,848) (1,569,069)

Income tax benefit reported in profit and loss (3,205,060) (753,429)

Reconciliation between the actual income tax expense and expense that would result from applying thestatutory tax rate was as follows:

2016 2015Loss before income tax (12,147,952) (6,443,828)Income tax benefit at statutory income tax rate of 18% (2,186,632) (1,159,889)Effect of changes in legislation (882,364) -Correction of prior period tax return (155,083) -Non-deductible expenses 19,019 406,460

Income tax benefit (3,205,060) (753,429)

Deferred income tax related to items recognised in other comprehensive income:

2016 2015Increase in fair value of oil and gas properties, filling stations and other property,plant and equipment (1,164,725) (914,314)Decrease in fair value of oil and gas properties and other property, plant andequipment 763,573 566,890Change in estimate relating to asset retirement obligation recorded in equity 20,712 (21,276)Re-measurement of post-employment benefit obligations 24,858 553

Income tax reported in equity (355,582) (368,147)

Statement of financialposition

(Charged)/credited toprofit and loss

(Charged)/creditedto OCI

Charged toretainedearnings

2016 2015 2016 2015 2016 2015 2016Deferred tax

asset/(liability)Provisions 2,381,398 1,569,785 775,504 1,307,777 45,570 (20,723) (9,461)Trade and otherreceivables 1,789,796 - 1,823,234 27,514 - - (33,438)Prepayments and othercurrent assets 1,140,306 - 1,145,850 (59,455) - - (5,544)Advances and otherliabilities 187 187 - (11,674) - - -Trade and otherpayables (26) 3,412 (3,438) (13,564) - -Inventories - - - (27,137) - - -Other non-current assets (224,693) (226,811) 2,118 (585) - - -Oil and gas propertiesand other property, plantand equipment (1,580,632) (1,400,154) 224,580 346,193 (401,152) (347,424) (3,906)

3,506,336 (53,581) 3,967,848 1,569,069 (355,582) (368,147) (52,349)


33

15. Income tax (Continued)

Management estimates that deferred tax assets of UAH 5,311,687 thousand (2015: UAH 244,452 thousand)and deferred tax liabilities of UAH 1,805,351 thousand (2015: UAH 1,626,966 thousand) are recoverableafter more than twelve months after the end of the reporting period.

Due to adoption of changes to the Tax Code of Ukraine in December 2016 expenses on allowance fordoubtful accounts receivable became tax deductible and deferred tax asset was recognised on amount ofallowance for doubtful accounts.

16. Oil and gas properties

Valuation as at 1 January 2015 8,354,535Additions 412,517DisposalsIncrease in fair valueDecrease in fair valueElimination of accumulated depreciation against gross carrying amount

(67)1,549,970

(2,616,180)(1,893,084)

Valuation as at 31 December 2015 5,807,691

Additions 149,830Disposals (39,044)Increase in the fair value 4,089,917Decrease in the fair value (2,920,624)Change in investments in joint operations 21,688Elimination of accumulated depreciation against gross carrying amount (703,430)

Valuation as at 31 December 2016 6,406,028

Depletion and impairment as at 1 January 2015 (1,239,464)Depletion charge for the year (695,491)Disposals -Elimination of accumulated depreciation against gross carrying amount 1,893,083

Depletion and impairment as at 31 December 2015 (41,872)Depletion charge for the year (667,668)Disposals 6,110Elimination of accumulated depreciation against gross carrying amount 703,430

Depletion and impairment as at 31 December 2016 -

Carrying amount as at 31 December 2015 5,765,819

Carrying amount as at 31 December 2016 6,406,028

As at 31 December 2016, the Group engaged independent appraisers to determine the fair value of its oiland gas properties as disclosed in Note 4.

17. Exploration and evaluation assets

Cost as at 1 January 2015 392,248Additions 51,548

Cost as at 31 December 2015 443,796

Additions 46,405

Cost as at 31 December 2016 490,201

Accumulated impairment as at 1 January 2015 (224,697)Impairment charge for the year (Note 14) (54,065)Reversal of impairment due to write-off 67

Accumulated impairment as at 31 December 2015 (278,695)Impairment charge for the year (Note 14) (87,149)

Accumulated impairment as at 31 December 2016 (365,844)

Carrying amount as at 31 December 2015 165,101

Carrying amount as at 31 December 2016 124,357

During 2016 and 2015 there was no de-recognition of wells as a result of inability to use it in the future.


34

18. Other property, plant and equipment

Other property, plant and equipment comprised the following as at 31 December each year:

Filling stationsand relatedequipment Buildings

Machinery,equipment and

pipelines

Oil and gasprocessingequipment Vehicles

Other fixedassets Total

Valuation or cost

At 1 January 2015 2,412,505 2,223,207 2,062,503 334,018 455,915 571,768 8,059,916Additions 16,509 51,792 72,005 10,418 3,865 11,454 166,043Disposals (216) (2,442) (18,206) (156) (4,427) (6,506) (31,953)Increase in fair value 3,529,549 - - - - - 3,529,549Decrease in fair value (17,867) (686,191) (540,509) (75,325) - - (1,319,892)Elimination of accumulated

depreciation against grosscarrying amount (465,486) (304,564) (668,650) (138,598) - - (1,577,298)

At 31 December 2015 5,474,994 1,281,802 907,143 130,357 455,353 576,715 8,826,364Additions 36,439 37,090 101,294 8,208 2,844 33,536 219,411Disposals - (728) (8,590) (238) (1,116) (11,348) (22,020)Reclassification - 74,987 254,547 (44,692) 31,366 (316,208) -Increase in fair value 902,082 731,881 1,024,790 176,550 - - 2,835,303Decrease in fair value (1,282,653) (589,654) (473,459) (19,826) - - (2,365,592)Elimination of accumulated

depreciation against grosscarrying amount (398,258) (121,277) (356,379) (22,346) - - (898,260)

At 31 December 2016 4,732,604 1,414,101 1,449,346 228,013 488,447 282,695 8,595,206

Depreciation and impairment

At 1 January 2015 (327,113) (173,019) (464,915) (82,041) (373,020) (408,982) (1,829,090)Depreciation charge for the

year (138,573) (132,108) (219,978) (56,712) (12,830) (43,476) (603,677)Disposals 200 563 16,243 155 4,260 5,905 27,326Elimination of accumulated

depreciation against grosscarrying amount 465,486 304,564 668,650 138,598 - - 1,577,298

Impairment - - - - (48,063) (17,873) (65,936)

At 31 December 2015 - - - - (429,653) (464,426) (894,079)Depreciation charge for the

year (398,258) (83,869) (118,829) (32,126) (10,626) (32,319) (676,027)Disposals - 68 873 47 1,114 10,349 12,541Reclassification - (37,476) (238,423) 9,733 (10,677) 276,843 -Elimination of accumulateddepreciation against grosscarrying amount 398,258 121,277 356,379 22,346 - - 898,260

At 31 December 2016 - - - - (449,842) (209,553) (659,395)

Carrying amount

At 31 December 2015 5,474,994 1,281,802 907,143 130,357 25,700 112,289 7,932,285Construction in progress 393,562Development assets under

construction 216,098Prepayments for property, plant

and equipment 47,9938,589,938

At 31 December 2016 4,732,604 1,414,101 1,449,346 228,013 38,605 73,142 7,935,811

Construction in progress 251,076Development assets under

construction 164,866Prepayments for property, plant

and equipment 49,776

8,401,529


35

18. Other property, plant and equipment (Continued)

As at 31 December 2016, the Group engaged independent appraisers to determine the fair value of itsproperty, plant and equipment, except for vehicles and other fixed assets as disclosed in Note 4.

Group's property, plant and equipment are pledged under its debt arrangements. Amount of debt obligationsas at 31 December 2016 is nil (31 December 2015: nil).

Property, plant and equipment under tax lien is disclosed in Note 27.

19. Inventory

31 December 2016 31 December 2015Natural gas, crude oil and petroleum products 3,245,621 1,415,880Materials for extraction and drilling 245,876 131,580Other goods, materials and supplies 719,631 639,692

4,211,128 2,187,152

As at 31 December 2016 no inventories were valued at net realisable value (31 December 2015:UAH 1,190,855 thousand).

During 2015 the Company recognised a loss of UAH 125,264 thousand as the result of measurement of itsinventories at net realisable value and recognised it within cost of sales.

Petroleum products of UAH 2,354,537 thousand were held in the custody by related party as at31 December 2016 as disclosed in Note 28 (31 December 2015: UAH 1,190,855 thousand).

20. Accounts receivable

31 December 2016 31 December 2015Trade receivables 12,041,407 9,855,625Accounts receivable under export arrangements - 921,772Other receivables 882,729 630,023

12,924,136 11,407,420Allowance for doubtful accounts (9,943,312) (1,885,371)

Total accounts and notes receivable 2,980,824 9,522,049

The Group’s financial receivables are denominated in the following currencies:

31 December 2016 31 December 2015

Denominated in: UAH 2,980,824 8,600,276USD - 732,066EUR - 189,707

Total financial receivables 2,980,824 9,522,049

The Group accounted for accounts receivable at fair value at initial recognition and subsequently measure atamortised cost at initial effective interest rate less impairment. Management expected that the majority of theGroup’s accounts receivable would be settled up to 31 December 2016. However, accounts receivable havenot been settled by 31 December 2016 and thus impairment allowance was provided.

Movements in allowance for doubtful accounts were as follows:

2016 2015At 1 January 1,885,371 635,359Charge for the year (Note 11) 8,284,825 1,560,493Reversal of provision charged in prior years (Note 11) (54,716) (236,436)Amounts written off as uncollectible (1) (74,045)Change in investments in joint operations (172,167) -

At 31 December 9,943,312 1,885,371


36

20. Accounts receivable (Continued)

Allowance for impairment during the year was recognised due to financial difficulties of the customers.Portion of allowance amounting UAH 54,716 thousand recognised in prior periods was reversed in 2016 dueto payments received from doubtful customers.

As at 31 December, the analysis of carrying amount of trade and other receivables is as follows:

Past due and not impairedPast due and

impairedTotalNeither past due

nor impaired< 90

days90-180

days> 180days

2016 2,980,824 2,056,444 269,775 2,190 651,813 601

Past due and not impaired

Past due andimpairedTotal

Neither past duenor impaired

< 90days

90-180days

> 180days

2015 9,522,049 1,965,244 1,591,647 45,229 83,352 5,836,577

Neither past due nor impaired accounts receivable are from Ukrainian customers with no credit history forwhich contractual payment terms did not expire as at 31 December 2016 or which were renegotiated.

Information on related party balances is disclosed in Note 28.

21. Prepayments and other current assets

31 December2016

31 December2015

Prepayments to suppliers (including prepayments for financial instruments) 7,523,513 5,618,421Prepayments made for goods purchased for export arrangements 1,556,667 1,868,013Prepaid taxes 47,676 43,764Other current assets 374,077 46,680

9,501,933 7,576,878Allowance for doubtful prepayments (6,335,033) (3,016,653)

Total prepayments and other current assets 3,166,900 4,560,225

All prepayments are denominated in UAH and provided to the new vendors of the Group.

The Group accounts prepayments for financial instruments at fair value at initial recognition andsubsequently measures at amortised cost using effective interest rate at the date of origination lessimpairment. Expected maturity date of the majority of the Group’s prepayments to suppliers (includingprepayments for financial instruments) is 31 December 2018.

Movements in allowance for doubtful accounts were as follows:

2016 2015At 1 January 3,016,653 2,118,207Charge for the year (Note 11) 3,364,746 1,100,740Reversal of previously charged allowances (Note 11) (15,568) (202,294)Change in investments in joint operations (30,798) -

At 31 December 6,335,033 3,016,653

In 2016 due to non-supply of goods the Group had accrued an allowance for doubtful accounts forprepayments to suppliers in amount of UAH 3,364,746 thousand (2015: UAH 1,100,740 thousand) andincluded it in other operating expenses (Note 11).


37

22. Share capital and reserves

As at 31 December 2016 and 2015, the registered share capital of the Group of UAH 13,557 thousandcomprises 54,228,510 ordinary shares with a par value of UAH 0.25. All shares were fully paid as atreporting date. The legal share capital of the Group was registered in 1994 by the State Commission onSecurities and Stock Exchange.

The value of share capital of UAH 1,010,972 thousand shown in these financial statements has beendetermined in accordance with the provisions of IAS 29, applying conversion factors derived from theConsumer Price Index to the amount of the share capital in years when hyperinflation existed.

In accordance with Ukrainian legislation, the Company can distribute all profits for the period or retainedearnings as of the balance sheet date as dividends or transfer them to reserves as specified in theCompany’s charter. The subsequent use of amounts transferred to reserves may be legally restricted;amounts transferred to reserves typically must be used for the purpose designated when the transfer ismade. Dividends are normally only declared from profit for the period or retained earnings as shown in theUkrainian statutory financial statements, and not out of amounts previously transferred to non-distributablereserves. The Group can either legally distribute current year profit or distributable reserves as shown in thenon-consolidated financial statements prepared in accordance with IFRS.

Dividends declared and paid during the year were as follows:

2016 2015

Dividends payable at 1 January 2,804,079 3,984,848Dividends declared during the year - 1,264,609Dividends paid during the year (23,300) (2,445,378)

Dividends payable at 31 December 2,780,779 2,804,079

Dividends per share declared during the year, UAH - 23.32

On 22 July 2015 the Shareholder's Meeting approved the Company’s results for 2014 and declareddividends for the year 2014 in the amount of UAH 1,264,609 thousand (UAH 23.32 per share).

Under local tax legislation, the Group had to make a prepayment of income tax to the amount of 18% ofdividends payable. Income tax prepaid can be offset in next periods with income tax liability.

Basic earnings per share and diluted earnings per share

Earnings per share amounts are calculated by dividing net profit/(loss) for the year attributable to ordinaryequity holders of the parent by the weighted average number of ordinary shares outstanding during the year.

In 2016 the basic and diluted loss per share was UAH 164.91 (2015: UAH 104.93).


38

23. Provisions

Assetretirementobligation

Defined benefitstate pension

planRetirementbenefit plan

Provision forfines andpenalties Total

At 1 January 2015 809,208 504,493 255,642 744,315 2,313,658

Change during the year (6,931) 19,571 11,209 6,385,199 6,409,048

Past service gain - (16,022) (10,449) - (26,471)

Unwinding of discount 53,128 71,510 35,763 - 160,401Effect of change in other

assumptions/remeasurements (65,233) 25,930 (22,859) (62,162)

Utilised (1,346) (54,227) (25,243) - (80,816)

At 31 December 2015 788,826 551,255 244,063 7,129,514 8,713,658

Change during the year 5,288 21,154 10,985 4,182,338 4,219,765Change in investments in jointoperations - - - (52,563) (52,563)

Past service gain (4,592) (8,171) - (12,763)

Unwinding of discount 55,175 83,131 35,726 - 174,032Effect of change in other

assumptions/remeasurements 159,037 105,655 32,444 - 297,136

Utilised (130) (56,833) (38,752) (21,208) (116,923)

At 31 December 2016 1,008,196 699,770 276,295 11,238,081 13,222,342

Current 2016 188,212 51,707 52,723 11,238,081 11,530,723

Non-current 2016 819,984 648,063 223,572 - 1,691,619

Current 2015 129,665 43,968 52,443 7,129,238 7,355,314

Non-current 2015 659,161 507,287 191,620 276 1,358,344

In addition the Group recognises unused vacation provision in amount of UAH 131,253 thousand(31 December 2015: UAH 112,082 thousand) and provision for employees bonus in amount of UAH 44,475thousand as at 31 December 2016 (31 December 2015: nil).

Asset retirement obligation

It is expected that the Group will utilise its asset retirement obligation within 20 years.

Key assumptions made by management are: the discount rate to discount asset retirement obligations, theaverage cost of liquidation of one well on each field; and the average term to liquidation of the field. Sincethere were no long-term high quality corporate bonds in Ukraine and no regular publications of yields ongovernment bonds denominated in local currency, in prior periods the Group used yields on governmentbonds denominated in foreign currencies but adjusted for currency risks. In 2016 statistics over yields ongovernment bonds denominated in UAH became available, and thus to discount the asset retirementobligations management applied an average between market rates on government bonds denominated inforeign currencies adjusted for currency risk and government bonds denominated in UAH of appropriatematurity.

Main assumptions used by management are presented in the table below:

2016 2015Real discount rate, % 6.47 7.10Average cost in UAH thousands of liquidation of one well 414 346Average term to liquidation, years 7 8

The table below summarises the impact of changes in key assumptions, with other variables held constant,on the amount of the liability recognised in the consolidated statement of financial position:

Change in assumption Change in provision recognised

Change of real discount rates in all periods by 1 p.p Increase by UAH 58,967 thousand /decrease by UAH53,525 thousand

Change in average cost of liquidation of well by 10% Increase by UAH 100,967 thousand /decrease by UAH100,967 thousand

Change in average term to liquidation by 1 year Increase by UAH 65,335 thousand /decrease by UAH61,364 thousand


39

23. Provisions (Continued)

Defined benefit state pension plan

The Group has a legal obligation to compensate to the Ukrainian State Pension Fund additional pensionspaid to certain categories of the former and existing employees of the Group. Under the plan the Group’semployees who have qualifying working experience in hazardous environments are eligible to earlyretirements financed by the Group and paid through the Ukrainian State Pension Fund. These obligations fallunder definition of a defined benefit plan.

In 2016 the defined benefit plan covers 27,502 people, including 4,736 ex-employees (2015: 29,620 and4,676, respectively).

None of the benefit plans stated below are funded.

The following tables summarise the components of the net benefit expense recognised in the statement ofprofit or loss and other comprehensive income and amounts recognised in the statement of financial positionfor the plan.

2016 2015Benefit expenseCurrent service cost 21,154 19,571Unwinding of discount 83,131 71,510Past service gain (4,592) (16,022)Benefit expense recognised in profit and loss 99,693 75,059Remeasurements recognised in other comprehensive income 105,655 25,930

Total benefit expense recognised in statement of profit or lossand other comprehensive income 205,348 100,989

2016 2015Changes in the present value of the defined benefit obligationPresent value at the beginning of the year 551,255 504,493Current service cost 21,154 19,571Unwinding of discount 83,131 71,510Past service gain (4,592) (16,022)Remeasurements recognised in other comprehensive income 105,655 25,930Benefits paid (56,833) (54,227)

Present value at the end of the year 669,770 551,255

2016 2015Benefit liabilityPresent value of unfunded obligation 669,770 551,255

Benefit liability recognised in the statement of financial position 669,770 551,255

Retirement benefit plan

The Group has contractual commitments to pay employees certain lump-sum payments at retirement as wellas certain other employment benefits in accordance with the collective employee agreement.

The following tables summarise the components of the net benefit expense recognised in the statement ofprofit or loss and other comprehensive income and amounts recognised in the statement of financial positionfor the plan.


40

23. Provisions (Continued)

2016 2015Benefit expense

Current service cost 10,985 11,209Unwinding of discount 35,726 35,763Past service gain (8,171) (10,449)Benefit expense recognised in profit and loss 38,540 36,523Remeasurements recognised in other comprehensive income 32,444 (22,859)

Total benefit expense recognised in statement of profit or lossand other comprehensive income 70,984 13,664

2016 2015Changes in the present value of the defined benefit obligationPresent value at the beginning of the year 244,063 255,642Past service gain (8,171) (10,449)Current service cost 10,985 11,209Unwinding of discount 35,726 35,763Remeasurements recognised in other comprehensive income 32,444 (22,859)Benefits paid (38,752) (25,243)

Present value at the end of the year 276,295 244,063

2016 2015

Benefit liabilityPresent value of unfunded obligation 276,295 244,063

Benefit liability recognised in the statement of financial position 276,295 244,063

As a result of several changes into the pension legislation in 2016 the lists of professions that are eligible forearly retirement was reduced. Due to the reduction of the list of professions included into the List 1 and theList 2, the Group recognised a past service gain for 2016 of UAH 12,763 thousand for the defined benefitstate plan and the retirement benefit plan.

The principal assumptions used in determining retirement benefit obligations for the Group’s plans areshown below:

2016 2015Nominal discount rate, % 14.73 15.90Future salary increase, % 16 in 2017; 10 further 10.00Personnel turnover rate, % 5.70 5.37

Pension indexation rate used in determining retirement benefit obligations for the Group’s plans for 2016 is6.8% (2015: 7%).

2016 2015 2014 2013 2012Present value of unfunded defined benefit obligation 976,065 795,318 760,135 717,840 640,538Experience adjustments on plan liabilities (44,917) (26,557) (65,085) (96,746) (17,400)

The sensitivity of the defined benefit obligation and retirement benefit plan to changes in the principalassumptions is:

2016 2015

Nominal discount rate (increase)/decrease by 1% (7.11%)/8.12% (6.65%)/7.56%Nominal salary increase/(decrease) by 1% 5.50%/(5.00%) 5.15%/(4.66%)

As at 31 December 2016 weighted average maturity of the Group’s defined benefit obligations is 7 years(December 2015: 7 years). Payment in respect of defined benefit obligations expected to be made during theyear ending 31 December 2016 are UAH 115,047 thousand (2015: UAH 106,331 thousand).

Provision for fines and penalties

As a result of continuing non-payment and late payment of rent tax, income tax and VAT since 2015 theGroup had accrued additional provision for possible fines, penalties and late payment interest.


41

24. Advances, accruals and other liabilities

31 December 2016 31 December 2015Accrued dividends 2,780,779 2,804,079Advances received 354,314 387,148Settlements with employees 8,811 74,083Other current liabilities 410,182 469,630

3,554,086 3,734,940


Accrued dividends are unpaid as at 31 December 2015 due to the National Bank of Ukraine has imposed in2015 a number of restrictions on operations with foreign currency including: a temporary ban on payment ofdividends in foreign currency (Note 2). Starting from 13 June 2016 the NBU allowed Ukrainian companies topay dividends to non-residents with a limit of USD 5 million per month.

25. Accounts payable

31 December 2016 31 December 2015

Trade accounts payable 364,712 1,216,543Accounts payable for goods purchased for export arrangements - 1,204,383Other accounts payable - 1,514

364,712 2,422,440

Trade payables of UAH 109,276 thousand (2015: nil) are denominated in foreign currency: UAH 100,704thousand were denominated in US Dollars, UAH 4,034 thousand were denominated in GBP, UAH 1,716thousand were denominated in EUR and UAH 1,822 thousand in RUR.


26. Non-interest bearing loans and borrowings

As at 31 December 2015 the Group had UAH denominated non-interest bearing borrowings with a carryingvalue of UAH 461,343 thousand maturing in 2016. The nominal value of the non-interest bearing borrowingsamounted to UAH 562,911 thousand. These borrowings were accounted for at effective interest rate of23.4% being a market rate at the date of origination and were unsecured. Discounting effect in amount ofUAH 101,568 thousand was recognised in finance income and costs in 2015 (Note 13). Borrowings werefully repaired during 2016.

27. Commitments, contingencies and operating risks

License maintenance commitments

To comply with a number of exploration and development license or special authorisations requirements, theGroup is required to finance capital expenditures programs related to certain oil and gas fields/areas. Thereare no commitments as at 31 December 2016 and 31 December 2015 under which the Group required toinvest.

Tax compliance

Some other tax positions taken by management may also be potentially challenged by tax authorities, whichcould result in additional charges, including penalties of UAH 4,490 million (2015: UAH 2,468 million).

In addition, per Ukrainian legislation there is a right for tax lien arise for all assets of the tax payer in amountof the tax debt. However, this right was not fully claimed by the tax authorities as at 31 December 2016.

Ukrainian tax, currency and customs legislation is subject to varying interpretations and changes, which canoccur frequently. As a result, there may be significant uncertainty as to the implementation or interpretationof the new legislation and unclear or non-existent implementing regulations. Management’s interpretation ofsuch legislation as applied to the transactions and activity of the Group may be challenged by the relevantregional and State authorities. Recent events in Ukraine suggest that the tax authorities may be taking amore assertive position in their interpretation of the legislation and assessments, and it is possible thattransactions and activities of the Group that have not been challenged in the past may be challenged. As aresult, significant additional taxes, penalties and interest may be assessed. Fiscal periods remain open toreview by the authorities in respect of taxes for three calendar years preceding the year of review. Undercertain circumstances reviews may cover longer periods.


42

27. Commitments, contingencies and operating risks (Continued)

Management implemented internal controls and believes its pricing policy is in compliance with the newtransfer pricing legislation. Management has submitted the report on transfer pricing for 2015 and is currentlydeveloping necessary internal policies on transfer pricing.

Lease commitments

At the end of reporting period, land under all filling stations was under lease agreements with the state andthird parties with a maturity from 2017 to 2064. Management expects it will be able to prolong theseagreements at their maturity.

Changes in tax legislation with effect from 1 January 2017. Revisions were introduced to the Tax Codeof Ukraine from 1 January 2015. Further revisions were introduced in December 2016 when the Parliamentof Ukraine passed a law that introduced certain changes to the Tax Code effective 1 January 2017. Thesechanges were considered to be substantially enacted with respect of calculation of deferred taxes andeconomic obsolescence assessment as at 31 December 2016. The most significant changes that areexpected to impact the Group relate to decrease of rent tax rates, deductibility of accounts receivable write-off expenses through bad debt allowance for corporate income tax calculation that previously were non-deductible. Management expects that the reduction of the subsoil tax rates will significantly decrease theGroup's rent tax payments in 2017. Since 1 January 2017 rent tax rate for crude oil extracted from wells withdepth less than five thousand meters will be 29% (2016: 45%).

Legal

In the ordinary course of business, the Group is subject to legal actions and complaints. Managementbelieves that the ultimate liability, if any, arising from such actions or complaints will not have a materialadverse effect on the financial condition or the results of future operations of the Group to any amountgreater than that which is included in the provision for litigation.

Governmental activities

The operation of oil and gas facilities is of great importance to Ukraine. The Government of Ukraine hasexercised, significant influence over the operations of the Group through the majority shareholder of NAK“Naftogaz” till 22 July 2015 (Note 1).

On 19 March 2015 the amendment to the Law On Joint Stock Companies was adopted and come into forceon 27 May 2015. According to the amendments General shareholders meeting of any public company havea quorum in case of shareholders registration who collectively own more than 50 % of voting shares (before27 May 2015: more than 60% voting shares). On 22 July 2015 the Company held the General shareholdersmeeting. Consequently, starting from 22 July 2015, NAK “Naftogaz” who owned 50%+1 share and theGovernment as owner of NAK “Naftogaz” obtained control over the Group.

Social commitments

The Group contributes to the maintenance and social and economic development of the local communities inthe areas of the Group’s operations, including contributions toward the construction, development andmaintenance of housing, schools, hospitals, transport services, recreation and other social needs.

28. Related party disclosures

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


43

28. Related party disclosures (Continued)

At 31 December 2016 and 31 December 2015, the carrying value of outstanding balances with relatedparties were as follows:

NAK“Naftogaz”

Entities undercommon control of

NAK “Naftogaz”Other related

parties Joint ventures

At 31 December 2016

Accounts receivable 167 67,773 128,133 189,125Prepayments and other currentassets - - 56,708 -Accounts payable 3,430 2,356 102,787 -Advances, accruals and otherliabilities - - 54,748 -

At 31 December 2015

Accounts receivable 1,975 51,080 1,032,579 213,419Accounts payable 5,241 1,675 522,438 -Advances, accruals and otherliabilities - - 46,701 -

Income and expenses on transactions with related parties for 2016 and 2015 were as follows:

NAK“Naftogaz”

Entities undercommon control of

NAK “Naftogaz”Other related

parties Joint ventures

2016Sales of goods and revenue fromservices rendered - 76,457 11,362,480 28,427Purchases of petroleum products,raw materials and consumables - 455,618 8,839,029 20,714

2015Sales of goods and revenue fromservices rendered 5,282 47,869 2,687,056 46,251Purchases of raw materials andconsumables - 336,962 9,393,639 17,864

In 2016 and 2015 the Group did not have any significant operations and balances with the companies ownedby Ukrainian Government, except for the transactions with PJSC “NJSC “Naftogaz of Ukraine” and itssubsidiaries and associates, disclosed above.

Other related parties includes entities significantly influenced by NAK “Naftogaz” and minority shareholders.

For dividends paid and payable refer to the Note 22.

Terms and conditions of transactions with related parties

Outstanding balances with related parties at each reporting date are unsecured, interest free and settlementoccurs in cash. There have been no guarantees provided or received for any related party receivables orpayables.

As at 31 December 2016 and 2015 the related party receivables are stated net of allowances, whichamounted to UAH 35,691 thousand and UAH 109,928 thousand, respectively, and comprised:

Other related parties Joint ventures Total

At 1 January 2015 67,091 14,612 81,703Charge for the year - 21,079 21,079Unused amounts reversed (67,091) - (67,091)

At 31 December 2015 - 35,691 35,691Charge for the year 34,645 53,033 87,678Unused amounts reversed - - -

At 31 December 2016 34,645 88,724 123,369


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28. Related party disclosures (Continued)

Assessment of the impairment of related party receivables is undertaken each financial year throughexamining the financial position of the related party and the market in which the related party operates.

Cash and cash equivalents and restricted cash

As at 31 December 2016 the Group held cash and cash equivalents of UAH 8,007 thousand andUAH 57,368 thousand of restricted cash with a related party bank (as at 31 December 2015: UAH 289,177thousand and UAH 117,806 thousand, respectively).

Cash and cash equivalents, and restricted cash are placed in financial institution which as at 31 December2016 was assigned long-term rating “CCC“ by an international credit rating agency.

Key management personnel compensation

Total key management personnel compensation for 2016 approximated to UAH 117,235 thousand(2015: UAH 20,422 thousand).

Inventory held in the custody

31 December 2016 petroleum products of UAH 2,354,537 thousand were held in the custody of companysignificantly influenced by the Government (31 December 2015: 1,190,855 thousand).

29. Financial risk management objectives and policies

The Group’s principal financial liabilities comprises trade and other payables (2015: trade and other payablesand non-interest-bearing loans). The main purpose of the financial liabilities is to provide funding for theGroup’s operations. The Group has various financial assets such as cash and cash equivalents, trade andother receivables and other financial assets.

The main risks arising from the Group’s financial instruments are foreign currency risk, liquidity risk, creditrisk and interest rate risk. The policies for managing each of these risks are monitored and approved by themanagement of the Group and are summarised below.

Foreign currency risk

The Group performs its operations mainly in the following currencies: Ukrainian hryvnia, United States dollar(“USD”), EURO (“EUR”), and Russian ruble (“RUB”). The exchange rates for those currencies to UAH as setby the National Bank of Ukraine (“NBU”) as at the dates stated were as follows:

31 December2016

31 December2015

USD 27.19 24.00EUR 28.42 26.22RUB 0.45 0.33

Foreign currency denominated short and long term borrowings, trade receivables and payables denominatedin foreign currency give rise to foreign exchange exposure. The Group has not entered into transactionsdesigned to hedge against these foreign currency risks.

Currency risks as defined by IFRS 7 arise from financial instruments denominated in a foreign currencies.The following table demonstrates the sensitivity to a reasonably possible change in the foreign currencyexchange rate, with all other variables held constant, of the Group’s profit before tax.

As at 31 December 2016Increase/(decrease)

in exchange rateEffect on profit /(loss)

before tax

UAH/USD 20%/-20% (20,141)/20,141

UAH/EUR 20%/-20% (343)/343

As at 31 December 2015Increase/(decrease)

in exchange rateEffect on profit/(loss)

before tax

UAH/USD 20%/-20% 146,405/(146,405)

UAH/EUR 20%/-20% 37,941/(37,941)


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29. Financial risk management objectives and policies (Continued)

Liquidity risk

The Group’s objective is to maintain continuity and flexibility of funding through the use of credit termsprovided by suppliers and borrowings. The Group analyses the aging of its assets and the maturity of itsliabilities and plans its liquidity depending on expected repayment of various instruments.

The tables below summarises the maturity profile of the Group’s financial liabilities at 31 December based oncontractual undiscounted payments:

31 December 2016 Up to 6 months TotalCurrent liabilitiesAccounts payable 364,712 364,712Accrued dividends 2,780,779 2,780,779

3,145,491 3,145,491

31 December 2015 Up to 6 monthsFrom 6 months to

1 year TotalCurrent liabilitiesAccounts payable 2,422,440 - 2,422,440Non-interest bearing loans and borrowings - 562,911 562,911Accrued dividends - 2,804,079 2,804,079

2,422,440 3,366,990 5,789,430

Credit risk

Financial instruments of the Group, which are potentially subject to significant concentrations of credit risk,consist principally of cash and cash equivalents, restricted cash, accounts receivable under exportarrangements, trade and other accounts receivable and prepayments for financial instruments. The newmanagement is currently revising the Group’s risk management policies.

Prepayments are issued to private Ukrainian companies which do not have credit rating.

Trade receivables and other receivables are due from private Ukrainian companies majority of which do nothave a credit rating. In 2016 average turnover of Group's account receivable calculated as average accountsreceivable balance at 31 December 2015 and 31 December 2016 divided by net revenue for 2016 wasbelow 101 days (2015: below 110 days).

As at 31 December 2016 cash and cash equivalents comprised cash held on current bank accounts inamount of UAH 136,263 thousands (31 December 2015: UAH 231,909 thousands), cash in transit in amountof UAH 86,036 thousands (31 December 2015: UAH 37,151 thousands), cash on hand in amount of UAH25,746 thousands (31 December 2015: UAH 20,607 thousand).

Cash and cash equivalents, and restricted cash are placed in financial institution which as at31 December 2016 was assigned long-term rating “CCC“ by the international credit rating agency.

Management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis.Credit evaluations are performed on all customers requiring credit over a certain amount. Majority of theGroup’s sales in 2016 were made to the related parties with a history of past relationships. The Group doesnot require collateral in respect of its financial assets.

The credit risk exposure of the Group is monitored and analysed on a case-by-case basis and, based onhistorical collection statistics, the Group’s management believes that there is no significant risk of loss to theGroup beyond the impairment allowances recognised against the assets.

The maximum exposure to credit risk is equal to the carrying amount of trade and other receivables,prepayments and cash and cash equivalents.

As of 31 December 2016 the total aggregate amount of accounts receivable from top 5 customers operatingin Ukraine amounted to UAH 8,920,799 thousand and amount of prepayments to top 4 vendors wereUAH 6,276,771 thousand (31 December 2015: UAH 5,440,589 thousand and UAH 5,585,266 thousandrespectively) or 69% of the gross accounts receivable and 69% of gross prepayments to suppliers(31 December 2015: 48% and 75% respectively). Allowance for these balances is UAH 7,196,478 thousand(31 December 2015: UAH 1,197,178 thousand) and UAH 6,033,484 thousand (31 December 2015:UAH 2,348,517 thousand) respectively.


46

29. Financial risk management objectives and policies (Continued)

Non-cash (barter) transactions in amount of UAH 19,241 thousand were recognised in 2016 (2015: nil). Inaddition, in 2016 the amount of the financial instruments that were eligible for offsetting wasUAH 2,886 million. As at 31 December 2016 these financial instruments were reported in the statement offinancial position on net basis and no cash movement was reported in the cash flow statement.

Capital management

The primary objective of the Group’s capital management is to ensure that it maintains an optimal capitalstructure in order to safeguard the Group’s ability to continue as a going concern, support its business andmaximise the return to shareholders. Currently there is a restriction imposed on dividends payments in theforeign currencies (Note 2).

The Group manages its capital structure and makes adjustments to it, in the light of changes in economicconditions. The Group’s objectives when managing capital are to safeguard the Group’s ability to continue asa going concern in order to provide returns for shareholders and benefits for other stakeholders as well as toprovide financing of its operating requirements, capital expenditures and Group’s development strategy. TheGroup considers shareholders’ equity as primary capital source.

30. Fair value measurements

a) Recurring fair value measurements

Oil and gas assets and property, plant and equipment at fair value. Property, plant and equipment arecarried in the statement of financial position under revaluation model.

The Group’s oil and gas assets and property, plant and equipment are all categorised as Level 3 in the fairvalue hierarchy. During the year there were no transfers between the levels of the fair value hierarchy.

Petrol stations and related equipment were assessed using income approach (Level 3) based on expectedsales in subsequent periods. Oil and gas and other property, plant and equipment was valued usingdepreciation replacement cost for highly specialized production assets or fair value based on marketapproach the assets, which have market analogues. For oil and gas assets, the following major assumptionswere used: prices for wells were based on cost of drilling adjusted for construction inflation where necessary,prices for other properties where no market information exists are assessed as initial cost adjusted forappropriate inflation indices. Subsequently the depreciated replacement cost is analysed for economicceiling using discounted cash flows, projected for the period till full depletion of the field, or till the periodwhen projected discounted cash flow will be negative. (Level 3). The major assumptions include proveddeveloped mineral reserves as at valuation date for each field, revised rent tax rates from 1 January 2017,projection of crude oil prices varying from USD 340 in 2017 to USD 427 in 2021 per ton, post-tax discountrate being 21.8% and projected change in extraction volumes.

b) Fair value of financial assets and liabilities carried at amortised cost.

Financial instruments by categories

In accordance with IAS 39, Financial Instruments: Recognition and Measurement, the Group classifiesfinancial instruments as loans, receivables and prepayments for financial instruments.

As of 31 December 2016 and 31 December 2015 all of the Group’s financial assets and liabilities werecarried at amortised cost. Their carrying amount approximates fair value.

Fair value of financial instruments

The fair value of the financial assets and liabilities are included at the amount at which the instrument couldbe exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.

The fair value of cash and cash equivalents, trade receivables, trade payables and other current liabilitiesapproximate their carrying amounts largely due to the short-term maturities of these instruments.

The fair value of short-term and long-term trade receivables, non-interest bearing loans and other financialliabilities is estimated by discounting future cash flows using rates currently available for debt on similarterms, credit risk and remaining maturities. As at 31 December 2016 the carrying value of these financialinstruments approximates their fair value.


47

31. Events after the reporting period

Disputes with tax authorities. As disclosed in Note 4, in January 2017 the Highest Administrative Court ofUkraine required the State Fiscal Service of Ukraine to include the natural gas of 2,061 million cubic metersamounting to UAH 13,607,913 thousand as a tax pledge against the Group’s tax liabilities. As of the date ofthese financial statements this judgement has yet to be enforced.

group ukrnafta international financial reporting standards ... · decrease in fair value of oil and...

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