Annual Report 2015



5. Additional Notes

5.1.   Share-based compensation

Accounting policies

Equity-settled transactions

The cost of equity-settled transactions, such as stock options under the CEO long-term incentive plan, is determined by the fair value at the date when the grant is made using an appropriate valuation model. That cost is recognised, together with a corresponding increase in other reserves in equity, over the period in which the service conditions are fulfilled in employee benefits and related social charges expense (Note 2.3). No expense is recognised for awards that do not ultimately vest. The dilutive effect of outstanding options is reflected as additional share dilution in the computation of diluted earnings per share.

Cash-settled transactions

The cost of cash-settled transactions, such as phantom stock options under the 2012 and 2013 long-term incentive plans, is measured initially at fair value at the grant date using an appropriate valuation model. This fair value is expensed over the period until the vesting date with recognition of a corresponding liability. The liability is re-measured to fair value at each reporting date up to, and including the settlement date, with changes in fair value recognised in employee benefits and related social charges expense (Note 2.3).

The Group measures the cost of equity-settled and cash-settled share-based payment transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. For cash-settled awards the fair value is re-measured every reporting period. Estimating fair value for share-based payment transactions requires a determination of the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determination of the most appropriate inputs to the valuation model including the expected life of the share option, volatility and dividend yield and making assumptions about them. The assumptions and models used for estimating fair value for share-based payment transactions are disclosed below.


Long-term incentive programmes 2012 and 2013

In 2012 and 2013 the Company’s Board of Directors approved two long-term incentive programmes (LTI 2012 and LTI 2013) for certain key executive and senior level employees under which the parties selected to participate are awarded rights to phantom shares. The maximum number of phantom shares which could be awarded under each plan was 1.1% of the share capital of the Company (or 14,000,000 phantom shares in the aggregate) at the base price of $17.86 per share under LTI 2012 and $24.25 per share under LTI 2013.

Each plan had a three year duration and rights to phantom shares vest, and payments due to awardees are settled, in the second and third years.  Awardees receive payments on the basis of the difference between the base price and the weighted-average price of the Company’s shares n the period between January 15 and March 15 in the relevant year of vesting (the strike price).

In 2015 the Board of Directors of the Company approved an amendment to the terms of LTI 2012 and LTI 2013 to change the base price and the strike price for the awards outstanding as at 31 December 2014 and 2015 to 555 Rubles per share and 744 Rubles per share, respectively, for which settlement was due in April-May 2015 and April-May 2016.

The respective awards under LTI 2012 and LTI 2013 are classified as liabilities. The fair value of the phantom share rights had been estimated using the Monte Carlo model. The fair value of each grant is estimated at the end of each reporting period. The expected volatility is estimated based on the average historical volatility of the Group over the period equal to the expected life of the rights granted. The dividend yield is included in the model based on expected dividend payments. The risk free rate is determined on the basis of the key rate of the Central Bank of Russia with a remaining term to maturity equal to the expected life of the rights. The expected term of the rights equals their vesting term as the rights are settled in cash at the end of the relevant vesting period.

  LTI 2012 LTI 2013
  2015 2014 2015 2014
Employee benefits expense/(reversal) recognised during the year ended 31 December, including related social charges 569 (186) 98 5
The fair value of rights  outstanding at 31 December, Rubles per right to phantom share — — 102 8
The carrying amount of the liability at 31 December, including related social charges — — 102 5

CEO long-term incentive plan

As part of a long-term incentive plan approved by the Company’s Board of Directors in November 2012, Mr. Ivan Tavrin, the CEO of the Company purchased 2.5% of the Group’s total issued shares at the IPO price of $20 per share in 2012 and 2013. The remaining 15,500,000 options to buy up to a further 2.5% of the total issued shares at the IPO price could be exercised in May 2014 and May 2015 or subsequently, up till May 2017.

In March 2014 the Board of Directors of the Company agreed unanimously to amend the terms of the CEO long-term incentive plan and to accelerate the vesting of Mr. Tavrin’s final two options to acquire a 2.5% interest in the Company, so that all the remaining options became exercisable at any time after 1 May 2014. The change resulted in an additional employee benefits charge of 380 for the year ended 31 December 2014 due to the accelerated vesting, including incremental fair value in the amount of 111, recognised in 2014.

In December 2014 Mr. Tavrin exchanged his 2.5% interest in the Company and the 15,500,000 unexercised options for an interest in USM Holdings Limited (“USMHL”) (Note 5.2).

5.2.   Related parties

In August 2014 USMHL, a non-public entity and the parent company of the USM Group, announced a restructuring amongst its shareholders. As a result of this restructuring the voting interest held by Mr Alisher Usmanov, which previously enabled him to control USMHL, has been reduced to a 48% voting interest.

The following tables provide the total amount of transactions that have been entered into with related parties and balances of accounts with them for the relevant financial years:

  For the years ended
31 December
  2015 2014
Revenues from USM Group 52 31
Revenues from TeliaSonera Group 640 838
Revenues from Euroset 110 167
  802 1,036
Services from USM Group 979 883
Services from TeliaSonera Group 1,436 1,817
Services from Euroset 1,228 1,274
Services from Garden Ring 320 —
  3,963 3,974
  31 December
  2015 2014
Due from USM Group 477 13
Due from TeliaSonera Group 305 388
Due from Euroset 403 379
Due from Garden Ring 4,643 —
  5,828 780
Due to USM Group 809 7,476
Due to TeliaSonera Group 414 638
Due to Euroset 12 3
Due to Garden Ring 63 —
  1,298 8,117

Terms and conditions of transactions with related parties

Outstanding balances at the years ended 31 December 2015 and 2014 are unsecured. There have been no guarantees provided or received for any related party receivables or payables. As of 31 December 2015 and 2014, the Group has not recorded any impairment of receivables relating to amounts owed by related parties. This assessment is undertaken each financial year by examining the financial position of the related party and the market in which the related party operates.

USM Group

The outstanding balances and transactions with USM Group relate to operations with Garsdale, the Group’s parent, USMHL, an indirect owner of Garsdale, and their consolidated subsidiaries.

The Group has entered into an agreement with Telecominvest, a member of the USM Group, for provision of legal and personnel services effective in 2015 and 2014. In addition, the Group purchased billing system and related support services from PeterService, another member of the USM Group, in the amount of 5,343 and 1,979 during 2015 and 2014, respectively.

Amounts due to USM Group as of 31 December 2014 mainly represent the deferred consideration for the Scartel acquisition (Note 3.4).

The Group is a member of the Not-for-profit Partnership “Development, Innovations, Technologies” (the “Partnership”) which was established by companies in the USM Group. The Partnership is required to incur education, science and other social costs as well as to maintain certain social infrastructure assets in Skolkovo Innovation Centre which are not owned by MegaFon and not recorded in the consolidated statement of financial position. The Group’s accrued contributions to the Partnership of 1,826 during the year ended 31 December 2015 (2014: 1,089) are included into other non-operating expenses in the consolidated statement of comprehensive income.

TeliaSonera Group

The outstanding balances and transactions with TeliaSonera Group relate to operations with various companies in the TeliaSonera Group. Revenues and cost of services principally related to roaming agreements between MegaFon and members of the TeliaSonera Group located outside Russia and a wireline interconnection agreement with TeliaSonera International Carrier Russia.


Euroset is the Group’s joint venture with PJSC VimpelCom (Note 3.3). The Group has a dealership agreement with Euroset which qualifies as a related party transaction.

Garden Ring

Garden Ring is the Group’s joint venture with Sberbank (Note 3.3). The Group has a lease agreement with Garden Ring which qualifies as a related party transaction. The Group also has loan receivable from Garden Ring which it acquired together with the shares of Glanbury. The balance due from Garden Ring at 31 December 2015 consists of the loan receivable and an advance payment under the lease agreement.

Compensation to key management personnel

Members of the Board of Directors and the Management Board of the Company are the key management personnel. The amounts recognised as employee benefits expense to key management personnel of the Group for the years ended 31 December are as follows:

  2015 2014
Short-term employee benefits  520 603
Share-based compensation (Note 5.1) 246  593
Long-term incentive programme 179 12
Total  945  1,208

5.3.   Business combinations

Accounting policies

The Group applies the acquisition method of accounting and recognises the assets acquired, the liabilities assumed and any non-controlling interest in the acquired company at the acquisition date, measured at their fair values as of that date.

The identification of assets acquired and liabilities assumed as a result of those acquisitions, determining the fair value of assets acquired and liabilities assumed as well as any contingent consideration and quantification of resulting goodwill requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, terminal growth rates, licence and other asset useful lives and market multiples, among other items.

Results of subsidiaries acquired and accounted for by the acquisition method have been included in operations from the relevant date of acquisition.

Any contingent consideration to be transferred by the Group is recognised at fair value at the acquisition date. Subsequent changes in the fair value of the contingent consideration classified as an asset or liability that is a financial instrument within the scope of IAS 39, Financial Instruments: Recognition and Measurement, are recognised in accordance with IAS 39 in the statement of comprehensive income. If the contingent consideration is not within the scope of IAS 39, it is measured in accordance with the appropriate IFRS. Contingent consideration that is classified as equity is not re-measured and subsequent settlement is accounted for within equity.

Acquisition-related costs are expensed as incurred and included in general and administrative expenses.

2015 acquisitions


On 18 September 2015 the Group acquired 100% of the shares of GARS Holding Limited (“GARS”), which is a building local exchange carrier providing a full range of fixed-line telecommunication services to the tenants of business centers in Moscow and Saint Petersburg, for a total consideration having a fair value of 2,213 at the date of acquisition, consisting of cash consideration of 1,542 and deferred and contingent consideration of 671.

The primary reason for the acquisition was to further enhance the Group’s position in the fixed-line telecommunications market in Moscow and Saint Petersburg.

Contingent consideration, whose payment depends on the satisfaction of certain conditions, has been ascribed a fair value of $5 million (314 at the exchange rate as of 18 September 2015), approximating the maximum possible amount which is payable within eight months from the date of acquisition. Deferred consideration of approximately $5 million (357 at the exchange rate as of 18 September 2015) is payable on or prior to the second anniversary of the acquisition date.

The acquisition of GARS was accounted for using the acquisition method. The valuation of certain acquired assets and liabilities assumed has not been finalised as of the date these consolidated financial statements were authorised for issue; thus, the provisional measurements of certain intangible and tangible assets, deferred taxes and goodwill are subject to change.

The table below includes the provisional allocation of the purchase price to the acquired net assets of GARS based on their estimated fair values.

Property and equipment 328
Intangible assets 458
Deferred tax assets 24
Other current assets 179
Cash and cash equivalents 75
Loans and borrowings 158
Deferred tax liabilities 80
Non-current non-fiancial liabilities 17
Current liabilities 194
Total identifiable net assets at fair value 615
Goodwill arising on acquisition 1,598
Purchase consideration transferred 2,213

The goodwill recognised is attributable primarily to expected synergies from the acquisition and the value to be attributed to the workforce of GARS.

From the date of acquisition, GARS contributed 392 to revenue and 38 to profit before tax of the Group. If the combination had taken place at the beginning of the year, revenue of the Group for the year ended 31 December 2015 would have been 314,281 and profit before tax would have been 51,942.

The Group recognised GARS acquisition-related costs as general and administrative expenses in the amount of 7 for the year ended 31 December 2015 in the consolidated statement of comprehensive income.


In December 2015 the Group acquired 100% interest in CJSC Startel, which provides a full range of fixed-line telecommunication services to business clients in Moscow and Tver, for a cash consideration of 48, of which 21 is deferred for up to one year. The resulting goodwill is 43.

2014 acquisitions

In 2014 the Group acquired 100% ownership interests in a number of alternative wireline and broadband internet service providers in certain regions of the Russian Federation for a total cash consideration of 381, of which 150 was contingent consideration deferred for up to one year. In 2015, the contingent consideration was reduced by 26 and the remaining 124 was fully paid by the Group. Goodwill on these acquisitions amounted to 374.

5.4.   Financial risk management

The Group’s principal financial liabilities, other than derivatives, comprise loans and borrowings, and trade and other payables. The main purpose of these financial liabilities is to finance the Group’s operations. The Group has trade and other receivables, and cash and short-term deposits that derive directly from its operations. The Group also enters into derivative transactions.

The Group is exposed to market risk, credit risk and liquidity risk. The Group’s senior management oversees the management of these risks. The Group’s senior management is supported by the Finance and Strategy Committee of the Board of Directors that advises on financial risks and the appropriate financial risk governance framework for the Group. The Finance and Strategy Committee provides assurance to the Group’s senior management that the Group’s financial risk-taking activities are governed by appropriate policies and procedures and that financial risks are identified, measured and managed in accordance with the Group’s policies. All derivative activities for risk management purposes are carried out by specialist teams that have the appropriate skills, experience and supervision. It is the Group’s policy that no trading in derivatives for speculative purposes shall be undertaken.

The Company’s Board of Directors reviews and agrees policies for managing each of these risks, which 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 price risks that mostly impact the Group comprise two types of risk: interest rate risk and currency risk. Financial instruments affected by market risk include: loans and borrowings, deposits and derivative financial instruments.

The sensitivity analyses in the following sections relate to the position as of 31 December in 2015 and 2014. The sensitivity analyses have been prepared on the basis that the amount of net debt, the ratio of fixed-to-floating interest rates of the debt and derivatives and the proportion of financial instruments in foreign currencies are all constant and on the basis of the hedge designations in place at 31 December 2015 and 2014.

Interest rate risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Group’s exposure to the risk of changes in market interest rates relates primarily to the Group’s long-term debt obligations with floating interest rates.

The Group manages its interest rate risk by having a balanced portfolio of fixed and variable rate loans and borrowings. To manage this, the Group enters into interest rate swaps, under which the Group agrees to exchange, at specified intervals, the difference between fixed and variable rate interest amounts calculated by reference to an agreed-upon notional principal amount. These swaps are designated to hedge underlying debt obligations.

At 31 December 2015, after taking into account the effect of interest rate swaps, approximately 78% of the Group’s borrowings are at a fixed rate of interest (2014: 86%).

Interest rate sensitivity

The following table demonstrates the sensitivity to a reasonably possible change in interest rates on loans and borrowings, after the impact of hedge accounting. With all other variables held constant, the Group’s profit before tax is affected through the impact on floating rate borrowings as follows:

in basis points
Effect on profit
before tax
Year ended 31 December 2015    
US Dollar +95 (418)
US Dollar -95 418
Year ended 31 December 2014    
US Dollar +2 (7)
US Dollar -2 7

The analysis is prepared assuming the amount of variable rate liability outstanding at the balance sheet date was outstanding for the whole year.

Foreign currency 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 financing activities (when cash deposits and loans and borrowings are denominated in a different currency from the Group’s functional currency).

A significant portion of the Group’s liabilities is denominated in US dollars or Euro. If the Ruble continued to decline dramatically against the US dollar or Euro, this could negatively impact the Group’s earnings.

To the extent permitted by Russian law, the Group keeps part of its cash and cash equivalents in US dollar and Euro interest bearing accounts to manage against the risk of Ruble decline or devaluation, and also to match its foreign currency liabilities.

To minimise its foreign exchange exposure to fluctuations in foreign currency exchange rates, the Group is migrating most of its foreign currency linked costs to Ruble based costs to balance assets and liabilities and revenues and expenses denominated in Rubles. In order to manage the foreign currency risk the Group is also focused on increasing the proportion of Ruble loans through refinancing and hedging activities.

Before 2015 the Group entered into three long-term cross-currency swaps. These derivative financial instruments were used to limit exposure to changes in foreign currency exchange rates on certain of the Group’s long-term debts denominated in foreign currencies (Note 3.4).

Overall, the share of Ruble loans (including the effect of cross-currency swaps) amounted to 63% as of 31 December 2015 (65% at 31 December 2014).

In accordance with the Group’s policies, the Group does not enter into any treasury management transactions of a speculative nature.

Foreign currency sensitivity

The following table demonstrates the sensitivity to a reasonably possible change in the US dollar, HK dollar and Euro exchange rates, with all other variables held constant, of the Group’s profit before tax (due to changes in the fair value and future cash flows of monetary assets and liabilities including non-designated foreign currency derivatives) after the impact of hedge accounting. The Group’s exposure to foreign currency changes for all other currencies is not material.

  Change in foreign
exchange rates
Effect on profit
before tax
Year ended 31 December 2015    
US Dollar +50% (24,807)
US Dollar -50% 24,807
Euro +50% (2,063)
Euro -50% 2,063
Year ended 31 December 2014    
US Dollar +30% (18,372)
US Dollar -30% 18,372
Euro +30% (1,307)
Euro -30% 1,307
HK Dollar +30% 9,644
HK Dollar -30% (9,644)

The movement in the pre-tax effect is a result of a change in the fair value of derivative financial instruments not designated in a hedging relationship and monetary assets and liabilities denominated in currencies other than the functional currency of the Company. Although the derivatives have not been designated in a hedge relationship, they act as a commercial hedge and will offset the underlying transactions when they occur.

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 institutions and other financial instruments.

The Group deposits available cash with various banks in the Russian Federation. Deposit insurance is either not offered or only offered in de minimis amounts in respect of bank deposits within the Russian Federation. To manage the concentration of credit risk, the Group allocates available cash to domestic branches of international banks and a limited number of Russian banks. A majority of these Russian banks are either owned or controlled by the Russian government.

The Group extends credit to certain counterparties, principally international and national telecommunications operators, for roaming services, to certain dealers and to customers on post-paid tariff plans. The Group minimises its exposure to the risk by ensuring that credit risk is spread across a number of counterparties, and by continuously monitoring the credit standing of counterparties based on their credit history and credit ratings reviews. Other preventative measures to minimise credit risk include obtaining advance payments, bank guarantees and other security.

The maximum exposure to credit risk at the reporting date is the carrying value of each class of financial assets disclosed in Note 3.4. The Group evaluates the concentration of risk with respect

to trade receivables as low, as its customers are located in several jurisdictions and industries and operate in largely independent markets. Concentrations of credit risk with respect to trade receivables are limited given that the Group’s customer base is large and unrelated. Due to this management believes there is no further credit risk provision required in excess of the normal impairment allowance for trade and other receivables.

Liquidity risk

The Group monitors its risk relating to a shortage of funds using a recurring liquidity planning tool. The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of bank loans. Approximately 21% of the Group’s loans and borrowings will mature in less than one year at 31 December 2015 (2014: 24%) based on the carrying value of borrowings reflected in the consolidated financial statements. The Group assessed the concentration of risk with respect to refinancing its debt and concluded it to be low.

As of 31 December 2015 and 2014, the Group has net current liability position. The Group believes it will continue to be able to generate significant operating cash flows and that adequate access to sources of funding and significant amount of available credit lines are sufficient to meet the Group’s requirements. Additionally, the Group can defer capital expenditures if necessary in order to meet short-term liquidity requirements. Accordingly, Group management believes that cash flows from operating and financing activities will be sufficient for the Group to meet its obligations as they become due.

The table below summarises the maturity profile of the Group’s financial liabilities based on contractual undiscounted payments.

  Less than  1 year 1-3 years 4-5 years More than 5 years Total
31 December 2015          
Loans and borrowings  61,582  147,587  48,135  4,248  261,552
Trade and other payables  45,961 — — —  45,961
Deferred consideration  2,865  399 — —  3,264
Finance lease obligations  387  925  925  5,986  8,223
Long-term accounts payable —  986  107 —  1,093
Derivative financial liabilities  63 — — —  63
Total 31 December 2015  110,471  148,972  48,242  4,248  311,933
31 December 2014          
Loans and borrowings  64,445  85,361  78,125  23,036  250,967
Trade and other payables  36,549   — — —  36,549
Deferred consideration  7,257   — — —  7,257
Long-term accounts payable —  1,200    27    54    1,281
Derivative financial liabilities 263 — — —  263
Total 31 December 2014  108,514  86,561  78,152  23,090  296,317

Capital management

Capital includes equity attributable to the Group’s shareholders. The primary objective of the Group’s capital management is to ensure that it maintains a healthy credit rating and healthy capital ratios in order to secure access to debt and capital markets at all times and maximise shareholder value. The Group manages its capital structure and makes adjustments to it in light of changes in economic conditions.

The Net debt to OIBDA ratio is an important measure to assess the capital structure in light of the need to maintain a strong credit rating. Net debt represents the carrying amount of interest-bearing loans and borrowings less cash and cash equivalents and current and non-current bank deposits. As of 31 December 2015 the Net Debt to OIBDA ratio was 1.37 (2014: 0.98).

Some loan agreements also have covenants based on Net Debt to OIBDA ratios. The Group believes it has complied with all the capital requirements imposed by external parties.


The Group did not pledge collateral as security for its financial liabilities at 31 December 2015 or 2014, except certain assets purchased under finance leases or on deferred payment terms (Note 3.1 and 3.4).

100% of the shares of Garden Ring (Note 3.3) have been pledged as security for loans received by Garden Ring from Sberbank, which are due to be repaid in 2026.

5.5.   Group information

The consolidated financial statements of the Group include the following significant subsidiaries and joint ventures of PJSC MegaFon:

% equity interest
Legal entity Principal activities Country of incorporation20152014
OJSC MegaFon Retail subsidiary Retail Russia 100 100
LLC NetByNet Holding subsidiary Broadband internet Russia 100 100
LLC Scartel subsidiary Wireless services Russia 100 100
LLC MegaFon Finance subsidiary Financing Russia 100 100
MegaFon Investments (Cyprus) Limited subsidiary Transactions with treasury shares Cyprus 100 100
LLC Euroset-Retail (Note 3.3) joint venture Retail Russia 50 50
CJSC Sadovoe Koltso (Note 3.3) joint venture Corporate office Russia 49.999 —

The Company holds interests in material subsidiaries through a number of intermediary holding companies.

5.6.   Segment information

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker (“CODM”). The CODM is responsible for allocating resources and assessing performance of the operating segments. The Company’s CEO has been designated as the CODM.

The Group manages its business primarily based on eight geographical operating segments within Russia, which provide a broad range of voice, data and other telecommunication services, including wireless and wireline services, interconnection services, data transmission services and VAS. The CODM evaluates the performance of the Group’s operating segments based on revenue and OIBDA. Total assets and liabilities are not allocated to operating segments and not analysed by the CODM.

Operating segments with similar economic characteristics, such as forecasted OIBDA, have been aggregated into an integrated telecommunication services segment, which is the only reportable segment. Around 1.6% of the Group’s revenues and results are generated by segments outside of Russia. No single customer represents 10% or more of the consolidated revenues.

Reconciliation of consolidated OIBDA to consolidated profit before tax for the years ended 31 December:

  2015 2014
OIBDA  132,357  138,520
Depreciation  (48,173)  (47,431)
Amortisation  (7,313)  (7,827)
Loss on disposal of non-current assets  (913)  (1,437)
Finance costs  (14,779)  (13,792)
Finance income  2,508  1,155
Share of loss of associates and joint ventures  (649)  (516)
Other non-operating loss  (2,949)  (1,370)
Gain/(loss) on financial instruments, net  1,502  (50)
Foreign exchange loss, net  (10,041)  (16,884)
Profit before tax  51,550  50,368

5.7.   Commitments, contingencies and uncertainties

Russian operating environment

Russia continues economic reforms and development of its legal, tax and regulatory frameworks as required by a market economy. The future stability of the Russian economy is largely dependent upon these reforms and developments and the effectiveness of economic, financial and monetary measures undertaken by the government.

During 2014 and 2015, the Russian economy was negatively impacted by a significant drop in crude oil prices and a devaluation of the Russian Ruble, as well as sanctions imposed on Russia by several countries. The Ruble interest rates have fluctuated significantly and as of 31 December 2015 the key rate of the Central Bank of Russia was at 11%.

The combination of the above resulted in reduced access to capital, a higher cost of capital, increased inflation and uncertainty regarding economic growth, which could negatively affect the Group’s future financial position, results of operations and business prospects. Management believes it is taking appropriate measures to support the sustainability of the Group’s business in the current circumstances.

4G/LTE licence capital commitments

In July 2012, the Federal Service for Supervision in Communications, Information Technologies and Mass Media granted MegaFon a licence and allocated frequencies to provide services under the 4G/LTE standard in Russia.

Under the terms and conditions of this licence, the Company is obligated to provide 4G/LTE services in each population center with over 50,000 inhabitants in Russia by 2019. The Company is also obligated to make capital expenditures of at least 15,000 annually toward the 4G/LTE roll-out until the network is fully deployed, to clear frequencies allocated to the military at its own cost and to compensate other operators for surrendering frequencies in an aggregate amount of 401. As of the date these consolidated financial statements were authorised for issue the Group was fully compliant with these capital expenditure commitments.

Equipment purchases agreements

In 2014 the Group entered into two separate 7-year agreements with two suppliers to purchase equipment and software for 2G/3G/4G network construction and modernisation. The software usage agreements contain various termination options, however the Group is specifically committed under the agreements to pay at least 3 years’ worth of fees plus an amount equal to 50-60% of the fees for years four through seven of the agreements for each base station in use as at the date of termination while receiving a credit against these commitments for fees already paid. The amount of the commitments at 31 December 2015 is 14,406 (31 December 2014: 9,206).

Social infrastructure expenses

From time to time, the Group may determine to maintain certain social infrastructure assets which are not owned by the Group and not recorded in the consolidated financial statements as well as to incur education, science and other social costs. Such activities may be conducted in collaboration with non-governmental organisations. These expenses are presented in other non-operating loss in the consolidated statement of comprehensive income.


Russian tax, currency and customs legislation, including transfer pricing legislation, are subject to varying interpretations and changes, which can occur frequently. Management’s interpretation of such legislation as applied to transactions and activities of the Group may be challenged by the relevant regional and federal authorities. Recent events within Russia suggest that the tax authorities are taking a more assertive position in their interpretation and enforcement of the

legislation and as a result, it is possible that transactions and activities that have not been challenged in the past may now be challenged. Therefore, significant additional taxes, penalties and interest may be assessed. Fiscal periods remain open to review by the authorities in respect of taxes for the three calendar years preceding the current year. Under certain circumstances reviews may cover longer periods.

In 2014 a law “On controlled foreign companies” (the “CFC law”) was enacted aimed at fiscal stimulation by decreasing the number of the entities involved in the Russian economy but registered abroad, and took effect on 1 January 2015. Under the CFC law retained profits of foreign companies and non-corporate structures controlled by Russian tax residents (companies and individuals) may be subject to Russian taxation. Russian taxpayers (controlling parties) must inform the tax authorities of the foreign companies controlled by them, while the tax authorities may impose additional tax liabilities on taxpayers failing to include retained profit of the foreign controlled companies in their taxable base, where necessary.

The Group’s management believes that its interpretation of the relevant legislation is appropriate and is in accordance with the current industry practice, and that the Group’s tax, currency and customs positions will be sustained. However, the interpretations of the relevant authorities could differ. 

As of 31 December 2015 the Group’s management estimated the possible effect of additional taxes, before fines and interest, if any, on these consolidated financial statements, if the authorities were successful in enforcing different interpretations being taken by them, to be in the amount of up to approximately 966.

Finance lease commitments

The Group has finance lease contracts for various items of telecommunications assets. Under these leases the lessor retains title to the leased assetson security for the Group’s obligation thereunder. Future minimum lease payments under finance leases together with the present value of the net minimum lease payments as of 31 December 2015 are as follows:

  Minimum payments Present value of payments
Within one year  387  387
After one year but not more than five years 1,590 1,109
More than five years 6,245 2,008
Total minimum lease payments  8,222  3,504
Less amounts representing finance charges  (4,718) —
Present value of minimum lease payments  3,504  3,504

Operating lease commitments

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to profit or loss on a straight‑line basis over the period of the lease.

The Group normally enters into operating leases with a term not exceeding one year. Accordingly, the Group’s operating lease commitments at 31 December 2015 and 2014 approximate the annual rent expense (Note 2.3).


The Group is not a party to any material litigation, although in the ordinary course of business, some of the Group’s subsidiaries may be party to various legal and tax proceedings, and subject to claims, certain of which relate to the developing markets and evolving fiscal and regulatory environments in which they operate. In the opinion of management, the Group’s and its subsidiaries’ liabilities, if any, in all pending litigation, other legal proceedings or other matters, will not have a material effect on the financial condition, financial performance or liquidity of the Group.

5.8.   Events after the reporting date

On 8 February 2016 the Group granted Strafor Commercial Ltd a loan in the amount of $43.8 million (3,192 at the exchange rate as of 31 December 2015). The loan is repayable on 28 February 2018 together with interest at 7% per annum.

On 17 February 2016 the Company successfully bid for 2,570-2,595 MHz band spectrum in 40 regions of the Russian Federation pursuant to a frequency distribution auction conducted by Roskomnadzor. Under the terms and conditions of these spectrum licences, the Company is obligated to compensate other operators for surrendering frequencies in an aggregate amount of 378. The total consideration for the spectrum including the compensation due to the other operators is 2,199.