2. Income Statement

2.1 Revenue

Accounting policies

Revenue is measured at the fair value of the consideration received or receivable, and represents amounts receivable for the sale of goods and services in the ordinary course of the Group’s activities, net of value added taxes, returns and discounts.

The Group recognises revenue when the amount of revenue can be reliably measured, when it is probable that future economic benefits will flow to the applicable entity and when specific criteria have been met for each of the Group’s activities as described below. The Group bases its estimate of return on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement.

Service revenue

Service revenue is generally recognised when the services are rendered.

Wireless revenue

The Group earns wireless revenues for usage of its cellular system, which include airtime charges from contract and prepaid subscribers, monthly contract fees, interconnect fees from other wireless and wireline operators, roaming charges, data transfer charges, and charges for value added services (“VAS”). Interconnect revenue includes revenues from wireless and wireline operators that was earned from terminating traffic from other operators. Roaming revenues include revenues from customers who roam outside their selected home coverage area and revenues from other mobile carriers for roaming by their customers using the network of the Group. VAS include SMS, MMS, provision of content and media and commissions for mobile payments.

The revenue from provision of content is presented net of related costs when the Group acts as an agent of the content providers while gross revenues and related costs are recorded when the Group is a primary obligor in the arrangement. The reporting of revenue on a net versus gross basis, depending on an analysis of the Group’s involvement as either principal or agent, involves management’s judgment.

(a) Loyalty programme

The Group operates a loyalty programme which allows customers to accumulate awards for usage of the Group’s cellular network. The awards can then be redeemed for free services, subject to a minimum number of awards being obtained. The portion of consideration received is allocated to the awards based on their fair value and deferred until the award credits are redeemed or expire. The Group estimates the fair value of awards to a customer by applying a statistical analysis. Inputs to the models include making assumptions about expected redemption rates, the mix of services that will be available for redemption in the future and customer preferences. Such estimates are subject to significant uncertainty.

(b) Multiple element arrangements

The Group enters into multiple element arrangements in which a customer may purchase a combination of equipment (e.g. handsets) and telecommunication services (e.g. airtime, data, and other services). The Group allocates consideration received from subscribers to the separate units of accounting based on their relative fair values but not exceeding the contractual consideration receivable for the delivered element. Revenues allocated to the delivered equipment and related costs are recognised in the accompanying consolidated statements of comprehensive income at the time of sale provided that other conditions for revenue recognition are met. Amounts allocated to telecommunication services are deferred and recognised as revenue over the period of rendering the services. Allocation of each separable component of a bundled offer based on the individual components’ relative fair values involves estimates and judgment.

(c)   Roaming rebates

The Group enters into roaming discount agreements with a number of wireless operators. According to the agreements the Group is committed to provide and entitled to receive a discount that is generally dependent on the volume of roaming traffic generated by the respective subscribers. The Group uses actual traffic data to estimate the amounts of rebates to be received or granted. Such estimates are adjusted and updated on a regular basis. The Group accounts for discounts received as a reduction of roaming expenses and rebates granted as reduction of roaming revenue.

The Group takes into account the terms of the various roaming discount agreements in order to determine the appropriate presentation of the amounts receivable from and payable to its roaming partners in its consolidated statement of financial position. Amounts of rebates earned from and given to roaming partners are included in trade and other receivables and payables, respectively, in the accompanying consolidated statement of financial position.

Management has to make estimates relating to revenue recognition, relying to some extent on information from other operators on values of services delivered. Management also makes estimates of the final outcome in instances where the other parties dispute the amounts charged.

Wireline revenue

The Group earns wireline revenues for usage of its fixed-line network, which include payments from individual, corporate and government subscribers for local and long-distance telecommunications and data transfer services. Charges are based upon usage (e.g., minutes of traffic processed), period of time (e.g., monthly service fees) or other established fee schedules. Wireline revenues also include interconnection charges from wireless and wireline operators for terminating calls on the Group’s wireline networks. Revenue from service contracts is recognised when the services are rendered. Billings received in advance of service being rendered are deferred and recognised as revenue as the service is rendered.

Sales of equipment and accessories

Revenue from the sale of equipment and accessories is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer, usually on delivery of the goods.

Change in presentation

In these consolidated financial statements the presentation of revenue has been changed so as to present service revenue and revenue from the sale of equipment and accessories combined, in line with growing trend of bundled offerings (e.g. handsets and telecommunication services).

2.2 Sales and marketing expenses

Accounting policies

Dealer commissions for connection of new subscribers are expensed as incurred. The Group’s third party dealer arrangements call for provision of post-sales services and revenue sharing. As a result, dealer commissions are recognised as the services are performed, generally during a twelve-month period from the date a new subscriber is activated.

Advertising costs are expensed as incurred.

General and administrative expenses

Included in general and administrative expenses for the years ended 31 December are:

Government pension funds

The Group contributes to local state pension funds and social funds on behalf of its employees. The contributions are expensed as incurred. Contributions for the years ended 31 December 2015 and 2014 were 5,514 and 5,112, respectively.

1.1.   Income taxes

Accounting policies

Current income tax

The tax expense for the year comprises current and deferred tax. Tax is recognised in profit or loss, except to the extent that it relates to items recognised in OCI or directly in equity. In this case, the tax is also recognised in OCI or directly in equity, respectively.

The current income tax is calculated on the basis of the tax laws enacted or substantively enacted at the reporting date in the countries in which the Company and its subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which the applicable tax regulation is subject to interpretation. If the applicable tax regulation is subject to interpretation, it establishes a provision where appropriate on the basis of amounts expected to be paid to the tax authorities.

Deferred income tax

Deferred income tax is recognised using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates and laws that have been enacted or substantively enacted at the reporting date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

Deferred income tax assets are recognised only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except for deferred income tax liability where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.

Significant estimates

The Group assesses the recoverability of deferred tax assets based on estimates of future earnings. The ability to recover these taxes depends ultimately on the Group’s ability to generate taxable earnings over the period for which the deferred tax assets remain deductible. The recognition of tax assets and liabilities depends on a series of factors, including estimates as to the timing and realisation of deferred tax assets and the projected tax payment schedule.

Actual Group income tax receipts and payments could differ from the estimates made by the Group as a result of changes in tax legislation or unforeseen transactions that could affect tax balances. The expected resolution of uncertain tax positions is based upon management’s judgment of the likelihood of sustaining a position taken through tax audits, tax courts and/or arbitration, if necessary. Circumstances and interpretations of the amount or likelihood may change through the settlement process.

Disclosures

The following presents the significant components of the Group’s income tax expense for the years ended 31 December:

Income tax is calculated at 20% of taxable profit for the years ended 31 December 2015 and 2014, respectively.

The reconciliation between the average effective income tax rate and the applicable Russian enacted statutory tax rate is as follows:

In 2014 the effective income tax rate was higher primarily due to derecognition of deferred tax assets related to the investment in Euroset and the acquisition of Scartel. The effect of intragroup transactions, in the table above, represents taxable intra-group income.

Deferred tax relates to the following:

The Group recognises deferred tax assets in respect of tax loss carry-forwards to the extent that realisation of tax losses against future taxable profit is probable. Deferred tax assets related to tax losses of the Group’s subsidiaries are recognised based on the tax planning opportunities that would be implemented, if necessary, to prevent unused tax losses.

Deferred tax assets in respect of the tax losses are attributable to the following subsidiaries:

In order to utilise tax losses the Group is able to implement appropriate tax planning strategies depending on the results of these subsidiaries in subsequent periods. The tax planning strategies may include, among others, merging of the respective subsidiaries with PJSC MegaFon which is expected to have sufficient pretax income to utilise the accumulated tax losses of these subsidiaries. Tax loss carry-forwards available for utilisation by the Group expire in 2019-2025.

Unrecognised deferred tax assets in the consolidated statement of financial position as of 31 December 2015 and 2014 amounted to 2,716 and 2,202, respectively. Unrecognised deferred tax assets arose on the acquisition of subsidiaries due to the difference between the accounting and tax bases of the acquisitions and are not expected to be realised due to lack of appropriate taxable profits.

Reconciliation of net deferred tax liabilities for the years ended 31 December is as follows:

1.2.   Earnings per share

Accounting policies

Basic earnings per share (“EPS”) are computed by dividing net profit available to shareholders of the Company by the weighted-average number of ordinary shares outstanding for the period.

Diluted earnings per share are computed by dividing adjusted net profit available to shareholders by the weighted-average number of ordinary shares outstanding during the period increased to include the number of additional ordinary shares that would be issued on the conversion of all the potentially dilutive securities into ordinary shares. Potentially dilutive securities include outstanding stock options and convertible debt instruments.

Disclosures

The following table sets forth the computation of basic and diluted EPS for the years ended 31 December: