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Closed Joint Stock Company Kyivstar G.S.M.


Independent auditors’ report

Closed Joint Stock Company Kyivstar G.S.M.

Consolidated Financial Statements As at 31 December 2010 with Independent Auditors’ Report

39 The accompanying notes form an integral part of the consolidated financial statements


Independent auditors’ report Consolidated statement of comprehensive income

43

Consolidated statement of financial position

44

Consolidated cash flow statement

45

Consolidated statement of changes in equity

47

Independent auditors’ report

Contents

Notes to the consolidated financial statements 1. Corporate information

48

2. Operating environment, risks and economic conditions in Ukraine

49

3. Basis of preparation

49

4. Changes in accounting policies

50

5. Summary of significant accounting policies

51

6. Critical accounting judgements and key sources of estimation uncertainty

60

7. IFRSs and IFRIC Interpretations not yet effective

62

8. Revenues and expenses

63

9. Income tax

66

10. Property, plant and equipment

69

11. Intangible assets

70

12. Other non-current assets

71

13. Trade and other receivables

72

14. Prepayments

73

15. Reconciliation of allowance accounts

73

16. Deferred expenses

74

17. Cash and cash equivalents

75

18. Share capital

76

19. Interest-bearing loans and borrowings

76

20. Employee benefit liability

77

21. Deferred revenue

79

22. Provisions

80

23. Taxes payable, other than income tax

80

24. Trade and other payables

81

25. Advances received

82

26. Other current liabilities

82

27. Related party disclosure

83

28. Commitments and contingencies

85

29. Fair value of financial instruments

86

30. Financial instruments and risk management

86

31. Earnings per share

89

32. Events after the reporting period

89

The accompanying notes form an integral part of the consolidated financial statements

41


For the year ended 31 December 2010 (in thousands of Ukrainian Hryvnia, except for earnings per share)

Revenues

Notes

2010

2009

8

11,443,025

11,590,538

Costs of materials and traffic charges

8

(1,939,528)

(2,091,274)

Salaries and personnel costs

8

(866,243)

(935,249)

Other operating expenses

8

(2,078,358)

(2,136,650)

28,552

25,850

8

(64,373)

(82,467)

Other income Other expenses Depreciation and amortisation

8

(1,781,469)

(1,754,174)

Impairment losses

8

(3,414)

(118,069)

4,738,192

4,498,505

Finance income

8

227,431

529,958

Finance costs

8

(7,217)

(38,079)

Foreign exchange loss, net

(36,196)

(45,510)

Profit before tax

4,922,210

4,944,874

(1,244,330)

(1,259,477)

Profit for the year

3,677,880

3,685,397

Total comprehensive income for the year, net of tax

3,677,880

3,685,397

344.13

344.84

Income tax expense

9

Earnings per share, UAH

31

Independent auditors’ report

Consolidated statement of comprehensive income

Signed and authorised for release on behalf of management of Closed Joint Stock Company Kyivstar G.S.M. on 11 March 2011:

President Igor Lytovchenko

Chief Financial Officer Andrew Simmons

Deputy Chief Financial Officer/Chief Accountant Lesya Samoylovich

43 The accompanying notes form an integral part of the consolidated financial statements


Consolidated statement of financial position As at 31 December 2010 (in thousands of Ukrainian Hryvnia) Notes

2010

2009

Property, plant and equipment

10

6,274,153

6,349,031

Intangible assets

11

970,861

1,080,566

Other non-current assets

12

44,493

56,858

Deferred tax asset

9

635,940

307,140

7,925,447

7,793,595

68,990

64,489

320,553

595,702

-

899,492

ASSETS

Closed Joint Stock Company Kyivstar G.S.M.

Non-current assets

Current assets Inventories Trade and other receivables

13

Prepaid income tax Prepaid taxes, other than income tax

401

587

Prepayments

14

74,902

78,362

Deferred expenses

16

92,583

77,912

Other current financial assets

27

3,349,309

-

Cash and cash equivalents

17

1,595,056

1,210,394

5,501,794

2,926,938

13,427,241

10,720,533

2010

2009

TOTAL ASSETS Notes EQUITY AND LIABILITIES Equity attributable to equity holders of the parent Share capital

18

Retained earnings

656,499

656,499

10,679,975

8,322,298

11,336,474

8,978,797

Non-current liabilities Interest-bearing loans and borrowings

19

-

51,192

Employee benefit liability

20

37,262

42,231

Provisions

22

52,727

-

89,989

93,423

Current liabilities Interest-bearing loans and borrowings

19

51,735

694

Employee benefit liability

20

7,566

3,896

Deferred revenue

21

736,659

614,519

Provisions

22

12,986

14,666

Income tax payable

266,911

-

Taxes payable, other than income tax

23

146,961

134,546

Trade and other payables

24

480,288

568,486

Advances received

25

136,207

136,198

Other current liabilities

26

161,465

175,308

TOTAL EQUITY AND LIABILITIES

44

2,000,778

1 648,313

13,427,241

10,720,533


For the year ended 31 December 2010 (in thousands of Ukrainian Hryvnia) Notes

2010

2009

4,922,210

4,944,874

1,346,803

1,337,770

Operating activities Profit before tax

Independent auditors’ report

Consolidated cash flow statement

Non-cash adjustments to reconcile profit before tax to net cash flows: Depreciation of property, plant and equipment

8

Impairment of property, plant and equipment and intangible assets

8

3,414

118,069

Amortisation of intangible assets

8

434,666

416,404

Loss on disposal of property, plant and equipment and intangible assets

8

61,477

68,622

Interest income

8

(150,641)

(528,065)

Unwinding of discount on other current financial assets

8

Interest expense related to bank loans

(76,790)

-

3,942

34,381

Other finance costs

8

3,275

3,698

Net gain on derivative financial instrument

8

-

(1,893)

Movements in provisions and defined employee benefit liability

(6,254)

31,651

Unrealised foreign exchange loss

7,392

40,789

Working capital adjustments: Increase in inventories

(4,501)

(6,159)

Decrease/(increase) in trade and other receivables and prepayments

201,327

(82,134)

Decrease in short-term deposits

-

3,063,312

(Increase)/decrease in deferred expenses

(14,671)

15,315

Increase in trade and other payables and taxes payable, other than income tax

132,890

132,610

Increase/(decrease) in deferred revenue

122,140

(115,812)

Increase in advances received

9

14,745

Decrease in other liabilities

(13,843)

(29,780)

6,972,845

9,458,397

144,821

675,546

Interest received Interest paid

(3,944)

(70,648)

Income taxes paid

(234,233)

(2,384,247)

Net cash flows from operating activities

6,879,489

7,679,048

45 The accompanying notes form an integral part of the consolidated financial statements


For the year ended 31 December 2010 (in thousands of Ukrainian Hryvnia)

Notes

2010

2009

Purchase of property, plant and equipment

(1,356,578)

(1,212,587)

Purchase of intangible assets

(480,388)

(234,501)

Reimbursable interest-free financial aid provided to related party

(4,000,000)

-

Proceeds from sale of property, plant and equipment and disposal of assets under buy-back agreement

114,897

215,681

Net cash flows used in investing activities

(5,722,069)

(1,231,407)

Dividends paid to equity holders of the parent

(743,591)

(9,134,787)

Withholding tax paid on dividends

(21,625)

(260,214)

Repayment of loans and borrowings

-

(973,130)

Payment of financial fees

-

(3,698)

Proceeds from derivative financial instrument

-

32,664

Net cash flows used in financing activities

(765,216)

(10,339,165)

Net increase/(decrease) in cash and cash equivalents

392,204

(3,891,524)

Net foreign exchange difference

(7,542)

33,549

Closed Joint Stock Company Kyivstar G.S.M.

Investing activities

46

Financing activities

Cash and cash equivalents as at 1 January

17

1,210,394

5,068,369

Cash and cash equivalents as at 31 December

17

1,595,056

1,210,394


For the year ended 31 December 2010 (in thousands of Ukrainian Hryvnia) Attributable to the equity holders of the parent Share capital (Note 18)

Retained earnings

Total equity

Balance at 1 January 2009

656,499

11,136,901

11,793,400

Profit for the year

-

3,685,397

3,685,397

Total comprehensive income for the year, net of tax

-

3,685,397

3,685,397

Dividends declared (Note 18)

-

(6,500,000)

(6,500,000)

Balance at 31 December 2009

656,499

8,322,298

8,978,797

Profit for the year

-

3,677,880

3,677,880

Total comprehensive income for the year, net of tax

-

3,677,880

3,677,880

Dividends declared (Note 18)

-

(765,216)

(765,216)

Distributions to shareholders (Note 27)

-

(554,987)

(554,987)

Balance at 31 December 2010

656,499

10,679,975

11,336,474

Independent auditors’ report

Consolidated statement of changes in equity

47 The accompanying notes form an integral part of the consolidated financial statements


Closed Joint Stock Company Kyivstar G.S.M.

Notes to the consolidated financial statements at 31 December 2010 (in thousands of Ukrainian Hryvnia)

1. Corporate information Closed Joint Stock Company Kyivstar G.S.M. (hereinafter referred to as ‘Kyivstar’ or ’the Company’) was established and registered on 3 September 1997 under the laws of Ukraine. The Company is involved in the design, construction and operating of a dedicated cellular telecommunication network and provides a wide range of mobile communication services in Ukraine. The Company’s registered legal address is at 51, Chervonozoryanyy Av., Kyiv, 03110, Ukraine. The Company’s head office and principal place of business is at 53, Degtyarivska St., Kyiv, 03113, Ukraine.

Prior to 21 April 2010, 56.52% of the Company’s shares were owned by Telenor Mobile Communications AS, an entity affiliated with Telenor ASA (‘Telenor’), and the remaining 43.48% – by Storm LLC, an entity affiliated with Altimo Holdings and Investments Limited (‘Altimo’). On 21 April 2010, Telenor and Altimo legally consummated a combination of their holdings in Open Joint Stock Company VimpelCom, one of the largest telecommunications operators in the Russian Federation, and Kyivstar, by creating a jointly owned telecommunication company, VimpelCom Ltd. As a result, the Company’s ownership structure has changed. As at 31 December 2010 and 2009 the Company’s direct shareholders and their respective declared interests were as follows: 2010 Interest

Number of shares

Interest

Number of shares

VimpelCom Holdings B.V. (Netherlands)

56.52%

6,040,262

-

-

Storm LLC (Ukraine)

43.48%

4,647,127

43.48%

4,647,124

Telenor Mobile Communications AS (Norway)

-

-

56.52%

6,040,255

Other shareholders

-

-

less than 0.01% 10

100.00%

10,687,389

100.00%

The Company has one wholly owned subsidiary – Joint Stock Company Staravto, which was established in order to provide transportation services to the Company. The Company and its subsidiary are hereinafter together referred to as

48

2009

‘the Group’. The Company’s ultimate parent is VimpelCom Ltd., a company headquartered in Amsterdam, the Netherlands.

10,687,389


The Ukrainian economy while deemed to be of market status continues to display certain characteristics consistent with that of an economy in transition. These characteristics include, but are not limited to, low levels of liquidity in the capital markets, high inflation and the existence of currency controls which cause the national currency to be illiquid outside of Ukraine. The stability of the Ukrainian economy will be significantly impacted by the Government’s policies and actions with regard to administrative, legal, and economic reforms. As a result, operations in Ukraine involve risks that are not typical for developed markets.

3. Basis of preparation The consolidated financial statements have been prepared on a historical cost basis, except for certain financial instruments measured in accordance with the requirements of IAS 39 Financial instruments: recognition and measurement. These consolidated financial statements are presented in Ukrainian Hryvnia (‘UAH’) and all values are rounded off to the nearest thousand, except when otherwise indicated. Statement of compliance The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).

The Ukrainian economy is vulnerable to market downturns and economic slowdowns elsewhere in the world. The global financial crisis has resulted in a decline in the gross domestic product, instability in the capital markets, a significant deterioration in the liquidity of the banking sector, and tighter credit conditions within Ukraine. Whilst the Ukrainian Government continues to introduce various stabilisation measures aimed at supporting the banking sector and providing liquidity to Ukrainian banks and companies, there continues to be uncertainty regarding access to capital and its cost for the Group and its counterparties, which could affect the Group’s financial position, results of operations and business prospects. Whilst management believes it is taking appropriate measures to support the sustainability of the Group’s business in the current circumstances, any unexpected further deterioration in the areas described above could negatively affect the Group’s results and financial position in a manner not currently determinable.

Notes to the consolidated financial statements

2. Operating environment, risks and economic conditions in Ukraine

Basis of consolidation The consolidated financial statements comprise the financial statements of the Company and its wholly-owned subsidiary. The subsidiary is fully consolidated from the date it was incorporated by the Company. The subsidiary’s financial statements are prepared as at the same reporting date as the Company’s, using consistent accounting policies. All intra-group balances, income and expenses and unrealised gains and losses resulting from intra-group transactions are eliminated in full.

49


Closed Joint Stock Company Kyivstar G.S.M.

4. Changes in accounting policies The accounting policies adopted are consistent with those of the previous financial year, except for the following new and amended IFRS and IFRIC interpretations effective as of 1 January 2010: •IFRS 2 Share-based Payment: Group Cashsettled Share-based Payment Transactions effective 1 January 2010 • IFRS 3 Business Combinations (Revised) and IAS 27 Consolidated and Separate Financial Statements (Amended) effective 1 July 2009, including consequential amendments to IFRS 2, IFRS 5, IFRS 7, IAS 7, IAS 21, IAS 28, IAS 31 and IAS 39 • IAS 39 Financial Instruments: Recognition and Measurement – Eligible Hedged Items effective 1 July 2009 • IFRIC 17 Distributions of Non-cash Assets to Owners effective 1 July 2009 • Improvements to IFRSs (May 2008) • Improvements to IFRSs (April 2009) The adoption of the standards or interpretations is described below: IFRS 2 Share-based Payment (Revised) The IASB issued an amendment to IFRS 2 that clarified the scope and the accounting for group cash-settled share-based payment transactions. The Group adopted this amendment as of 1 January 2010. It did not have an impact on the financial position or performance of the Group. IFRS 3 Business Combinations (Revised) and IAS 27 Consolidated and Separate Financial Statements (Amended) IFRS 3 (Revised) introduces significant changes in the accounting for business combinations occurring after becoming effective. Changes affect the valuation of non-controlling interest, the accounting for transaction costs, the initial recognition and subsequent measurement of a contingent consideration and business combinations achieved in stages. These changes will impact the amount of goodwill recognised, the reported results in the period that an acquisition occurs and future reported results. IAS 27 (Amended) requires that a change in the ownership interest of a subsidiary (without loss of control) is accounted for as a transaction with owners in their capacity as owners. Therefore, such transactions will no longer give rise to goodwill, nor will they give rise to a gain or loss. Furthermore, the amended standard changes the accounting for losses incurred by the subsidiary as well as the loss of control of a subsidiary. The changes by IFRS 3 (Revised) and IAS 27 (Amended) affect acquisitions or loss of control of subsidiaries and transactions with non-controlling interests after 1 January 2010.

50

The change in accounting policy was applied prospectively. It did not have an impact on the financial position or performance of the Group. IAS 39 Financial Instruments: Recognition and Measurement – Eligible Hedged Items The amendment clarifies that an entity is permitted to designate a portion of the fair value changes or cash flow variability of a financial instrument as a hedged item. This also covers the designation of inflation as a hedged risk or portion in particular situations. The amendment had no impact on the financial position or performance of the Group in 2010, as the Group has not entered into any such hedges. IFRIC 17 Distribution of Non-cash Assets to Owners This interpretation provides guidance on accounting for arrangements whereby an entity distributes non-cash assets to shareholders either as a distribution of reserves or as dividends. The interpretation has no effect on the financial position or performance of the Group. Improvements to IFRSs In May 2008 and April 2009, the IASB issued omnibus of amendments to its standards, primarily with a view to removing inconsistencies and clarifying wording. There are separate transitional provisions for each standard. The adoption of the following amendments resulted in changes to accounting policies but did not have any impact on the financial position or performance of the Group. Issued in May 2008 • IFRS 5 Non-current Assets Held for Sale and Discontinued Operations: clarifies that when a subsidiary is classified as held for sale, all its assets and liabilities are classified as held for sale, even when the entity retains a non-controlling interest after the sale transaction. The amendment is applied prospectively and has no impact on the financial position or financial performance of the Group. Issued in April 2009 • IFRS 5 Non-current Assets Held for Sale and Discontinued Operations: clarifies that the disclosures required in respect of noncurrent assets and disposal groups classified as held for sale or discontinued operations are only those set out in IFRS 5. The disclosure requirements of other IFRSs only apply if specifically required for such non-current assets or discontinued operations. The amendment is applied prospectively and has no impact on the the disclosures made in the Group’s consolidated financial statements. • IFRS 8 Operating Segments: clarifies that segment assets and liabilities need only


• IAS 7 Statement of Cash Flows: states that only expenditure that results in recognising an asset can be classified as a cash flow from investing activities. This amendment did not change the presentation of the cash flow statement in the Group’s consolidated financial statements. Other amendments resulting from Improvements to the following standards did not have any impact on the accounting policies, financial position or performance of the Group:

5. Summary of significant accounting policies Functional and presentation currencies The functional and presentation currency of each of the Group’s entities is Ukrainian Hryvnia. Foreign currency translation Transactions denominated in currencies other than the relevant functional currency (foreign currencies) are initially recorded in the functional currency at the rate in effect at the date of transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the functional-currency rate of exchange in effect at the reporting date. Non-monetary items that were measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of the initial transaction. Nonmonetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair values were determined. The resulting gains and losses are recognised in the profit and loss. Revenue recognition and measurement Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. Revenues are measured at the fair value of the consideration received or receivable, excluding discounts, rebates and sales taxes. These taxes are regarded as collected on behalf on the authorities.

Issued in April 2009 • IFRS 2 Share-based Payment • IAS 1 Presentation of Financial Statements • IAS 17 Leases • IAS 34 Interim Financial Reporting • IAS 36 Impairment of Assets • IAS 38 Intangible Assets • IAS 39 Financial Instruments: Recognition and Measurement • IFRIC 9 Reassessment of Embedded Derivatives • IFRIC 16 Hedge of a Net Investment in a Foreign Operation • IFRIC 18 Transfers of Assets from Customers

Notes to the consolidated financial statements

be reported when those assets and liabilities are included in measures that are used by the chief operating decision maker. The amendment did not result in additional disclosures as the Group’s management identified that the Group has only one reportable segment.

Revenues primarily comprise sales of: • Services: revenue from air time charges, interconnection fees, periodic fees, connection and one-time subscription fees, roaming, value added services; • Customer equipment: telephony handsets, modems, etc. Air time revenue The Company earns air time revenue by providing its prepaid and post-paid subscribers with access to the cellular network and routing their calls through the network and its roaming partners’ networks. Revenue from interconnection Revenue from interconnection represents the revenue earned for the termination of calls from other telecommunications service providers’ networks on the Company’s network. Air time and interconnection revenue is recognised in the period when the respective service is rendered. Periodic fees Periodic fees include fees for subscription to new tariff plans and fees for supplementary subscriptions used by subscribers in particular period, such as periodic fees for subscription to voicemail, itemised invoice etc. Periodic fees are recognised in the period, when the respective service is rendered.

51


Closed Joint Stock Company Kyivstar G.S.M.

Connection and one-time subscription fees Connection fees are paid by subscribers for the first time activation of network service. Revenues from connection are deferred and recognised over the period that the fees are earned, which is the expected period of the customer relationship and approximates 4 years (2009: 3 years). The expected period of the customer relationship is based on the past history of churn and expected development of the Company. One-time subscription fees mainly consist of one-time fees for various supplementary subscriptions and also include change of subscription type and transfer of subscriptions from one location to another. One-time subscription fees that are linked to other elements in a way that the commercial effect cannot be understood without reference to the other transactions are deferred and recognised over the period that the fees are earned, which is the subscription validity period or, in case of no validity period, the expected period of the customer relationship, which approximates 4 years (2009: 3 years). Roaming revenues Roaming revenues include roaming revenues from the services provided to the Company’s subscribers in the networks of its roaming partners and roaming revenues from access to the services provided by the Company in its network to subscribers of the Company’s roaming partners. Roaming revenues are recognised in the period, when the respective services are rendered. Value added services Value added services include revenues from outgoing SMS and MMS, circuit of switched data and packet switched data (WAP, GPRS, EDGE etc.) Revenues from value added services are recognised in the period, when the respective services are rendered. Sales of telephony handsets and modems Revenues from sales of handsets and modems are normally recognised, when the related significant risks and rewards are transferred to the buyer. Discounts Discounts are often provided in the form of cash discount, free or discounted products or services delivered by the Company or by external parties. Discounts are recorded on a systematic basis over the period the discount is earned. Cash discounts or free products are recorded as revenue reductions. Free products or services delivered by external parties are recorded as expenses.

52

Presentation Where the Company’s role in a transaction is a principal, revenue is recognised on a gross basis. This requires revenue to comprise the gross value of the transaction billed to the customer, after trade discounts, with any related expenditure charged as an operating cost. Where the Company’s role in a transaction is that of an agent, revenue is recognised on a net basis and represents the margin earned. The evaluation of whether the Company is acting as principal or agent is based on an evaluation of the substance of the transaction, the responsibility for providing the goods or services and setting prices and the underlying financial risk and rewards. Interest income Interest income is recorded using the effective interest rate, which is the rate that exactly discounts the estimated future cash flows through the expected life of financial instruments or a shorter period, where appropriate, to the net carrying amount of the financial asset or liability. Interest income is included in finance income in the statement of comprehensive income. Deferred revenue Cellular service revenue is recognised on the basis of actual airtime usage by the end customer. Unused time on sold prepaid cards is recognised as deferred revenue until the related services have been provided to the subscribers or the prepaid card has expired. Loyalty programs Customer loyalty credits are accounted for as a separate component of the sales transaction, in which they are granted. A portion of the fair value of the consideration received is allocated to the award credits and deferred, based on estimated number of award credits that will actually be earned by the customer. This is then recognised as revenue over the period that the award credits are redeemed. Costs related to connection fees Initial direct costs incurred in earning connection fees are deferred over the same period as the connection revenue, limited to the amount of the deferred connection fees. Costs incurred consist primarily of the costs of the start packages and dealers’ bonuses. In some cases costs associated with connection fees exceed the respective connection revenues and the amount of connection costs exceeding the amount of deferred connection fees is expensed.


Property, plant and equipment Property, plant and equipment is stated at cost less accumulated depreciation and any accumulated impairment losses. Cost includes professional fees and, for qualifying assets, borrowing costs are capitalised. Depreciation is calculated to reduce the cost of assets, other than land, to their estimated residual value, if any, over their estimated useful lives. Depreciation commences, when the assets are ready for their intended use. Repair and maintenance is expensed as incurred. If new parts are capitalised, replaced parts are derecognised and any remaining net book value is recorded to operating profit (loss) as loss on disposal. When the expected cost for the decommissioning of the asset after its use is material to the financial statements, the present value of the expected cost for the decommissioning of the asset after its use is included in the cost of the respective asset if the recognition criteria for the provision is met. Depreciation is calculated on a straightline basis over the estimated useful life of the asset as follows:

Leasehold improvements are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, the term of the relevant lease. Construction in progress Assets under construction are capitalised as a separate component of property, plant and equipment. On completion, the cost of construction is transferred to the appropriate category of property, plant and equipment. Construction in progress is not depreciated. Uninstalled equipment Uninstalled equipment represents equipment purchased by the Group, but not yet put into operation. Uninstalled equipment is not depreciated. Land Freehold land to which the Group has due legal title is included in the Group’s statement of financial position at its historical cost. Freehold land is not depreciated. Leases Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. The evaluation is based on the substance of the transaction. However, situations that individually would normally lead the Group to classify a lease as a finance lease is if the lease term is more than 75 percent of the estimated economic life or the present value of the minimum lease

Asset category

Useful life (years)

Local, regional & trunk networks

20

Mobile telephone network and switches

3-15

Radio installations

7

Buildings

15-30

Corporate administrative assets

3-4

Depreciation method, estimated useful life and residual value are evaluated at least annually and adjusted prospectively, if appropriate. Residual value is estimated to be zero for most assets, except for vehicles, which are included in corporate administrative assets, that the Group does not expect to use for the assets’ whole economic life. An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in profit and loss in the year the item is derecognised.

Notes to the consolidated financial statements

Advertising costs, marketing and sales commissions Advertising costs, marketing and sales commissions are expensed as incurred, unless they form part of the costs that are deferred in relation to deferral of connection fees as described above. Expenditure on advertising and promotional activities is recognised as an expense when the Group either has the right to access the goods or has received the service.

payments exceeds 90 percent of the fair value of the leased asset. The Group may enter into an arrangement that does not take the legal form of a lease but conveys a right to use an asset in return for a payment or series of payments. Determining whether an arrangement is, or contains, a lease is based on the substance of the arrangement and requires an assessment of whether: (a) fulfilment of the arrangement is dependent on the use of a specific asset; and (b) the arrangement conveys a right to use the asset.

53


Closed Joint Stock Company Kyivstar G.S.M.

The Group as lessee Property and equipment acquired by way of finance lease is capitalised and carried at the lower of its fair value and the present value of the minimum lease payments at inception of the lease, less accumulated depreciation and impairment losses. Leased assets are depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term. Operating lease payments are charged to profit and loss on a straight-line basis over the term of the relevant lease. Benefits received and incentives to enter into an operating lease are also amortised on a straight-line basis over the lease term. Advance lease payments made on entering into operating leases or acquiring leaseholds are amortised to profit and loss over the lease term in accordance with the pattern of benefits provided. Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of the respective assets. All other borrowing costs are expensed in the period they occur. Borrowing costs consist of interest and other costs incurred in connection with the borrowing of funds. Intangible assets Intangible assets acquired are initially measured at cost. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. Internally generated intangible assets, excluding capitalised development costs, are not capitalised and expenditure is reflected in profit and loss in the period, in which the expenditure is incurred. Intangible assets, all of which are determined as having finite useful lives, are amortised over the useful economic lives. The amortisation period and amortisation method for intangible assets is reviewed at least annually, and adjusted prospectively if appropriate.

54

Amortisation is provided using the straight-line basis over the estimated useful lives of the related assets as follows: Asset category

Useful life (years)

Licenses

10-15

Network and billing software

5

Gains and losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised as other expenses in the statement of comprehensive income. Impairment of non-financial assets The Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Group makes an estimate of the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cashgenerating unit’s fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset or cash generating unit exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs to sell, recent market transactions are taken into account, if available. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples or other available fair value indicators. Impairment losses of continuing operations are recognised in profit and loss.


Financial assets Initial recognition and measurement Financial assets within the scope of IAS 39 are classified as financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, availablefor-sale financial assets, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Group determines the classification of its financial assets at initial recognition. Financial assets are recognised initially at fair value plus, in the case of investments not at fair value through profit or loss, directly attributable transaction costs. Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the marketplace (regular way purchases) are recognised on the trade date, i.e., the date that the Group commits to purchase or sell the asset. The Group’s financial assets include cash and cash equivalents, trade and other receivables and interest-free reimbursable financial aid, all of which are classified as loans and receivables in accordance with IAS 39.

Subsequent measurement Loans and receivables are nonderivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, such financial assets are subsequently measured at amortised cost using the effective interest rate method, less impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fee or costs that are integral part of the effective interest rate. The amortisation is included in finance income in the statement of comprehensive income.

Notes to the consolidated financial statements

A cash generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Based on the specifics of the Group’s operations, the management concluded that the Group has one cash generating unit, which is the Company’s network as a whole. An assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognised. If that is the case the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in profit and loss. After such a reversal the depreciation charge is adjusted in future periods to allocate the asset’s revised carrying amount, less any residual value, on a systematic basis over its remaining useful life.

Financial liabilities Initial recognition and measurement Financial liabilities within the scope of IAS 39 are classified as financial liabilities at fair value through profit or loss, loans and borrowings, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Group determines the classification of its financial liabilities at initial recognition. Financial liabilities are recognised initially at fair value less, in the case of loans and borrowings, directly attributable transaction costs. The Group’s financial liabilities mainly include trade and other payables and loans and borrowings. Subsequent measurement After initial recognition, interest-bearing loans and borrowings and trade and other payables with fixed maturity are subsequently measured at amortised cost using the effective interest rate method. Gains and losses are recognised in net profit or loss when the liabilities are derecognised as well as through the effective interest rate method amortisation process. Amortised cost is calculated by taking into account any discount or premium on acquisition and fee or costs that are integral part of effective interest rate. The effective interest rate amortisation is included in finance costs in the statement of comprehensive income.

55


Closed Joint Stock Company Kyivstar G.S.M.

Offsetting of financial instruments Financial assets and financial liabilities are offset and the net amount reported in the consolidated statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liabilities simultaneously. Fair value of financial instruments The fair value of financial instruments that are actively traded in organised financial markets at each reporting date is determined by reference to quoted market prices or dealer price quotations (bid price for long positions and ask price for short positions), without any deductions for transaction costs. For financial instruments where there is no active market, fair value is determined using appropriate valuation techniques. Such techniques may include using recent arm’s length market transactions; reference to the current fair value of another instrument that is substantially the same; discounted cash flow analysis or other valuation models. Amortised cost of financial instruments Amortised cost is computed using the effective interest method less any allowance for impairment and principal repayment or reduction. The calculation takes into account any premium or discount on acquisition and includes transaction costs and fees that are an integral part of the effective interest rate. Impairment of financial assets The Group assesses at each reporting date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred ‘loss event’) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

56

For financial assets carried at amortised cost, the Group first assesses individually whether objective evidence of impairment exists for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of 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 measured as the difference between the asset’s 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 estimated future cash flows is discounted at the financial asset’s original effective interest rate. If an instrument has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in profit and loss. Interest income continues to be accrued on the reduced carrying amount based on the original effective interest rate of the asset. Loans and receivables together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realised or has been transferred to the Group. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a future write-off is later recovered, the recovery is credited to finance costs in the statement of comprehensive income.


Financial liabilities A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in profit or loss.

Employee benefits The Group makes defined contributions to the State Pension fund at the relevant statutory rates in force during the year, based on gross salary payments; such an expense is charged in the period when the related salaries are earned. In addition to the above, employees of the Group are entitled to jubilee and post-employment benefits. Jubilee benefits are paid out on occasion of anniversary, while post-employment benefits are paid out as a one-off benefit upon retirement. The amount of those benefits depends on the tenure with the Company and the average salary. The benefits payable under these arrangements are unfunded. The expected cost of providing employee benefits is determined annually using the projected unit credit actuarial valuation method to calculate the net present value of benefit obligations at the reporting date. The balance of employee benefit obligations equals discounted payments to be made in the future and accounts for staff turnover and relates to the period to the reporting date. Demographic information and information on staff turnover are based on historical data. Gains and losses resulting from the use of actuarial valuation methodologies to calculate post-employment benefits are recognised when the cumulative unrecognised actuarial gains or losses for the plan at the end of the previous reporting period exceed 10% of defined benefit obligation at that date. These gains or losses are recognised as income or expense over the expected average remaining working lives of the employees participating in the plan. Any actuarial gains or losses relating to jubilee benefits are recognised in profit or loss in the period in which they arise. The past service cost is recognised as an expense on a straight-line basis over the average period until the benefits become vested. If the benefits are already vested following the introduction of, or changes to, a pension plan, past service cost is recognised immediately. The defined benefit liability is the aggregate of the present value of the defined benefit obligation and actuarial gains and losses not recognised reduced by past service cost not yet recognised.

Notes to the consolidated financial statements

Derecognition of financial instruments Financial assets 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 or • the Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, a new asset is recognised to the extent of the Group’s continuing involvement in the asset. In that case, the Group also recognises an associated liability. The transferred asset and the associated liability are measured on the basis that reflects the rights and obligations that the Group has retained. Continuing involvement that takes the form of a guarantee over the transferred asset, is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.

57


Closed Joint Stock Company Kyivstar G.S.M.

Taxes Current income tax Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the reporting date. Deferred income tax Deferred income tax is provided using the liability method on temporary differences at the reporting date between 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 in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and • in respect of taxable temporary differences associated with investments in subsidiaries, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred income tax assets are recognised for all deductible temporary differences and carry-forward of unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary 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 the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and • in respect of deductible temporary differences associated with investments in subsidiaries, deferred tax assets are recognised only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.

58

The carrying amount of deferred income tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Unrecognised deferred income tax assets are reassessed at each reporting date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. Deferred tax relating to items recognised outside profit or loss is recognised outside profit or loss. Deferred tax items are recognised in correlation to the underlying transaction either in other comprehensive income or directly in equity. Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. Value-added tax Revenues, expenses and assets are recognised net of value-added tax (“VAT”) except: • where VAT incurred on a purchase of assets or services is not recoverable from the taxation authority, in which case VAT is recognised as part of the cost of acquisition of the asset or as part of expense item as applicable; and • receivables and payables are stated with the amount of VAT included. The net amount of VAT recoverable from, or payable to, the taxation authority is disclosed in the notes to the consolidated statement of financial position.


Cash and cash equivalents Cash and cash equivalents include cash at banks and on hand and short-term deposits with an original maturity of three months or less. For the purpose of consolidated cash flow statement, cash and cash equivalents consists of cash and cash equivalents as defined above, net of outstanding bank overdrafts. Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the statement of comprehensive income net of any reimbursement. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost.

Contingent assets and liabilities A contingent asset is not recognised in the financial statements but disclosed when an inflow of economic benefits is probable. Contingent liabilities are not recognised in the financial statements unless it is probable that an outflow of economic resources will be required to settle the obligation and it can be reasonably estimated. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. Inventories Inventories are valued at the lower of cost or net realisable value for items that will be sold as a separate products. Inventories that will be sold as part of a transaction with several components, which the Group expects to earn net income from, are valued at cost even if the selling price of the inventory is below cost price. Cost is determined using the FIFO method.

Notes to the consolidated financial statements

Current/non-current classification An asset/liability is classified as current, when it is expected to be realised (settled) or is intended for sale or consumption within twelve months after the reporting date. Other assets/liabilities are classified as non-current. Financial instruments are classified based on expected life. Deferred revenues and respective costs of connection are classified as current.

Events after the reporting date Events after the reporting date that provide additional information on the Group’s position at the reporting date (adjusting events) are reflected in the consolidated financial statements. Events after the reporting date that are not adjusting events are disclosed in the notes when material.

59


Closed Joint Stock Company Kyivstar G.S.M.

6. Critical accounting judgements and key sources of estimation uncertainty Key sources of estimation uncertainty – critical accounting estimates Certain amounts included in or affecting the consolidated financial statements and related disclosures must be estimated, requiring management to make assumptions with respect to values or conditions which cannot be known with certainty at the time the consolidated financial statements are prepared. A ‘critical accounting estimate’ is one, which is both important to the portrayal of the Group’s financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Management evaluates such estimates on an ongoing basis, based upon historical results and experience, consultation with experts, trends and other methods, which management considers reasonable in the particular circumstances, as well as the forecasts as to how these might change in the future. However, uncertainty about these estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future periods. Revenue recognition The main part of the Group’s revenues is earned from mobile services, such as airtime, one-time connection fees or periodic subscriptions. The Company has many subscribers and offers a number of different services with different tariff plans. The Company also provides discounts of various types, often in connection with different campaigns. Revenues from one-time subscriptions or connections to the Company’s network are recognised as deferred revenue and released to the profit and loss in the periods, when these revenues are earned, based on the average customer relationship period. The management regularly reviews its estimates in respect of customer relationship period, based on the historical experience and its plans for future development of the Company. As at 31 December 2010 the management estimated its customer relationship period to be equal 4 years (2009: 3 years).

60

Employee benefits The cost of long-term employee benefits and other post employment benefits is determined using actuarial valuations. The actuarial valuation involves making assumptions about discount rates, future salary increases and future pension increases. All assumptions are reviewed at each reporting date. In determining the discount rate, the management considers the market yields on government bonds extrapolated for the period of payments. The turnover rate is calculated based on the past experience. Further details about the assumptions used are given in Note 20. Provision for decommissioning In determining the carrying value of the provision for decommissioning associated with future dismantling of base stations from leased sites the Group has to make assumptions and estimates in relation to discount rates, probability of prolongation of operating lease agreements, the expected cost to dismantle and remove the base stations from the sites and the expected timing of those costs. All assumptions are reviewed at each reporting date. Deferred tax assets Deferred tax assets are recognised for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgment is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and the level of future taxable profits together with future tax planning strategies. Please refer to Note 9 for additional information on the Group’s tax position. Depreciation and amortisation Depreciation and amortisation methods are based on management estimates of the expected useful life of property, plant and equipment and intangible assets. Estimates may change due to technological developments, competition, changes in market conditions and other factors and may result in changes in the estimated useful life and in the amortisation or depreciation charges. Technological developments are difficult to predict and the Group’s views on the trends and pace of development may change over time. Some of the assets and technologies, in which the Group invested several years ago, are still in use and provide the basis for the new technologies. The useful lives of property, plant and equipment and intangible assets are reviewed at least annually taking into consideration the factors mentioned above and all other important factors. In case of significant changes in estimated useful lives, depreciation and amortisation charges are adjusted prospectively.


Legal proceedings and claims The Group is a subject to various legal proceedings and claims, the outcomes of which are subject to significant uncertainty. Management evaluates, among other factors, the degree of probability of an unfavourable outcome and the ability to make a reasonable estimate of the amount of loss. Unanticipated events or changes in these factors may require to increase or decrease the amount to be accrued for any matter or accrue for a matter that has not been previously accrued because it was not considered probable or a reasonable estimate could not be made.

Notes to the consolidated financial statements

Impairment of non-financial assets The Group has made significant investments in property, plant and equipment and intangible assets. These assets are tested, as described, for impairment annually or when circumstances indicate there may be a potential impairment. Factors considered important which could trigger an impairment evaluation include the following: significant fall in market values, significant underperformance relative to historical or projected future operating results, significant changes in the use of assets or the strategy for the Group’s overall business, including assets that are decided to be phased out or replaced and assets that are damaged or taken out of use, significant negative industry or economic trends and significant cost overruns in the development of assets. Estimating recoverable amounts of assets must in part be based on management’s evaluations, including determining appropriate cash generating units, estimates of future performance, revenue generating capacity of the assets, assumptions of the future market conditions and the success in marketing of new products and services. Changes in circumstances and in management’s evaluations and assumptions may give rise to impairment losses in the relevant periods.

61


Closed Joint Stock Company Kyivstar G.S.M.

7. IFRSs and IFRIC Interpretations not yet effective Standards issued but not yet effective up to the date of issuance of the Group’s consolidated financial statements are listed below. The Group intends to adopt those standards when they become effective. IAS 24 Related Party Disclosures (Amendment) The amended standard is effective for annual periods beginning on or after 1 January 2011. It clarified the definition of a related party to simplify the identification of such relationships and to eliminate inconsistencies in its application. The revised standard introduces a partial exemption of disclosure requirements for government-related entities. The amended standard will not result in additional disclosures as the Company is not a subsidiary of a government-related entities. IAS 32 Financial Instruments: Presentation – Classification of Rights Issues (Amendment) The amendment to IAS 32 is effective for annual periods beginning on or after 1 February 2010 and amended the definition of a financial liability in order to classify rights issues (and certain options or warrants) as equity instruments in cases where such rights are given pro rata to all of the existing owners of the same class of an entity’s non-derivative equity instruments, or to acquire a fixed number of the entity’s own equity instruments for a fixed amount in any currency. This amendment will have no impact on the Group after initial application. IFRS 9 Financial Instruments: Classification and Measurement IFRS 9 as issued reflects the first phase of the IASBs work on the replacement of IAS 39 and applies to classification and measurement of financial assets as defined in IAS 39. The standard is effective for annual periods beginning on or after 1 January 2013. In subsequent phases, the IASB will address classification and measurement of financial liabilities, hedge accounting and derecognition. The completion of this project is expected in early 2011. The adoption of the first phase of IFRS 9 will have an effect on the classification and measurement of the Group’s financial assets. The Group expects that the new standard may have effect on the classification and measurement of its financial instruments, however, the exact amount of potential effect has not yet been quantified.

62

IFRIC 14 Prepayments of a minimum funding requirement (Amendment) The amendment to IFRIC 14 is effective for annual periods beginning on or after 1 January 2011 with retrospective application. The amendment provides guidance on assessing the recoverable amount of a net pension asset. The amendment permits an entity to treat the prepayment of a minimum funding requirement as an asset. This amendment will have no impact on the financial position or performance of the Group, as the Group’s employee benefit plans are unfunded. IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments IFRIC 19 is effective for annual periods beginning on or after 1 July 2010. The interpretation clarifies that equity instruments issued to a creditor to extinguish a financial liability qualify as consideration paid. The equity instruments issued are measured at their fair value. In case that this cannot be reliably measured, the instruments are measured at the fair value of the liability extinguished. Any gain or loss is recognised immediately in profit or loss. The adoption of this interpretation will have no effect on the financial position or performance of the Group. Improvements to IFRSs (issued in May 2010) The IASB issued Improvements to IFRSs, an omnibus of amendments to its IFRS standards. The amendments have not been adopted as they become effective for annual periods on or after either 1 July 2010 or 1 January 2011. IFRIC 13 Customer Loyalty Programmes The amendment clarifies that when the fair value of award credits is measured based on the value of the awards for which they could be redeemed, the amount of discounts or incentives otherwise granted to customers not participating in the award credit scheme, is to be taken into account. The amendment is effective for annual periods beginning on 1 January 2011. The Group expects that the application of this amendment will not have significant effect on the financial position or performance of the Group. The Group expects that the amendments listed below will have no impact on its financial position, its financial performance or disclosures in the consolidated financial statements: • IFRS 3 Business Combinations • IFRS 7 Financial Instruments: Disclosures • IAS 34 Interim Financial Reporting • IAS 1 Presentation of Financial Statements • IAS 27 Consolidated and Separate Financial Statements • IFRS 1 First-Time Adoption of IFRSs • IAS 12 Income Taxes


Revenues

Air time charges

2010

2009

5,924,973

6,194,401

Interconnection revenue

2,084,790

2,417,416

Periodic fees

1,703,262

1,445,167

Value added services

876,376

790,614

Roaming and access to network

430,001

329,594

Roaming revenue (subscribers)

222,621

183,072

Connection and one-time subscription fees

82,671

146,521

Fixed lines

48,524

25,613

Other revenue

69,807

58,140

11,443,025

11,590,538

2010

2009

Notes to the consolidated financial statements

8. Revenues and expenses

Costs of materials and traffic charges

Interconnection

1,588,590

1,727,902

Cost of materials

188,971

192,269

Roaming expenses

157,860

168,745

Leased line costs

4,107

2,358

1,939,528

2,091,274

2010

2009

663,267

731,614

Salaries and personnel costs

Salaries, holiday pay and other employee benefits Social security taxes

165,810

157,491

Medical insurance

35,652

37,901

Training

1,514

8,243

866,243

935,249

The average number of employees of the Group in 2010 was 3,689 (2009: 4,331).

63


Other operating expenses

Closed Joint Stock Company Kyivstar G.S.M.

Repair and maintenance

2010

2009

753,637

780,987

Marketing and sales commission

314,110

412,980

Operating leases of land and buildings

290,126

285,787

Advertising

190,420

224,747

Local taxes and non-refundable VAT

187,213

119,919

Consultancy fees and external personnel

168,857

94,953

Insurance

74,844

79,298

Materials and supplies

22,976

24,415

Bad debts

20,920

32,116

License and research fees

19,493

25,701

Business trip expenses

14,401

17,680

Postage, freight, distribution and telecommunication

7,861

14,776

Bank charges

6,003

9,622

Other operating expenses

7,497

13,669

2,078,358

2,136,650

2010

2009

Other expenses

Loss on disposal of property, plant and equipment and intangible assets

61,477

68,622

Contributions and donations

2,896

3,543

Other expenses

-

10,302

64,373

82,467

Amortisation, depreciation and impairment losses Details of amortisation, depreciation and impairment losses are as follows: Property, plant and equipment

64

Intangible assets

2010

2009

2010

2009

Depreciation and amortisation

1,346,803

1,337,770

434,666

416,404

Impairment losses, net of reversals

3,414

115,743

-

2,326

1,350,217

1,453,513

434,666

418,730


use this equipment in future. Assets identified as no longer in use were written down to their recoverable amounts, usually zero. In addition, in 2010 the Group recognised reversal of impairment losses in respect of network equipment in amount of UAH

10,662 thousand (2009: UAH 90,590 thousand) as a result of changes in tariff policies and respective plans for future usage of previously impaired network equipment in accordance with adjusted capital expenditure budgets for future years.

Finance income 2010

2009

Interest income

150,641

528,065

Total interest income

150,641

528,065

Unwinding of discount on other current financial assets

76,790

-

Net gain on derivative financial instrument

-

1,893

227,431

529,958

2010

2009

Interest charges related to bank loans

3,942

42,519

Total interest charges

3,942

42,519

Other finance costs

3,275

3,698

7,217

46,217

-

(8,138)

7,217

38,079

Notes to the consolidated financial statements

In 2010 the Group recognised impairment losses on property, plant and equipment in amount of UAH 14,076 thousand (2009: UAH 206,333 thousand), based on internal indications of impairment for various individual components of network equipment, as the Group did not plan to

Finance costs

Less – interest capitalised

65


9. Income tax

Closed Joint Stock Company Kyivstar G.S.M.

The Group’s income was subject to taxation in Ukraine only. During the years ended 31  December  2010 and 2009 Ukrainian corporate income tax was levied on taxable income less allowable expenses at a rate of 25% according to the Law of Ukraine on Corporate Income Tax. In 2010 Ukrainian Parliament approved the

Tax Code, which superseded the Law of Ukraine on Corporate Income Tax. New Tax Code significantly changed the rules for tax base calculation and provided for gradual decrease in tax rates from 25% to 16% over the next few years. The Group has calculated its deferred tax position as at 31 December 2010 in accordance with corporate income tax rates as prescribed by the new Tax Code.

The major components of income tax expense for the years ended 31 December 2010 and 2009 are: 2010

2009

1,400,636

1,455,683

(156,306)

(196,206)

1,244,330

1,259,477

Current income tax: Current income tax charge Deferred tax: Relating to origination and reversal of temporary differences Income tax expense

Reconciliations between tax expense and the product of accounting profit multiplied by the tax rate for the years ended 31 December 2010 and 2009 are as follows:

66

2010

2009

Accounting profit before tax

4,922,210

4,944,874

Income tax at statutory rate of 25% (2009: 25%)

1,230,553

1,236,219

Non-taxable income

(12,966)

-

Non- deductible expenses for tax purposes

31,708

43,100

Reassessment of temporary differences

(49,549)

(19,842)

Effect of changes in tax rules

(54,016)

-

Effect of changes in tax rates

98,600

-

1,244,330

1,259,477


31-Dec-10

Credited to statement Credited to equity of comprehensive income

31-Dec-09

-

(26,087)

26,087

Deferred tax liabilities: Intangible assets (i)

-

Deferred expenses (iii)

20,385

907

-

19,478

Prepayments (iii)

16,639

(330)

-

16,969

Trade and other receivables (v)

3,319

1,613

-

1,706

40,343

(23,897)

-

64,240

148,413

22,578

-

125,835

Notes to the consolidated financial statements

Deferred tax assets and liabilities relate to the following items in 2010:

Deferred tax assets: Property, plant and equipment (i) Intangible assets (i)

55,556

55,556

-

-

Other current financial assets (iii)

153,296

(19,198)

172,494

-

Other current liabilities (v)

37,196

34,887

-

2,309

Employee benefits (iii)

7,959

(3,573)

-

11,532

Advances received and deferred revenue 211,779 (iii)

24,101

-

187,678

Inventories (ii)

(2,979)

-

2,979

-

Trade and other payables (iii)

50,944

9,897

-

41,047

Provisions (iii)

8,436

8,436

-

-

Taxes payable, other than income tax (iii)

Net deferred tax asset

2,704

2,704

-

-

676,283

132,409

172,494

371,380

635,940

156,306

172,494

307,140

67


Deferred tax assets and liabilities relate to the following items in 2009: 31-Dec-09

Credited to statement of comprehensive income

31-Dec-08

Property, plant and equipment (i)

-

(4,166)

4,166

Intangible assets (i)

26,087

(38,419)

64,506

Deferred expenses (iii)

19,478

(3,829)

23,307

Prepayments (iii)

16,969

(1,342)

18,311

Derivative financial instrument (iv)

-

(9,254)

9,254

Trade and other payables (iii)

-

(8,990)

8,990

Trade and other receivables (v)

1,706

1,706

-

64,240

(64,294)

128,534

Property, plant and equipment (i)

125,835

125,835

-

Trade and other receivables (v)

-

(13,272)

13,272

Other current liabilities (v)

2,309

(4,431)

6,740

Employee benefits (iii)

11,532

5,470

6,062

Advances received and deferred revenue (iii)

187,678

(25,716)

213,394

Inventories (ii)

2,979

2,979

-

Trade and other payables (iii)

41,047

41,047

-

371,380

131,912

239,468

307,140

196,206

110,934

Closed Joint Stock Company Kyivstar G.S.M.

Deferred tax liabilities:

Deferred tax assets:

Net deferred tax asset The nature of the temporary differences is as follows: (i) Property, plant and equipment and intangible assets – differences in depreciation and amortisation patterns and estimates of the remaining useful lives, differences in capitalisation principles; (ii) Inventories – differences in inventories measurement basis and the periods of recognition;

68

(iii) Advances received and deferred revenue, prepayments and deferred expenses, employee benefits, trade and other payables, provisions, taxes payable, other than income tax, other current financial assets – differences in period of recognition; (iv) Interest-bearing borrowings and derivative financial instrument – differences in measurement basis (cost vs. fair values or amortised cost);

(v) Other liabilities and receivables – differences in measurement and recognition principles.


The movement of property, plant and equipment is as follows: Mobile Local, regiontelephone Radio instalal & trunk Buildings network and lations networks switches

Land

Construction in progress, Corporate aduninstalled ministrative Total and dismanassets tled equipment (iii)

678,920

5,016,689

2,382,043

721,932

103,404

566,713

1,884,792

11,354,493

Additions (i) Disposals Transfers and reclassifications (ii) At 31 December 2009

3,160 (32)

18,502 (45,173)

9,593 (19,180)

(2,568)

600 -

6,920 (7,629)

968,648 (640,963)

1,007,423 (715,545)

90,076

324,833

109,989

230,228

-

105,053

(901,183)

(41,004)

772,124

5,314,851

2,482,445

949,592

104,004

671,057

1,311,294

11,605,367

Additions (i) Disposals Transfers and reclassifications At 31 December 2010

2,127 (1,230)

25,656 (182,993)

77,616 (18,738)

(36,821)

2,505 -

10,042 (27,688)

1,244,628 (93,050)

1,362,574 (360,520)

49,440

635,342

139,726

361,693

-

76,628

822,461

5,792,856

2,681,049

1,274,464

106,509

730,039

1,200,043

12,607,421

Cost: At 1 January 2009

Notes to the consolidated financial statements

10. Property, plant and equipment

(1,262,829) -

Accumulated depreciation and impairment losses: At 1 January 2009

87,485

2,099,641

1,093,487

101,549

-

373,905

714,629

4,470,696

Depreciation charge for the year

35,604

696,412

322,888

78,883

-

125,818

78,165

1,337,770

Impairment (Note 8)

-

-

-

-

-

-

115,743

115,743

Disposals

(21)

(34,825)

(13,979)

(1,003)

-

(4,237)

(586,354)

(640,419)

Transfers and reclas2 sifications (ii)

(53,872)

(34,813)

1,790

-

(48,435)

107,874

(27,454)

At 31 December 2009 123,070

2,707,356

1,367,583

181,219

-

447,051

430,057

5,256,336

Depreciation charge for the year

39,510

702,017

326,954

84,428

-

129,766

64,128

1,346,803

Impairment (Note 8)

-

-

-

-

-

-

3,414

3,414

Disposals

(1,001)

(120,486)

(13,956)

(28,388)

-

(19,048)

(90,406)

(273,285)

Transfers and reclassi1,004 fications

(27,774)

(71,464)

2,844

-

(31,614)

127,004

-

At 31 December 2010 162,583

3,261,113

1,609,117

240,103

-

(526,155)

534,197

6,333,268

591,435

2,917,048

1,288,556

620,383

103,404

192,808

1,170,163

6,883,797

At 31 December 2009 649,054

2,607,495

1,114,862

768,373

104,004

224,006

881,237

6,349,031

At 31 December 2010 659,878

2,531,743

1,071,932

1,034,361

106,509

203,884

665,846

6,274,153

Net book value: At 1 January 2009

(i) The amount of borrowing costs capitalised for the year ended 31 December 2009 comprised UAH  8,138 thousand (Note 8). The weighted average rate used to determine the amount of borrowing costs eligible for capitalisation was 10.46%. In 2010 there were no acquisitions, construction or production of qualifying assets, to which borrowing costs could be attributed.

(ii) In 2009 the Company exchanged its used telecommunication equipment into the new communication equipment under the buy-back agreement with Ericsson AB. The equipment identified for exchange under this agreement was reclassified from property, plant and equipment to assets held for sale and disposed by the end of 2009.

(iii) Temporarily dismantled equipment is continued to be depreciated over the estimated remaining useful life.

69


11. Intangible assets The movement of intangible assets is as follows: Licenses

Network and billing software

Total

At 1 January 2009

409,738

2,290,445

2,700,183

Additions

2,008

292,265

294,273

Disposals

-

(18,264)

(18,264)

At 31 December 2009

411,746

2,564,446

2,976,192

Additions

1,510

326,369

327,879

Disposals

-

(38,012)

(38,012)

At 31 December 2010

413,256

2,852,803

3,266,059

At 1 January 2009

176,108

1,319,052

1,495,160

Amortisation charge for the year

21,091

395,313

416,404

Impairment (Note 8)

-

2,326

2,326

Disposals

-

(18,264)

(18,264)

At 31 December 2009

197,199

1,698,427

1,895,626

Amortisation charge for the year

42,734

391,932

434,666

Disposals

-

(35,094)

(35,094)

At 31 December 2010

239,933

2,055,265

2,295,198

At 1 January 2009

233,630

971,393

1,205,023

At 31 December 2009

214,547

866,019

1,080,566

At 31 December 2010

173,323

797,538

970,861

Closed Joint Stock Company Kyivstar G.S.M.

Cost:

Accumulated amortisation and impairment losses:

Net book value:

70


Acquisition date

Expiration date

Net book value Net book value as at 31 Decem-as at 31 ber 2010 December 2009

License #

Coverage

License

N/A

National

1800 MHz (GSM) frequencies usage licenses

(i)

102,639

121,468

N/A

National

900 MHz (GSM) frequencies usage licenses

(ii)

43,295

53,076

АА №009503 National

900 MHz (GSM) and 1800 MHz (GSM) cellular license

Apr-01

Oct-11

10,374

18,760

АА №720166 International International communication

Aug-04

Aug-19

5,187

6,075

АА №720167 Inter city

Inter city communication

Aug-04

Aug-19

5,295

6,201

N/A

Other licenses

Mar-01

Apr-24

6,533

8,967

173,323

214,547

National

(i) 1800 MHz (GSM) frequencies usage licenses comprise a number of licenses that were acquired in the period from February 2001 to January 2007. The validity period of such licenses varies from 10 to 15 years.

Notes to the consolidated financial statements

The Group’s major licenses as at 31 December were as follows:

(ii) 900 MHz (GSM) frequencies usage licenses comprise a number of licenses that were acquired in the period from June 1999 to October 2008. The validity period of such licenses varies from 10 to 15 years.

12. Other non-current assets Other non-current assets as at 31 December were as follows:

Prepayments for property, plant and equipment

2010

2009

30,047

48,725

Prepayments for intangible assets

9,840

597

Other non-current assets

4,606

7,536

44,493

56,858

71


13. Trade and other receivables Trade and other receivables consisted of the following as at 31 December:

Closed Joint Stock Company Kyivstar G.S.M.

2010

2009

Trade receivables – interconnection and access to network

141,389

330,770

Trade receivables – subscribers

102,590

68,335

Trade receivables – roaming

85,361

97,019

Trade receivables – dealers for prepaid cards and packages

35,630

68,283

Interest receivable

7,933

2,113

Trade receivables – dealers for post-paid subscribers’ advances

168

166

Accounts receivable – for assets under buy-back agreement

-

86,220

Other receivables

21,545

19,650

394,616

672,556

(74,063)

(76,854)

320,553

595,702

Allowance for impairment

Trade and other receivables, net of allowance for impairment as at 31 December were denominated in the following currencies: 2010

2009

UAH

160,135

364,159

EUR

103,463

113,891

USD

56,955

117,652

320,553

595,702

As at 31 December 2010 and 2009 trade and other receivables are non-interest bearing and are settled in the normal course of business.

72


Prepayments as at 31 December were denominated in the following currencies: 2010

2009

UAH

74,597

78,283

EUR

215

79

USD

69

-

RUR

21

-

74,902

78,362

Independent auditors’ report

14. Prepayments

15. Reconciliation of allowance accounts The reconciliation of changes in allowance accounts is as follows: Trade and other receivPrepayments ables

Total

As at 1 January 2009

64,851

1,567

66,418

Charge for the year

41,062

-

41,062

Utilised

(21,164)

-

(21,164)

Unused amounts reversed

(7,895)

(1,051)

(8,946)

As at 31 December 2009

76,854

516

77,370

Charge for the year

21,929

31

21,960

Utilised

(23,680)

-

(23,680)

Unused amounts reversed

(1,040)

-

(1,040)

As at 31 December 2010

74,063

547

74,610

73 The accompanying notes form an integral part of the consolidated financial statements


16. Deferred expenses

Closed Joint Stock Company Kyivstar G.S.M.

As at 31 December deferred expenses consisted of the following:

74

2010

2009

Deferred connection costs

(i)

80,928

68,052

Deferred costs of start packages and scratch-cards

(ii)

11,655

9,860

92,583

77,912

(i) As at 31 December 2010 and 2009 deferred connection costs mainly consisted of costs of start packages and dealers’ bonuses for connection of new subscribers, limited to the amount of deferred connection fees.

(ii) Deferred costs of start packages and scratch-cards represent costs of start packages and scratch-cards sold to dealers, but not yet activated by subscribers.

The movement in deferred connection costs is as follows:

At 1 January

2010

2009

68,052

78,954

Deferred during the year

43,907

38,659

Released to the statement of comprehensive income

(31,031)

(49,561)

At 31 December

80,928

68,052


Cash and cash equivalents consisted of the following as at 31 December:

Short-term deposits

2010

2009

1,460,848

1,073,322

Cash at bank

134,182

137,051

Cash on hand

26

21

1,595,056

1,210,394

As at 31 December cash on hand and cash at bank were denominated in the following currencies:

UAH

2010

2009

124,437

128,367

EUR

5,095

4,091

USD

4,676

4,614

134,208

137,072

Notes to the consolidated financial statements

17. Cash and cash equivalents

As at 31 December short-term deposits split by contractual maturity, currency and interest rate earned was as follows: Currency

Maturity date

Interest rate p.a.

2010

2009

UAH

0-30 days

8-21%

125,000

40,000

USD

EUR

31-60 days

6.5-21%

745,035

140,000

61-92 days

8-12.5%

330,000

-

1,200,035

180,000

0-30 days

6-9.75%

-

127,760

31-60 days

5.5-11%

54,936

340,121

61-92 days

5.5-6.5%

123,406

-

178,342

467,881

0-30 days

8-10%

-

130,518

31-60 days

3-10%

82,471

294,923

82,471

425,441

1,460,848

1,073,322

75


18. Share capital As at 31 December 2010 and 2009 the authorised and fully paid share capital comprised 10,687,389 ordinary shares at a par value of UAH 50 each. The share

capital is stated at cash consideration received. The carrying value of share capital differs from par by UAH 122,130 thousand being the currency translation difference,

accumulated till 1 May 2004, when the Company changed its functional currency from US dollar to Ukrainian Hryvnia.

Dividends on ordinary shares declared comprised:

Closed Joint Stock Company Kyivstar G.S.M.

2010 Interim dividends for 2008 (UAH 71.60 per share declared)

765,216 765,216 2009

Interim dividends for 2006 and 2007 (UAH 430.41 per share)

4,600,000

Final dividends for 2006 and 2007 (UAH 162.43 per share)

1,736,000

Interim dividends for 2008 (UAH 15.35 per share)

164,000 6,500,000

In 2010 and 2009 the Company fully paid dividends to its shareholders in cash, net of withholding tax.

19. Interest-bearing loans and borrowings Interest-bearing loans and borrowings consisted of the following as at 31 December: 2010

2009

Current Interest-bearing borrowings from Dresdner Bank, (USD-denominated, at 7.75% p. a., matures on 27 April 2012)

51,043

-

Interest accrued

692

694

51,735

694

-

51,192

-

51,192

51,735

51,886

Non-current Interest-bearing borrowings from Dresdner Bank (USD-denominated, at 7.75% p. a., matures on 27 April 2012 )

Total interest-bearing loans and borrowings On 23 November 2010, the Company entered into the agreement to provide reimbursable interest-free financial aid of UAH 4,000,000 thousand to the entity under common control. As required by the terms of the loan agreement, for this type of transactions the Company should have

76

provided Dresdner Bank with a fairness opinion from an accounting, appraisal or investment banking firm of international standing. However, this requirement was not met. Such non-compliance with the terms of the loan agreement gives Dresdner Bank the right, by notice to the Com-

pany, to demand at any time the accelerated or immediate repayment of the loan and accrued interest thereon. Accordingly, the loan was classified as current liability as at 31  December  2010 as the Company did not have an unconditional right to defer its settlement for at least twelve months.


The Group, pursuant to the terms of personnel motivation programme, has established post-employment benefit pension plan, covering substantially all of its employees, who achieve regular pension age

and retire from the Group companies. In addition, the Group pays jubilee benefits to its employees.

Employee benefit liability as at 31 December consisted of the following: 2010

2009

Post-employment defined benefit liability

27,935

21,851

Jubilee payments

16,893

24,276

44,828

46,127

Less: Current portion

(7,566)

(3,896)

Defined employee benefit liability – non-current portion

37,262

42,231

Post-employment defined employee benefits As at 31 December 2010 3,675 employees (2009: 4,080 employees) were enti-

Notes to the consolidated financial statements

20. Employee benefit liability

tled to benefits under post-employment defined employee benefits.

Changes in the present value of the defined benefit obligation as at 31 December were as follows: 2010

2009

Defined benefit obligation at 1 January

40,340

12,634

Interest cost

3,275

953

Current service cost

2,407

8,316

Benefits paid

(214)

(595)

Actuarial (gain)/loss for the year

(30,487)

19,032

Defined benefit obligation at 31 December

15,321

40,340

Unrecognised actuarial gain/(loss)

12,614

(18,489)

Defined benefit liability at 31 December

27,935

21,851

Classified as Defined benefit liability – current portion

4,650

1,324

Defined benefit liability – non-current

23,285

20,527

77


Closed Joint Stock Company Kyivstar G.S.M.

Benefit expense

2010

2009

Interest cost

3,275

953

Current service cost

2,407

8,316

Net actuarial losses recognised in the year

616

-

Total expenses recognised in the statement of comprehensive income

6,298

9,269

Net benefit expense was included into Salaries and personnel costs, except for interest cost charged to Finance costs. Benefit liability

2010

2009

Net liability at 1 January

21,851

13,177

Benefits expense

6,298

9,269

Benefits paid

(214)

(595)

Net liability at 31 December

27,935

21,851

Jubilee payments As at 31 December 2010 3,496 employees were entitled to jubilee benefits (2009: 3,774 employees). 2010

2009

16,893

24,276

Benefit liability – current portion

2,916

2,572

Benefit liability – non-current

13,977

21,704

Present value of unfunded obligations Classified as

The principal assumptions used in determining the post-employment defined employee benefits are shown below:

78

2010

2009

Discount rate

8.12%

7.55%

Future benefit increases

6.99%

12.46%

2010

2009

2008

2007

2006

Defined benefit obligation at 31 December

15,321

40,340

12,634

13,856

8,789

Experience adjustment

(5,226)

(1,230)

(549)

965

299


As at 31 December deferred revenue consisted of the following: 2010

2009

Deferred revenue – dealers and subscribers

(i)

548,969

446,178

Deferred connection and one-time subscription fees

(ii)

154,006

134,231

Customer loyalty programs

(iii)

33,684

34,110

736,659

614,519

(i) Deferred revenue – dealers – represents deferred revenue from unused time on prepaid cards, which were sold to dealers, but have not yet been activated by subscribers. Deferred revenue – dealers is recognised in the statement of financial position until the prepaid cards have been activated by subscribers or the prepaid card has expired. Deferred revenue – subscribers – mainly consists of deferred revenue from unused time on prepaid cards, which were acti-

vated by subscribers. Deferred revenue – subscribers is recognised as revenue in the statement of comprehensive income on the basis of actual airtime usage by subscribers. (ii) Deferred connection and one-time subscription fees – mainly consist of fees for initial connection to the network and oneoff payments for subscription to additional services. Deferred connection and subscrip-

tion fees are recognised in the statement of comprehensive income over the periods that the fees are earned.

Notes to the consolidated financial statements

21. Deferred revenue

(iii) Customer loyalty programs – represent various loyalty programs, established by the Company, whereby enrolled subscribers are eligible for bonuses, which may then be used for discount on future calls or purchase of mobile handsets.

The movements in deferred connection and one-time subscription fees are as follows: 2010

2009

At 1 January

134,231

173,240

Deferred during the year

102,446

107,512

Released to the statement of comprehensive income

(82,671)

(146,521)

At 31 December

154,006

134,231

79


22. Provisions The movement in provisions is as follows:

Closed Joint Stock Company Kyivstar G.S.M.

At 1 January

2010

2009

14,666

4,891

Arising during the year

(i),(ii),(iii)

59,435

9,775

Unused amounts reversed

(ii)

(8,388)

-

At 31 December

65,713

14,666

Less: Current portion

(12,986)

(14,666)

Non-current

52,727

-

(i) As at 31 December 2009 the Company recognised UAH 5,382 thousand of provision regarding legal proceeding initiated by its counterparty in respect of consulting and advertising services provided by the counterparty, but not accepted by the  Company. As at 31 December 2010 the Company increased its assessment of the provision to UAH 11,993 thousand following the increase in the amount claimed by plaintiff. The management believes that the risk of loss of the case is probable.

(ii) As at 31 December 2009 the Group recognised provision in respect of potential penalties, which might have arisen on VAT paid to certain suppliers at 20% rate on purchase of assets and services in amount of UAH 9,284 thousand. The Group has revised its assessment of risk exposure based on information available as at 31 December 2010 and reduced the provision to UAH 993 thousand.

(iii) As at 31 December 2010 the Group recognised UAH 52,727 thousand of provision for asset retirement obligation in respect of future dismantling costs related to its network equipment installed on leased sites.

23. Taxes payable, other than income tax Taxes payable, other than income tax consisted of the following as at 31 December: 2010

80

2009

VAT payable

110,287

108,921

Pension fund for mobile services

24,133

22,224

Frequency fee

11,878

2,403

Miscellaneous other taxes

663

998

146,961

134,546


As at 31 December trade and other payables consisted of the following: 2010

2009

Roaming

206,053

90,076

Technical support services

70,189

72,409

Equipment and construction works

53,413

118,821

Interconnection

29,336

16,231

Content services

26,280

22,215

Dealers

22,700

32,249

Inventory

21,490

8,790

Professional fees

14,726

15,058

Advertising and promotion

13,824

4,046

Rent

7,518

15,785

Software

3,043

146,308

Other payables

11,716

26,498

480,288

568,486

Notes to the consolidated financial statements

24. Trade and other payables

As at 31 December trade and other payables were denominated in the following currencies:

UAH

2010

2009

230,236

328,454

EUR

153,948

85,074

USD

94,068

154,411

RUR

2,036

547

480,288

568,486

As at 31 December 2010 and 2009 trade and other payables are non-interest bearing and settled in the normal course of business.

81


25. Advances received As at 31 December advances received consisted of the following:

Closed Joint Stock Company Kyivstar G.S.M.

2010

2009

Advances received from subscribers

106,657

102,286

Advances received from partners

23,407

28,161

Advances received from dealers

5,650

5,215

Other advances received

493

536

136,207

136,198

2010

2009

UAH

135,729

136,198

USD

478

-

136,207

136,198

2010

2009

123,219

134,475

As at 31 December advances received were denominated in the following currencies:

26. Other current liabilities As at 31 December other current liabilities consisted of the following:

Bonuses accrued Accrual for unused vacations

37,879

40,174

Accruals for future dealers’ reimbursement

347

653

Other

20

6

161,465

175,308

As at 31 December 2010 and 2009 other current liabilities are non-interest bearing and denominated in UAH.

82


The Group’s transactions with its related parties for the years ended 31 December were as follows: 2010

Revenue

Cost of materiPurchase of Salaries and Other operating als and traffic Finance income property, plant personnel costs expenses charges and equipment

Entities under common control 615,448

177,436

-

488

76,790

36,199

Other related parties

360,152

-

79,006

69,215

-

-

75,712

-

-

-

537,588

75,712

79,494

146,005

36,199

341,883

Key management personnel of the Group 957,331 2009 Entities affiliated with Telenor Mobile Communications AS Entities affiliated with Storm LLC Key management personnel of the Group

Revenue

Cost of materials and traffic charges

Salaries and personnel costs

Other operating expenses

Finance income

27,176

6,211

-

25,333

-

899,001

558,287

-

9,694

106,458

-

-

72,668

-

-

926,177

564,498

72,668

35,027

106,458

Notes to the consolidated financial statements

27. Related party disclosure

The outstanding balances from related parties as at 31 December were as follows: 2010

Trade and other receivables

Prepayments

Cash and cash equivalents

Other current financial assets

Total

Entities under common control

50,778

416

-

3,349,309

3,400,503

Other related parties

11,846

3,435

368,850

-

384,131

62,624

3,851

368,850

3,349,309

3,784,634

2009

Trade and other receivables

Prepayments

Cash and cash equivalents

Total

Entities affiliated with Telenor Mobile Communications AS

8,177

-

-

8,177

Entities affiliated with Storm LLC

70,888

4

168,244

239,136

79,065

4

168,244

247,313

The outstanding amounts due to related parties as at 31 December were as follows: 2010 Entities under common control

80,497

Other related parties

24,960 105,457 2009

Entities affiliated with Telenor Mobile Communications AS

12,680

Entities affiliated with Storm LLC

3,530 16,210

83


Closed Joint Stock Company Kyivstar G.S.M.

Terms and conditions of transactions with related parties Outstanding balances on settlements with related parties at the year-end are unsecured, interest free and settlement occurs in cash. There have been no financial guarantees received from any related party. For the years ended 31 December 2010 and 2009, the Group has not recorded any impairment of receivables as regards to the amounts owed by related parties. Revenue and trade receivables In 2010 the Group sold to domestic and overseas telecom operators, being the Group’s related parties, roaming services, access to network and interconnection services in total amount of UAH  957,331  thousand (2009: UAH 926,177 thousand). Trade receivables as at 31 December 2010 and 2009 due from related parties are non-interest bearing, unsecured and are settled in the normal course of business. Cost of materials and traffic charges and trade payables Cost of materials and traffic charges from related parties include roaming and interconnection services, provided by entities under common control and other related parties. Trade payables to entities under common control and other related parties comprise amounts due for interconnection and roaming services. Trade payables to related parties are non-interest bearing and are settled in the normal course of business.

Other operating expenses Other operating expenses include consulting services provided by entities under common control and other related parties. Finance income In 2010 finance income included UAH 69,215 thousand of interest on short-term deposits placed in Ukrainian bank, which is the Company’s other related party (2009: UAH  106,458  thousand). In addition, UAH 76,790 thousand representing unwinding of discount on interest-free financial aid provided to the entity under common control was included in finance income (2009: nil). Purchase of property, plant and equipment In 2010 the Group acquired fiber-to–thebuilding (FTTB) equipment from entity under common control for cash consideration of UAH 36,199 thousand (2009: nil). Other current financial assets On 23 November 2010 the Company provided short-term reimbursable interestfree financial aid of UAH 4,000,000 thousand to the entity under common control. At initial recognition this facility was stated at fair value of UAH 3,272,519 thousand. UAH 554,987 thousand of loss on initial recognition at fair value, net of tax effect, was charged directly to equity as distributions to shareholders. Cash and cash equivalents As at 31 December 2010 and 2009 some of short-term deposits and cash in bank were placed in Ukrainian bank being the Company’s other related party.

As at 31 December the split of short-term deposits placed with related party bank by contractual maturity and interest rate earned was as follows: Currency

Maturity date

Interest rate

2010

2009

UAH

1-3 months

7-21%

365,000

30,000

USD

1-3 months

8.5-9%

-

60,127

EUR

1-3 months

8%

-

68,235

365,000

158,362

Compensation to management personnel As at 31 December 2010 key management personnel consisted of 48 top executives of the Group (2009: 41). For the years ended 31 December total compensation to key management personnel included in salaries and personnel costs comprised:

84

2010

2009

Short-term employee benefits

75,474

72,461

Long-term employee benefits

238

207

Total compensation to key management personnel

75,712

72,668


(i) Tax risks Ukrainian legislation and regulations regarding taxation and other operational matters, including currency exchange control and custom regulations, continue to evolve. Legislation and regulations are not always clearly written and are subject to varying interpretations by local, regional and national authorities, and other governmental bodies. Instances of inconsistent interpretations are not unusual. Management believes that the Group has complied with all regulations, and paid and accrued all taxes that are applicable. Where the risk of outflow of resources is probable, the Group has accrued provisions based on management’s best estimate. The Group identified certain possible tax contingencies, which are not required to be accrued in the financial statements. Such possible tax contingencies could materialise and require the Group to pay additional amounts of tax. As at 31 December 2010 the Group estimates such tax contingencies to be equal UAH 45,448 thousand.

(ii) Legal matters In the ordinary course of business, the Group is subject to legal actions and complaints. As at 31  December  2010 the Group’s exposure to presented third parties’ claims is UAH 11,993 thousand (2009: UAH 5,382 thousand). Management believes that the ultimate liability, arising from unasserted claims and complaints, if any, will not have a material adverse effect on the Group’s financial position or the results of its future operations and is less than probable, accordingly no corresponding accrual was provided in these consolidated financial statements.

Notes to the consolidated financial statements

28. Commitments and contingencies

(iii) Other capital commitments As at 31 December 2010 the Group had outstanding commitments in respect of purchase and construction of property, plant and equipment in amount of UAH 209,635 thousand (2009: UAH 379,576 thousand). As at 31 December 2010 the Group had outstanding commitments in respect of purchasing intangible assets in amount of UAH  49,577  thousand (2009: UAH 62,769 thousand). (iv) Lease commitments Operating lease – the Group as a lessee

The Group has entered into certain leases of land and buildings. These leases have an average life from one to five years with a renewal option included in the contracts. Future minimum rentals payable under non-cancellable operating lease agreements as at 31 December were as follows: 2010

2009

Within one year

165,414

172,807

After one year but not more than five years

144,823

137,140

More than five years

153,197

-

463,434

309,947

(v) Commitment for additional issue of shares On 19 October 2010 the Company’s shareholders approved the restructuring plan, whereby Storm  LLC, one of the Company’s shareholders, will be merged into Kyivstar and cease to exist as a legal entity. Pursuant to the relevant resolutions, on 21 October 2010 Kyivstar and Storm LLC entered into the accession agreement, according to which Storm LLC will transfer to Kyivstar all its assets and liabilities,

including the Company’s shares it owns. At the same time, Kyivstar has issued the written commitment to VimpelCom Holdings B.V. and VimpelCom Ltd. to issue additional 7,000,000 of shares with par value of UAH 50 each in exchange for their participatory interests in Storm LLC. After Storm LLC is legally dissolved and Kyivstar’s additional shares are issued to VimpelCom Holdings B.V. and VimpelCom Ltd., the treasury shares, which will be received by Kyivstar from Storm LLC as part of accession, will be cancelled.

85


29. Fair value of financial instruments

Closed Joint Stock Company Kyivstar G.S.M.

As at 31 December 2010 and 2009 the carrying value of the Group’s financial instruments approximates their fair values.

30. Financial instruments and risk management The Group’s principal financial instruments comprise interest-bearing loans and borrowings, cash and cash equivalents and other current financial assets. The Group has various other financial instruments, such as trade payables and trade receivables, which arise directly from its operations. It is the Group’s policy not to trade with financial instruments. The Group is exposed to market risk, credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability and inefficiency of the Ukrainian financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. The Group’s senior management oversees the management of these risks and financial risk-taking activities are governed by appropriate policies and procedures so that financial risks

The face values of financial assets and liabilities with a maturity of less than one year, less any estimated credit adjustments, are assumed to be their fair values. The fair value of financial liabilities is estimated by discounting the future contractual cash flows at the current market interest rate available to the Group for similar financial instruments.

are identified, measured and managed in accordance with Group policies. The policies for managing each of these risks are summarised below. Market risk Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises three types of risk: interest rate risk, currency risk and other price risk. The Group does not have significant exposure to interest rate risk as it normally borrows at fixed rates. Neither it has exposure to other price risk. Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Group’s exposure to the risk of changes in foreign exchange rates relates primarily to the Group’s operating activities (when the Group’s trade receivables and trade payables are denominated in foreign currencies) and financing activities (when interest-bearing borrowings are denominated in foreign currencies).

The exchange rates for foreign currencies, in which the Group’s financial assets and liabilities were denominated, against Ukrainian hryvnia, as declared by the National Bank of Ukraine as at the dates and periods stated, were as follows:

1 January 2009

86

Russian ruble (‘RUR’)

USD

Euro (‘EUR’)

0.2621

7.7000

10.8555

Average for 2009

0.2465

7.7962

10.8889

31 December 2009

0.2640

7.9850

11.4489

Average for 2010

0.2614

7.9356

10.5329

31 December 2010

0.2612

7.9617

10.5731


liabilities). The sensitivity analyses have been prepared on the basis that the proportion of financial instruments in foreign currencies are all constant at 31  December 2010 and 2009.

2010

Increase/ (decrease) in basis points Effect on profit before tax

Change in USD exchange rate

+29.50%

27,780

Change in EUR exchange rate

+27.90%

10,346

Change in RUR exchange rate

+29.70%

(605)

Change in USD exchange rate

-29.50%

(27,780)

Change in EUR exchange rate

-27.90%

(10,346)

Change in RUR exchange rate

-29.70%

605

2009

Increase/ (decrease) in basis points Effect on profit before tax

Change in USD exchange rate

+31.30%

120,145

Change in EUR exchange rate

+33.10%

151,713

Change in RUR exchange rate

+34.00%

(186)

Change in USD exchange rate

-31.30%

(120,145)

Change in EUR exchange rate

-33.10%

(151,713)

Change in RUR exchange rate

-34.00%

186

Liquidity risk The Group analyses the aging of its assets and the maturity of its liabilities and plans its liquidity depending on the expected repayment of various instruments. The Group’s short-term and long-term liquidity needs are funded largely through cash flow from operating activities.

Notes to the consolidated financial statements

The following tables demonstrate the sensitivity to a reasonably possible change in the corresponding exchange rates, with all other variables held constant, of the Group’s profit before tax (due to changes in the fair value of monetary assets and

The tables below show the maturity profile of the Group’s financial liabilities as at 31 December based on contractual undiscounted payments.

2010

On demand

Less than 3 months

3 to 6 months

6 to 12 months

Total

Interest-bearing loans and borrowings

51,043

-

-

-

51,043

Interest accrued

-

-

692

-

692

Trade and other payables

-

462,271

15,694

2,323

480,288

51,043

462,271

16,386

2,323

532,023

87


Closed Joint Stock Company Kyivstar G.S.M.

2009

Less than 3 months

3 to 6 months

6 to 12 months

1 to 5 years

Total

Interest-bearing loans and borrowings

-

-

-

51,192

51,192

Interest accrued

-

694

-

-

694

Trade and other payables

547,507

19,259

1,720

-

568,486

547,507

19,953

1,720

51,192

620,372

Credit risk Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. The Group is exposed to credit risk from its operating activities (primarily for trade receivables) and from its financing activities, including deposits with banks and financial institu-

tions, foreign exchange transactions and other financial instruments. Financial instruments, which potentially expose the Group to significant concentrations of credit risk, consist principally of cash in bank, short-term deposits, other current financial assets and trade and other receivables.

The Group’s maximum credit risk exposure at 31 December comprised: 2010

2009

Cash and cash equivalents

1,595,056

1,210,394

Trade and other receivables

51,735

595,702

Other current financial assets

3,349,309

-

4,996,100

1,806,096

The Group’s cash is primarily held with major reputable banks located in Ukraine. Accounts receivable are presented net of allowances. The Group does not require collateral in respect of trade receivables. Concentrations of credit risk with respect to trade receivables are limited by the fact that the Company’s customer base contains significant number of small customers, which are considered unrelated. Management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. Credit evaluations

are performed for all customers requiring credit over a certain amount. Credit risk arising from financial transactions is reduced through diversification, through accepting counterparties with high credit ratings only and through defining limits on aggregated credit exposure towards each counterparty. The Group’s credit risk exposure is monitored and analysed on a case-by-case basis, and the Group’s management believes that credit risk is appropriately reflected in impairment allowances recognised against assets.

As at 31 December 2010 and 2009, the ageing of the Group’s trade and other receivables and other current financial assets was as follows:

Total

Past due, but not impaired Neither past due, Less than Fully impaired nor impaired 30-60 days 60-90 days 30 days

More than 120 days

2010

3,669,862

74,063

3,645,030

6,087

4,828

2,479

2,386

9,052

2009

595,702

76,854

541,378

48,206

2,349

389

239

3,141

Capital management The Group considers shareholders’ equity as primary capital source. Also the Group can incur debt either through shareholder loans or through external funding. The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders as

88

90-120 days

well as to provide financing of its operating requirements, capital expenditures and sustain the Group’s development strategy. Management monitors on a regular basis the Group’s capital structure and may adjust its capital management policies and targets following changes in its operating environment, market sentiment or its development strategy.


Basic earnings per share amounts are calculated by dividing net profit for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year. Basic earnings per share for the years ended 31 December is as follows:

Net profit attributable to ordinary equity holders of the parent for basic earnings Weighted average number of ordinary shares for basic earnings per share Basic earnings per share, UAH

2010

2009

3,677,880

3,685,397

10,687,389

10,687,389

344.13

344.84

Notes to the consolidated financial statements

31. Earnings per share

As at 31 December 2010 and 2009 there are no potential ordinary shares. There have been no transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of issue of these consolidated financial statements.

32. Events after the reporting period (i) Reorganisation of Storm LLC Pursuant to the accession agreement referred to in Note 28, on 18 January 2011 Storm LLC transferred 4,647,127 of Kyivstar’s ordinary shares into the Company’s depository account.

89


Notes



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