30. Fiancial instruments

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)
  2014 2013
Available-for-sale financial assets    
Long-term investments at fair value    
Level 1 - 6
Level 2 - -
Level 3 - -
Total long-term equity investments at fair value - 6
Financial assets at fair value through profit and loss    
Non-hedge derivatives    
Level 1 - -
Level 2 3 401
Level 3 - -
Total non-hedge derivatives 3 401
Financial liabilities at fair value through profit and loss    
Non-hedge derivatives    
Level 1 - -
Level 2 5,975 878
Level 3 - -
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)
Loans - - 743 - - - (307) - - - 436
Total financial assets (2,182) - 1,180 12 (64) (399) (307) - 2,783 - 1,023
Bank and corporate loans - (11,679) - - - - - - (475) - (12,154)
Bonds - (3,197) - - - - - - - - (3,197)
Promissory notes - (1) - - - - - - - - (1)
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
Loans - - 509 - - - (17) - 23 - 515
Total financial assets (2,140) - 1,239 20 41 386 (17) - 337 - (134)
Bank and corporate loans - (11,893) - - - - - - (170) - (12,063)
Bonds - (2,889) - - - - - - - - (2,889)
Promissory notes - - - - - - - - (12) - (12)
Vendor financing - (63) - - - - - - (178) - (241)
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
Bonds 18,603 11,396 1,230 15,081 - 46,310
Promissory notes 5 11 - - 9 25
Vendor financing 9 9 9 9 19 55
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
Guarnties issued - - - - 13,822 13,822
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
Bonds 8,981 2,778 1,396 11,230 25,081 49,466
Promissory notes 377 1 - - 8 386
Vendor financing 9 9 9 9 28 64
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  
Financial assets 18,902 9,962
Financial liabilities (178,890) (176,437)
(159,988) (166,475)
     
Variable rate instruments 3 401
Financial assets (17,100) (42,250)
Financial liabilities (17,097) (41,849)

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.

2014 2013
Euribor (+1%) - -
Euribor (-1%) - -
MosPrime (+1%) (51) (1,090)
MosPrime (-1%) 51 1,090
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
USD EUR USD EUR
Cash and cash equivalents 487 192 327 62
Trade receivables 2,343 835 1,497 879
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)
Net exposure (6,407) 762 (2,351) (1,429)

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
USD EUR USD EUR
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.

  Increase/decrease
in percentage point
Effect on revaluation result
recognized in profit or loss
2014    
MICEX + 30.0% 1,685
MICEX -  30.0% (1,804)
2013    
MICEX + 30.0% 1,191
MICEX -  30.0% (1,496)

(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.

(e) Guarantee

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.

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