The Group’s principal financial instruments comprise cash and cash equivalents, investments, bank loans, bonds and promissory notes issued and finance leases liabilities. These instruments serve to finance the Group’s operations and capital expenditures; its corporate financial transactions such as share repurchase and acquisition strategy; place available funds in course of cash management. Other financial assets and liabilities such as trade receivables and trade payables arise directly from the Group’s operations. The following table presents the carrying amounts of financial assets and liabilities as at 31 December 2014 and 2013:
|Classes||Categories||31 December 2014||31 December 2013|
|Cash and cash equivalents||Loans and receivables||16,945||7,960|
|Trade and other receivables||Loans and receivables||49,290||40,986|
|Available-for-sale financial assets at cost||Available-for-sale||84||83|
|Available-for-sale financial assets at fair value||Available-for-sale||-||6|
|Loans||Loans and receivables||1,957||1,996|
|Non-hedge derivative||Financial assets at fair value through profit or loss||3||401|
|Total financial assets||68,279||51,432|
|Bank and corporate loans||Liabilities at amortized cost||150,857||175,925|
|Bonds||Liabilities at amortized cost||37,560||40,000|
|Promissory notes||Liabilities at amortized cost||10||386|
|Vendor financing||Liabilities at amortized cost||55||64|
|Finance lease liabilities||Liabilities at amortized cost||175||168|
|Interest payable||Liabilities at amortized cost||1,265||1,170|
|Other borrowings||Liabilities at amortized cost||92||96|
|Trade and other payables||Liabilities at amortized cost||47,870||43,045|
|Non-hedge derivative||Financial liabilities at fair value through profit and loss||5,975||878|
|Total financial liabilities||243,859||261,732|
The fair value of cash and cash equivalents, current receivables, trade payables, other current financial assets and liabilities approximate their carrying amount largely due to the short-term maturity of these instruments.
The fair value of long-term debt investments, long-term accounts receivable and non-current accounts payable correspond to the present values of the payments related to the assets and liabilities, taking into account the current interest rate parameters that reflect market-based changes to terms and conditions and expectations. Fair value of financial liabilities approximate their carrying amount.
Available for sale investments accounted for at cost include unquoted equity investments whose value cannot be measured reliably. Quoted prices are not available for these investments due to the absence of an active market. It is also impracticable to derive fair value using the similar transaction method. The discounting cash flow method cannot be applied to such investments as there are no reliably determinable cash flows related to them.
The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:
- Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities
- Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices)
- Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs)
|Available-for-sale financial assets|
|Long-term investments at fair value|
|Total long-term equity investments at fair value||-||6|
|Financial assets at fair value through profit and loss|
|Total non-hedge derivatives||3||401|
|Financial liabilities at fair value through profit and loss|
|Total non-hedge derivatives||5,975||878|
Management of the Group believes that the fair values of accounts receivable and accounts payable shown in the balance sheet approximate their carrying amounts
Income and expenses on financial instruments
|Finance costs||Other investing and financing gains and losses Equity||Equity|
|2014||Bad debt income/ (expense)||Interest expense||Interest income||Dividend income||Gains / (losses) on asset disposal||Fair value change||Impairment loss (reversal of impairment)||Other||Foreign exchange gains / (losses)||Fair value change||Total|
|Cash and cash equivalents||-||-||116||-||-||-||-||-||284||-||400|
|Trade and other receivables||(2,182)||-||321||-||-||-||-||-||2,499||-||638|
|Available for sale financial instruments||-||-||-||12||(64)||-||-||-||-||-||(52)|
|Financial assets at fair value through profit and loss||-||-||-||-||-||(399)||-||-||-||-||(399)|
|Total financial assets||(2,182)||-||1,180||12||(64)||(399)||(307)||-||2,783||-||1,023|
|Bank and corporate loans||-||(11,679)||-||-||-||-||-||-||(475)||-||(12,154)|
|Finance lease liabilities||-||(22)||-||-||-||-||-||-||-||-||(22)|
|Trade and other payables and non-hedge derivatives||-||-||-||-||-||(5,097)||-||-||(2,125)||-||(7,222)|
|Total financial liabilities||-||(14,899)||-||-||-||(5,097)||-||-||(2,600)||-||(22,596)|
Income and expenses on financial instruments
|Finance costs||Other investing and financing gains and losses||Equity|
|2013||Bad debt income/ (expense)||Interest expense||Interest income||Dividend income||Gains / (losses) on asset disposal||Fair value change||Impairment loss (reversal of impairment)||Other||Foreign exchange gains / (losses)||Fair value change||Total|
|Cash and cash equivalents||-||-||676||-||-||-||-||-||19||-||695|
|Trade and other receivables||(2,140)||-||45||-||-||-||-||-||295||-||(1,800)|
|Available for sale financial instruments||-||-||9||20||41||-||-||-||-||-||70|
|Financial assets at fair value through profit and loss||-||-||-||-||-||386||-||-||-||-||386|
|Total financial assets||(2,140)||-||1,239||20||41||386||(17)||-||337||-||(134)|
|Bank and corporate loans||-||(11,893)||-||-||-||-||-||-||(170)||-||(12,063)|
|Finance lease liabilities||-||(48)||-||-||-||-||-||-||-||-||(48)|
|Trade and other payables and non-hedge derivatives||-||-||-||-||-||(878)||-||-||(551)||-||(1,429)|
|Total financial liabilities||-||(14,893)||-||-||-||(878)||-||-||(911)||-||(16,682)|
(a) Credit risk
Each class of financial assets represented in the Group’s statement of financial position to some extent is exposed to credit risk. Management develops and implements policies and procedures aiming to minimize the exposure and impact on the Group’s financial position in case of risk realization.
Financial instruments that could expose the Group to concentrations of credit risk are mainly trade and other receivables. The credit risk associated with these assets is limited due to the Group’s large customer base and ongoing procedures to monitor the credit worthiness of customers and other debtors.
The Group’s accounts receivable are represented by receivables from the Government and other public organizations, businesses and individuals each of them bearing different credit risk. Collection of receivables from the Government and other public organizations is mainly influenced by political and economic factors and not always under full control of the Group. However, management undertakes all possible efforts to minimize the exposure to risk of receivable from this category of clients. In particular, creditworthiness of such subscribers is assessed based on financing limits set by the Government. Management believes there were no significant unprovided losses relating to these or other receivables as at 31 December 2014 and 2013.
To reduce risk of exposure on receivables from businesses and individuals the Group implements a range of procedures. Credit risk is determined based on a summary of probabilities of occurrences and possible impact of events negatively influencing the customer’s ability to discharge its obligation. A credit rating is attributed to a customer on initial stage of cooperation and, then, reassessed periodically based on credit history. As a part of its credit risk management policy, the Group arranges preventive procedures which are represented by but not limited to advance payments, request for collaterals and banks and third parties guarantees. For collection of receivables, which are past due, the Group takes a variety of actions from suspension of rendering of services to taking legal action.
According to the financial policy of the Group, the Group deposits excess cash available with several largest Russian banks (with high credit ratings) . To manage the credit risk related to deposit of cash available with banks, management of the Group implements procedures to periodically assess the creditworthiness of the banks. To facilitate this assessment, deposits are mainly placed with banks where the Group has already had comparable credit obligations, current settlement account and can easily monitor activity of such banks.
Maximum exposures to credit risk are limited to the net carrying amounts of respective financial assets, except for guarantee (see Note 30 (e)).
(b) Liquidity risk
The Group monitors its risk of a shortage of funds by preparing and monitoring compliance with cash flow budgets. The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of bank overdrafts, bank loans, bonds, etc.. Cash flow budgets consider the maturity of both cash inflows and outflows from the Group’s operations. Based on projected cash flows the decision is taken on either investment of free cash or attracting financing required. Realization of liquidity risk management policy provides the Group with sufficient cash to discharge its obligation on a timely basis. Financing was provided within the Group introducing the need for certain companies to raise financing from the Group parent company (OJSC Rostlelecom) via cash-pooling.
Maturity analysis as at 31 December 2014 and 2013 represented below shows undiscounted cash flows, including estimated interest payments:
|2015||2016||2017||2018||2019 and later||Total|
|31 December 2014|
|Bank and corporate loans||51,583||45,956||45,958||34,661||6,096||184,254|
|Finance lease liabilities||84||19||18||18||183||322|
|Other borrowings and hedge derivatives||92||1||-||-||-||93|
|Trade and other payables||47,870||-||1||-||1||47,872|
|Total financial liabilities||118,246||57,392||47,216||49,769||20,130||292,753|
|2014||2015||2016||2017||2018 and later||Total|
|31 December 2013|
|Bank and corporate loans||40,583||33,563||69,541||43,175||32,423||219,285|
|Finance lease liabilities||78||20||19||18||200||335|
|Other borrowings and hedge derivatives||80||20||2||-||-||102|
|Trade and other payables||43,045||90||-||-||1||43,136|
|Stock redemption reserve||23,161||-||-||-||-||23,161|
|Total financial liabilities||116,314||36,481||70,967||54,432||57,741||335,935|
(c) Market risks
Significant market risk exposures are interest rate risk, exchange rate risk and other price risk. Exposure to other price risk arises from available for sale investments quoted on active markets.
Interest rate risk
Interest rate risk mainly relates to floating rate debt primary denominated in US dollars, Russian Roubles and euros and financial instruments denominated in Russian Roubles. To manage this risk, the Group entered into interest rate swaps to hedge significant amounts of its floating rate debt. Other borrowings do not materially influence the exposure to interest risk.
|31 December 2014||31 December 2013|
|Fixed rate instruments|
|Variable rate instruments||3||401|
Fair value sensitivity analysis for fixed rate instruments
The Group does not account for any fixed rate financial instruments as fair value through profit or loss.
Cash flow sensitivity analysis for variable rate instruments
The table below demonstrates the sensitivity to a reasonably possible change in interest rates, with all other variables held constant, of the Group’s profit before tax.
|Federal loan bonds rate (+1%)||111||90|
|Federal loan bonds rate (-1%)||(111)||(90)|
|CB refinancing (+1%)||(1)||-|
|CB refinancing (-1%)||1||-|
Foreign exchange risk
Currency risk is the risk that fluctuations in exchange rates will adversely affect the Group’s cash flows. As a result, these fluctuations in exchange rates will be reflected in respective items of the Group’s consolidated statement of comprehensive income, statement of financial position and/or statement of cash flows. The Group is exposed to currency risk in relation to its assets and liabilities denominated in foreign currencies, mostly from accounts receivable and payable from operations with international telecom operators, accounts payable for equipment, borrowings issued in foreign currencies. The Group does not have formal procedures to reduce its currency risks.
Financial assets and liabilities of the Group presented by currency as at 31 December 2014 and 2013 were as follows:
|31 December 2014||31 December 2013|
|Cash and cash equivalents||487||192||327||62|
|Financial assets at fair value through profit or loss||3||-||401||-|
|Loans and receivables||-||-||79||-|
|Bank and corporate loans||(1,056)||(20)||(604)||(220)|
|Trade and other payables and non-hedge derivatives||(8,184)||(245)||(4,051)||(2,150)|
The table below demonstrates the sensitivity to a reasonably possible change in exchange rates, with all
other variables held constant, of the Group’s profit before tax:
|31 December 2014||31 December 2013|
|Strengthening of the currency (+20%)||(2,476)||152||(1,398)||(286)|
|Weakening of the currency (-20%)||2,416||(152)||1,272||286|
The analysis was applied to monetary items denominated in relevant currencies at the reporting date.
Other price risk
As at 31 December 2014, the Group’s assets include investments in quoted securities subject to other price risk. To mitigate this risk, the Group regularly analyses market securities trends and makes a decision to sell a security, when necessary.
The table below demonstrates the sensitivity to a reasonably possible change in market indexes for securities, with all other variables held constant, of the Group in terms of the result of fair value revaluation recognized in other comprehensive income.
in percentage point
|Effect on revaluation result
recognized in profit or loss
(d) Capital management policy
Capital management policy of the companies comprising the Group is primarily focused on increasing credit ratings, improving financial independence and liquidity ratios, improving the structure of payables, and reducing cost of borrowings. Among the main methods of capital management are profit maximization, investment program management, sale of assets to reduce debt, debt portfolio management and restructuring, use of different classes of borrowings. In addition, the companies of the Group are subject to externally imposed capital requirements, which are used for capital monitoring. There were no changes in the objectives, policies and processes of capital management during 2013-2014.
The Boards of directors of the companies comprising the Group review their performance and establish a variety of key performance indicators which are based on Russian statutory accounts. The companies comprising the Group monitor and manage their debt using financial independence ratio and net debt/equity, net debt/OIBDA ratios.
The Group guaranteed repayment of debts of Infrastruktunie investitsii-4 LLC at the amount of 13,822 to its creditors. The Group received a loan from the company to finance elimination of digital divide.