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Public Joint Stock Company
“National Joint Stock Company
“NAFTOGAZ OF UKRAINE”
Separate Financial Statements
as at and for the Year Ended
31 December 2017
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
TABLE OF CONTENTS
Page
INDEPENDENT AUDITOR’S REPORT 1-4
SEPARATE FINANCIAL STATEMENTS
Balance sheet (statement of financial position) 5-6
Statement of profit or loss (statement of comprehensive income) 7-8
Statement of cash flows 9-10
Statement of changes in equity 11-12
Notes to the separate financial statements
1. THE ORGANISATION AND ITS OPERATIONS ..................................................................... 13 2. OPERATING ENVIRONMENT .................................................................................................. 16 3. RESTATEMENT OF COMPARATIVE INFORMATION ......................................................... 22 4. SEGMENT INFORMATION ....................................................................................................... 22 5. BALANCES AND TRANSACTIONS WITH RELATED PARTIES ......................................... 27 6. NON-CURRENT FINANCIAL INVESTMENTS ....................................................................... 30 7. NON-CURRENT ACCOUNTS RECEIVABLE AND OTHER NON-CURRENT ASSETS ..... 31 8. INVENTORIES ............................................................................................................................ 32 9. TRADE ACCOUNTS RECEIVABLE ......................................................................................... 32 10. ACCOUNTS RECEIVABLE ON PREPAYMENTS MADE, SETTLEMENTS WITH THE
STATE BUDGET, OTHER CURRENT ACCOUNTS RECEIVABLE AND OTHER
CURRENT ASSETS ..................................................................................................................... 34 11. CURRENT FINANCIAL INVESTMENTS AND CASH AND CASH EQUIVALENTS .......... 35 12. SHARE CAPITAL ........................................................................................................................ 35 13. BORROWINGS ............................................................................................................................ 36 14. NON-CURRENT AND CURRENT PROVISIONS .................................................................... 38 15. ADVANCES RECEIVED AND OTHER CURRENT LIABILITIES ......................................... 39 16. COST OF SALES ......................................................................................................................... 40 17. OTHER OPERATING INCOME ................................................................................................. 40 18. ADMINISTRATIVE EXPENSES ................................................................................................ 40 19. OTHER OPERATING EXPENSES ............................................................................................. 41 20. OTHER EXPENSES ..................................................................................................................... 41 21. FINANCE COSTS ........................................................................................................................ 41 22. INCOME TAX .............................................................................................................................. 41 23. CONTINGENCIES AND CONTRACTUAL COMMITMENTS AND OPERATING RISKS .. 43 24. FINANCIAL RISK MANAGEMENT ......................................................................................... 48 25. FAIR VALUE ............................................................................................................................... 52 26. SUBSEQUENT EVENTS ............................................................................................................ 54 27. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES .................................................... 55 28. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS ................................................ 66 29. ADOPTION OF NEW OR REVISED STANDARDS AND INTERPRETATIONS .................. 67
INDEPENDENT AUDITOR’S REPORT
To the shareholder of Public Joint Stock Company “National Joint Stock Company “Naftogaz of
Ukraine”:
Qualified Opinion
We have audited the separate financial statements of Public Joint Stock Company “National Joint Stock
Company “Naftogaz of Ukraine” (the “Company”), which comprise the separate balance sheet
(statement of financial position) as at 31 December 2017, and the separate statement of financial results
(statement of comprehensive income), the separate statement of changes in equity and the separate
statement of cash flows for the year then ended, and notes to the separate financial statements, including
a summary of significant accounting policies (the “separate financial statements”).
In our opinion, except for the possible effects of the matters described in the paragraphs 1 and 3 of the
Basis for Qualified Opinion section of our report, and except for the effect of the matter described in the
paragraph 2 of the Basis for Qualified Opinion section of our report, the accompanying separate
financial statements present fairly, in all material respects, the financial position of the Company as at
31 December 2017, and its financial performance and its cash flows for the year then ended in
accordance with International Financial Reporting Standards (“IFRSs”).
Basis for Qualified Opinion
1) Investments in subsidiaries and associates
As discussed in Note 27 to the separate financial statements, the Company’s investments are accounted
for using the equity method. We were unable to:
a) obtain sufficient and appropriate audit evidence regarding:
the Company’s share in the after tax financial results and other comprehensive income of the
PJSC “Ukrtatnafta” for the year ended 31 December 2017, since independent audit of the financial
statements under International Financial Reporting Standards of PJSC “Ukrtatnafta” as at
31 December 2017 and for the year then ended were not completed by the date of our audit opinion;
the Company’s share in the after tax financial results of the joint ventures of
PJSC “Ukrgasvydobyvannia” in the amounts of UAH 93 036 thousand of loss and UAH 51 994
thousand of profit for the years then ended 31 December 2017 and 2016, respectively, since we were
unable to obtain an access to the audited financial statements and financial information of joint
ventures, prepared in accordance with International Financial Reporting Standards;
recognition and measurement of prepayments made and trade accounts receivable of the subsidiary
PJSC “Ukrnafta” in the amount of UAH 2 969 887 thousand and UAH 2 552 094 thousand as at
31 December 2017 and 2016, respectively, and the after tax financial results of the joint operations
of PJSC “Ukrnafta” for the year ended 31 December 2016 and, as a result, the effect of these matters
on the Company’s share in the after tax financial result of PJSC “Ukrnafta”, including share in profit
in the amount of UAH 222 180 thousand and share in other comprehensive loss of UAH 17 936
thousand for the year ended 31 December 2017 and share in losses in the amount of UAH 4 341 118
thousand and share in other comprehensive income in the amount of UAH 944 795 thousand for the
year ended 31 December 2016.
2
b) determine the effect of the departure from the uniform accounting policy of the Company to use the
revaluation model for measurement of property, plant and equipment by PJSC “Ukrtatnafta” and the
joint operations of PJSC “Ukrgasvydobyvannya”, as required by IAS 28 “Investments in Associates and
Joint Ventures” as at 31 December 2017 and 2016 and for the years then ended.
As a result, we were unable to determine whether any adjustments were necessary to the carrying amounts
of investments in subsidiaries and associates and accumulated deficit as at 31 December 2017 and 2016
and the after income tax financial results and other comprehensive income of subsidiaries and associates
for the years ended 31 December 2017 and 2016.
2) Natural gas classification
As at 31 December 2017, the Company accounted for as inventories the natural gas stored in
underground gas storage facilities which, during the recent years, never decreased to the level of less
than about 4.7 billion cubic meters. As at 31 December 2016, the Company intended to sell those
volumes of gas to its subsidiary during 2017. The respective decision of shareholders taken in January
2017 provided for the acquisition by the Company’s subsidiary of a respective volume of natural gas,
with the inclusion of this transaction in the annual procurement plan and the financial plan. After the
Cabinet of Ministers of Ukraine did not approve the financial plan of the subsidiary in 2017 with the
said purchase, the Company was not able to sell this gas. As at 31 December 2017 the Company had no
intention to sell those volumes of natural gas during 2018. Considering the above, we believe that the
natural gas with the carrying amount of UAH 27 948 741 thousand as at 31 December 2017 should be
carried as non-current assets of the Company and, as at 31 December 2017, inventories should be
decreased and other non-current assets increased by UAH 27 948 741 thousand.
3) Matters related to prior periods that affect comparability of the current year and the
corresponding figures - investments in subsidiaries and associates
We were unable to obtain sufficient and appropriate audit evidence regarding certain purchases of capital
investments, inventories, and services made by the Company’s subsidiary, PJSC “Ukrtransgaz” during
2016 and, as a result, the effect of this matter on the Company’s share in the financial performance, after
tax, of PJSC “Ukrtransgaz” in the amount of UAH 6 136 270 thousand. Our audit opinion on the separate
financial statements for the year ended 31 December 2016 was modified accordingly. Our opinion on
the current period’s financial statements is also modified because of the possible effect of this matter on
the comparability of the current period’s figures and the corresponding figures.
We conducted our audit in accordance with International Standards on Auditing (“ISAs”). Our
responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit
of the Separate Financial Statements section of our report. We are independent of the Company in
accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for
Professional Accountants (the “IESBA Code”) together with the ethical requirements that are relevant
to our audit of the financial statements in Ukraine, and we have fulfilled our other ethical responsibilities
in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have
obtained is sufficient and appropriate to provide a basis for our qualified opinion.
Emphasis of Matters
Operating environment
We draw your attention to Note 2 to the separate financial statements, which describes that the impact
of the continuing economic crisis and political turmoil in Ukraine and their final resolution are
unpredictable and may adversely affect the Ukrainian economy and the operations of the Company. Our
opinion is not modified in respect of this matter.
3
Disputes with JSC “Gazprom”
We also draw your attention to Note 23 to the separate financial statements, which describes decisions
of the Arbitration Institute of the Stockholm Chamber of Commerce with regard to the claims between
the Company and JSC “Gazprom” and material uncertainty regarding final resolution of contentious
issues between the Company and JSC “Gazprom”. Our opinion is not modified in respect of this matter.
Responsibilities of Management and Those Charged with Governance for the Separate Financial
Statements
Management is responsible for the preparation and fair presentation of the separate financial statements
in accordance with IFRSs, and for such internal control as management determines is necessary to enable
the preparation of separate financial statements that are free from material misstatement, whether due to
fraud or error.
In preparing the separate financial statements, management is responsible for assessing the Company’s
ability to continue as a going concern, disclosing, as applicable, matters related to going concern and
using the going concern basis of accounting unless management either intends to liquidate the Company
or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company’s financial reporting
process.
Auditor’s Responsibilities for the Audit of the Separate Financial Statements
Our objectives are to obtain reasonable assurance about whether the separate financial statements as
a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s
report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee
that an audit conducted in accordance with ISAs will always detect a material misstatement when it
exists. Misstatements can arise from fraud or error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the economic decisions of users taken on the
basis of these separate financial statements.
As part of an audit in accordance with ISAs, we exercise professional judgment and maintain
professional scepticism throughout the audit. We also:
Identify and assess the risks of material misstatement of the separate financial statements, whether
due to fraud or error, design and perform audit procedures responsive to those risks, and obtain
audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not
detecting a material misstatement resulting from fraud is higher than for one resulting from error,
as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override
of internal control;
Obtain an understanding of internal control relevant to the audit in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control;
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting
estimates and related disclosures made by management.
Conclude on the appropriateness of management’s use of the going concern basis of accounting
and, based on the audit evidence obtained, whether a material uncertainty exists related to events
or conditions that may cast significant doubt on the Company’s ability to continue as a going
concern. If we conclude that a material uncertainty exists, we are required to draw attention in our
auditor’s report to the related disclosures in the separate financial statements or, if such disclosures
are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained
up to the date of our auditor’s report. However, future events or conditions may cause the Company
to cease to continue as a going concern;
4
Evaluate the overall presentation, structure, and contents of the separate financial statements,
including the disclosures, and whether the separate financial statements represent the underlying
transactions and events in a manner that achieves fair presentation;
Obtain sufficient appropriate audit evidence regarding the financial information of the entities or
business activities within the Company to express an opinion on the separate financial statements.
We are responsible for the direction, supervision and performance of the group audit. We remain
solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned
scope and timing of the audit and significant audit findings, including any significant deficiencies in
internal control that we identify during our audit.
Original signed:
16 April 2018
Certified Auditor Sergey Kulyk
Auditor’s Certificate # 007492
Issued by the Audit Chamber of Ukraine on 21 December 2017
on the basis of Resolution of the Audit Chamber of Ukraine # 353/2,
valid until 21 December 2022
PJSC “Deloitte & Touche Ukrainian Services Company”
48, 50a Zhylianska Str., Kyiv, 01033, Ukraine
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
BALANCE SHEET (STATEMENT OF FINANCIAL POSITION) AS AT 31 DECEMBER 2017
The accompanying notes form an integral part of these separate financial statements.
5
CODES Date (year, month, day) 2017 12 31
Entity National Joint Stock Company “Naftogaz of Ukraine” and its branches EDRPOU 20077720
Location Ukraine KOATUU 8039100000
Legal form of organisation: Public Joint Stock Company KOPFG 230
Type of economic activities Holding company KVED 70.10
Average number of employees 709
Address, phone 6 Bogdana Khmelnytskoho Str, Kyiv
Measuring unit: UAH thousands without decimals
Prepared under (mark “v” in the respective box): Ukrainian Accounting Standards
International Financial Reporting Standards V
Balance Sheet (Statement of Financial Position)
as at 31 December 2017
Form №1
Код за ДКУД 1801001
ASSETS Line code 31 December
2017
31 December
2016 Notes
1 2 3 4 5
I. Non-current Assets
Intangible assets: 1000 122 125 143 080
cost 1001 258 570 250 499
accumulated amortisation and impairment 1002 (136 445) (107 419)
Construction in progress 1005 543 276 842 895
Property, plant and equipment: 1010 589 099 502 842
cost 1011 780 164 596 638
accumulated depreciation and impairment 1012 (191 065) (93 796)
Investment property 1015 - -
Long-term biological assets 1020 - -
Long-term financial investments:
accounted under equity method 1030 413 980 172 447 973 804 6
other financial investment 1035 103 257 103 257 6
Long-term accounts receivable 1040 5 017 854 4 780 607 7
Deferred tax assets 1045 725 546 2 630 000 22
Other non-current assets 1090 1 477 497 3 051 742 7
including income tax prepaid 1090 (а) - 1 317 274
Total Section I 1095 422 558 826 460 028 227
IІ. Current Assets
Inventories 1100 74 353 275 59 450 068 8
Current biological assets 1110 - -
Trade accounts receivable 1125 57 474 372 54 719 178 9
Accounts receivable:
prepayments made 1130 811 703 5 997 601 10
due from budget 1135 22 132 34 356 10
including income tax prepaid 1136 - -
Other current accounts receivable 1155 1 241 886 1 100 019 10
Current financial investments 1160 - 679 771 11
Cash and cash equivalents 1165 18 485 661 17 660 966 11
Prepaid expense 1170 389 628 1 134
Other current assets 1190 63 609 159 121 143 10
including amount due under the Gas Transit Arbitration 1190 (а) 57 125 342 -
10,
23
Total Section IІ 1195 216 387 816 139 764 236
ІІІ. Non-current assets classified as held for sale and disposal
groups 1200 - -
Total Assets 1300 638 946 642 599 792 463
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
BALANCE SHEET (STATEMENT OF FINANCIAL POSITION) AS AT 31 DECEMBER 2017
(CONTINUED)
The accompanying notes form an integral part of these separate financial statements.
6
EQUITY AND LIABILITIES Line code 31 December
2017
31 December
2016 Notes
1 2 3 4 5
I. Equity
Share capital 1400 190 150 481 190 150 481 12
including: contributions to unregistered statutory capital 1401 - 29 700 000 12
Revaluation reserve 1405 296 420 839 322 676 150
Additional paid-in capital 1410 2 660 010 2 690 237
Legal reserve 1415 2 750 674 1 424 224
Retained earnings (accumulated deficit) 1420 (60 478 029) (69 103 045)
Unpaid capital 1425 - -
Withdrawn capital 1430 - -
Total Section I 1495 431 503 975 447 838 047
II. Non-current Liabilities and Provisions
Deferred tax liabilities 1500 - -
Non-current bank borrowings 1510 14 117 317 22 971 585 13
Other non-current liabilities 1515 - -
Non-current provisions 1520 135 283 7 345 424 14
Purpose financing 1525 - -
Total Section II 1595 14 252 600 30 317 009
III. Current Liabilities and Provisions
Current bank borrowings 1600 25 484 601 25 512 030 13
Accounts payable:
current portion of long-term liabilities 1610 17 101 897 19 388 256 13
trade accounts payable 1615 47 694 343 53 432 850
due to budget 1620 8 794 699 3 666 216
including income tax payable 1621 6 798 494 -
social charges payable 1625 356 1 556
salary payable 1630 3 780 15 562
Advances received 1635 1 443 500 1 033 136 15
Current provisions 1660 31 622 849 14 022 759 14
Deferred income 1665 217 835 17 368
Other current liabilities 1690 60 826 207 4 547 674 15
including amount due under the Gas Sales Arbitration 1690 (а) 57 125 342 -
15,
23
Total Section ІІІ 1695 193 190 067 121 637 407
ІV. Liabilities related to non-current assets held for sale and
disposal groups 1700 - -
Total Equity and Liabilities 1900 638 946 642 599 792 463
Original signed by:
Director Konovets S.O.
Acting Chief Accountant Guchek A.V.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
STATEMENT OF PROFIT OR LOSS (STATEMENT OF COMPREHENSIVE INCOME) FOR THE
YEAR ENDED 31 DECEMBER 2017
The accompanying notes form an integral part of these separate financial statements.
7
CODES
Date (year, month, day) 2017 12 31
Entity National Joint Stock Company “Naftogaz of Ukraine” and its branches EDRPOU 20077720
Location Ukraine KOATUU 8039100000
Legal form of organisation: Public Joint Stock Company KOPFG 230
Type of economic activities Holding company KVED 70.10
Average number of employees 709
Address, phone 6 Bogdana Khmelnytskoho Str, Kyiv
Measuring unit: UAH thousands without decimals (except Section ІV of the Statement of
Profit or Loss (Statement of Comprehensive Income) (Form # 2), stated in UAH with
kopecks) Prepared under (mark “v” in the respective box): Ukrainian Accounting Standards
International Financial Reporting Standards V
Statement of Profit or Loss (Statement of Comprehensive Income)
for the Year Ended 31 December 2017
Form # 2 DKUD Code 1801003
I. PROFIT OR LOSS STATEMENT
Item Line code 2017 2016 Notes 1 2 3 4 5
Revenue 2000 187 927 433 161 382 827 4
Cost of sales 2050 (146 639 564) (116 277 398) 16
Gross:
-- profit 2090 41 287 869 45 105 429
-- loss 2095 - -
Other operating income 2120 63 323 549 1 200 157 17
including income recognised under the Gas Transit
Arbitration 2120 (а) 57 125 342 - 23
General administrative expense 2130 (1 561 211) (1 400 788) 18
Selling and distribution expense 2150 - -
Other operating expense 2180 (46 532 479) (11 273 460) 19
including expense recognised under the Gas Sales
Arbitration 2180 (а) (44 528 046) - 23
Operating:
-- profit 2190 56 517 728 33 631 338
-- loss 2195 - -
Income on equity investments 2200 2 467 164 2 388 878
Other finance income 2220 1 089 072 1 005 647
Other income 2240 5 968 4 106
Finance costs 2250 (7 364 134) (8 181 637) 21
Loss on equity investments 2255 - -
Other expense 2270 (1 429 352) (4 949 343) 20
Profit or loss before income tax:
-- profit 2290 51 286 446 23 898 989
-- loss 2295 - -
Income tax (expense) benefit 2300 (11 956 294) 2 630 000 22
Profit (loss) on discontinued operations after tax 2305 - -
Net profit or loss:
-- profit 2350 39 330 152 26 528 989
-- loss 2355 - -
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
STATEMENT OF PROFIT OR LOSS (STATEMENT OF COMPREHENSIVE INCOME) FOR THE
YEAR ENDED 31 DECEMBER 2017 (CONTINUED)
The accompanying notes form an integral part of these separate financial statements.
8
II. COMPREHENSIVE INCOME
Item Line code 2017 2016 Notes 1 2 3 4 5
Revaluation of the property, plant and equipment* 2400 (45 078) -
Revaluation of the financial investments* 2405 - -
Currency translation reserve** 2410 301 972 1 054 050
Share of movements in comprehensive income of subsidiaries,
associates and joint ventures* 2415 (26 347 369) 5 487 833
Other comprehensive income* 2445 (92 848) 17 374
Other comprehensive income before income tax 2450 (26 183 323) 6 559 257
Income tax related to items of other comprehensive income 2455 16 713 - 22
Other comprehensive income, after income tax 2460 (26 166 610) 6 559 257
Total comprehensive income (sum of lines 2350, 2355 and
2460) 2465 13 163 542 33 088 246
ІII. OPERATING EXPENSE BY ELEMENTS
Item Line code 2017 2016 Notes 1 2 3 4 5
Materials 2500 108 752 499 82 181 190
Staff costs 2505 724 469 622 135
Social charges 2510 67 483 65 600
Depreciation and amortisation 2515 67 806 93 307
Other operating expense 2520 85 120 997 45 989 414
Total 2550 194 733 254 128 951 646
IV. EARNINGS PER SHARE
Item Line code 2017 2016 Notes 1 2 3 4 5
Average annual number of ordinary shares 2600 190 150 481 190 150 481
Diluted average number of ordinary shares 2605 190 150 481 190 150 481
Net profit (loss) per 1 ordinary share 2610 206,84 139,52
Net profit (loss) per 1 ordinary share (diluted) 2615 206,84 139,52
Dividends per ordinary share 2650 155,13 69,76
* items that cannot be reclassified subsequently to profit or loss
** items that can be reclassified subsequently to profit or loss
Original signed by:
Director Konovets S.O.
Acting Chief Accountant Guchek A.V.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2017
The accompanying notes form an integral part of these separate financial statements.
9
CODES
Date (year, month, day) 2017 12 31
Entity National Joint Stock Company “Naftogaz of Ukraine” and its branches EDRPOU 20077720
Location Ukraine KOATUU 8039100000
Legal form of organisation: Public Joint Stock Company KOPFG 230
Type of economic activities Holding company KVED 70.10
Average number of employees 709
Address, phone 6 Bogdana Khmelnytskoho Str, Kyiv
Measuring unit: UAH thousands without decimals Prepared under (mark “v” in the respective box): Ukrainian Accounting Standards
International Financial Reporting Standards V
Statement of Cash Flows (indirect)
for the Year Ended 31 December 2017
Form # 3 DKUD Code 1801006
Item Code 2017
2016
(as restated, Note 3)
inflows outflows inflows outflows 1 2 3 4 5 6
І. Cash flows from operating activities
Profit before income tax 3500 51 286 446 - 23 898 989 -
Adjustments for:
depreciation and amortisation 3505 67 806 X 93 307 X
(decrease) increase in provisions 3510 - (5 929 470) 5 348 017 -
unrealised foreign exchange loss 3515 1 179 484 - 4 909 630 -
(gain) loss on non-operating activities and
other non-cash transactions 3520 - (11 331 248) 1 089 360 -
loss (gain) on equity investment 3521 - (2 467 164) - (2 388 878)
Finance costs 3540 6 275 062 - 7 175 990 -
Increase in current assets 3550 - (10 724 561) - (26 467 349)
Increase in current liabilities 3560 19 560 421 - 22 356 826 -
Cash flows from operating activities 3570 47 916 776 - 36 015 892 -
Income tax paid as advance on dividend
payment (Note 22) 3580 X (2 387 609) X -
Net cash flow from operating activities 3195 45 529 167 - 36 015 892 -
ІІ. Cash flows from investing activities
Proceeds from sale of:
financial investments 3200 13 033 X 110 581 X
non-current assets 3205 - X - X
Proceeds from:
interest received 3215 977 440 X 823 131 X
dividends received 3220 10 226 087 X 124 088 X
Proceeds from derivatives 3225 - X - X
Other inflows 3250 - X - X
Outflows from:
financial investments 3255 X (429 496) X (222 006)
non-current assets 3260 X (32 108) X (252 257)
Outflows from derivatives 3270 X - X -
Other outflows 3290 X - X -
Net cash flow from investing activities 3295 10 754 956 - 583 537 -
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2017 (CONTINUED)
The accompanying notes form an integral part of these separate financial statements.
10
Item Code 2017
2016
(as restated, Note 3)
inflows outflows inflows outflows 1 2 3 4 5 6
ІІІ. Cash flows from financing activities
Proceeds from:
issue of shares 3300 - X - X
loans and borrowings received 3305 12 181 430 X 4 290 454 X
Other inflows 3340 - X - X
Outflows from:
redemption of own shares 3345 X - X -
loans and borrowings repaid 3350 X (47 553 315) X (23 216 196)
dividends paid 3355 X (13 264 495) X -
interest paid 3360 X (7 233 853) X (8 150 616)
Other outflows 3390 X (596 526) X (13 406)
Net cash flow from financing activities 3395 - (56 466 759) - (27 089 764)
Net increase in cash and cash equivalents 3400 - (182 636) 9 509 665 -
Cash and cash equivalents at the beginning of
the reporting period 3405 17 660 966 X 7 145 542 X
Effects of exchange rates changes on cash and
cash equivalents 3410 1 007 331 - 1 005 759 -
Cash and cash equivalents at the end of the
reporting period 3415 18 485 661 X 17 660 966 X
Original signed by:
Director Konovets S.O.
Acting Chief Accountant Guchek A.V.
Significant Non-Cash Transactions
In thousands of Ukrainian hryvnias Note 2017 2016
Payment for the natural gas acquired by a lending bank
to suppliers 13 21 850 305 13 636 276
Payment by subsidiaries of their portions of profit to the
state budget 12 - 1 021 364
Payment of dividends by mutual settlement - 264 078
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY “NAFTOGAZ OF UKRAINE”
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2017
The accompanying notes form an integral part of these separate financial statements.
11
CODES
Date (year, month, day) 2017 12 31
Entity National Joint Stock Company “Naftogaz of Ukraine” and its branches EDRPOU 20077720
Location Ukraine KOATUU 8039100000
Measuring unit: UAH thousands without decimals Prepared under (mark “v” in the respective box): Ukrainian Accounting Standards
International Financial Reporting Standards V
Statement of Changes in Equity
for the Year Ended 31 December 2017
Form # 4 DKUD Code 1801005
Item Line
code Share capital
Revaluation
reserve
Additional
paid-in
capital
Legal
reserve
Retained
earnings
(accumulated
deficit)
Unpaid
capital
Withdrawn
capital Total
1 2 3 4 5 6 7 8 9 10
Balance at 31 December 2016 4000 190 150 481 322 676 150 2 690 237 1 424 224 (69 103 045) - - 447 838 047
Net profit for the reporting period 4100 - - - - 39 330 152 - - 39 330 152
Other comprehensive income for the
reporting period 4110 - (26 254 973) 325 - 88 038 - - (26 166 610)
Profit distribution: Payments to owners (dividends) 4200 - - - - - - - -
Charge to the Legal reserve(Note 12) 4210 - - - 1 326 450 (1 326 450) - - -
Portion of net profit attributable to the State
Budget of Ukraine (Notes 12 and 14) 4215 - - - - (29 497 614) - - (29 497 614)
Contributions by the equity holders: Contributions to the share capital 4240 - - - - - - - -
Contributions to the share capital receivable
repaid 4245 - - - - - - - -
Capital withdrawals: Redemption of shares 4260 - - - - - - - -
Resale of treasury shares 4265 - - - - - - - -
Treasury shares cancelled 4270 - - - - - - - -
Capital withdrawn 4275 - - - - - - - -
Other changes in equity 4290 - (338) (30 552) - 30 890 - - -
Total changes in equity 4295 - (26 255 311) (30 227) 1 326 450 8 625 016 - - (16 334 072)
Balance at 31 December 2017 4300 190 150 481 296 420 839 2 660 010 2 750 674 (60 478 029) - - 431 503 975
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY “NAFTOGAZ OF UKRAINE”
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2017 (CONTINUED)
The accompanying notes form an integral part of these separate financial statements.
12
Statement of Changes in Equity
for the Year Ended 31 December 2016
Form # 4 DKUD Code 1801005
Item Line
code Share capital
Revaluation
reserve
Additional
paid-in
capital
Legal
reserve
Retained
earnings
(accumulated
deficit)
Unpaid
capital
Withdrawn
capital Total
1 2 3 4 5 6 7 8 9 10
Balance at 31 December 2015 4095 190 150 481 317 158 850 6 063 926 1 424 224 (85 761 705) - - 429 035 776
Net profit for the reporting period 4100 - - - - 26 528 989 - - 26 528 989
Other comprehensive income for the
reporting period 4110
- 5 517 306 (3 373 573) - 4 415 524 - - 6 559 257
Profit distribution: Payments to owners (dividends) (Note 12) 4200 - - - - (1 021 364) - - (1 021 364)
Portion of net profit attributable to the State
Budget of Ukraine (Notes 12 and 14) 4215 - - - - (13 264 495) - - (13 264 495)
Contributions by the equity holders: Contributions to the share capital 4240 - - - - - - - -
Capital withdrawals: Redemption of shares 4260 - - - - - - - -
Other changes in equity 4290 - (6) (116) - 6 - - (116)
Total changes in equity 4295 - 5 517 300 (3 373 689) - 16 658 660 - - 18 802 271
Balance at 31 December 2016 4300 190 150 481 322 676 150 2 690 237 1 424 224 (69 103 045) - - 447 838 047
Original signed by:
Director Konovets S.O.
Acting Chief Accountant Guchek A.V.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
13
1. THE ORGANISATION AND ITS OPERATIONS
Public Joint Stock Company “National Joint Stock Company “Naftogaz of Ukraine” (“Naftogaz of
Ukraine” or the “Company”) was founded in 1998 in accordance with the Resolution of the Cabinet of
Ministers of Ukraine №747 dated 25 May 1998.
Naftogaz of Ukraine is beneficially owned by the State of Ukraine. The Government of Ukraine, as
represented by the Cabinet of Ministers of Ukraine, controls the Company through participation in the
shareholders’ meetings and decisions making on behalf of the State of Ukraine as a single shareholder,
as well as through the appointment of the Chairman of the Executive Board and the Executive Board
members.
As at 31 December 2017 and at the date when these separate financial statements were authorised for
issue the Executive Board was as follows:
Position Name Commission of appointment
Head of the Executive
Board
Kobolyev Andriy
Volodymyrovych
Resolution of the Cabinet of Ministers of
Ukraine dated 25.03.14 №262-р;
Order dated 26.03.14 №48-К;
The 1st Deputy Head of
the Executive Board
Pereloma Sergiy
Vitaliyovych
Resolution of the Cabinet of Ministers of
Ukraine dated 08.08.14 №713-р;
Order dated 12.08.14 №195-К
Deputy Head of the
Executive Board
Konovets Sergiy
Oleksandrovych
Resolution of the Cabinet of Ministers of
Ukraine dated 30.04.14 №439-р;
Order dated 05.05.14 №82-К
Executive Board member Kolbushkin Yuriy
Petrovych
Resolution of the Cabinet of Ministers of
Ukraine dated 25.02.99 №268
Order dated 25.02.99 №60-К
Executive Board member
Chairman of Executive
Board at “Ukrgas-
vydobyvannia” PJSC
Prokhorenko Oleg
Vasiliyovych
Resolution of the Cabinet of Ministers of
Ukraine dated 24.05.17 №355-p
Executive Board member
Chief executive officer at
“Ukrtransnafta” PJSC
Havrylenko Mykola
Mykolayovych
Resolution of the Cabinet of Ministers of
Ukraine dated 24.05.17 №355-p
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
14
1. THE ORGANISATION AND ITS OPERATIONS (Continued)
As at 31 December 2017 and at the date when these separate financial statements were authorised for
issue the Supervisory Board was as follows:
Title
Name, the State
representative /independent
non-executive director Commission of appointment
Chairperson of the
Supervisory Board
Spottiswoode Clare Mary Joan,
independent non-executive
director
Resolution of the Cabinet of Ministers
of Ukraine dated 13.12.17 #892-p
Minutes of the Supervisory Board
Deputy chairperson of
the Supervisory
Board
Demchyshyn Volodymyr
Vasylyovych,
the State representative
Order of the Ministry of Economic
Development and Trade of Ukraine
dated 21.04.2016 №725
Supervisory Board
members
Lescoeur Bruno, Jean, Gaston,
independent non-executive
director
Resolution of the Cabinet of Ministers
of Ukraine dated 13.12.17 #892-p
Hochstein Amos,
independent non-executive
director
Resolution of the Cabinet of Ministers
of Ukraine dated 13.12.17 #892-p
Haysom Steven John,
independent non-executive
director
Resolution of the Cabinet of Ministers
of Ukraine dated 13.12.17 #892-p
Popyk Serhij Dmytrovych,
the State representative
Resolution of the Cabinet of Ministers
of Ukraine dated 13.12.17 #892-p
Kudrytskyi Volodymyr
Dmytrovych,
the State representative
Resolution of the Cabinet of Ministers
of Ukraine dated 13.12.17 #892-p
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY “NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
15
1. THE ORGANISATION AND ITS OPERATIONS (Continued)
Attendance of the Supervisory board meetings in 2017 (both regular and extraordinary) was as follows:
Name Supervisory Board 1
Audit and Risks
Committee
Ethics and Unbundling
Committee
Nomination
and
Remuneration
Committee
Committee on
health, safety,
environment and
reserves 2
Kovaliv Yulia Ihorivna 8/11 4/5 2/3 2/3 1/1
Warwick Paul Cyril 21/21 9/9 7/7 8/8 2/2
Richards Marcus Trevor 19/21
(with partial presence
during meetings on
13-16 March 2017
and 3-6 April 2017)
7/9
7/7
8/8
2/2
Proctor Charles Richard Faraday 21/21 9/9 7/7 8/8 2/2
Demchyshyn Volodymyr Vasylyovych 21/22 9/9 7/7 7/8 2/2
Spottiswoode Clare Mary Joan 1/1 - - - -
Lescoeur Bruno, Jean, Gaston 1/1 - - - -
Hochstein Amos 1/1 - - - -
Haysom Steven John 1/1 - - - -
Popyk Sergii Dmytrovych 1/1 - - - -
Kudrytskyi Volodymyr Dmytrovych 1/1 - - - -
1 Total number of the Supervisory Board meetings includes one Supervisory board meeting as at 29 September 2017 which was not valid due to absence of quorum as well as one Supervisory
board meeting convened on 29 September 2017 and held via absentee voting. 2 Total number of the Committee on health, safety, environment and reserves meetings excludes the first Supervisory board meeting held on 13-16 February 2017 which resolved to establish the
Committee on occupational health, environmental and industrial safety.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
16
1. THE ORGANISATION AND ITS OPERATIONS (Continued)
Naftogaz of Ukraine and its subsidiaries is a vertically integrated oil and gas company engaged in full
cycle of operations in gas and oil field exploration and development, exploratory drilling and production,
gas and oil transportation and storage, supply of natural gas and liquefied petroleum gas (“LPG”) to
customers.
The Company holds stakes in various entities that form the national system of production, refinery,
supply, distribution, wholesale and retail trade, transportation, and storage of natural gas, gas
condensate, and oil.
The Company conducts its business and holds its production facilities mainly in Ukraine.
The Company is registered at 6 B. Khmelnytskogo Street, Kyiv, Ukraine.
These separate financial statements were authorised for issue by the Executive Board on 6 April 2018.
2. OPERATING ENVIRONMENT
In the recent years, Ukraine has been in a political and economic turmoil. Crimea, an autonomous
republic of Ukraine, was effectively annexed by the Russian Federation. An armed conflict continued
in certain parts of Luhanska and Donetska regions. These events resulted in higher inflation, devaluation
of the national currency against major foreign currencies, decrease of GDP, illiquidity, and volatility of
financial markets.
In 2017, annual inflation rate amounted to 13.7% comparing to 12.4% in 2016. The Ukrainian economy
proceeded recovery from the economic and political crisis of previous years that resulted in real GDP
smooth growth of around 2.5% (2016: 2.4%) and stabilisation of national currency. From trading
perspective, the economy was demonstrating refocusing on the European Union (“EU”) market, which
was a result of the signed Association Agreement with the EU in January 2016 that established the Deep
and Comprehensive Free Trade Area (“DCFTA”). Under this agreement, Ukraine has committed to
harmonise its national trade-related rules, norms, and standards with those of the EU, progressively
reduce import customs duties for the goods originating from the EU member states, and abolish export
customs duties during a 10-year transitional period. Implementation of DCFTA began on
1 January 2017. As a result, the Russian Federation implemented a trade embargo or import duties on
key Ukrainian export products. In response, Ukraine implemented similar measures against Russian
products.
In terms of currency regulations, the National Bank of Ukraine (“NBU”) decreased the required share
of mandatory sale of foreign currency proceeds from 65% to 50% starting from April 2017, increased
settlement period for export-import transactions in foreign currency from 120 to 180 days from May
2017, and allowed companies to pay the 2013 (and earlier) dividends to non-resident entities with a limit
of USD 2 million per month from November 2017 (from June 2016, companies were allowed to pay
dividends for 2014–2016 to non-residents with a limit of USD 5 million per month).
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
17
2. OPERATING ENVIRONMENT (Continued)
In March 2015, Ukraine signed four-year Extended Fund Facility (“EFF”) with the International
Monetary Fund (“IMF”) that will last until March 2019. The total program amounted to
USD 17.5 billion, while Ukraine has so far received only USD 8.7 billion from the entire amount. In
September 2017, Ukraine successfully issued USD 3 billion of Eurobonds, of which USD 1.3 billion is
new financing, with the remaining amount aimed to refinance the bonds due in 2019. The NBU expects
that Ukraine will receive another USD 3.5 billion from the IMF in 2018. To receive next tranches, the
government of Ukraine has to implement certain key reforms, including in such areas as pension system,
anti-corruption regulations, privatisation, as well as switch to market pricing principles in respect of
natural gas.
Further stabilisation of the economic and political situation depends, to a large extent, upon success of
the Ukrainian government’s efforts, yet further economic and political developments are currently
difficult to predict.
The Government and the Company are undertaking significant measures in the open European natural
gas market development that is required by the Memorandum on Economic and Financial Policy agreed
with the IMF, provisions of the Coalition Agreement, the “Ukraine-2020” Sustainable Development
Strategy, the Corporate Governance Action Plan, and the Plan for Implementation of the Gas Sector
Reform. These measures introduce conceptual changes to the legal framework and functioning of the
natural gas market, to certain aspects of operations of the National Joint Stock Company “Naftogaz of
Ukraine” and also will have significant impact on the performance of the National Joint Stock Company
“Naftogaz of Ukraine” and its subsidiaries.
State regulation of gas market in Ukraine
Gas market reform in Ukraine started with adoption of the Law of Ukraine “On Natural Gas Market” №329-
VIII dated 9 April 2015 (“the Law on Gas Market”) that became effective on 1 October 2015. Starting from
this date, the wholesale and retail natural gas markets introduced the principle of free pricing and
freedom of choice regarding sources of the natural gas supplies, except for the cases when the Cabinet
of Ministers of Ukraine imposes specific obligations on the natural gas market participants.
At the same time, the Resolution of the Cabinet of Ministers of Ukraine dated 1 October 2015 №758
imposed public service obligations on the Company during the period from 1 October 2015 to
31 March 2017 in respect of gas purchase of domestic production from “Ukrgasvydobyvannia” PJSC
and gas sales to gas supply companies for the needs of households, religious organisations, and district
heating companies for generating heat for households and religious organisations, and starting from
23 December 2016 – for the needs of budget financed entities and PJSC “Odessa Port Plant”.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
18
2. OPERATING ENVIRONMENT (Continued)
Public service obligations imposed on the Company were prolonged up to 1 April 2018 according to the
Resolution of the Cabinet of Ministers of Ukraine #187 dated 22 March 2017 (“PSO Resolution”). This
Resolution contains, amongst others, a series of differences from the previous one, in particular:
Both “Ukrgasvydobyvannia” PJSC and “Chornomornftogas” PJSC are obliged to sell gas to the
Company for the needs of households, religious organisations and heat generating entities under
heat production and distribution and water supply for households and religious organisations.
The Company is obliged to sell gas to district heating companies for all groups of customers, as
well as for producing electricity by these companies.
Starting from 1 April 2017 the Company will sell gas for the needs of households, religious
organisations and district heating companies at the price of UAH 4 942 for 1 000 cubic meters.
(excluding VAT, transportation and distribution tariffs and trade mark-up). In setting wholesale
price for religious organisations and district heating companies for the needs of religious
organisations a ratio of 0.5 is applied to the price defined above; in setting wholesale price for gas
for district heating companies for all customers, except for the needs of religious organisations and
households, and for electricity production by district heating companies a ratio of 1.6 is applied.
In case gas wholesale price calculated at 100% import parity before 1 July 2017 is more than 10%
higher than currently effective price, selling price should be calculated at 100% import parity for
the period from 1 October 2017 up to 1 April 2018 for gas sales to households, religious
organisations and district heating companies. Concurrently with resolution on Company’s gas sales
price change for specified categories, gas purchase price from “Ukrgasvydobyvannia” PJSC and
“Chornomornftogas” PJSC should be revised.
Nevertheless, despite all preconditions for such price revision after recalculations performed by the
Ministry of Energy and Coal of Ukraine, final decision was not approved.
Other customers outside the PSO Resolution buy imported natural gas under the prices set discretionary
by the gas market participants, including the Company.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
19
2. OPERATING ENVIRONMENT (Continued)
The following tariffs and prices were set:
31 December
2017
31 December
2016
Effective from 1 May 2016 single retail gas price for households
was set at UAH 4.94 per cubic meter, excluding VAT, and tariffs
for gas transmission and distribution. This price represented the
level of import parity and was effective up to 31 March 2017. At the
same time, in case preconditions for the price revision exist, retail
gas price should be recalculated.
Starting from 1 April 2017, retail gas price for households remains at
the same level. At the same time, Resolution of the Cabinet of
Ministers of Ukraine dated 22.03.17 №187 sets maximum level of
mark up on price of 2.5% from the retails price for gas suppliers.
UAH 6.96 per
cubic meter
From 1 May
2016 to
31 March
2017:
UAH 6.88 per
cubic meter
Natural gas prices for district heating companies generating heat
for household needs, excluding VAT and tariffs for gas
transmission and distribution.
UAH 4.94 per
cubic meter
From 1 May
2016 to
31 March
2017:
UAH 4.94 per
cubic meter
Gas selling prices for industrial customers and entities financed
from the State or municipal budgets, excluding VAT and tariffs
for gas transmission and distribution. These selling prices are set
discretionary by the Company depending on monthly consumption
levels and terms of payments.
From
UAH 7 516 to
UAH 8 265
per
1 000 cubic
meters
From
UAH 6 484 to
UAH 7 148 per
1 000 cubic
meters
General tariff for gas storage (storage, injection, and withdrawal),
excluding VAT, UAH per thousand cubic meters for one season of
storage.
UAH 112.0 UAH 112.0
Tariff for entry and exit points of Ukrainian gas transmission
network, excluding VAT, USD per thousand cubic meters USD 12.47 USD 12.47
Households settle their debts on natural gas consumed via special purpose accounts opened in banks
that were authorised by the Cabinet of Ministers of Ukraine for such purpose. According to the current
procedure, gas suppliers with public service obligations open special purpose bank accounts to receive
payments for natural gas consumed. Amounts accumulated on the special purpose bank accounts are
then allocated to current accounts of the transmission system operator according to the Code of Gas
transmission system, distribution system operators and gas supplier with public service obligations
according to ratios calculated by the gas suppliers with specific obligations and approved by the National
Commission for Regulation of Energy and Utilities (“NCREU”). Balances on the special purpose
accounts cannot be arrested or blocked.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
20
2. OPERATING ENVIRONMENT (Continued)
District heating companies also open special purpose banks accounts for the settlement of debts for heat
supplied. Cash received by district heating companies on their special purpose bank accounts is then
allocated, among others, to current bank accounts of the gas supplier with public service obligations
according to ratios approved by the NCREU monthly. The special purpose bank accounts of district
heating companies also cannot be blocked or arrested.
In November 2016 the Law of Ukraine “On measures to settle the debts for the natural gas consumed
by district heating companies and distribution and water supplying companies” №1730 was adopted.
The principles of district heating companies and distribution and water supplying companies payables
for gas settling are set in this Law. Among other, the Law assumes writing off penalties and fines implied
for overdue debts for gas supplied, and restructuring of payables to the Company on gas consumed. The
list of companies entitled for debt settling procedures should be approved by the central body of the
government executive authority responsible for pursuing the State policy in housing and utilities. This
list should be approved as a separate register of companies.
As at 31 December 2017 the Company has signed gas debts restructuring agreements according to this
Law in the amount of UAH 432 169 thousand. Fulfilment of gas debt restructuring agreements is
guaranteed by municipal executive government bodies representing particular territorial community as
set by a separate guarantee agreement. According to the terms of gas debt restructuring agreements, the
Company has a right to terminate them in case of late payments by counterparty. There were no such
agreements terminated up to the date of these separate financial statements.
Compensation for performing the public service obligations
In accordance with Para 7, Article 11 of the Law of Ukraine “On Natural Gas Market”, a gas market
player with public service obligations is eligible for compensation of economically justified
expenditures incurred by such player, less any income obtained in the course of fulfilling such
obligations plus adequate margin. The level of margin should be calculated following the relevant
resolution by the Cabinet of Ministers of Ukraine.
In July 2017, Kyiv county administrative court has supported the Company’s claim against the Cabinet
of Ministers of Ukraine, and has admitted the failure of the latter to identify formula and sources of
financing the compensation for performing public service obligations when approving the PSO
Resolution. The court has obliged the Cabinet of Ministers of Ukraine to make respective amendments
to the PSO Resolution. The court decision became effective in October 2017.
As at the date of these separate financial statements such resolution has not been adopted. Accordingly,
the Company did not receive any compensation as a gas market player with public service obligations
during 2016 and 2017.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
21
2. OPERATING ENVIRONMENT (Continued)
Expected amount of compensation for performing special obligations for the whole period of PSO and
up to 31 December 2017 approximates to UAH 36.2 billion (unaudited), per the Company’s calculations.
This amount does not contain compensation attributable to other gas market players with public service
obligations, inter alia “Ukrgasvydobyvannia” PJSC and “Chornomornftogas” PJSC.
Gas transmission and storage unbundling process
As at 31 December 2016 and 2017 the Company executes control over transmission system operator
“Ukrtransgas” PJSC.
On 9 November 2016 the Cabinet of Ministers of Ukraine has approved incorporation of „Mahistralny
gasoprovody Ukrainy” PJSC with its Resolution №801. This decision was taken within the Company’s
Corporate Governance Restructuring Plan that assumes gas transmission and storage activities
unbundling. Unbundling was also approved by the Resolution of the Cabinet of Ministers of Ukraine
dated 01 July 2016 №496.
The Government has also approved the Corporate Governance Plan for „Mahistralny gasoprovody
Ukrainy” PJSC, taking into account requirements of the European Bank for Reconstruction and
Development and Energy community.
Assets located at temporarily occupied territories
In early 2014, Ukraine suffered from the military aggression of the Russian Federation which resulted
in the occupation of the Autonomous Republic of Crimea (“Crimea”) and unlawful military take-over
of certain areas in Luhanska and Donetska regions by armed terrorist groups that are controlled, directed
and financed by the Russian Federation, as well as а result of the unconcealed intrusion of regular armed
forces of the Russian Federation.
As a result, before 1 January 2016, the Company has recognised a provision for impairment for assets
located on anti-terrorist operation (“ATO”) as stipulated by the Law of Ukraine „On Provisional
Measures during ATO” dated 2 September 2014 №1669.
Management of the Company continues to undertake all possible legal and diplomatic measures to
reimburse for losses and recover control of the Company’s assets in Crimea.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
22
3. RESTATEMENT OF COMPARATIVE INFORMATION
The Company issued its separate financial statements as at and for the year ended 31 December 2016
on 31 March 2017.
Starting from 1 January 2017 the Company has changed its accounting policy in respect of presenting
cash flows for cash receipts and payments for items in which the turnover is quick, the amounts are
large, and the maturities are short. Such items are presented on a net basis in the statement of cash flows.
Management believes such presentation is more accurate and provides more relevant information for
the users of the financial statements.
When preparing the separate financial statements as at and for the year ended 31 December 2017 the
Company has performed reclassifications in respect of figures previously reported in the statement of
cash flows for the year ended 31 December 2016. The effect of such retrospective corrections was as
follows:
In thousands of Ukrainian hryvnias 2016, as
reported earlier
Effect of
reclassifications 2016, as restated
Loans and borrowings received 13 212 953 (8 922 499) 4 290 454
Loans and borrowings repaid (32 138 695) 8 922 499 (23 216 196)
4. SEGMENT INFORMATION
The Executive Board is the Company’s chief operating decision maker. Management has determined
operating segments used for disclosure by the Company based on reports reviewed by the Executive
Board for assessing their financial performance. Management assesses the performance of operating
segments based on a measure of net profit or loss before income tax. Reportable segments defined by
the Board in accordance with the type of activities are as follows:
Gas transit. Gas transmission pipelines in Ukraine are operated by “Ukrtransgaz” PJSC, which is
the Company’s fully owned subsidiary. The Company is mainly engaged in transit of natural gas
from the Russian Federation through the territory of Ukraine under the contract with
“Gazprom” PJSC.
Wholesale gas trading. “Ukrgasvydobyvannia” PJSC and “Chornomornftogas” PJSC sell all gas
produced to the end users via the Company, as they perform public service obligations under the
PSO Resolution (Note 2). The Company also imports significant volumes of natural gas for resale
to different groups of customers. This segment covers sales of natural gas to different groups of
customers within Ukraine.
Other. Revenues of this segment include revenues from sales of materials and services by auxiliary
divisions of the Company, mainly supporting services. The segment also includes results of joint
operations under the concession agreement for exploration and development with the Arab
Republic of Egypt and Egyptian General Petroleum Corporation.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
23
4. SEGMENT INFORMATION (Continued)
Segment information for reportable business segments of the Company for the year ended
31 December 2017 is as follows:
In thousands of Ukrainian hryvnias Gas transit
Wholesale
gas trading Other Total
Sales to external customers 73 940 136 113 528 769 458 528 187 927 433
Sales to other segments - - - -
Total revenue 73 940 136 113 528 769 458 528 187 927 433
Result from operating activities 36 408 002 1 208 181 604 683 38 220 866
Result from non-operating activities 45 587 (8 587 389) 9 346 (8 532 456)
Segment result 36 453 589 (7 379 208) 614 029 29 688 410
Income on equity investments 2 467 164
Net movement in provisions (Note 14) 5 954 244
Income recognised under the Gas Transit
Arbitration (Note 17) 57 125 342
Expense recognised under the Gas Sales
Arbitration (Note 19) (44 528 046)
Unallocated income, net 579 332
Profit before income tax 51 286 446
Material non-cash items included in
segment results:
Unrealised foreign exchange differences 45 587 (1 453 784) 228 760 (1 179 437) Depreciation of property, plant, and
equipment and amortisation of intangible
assets (Note 18) (17 631) (43 072) (7 103) (67 806) Net movement in provision for impairment of
trade and other receivables, prepayments
made, and other current assets (Note 19) - (1 539 946) 31 933 (1 508 013) Adjustment of inventories to net realisable
value (Note 8) - (1 190 955) - (1 190 955)
Segment assets 6 721 703 132 660 751 9 078 607 148 461 061
Non-current financial investments (Note 6) 414 083 429
Indebtedness under the Gas Transit
Arbitration (Note 10) 57 125 342
Deferred tax assets (Note 22) 725 546
Cash and cash equivalents (Note 11) 18 485 661
Unallocated assets 65 603
Total assets 638 946 642
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
24
4. SEGMENT INFORMATION (Continued)
Segment information for reportable business segments of the Company for the year ended 31 December
2016 is as follows:
In thousands of Ukrainian hryvnias Gas transit
Wholesales
gas trading Other Total
Sales to external customers 61 393 874 99 590 812 398 141 161 382 827
Sales to other segments - - - -
Total revenue 61 393 874 99 590 812 398 141 161 382 827
Result from operating activities 28 702 775 10 115 776 115 235 38 933 786
Result from non-operating activities 17 798 (13 012 453) (67 006) (13 061 661)
Segment result 28 720 573 (2 896 677) 48 229 25 872 125
Income on equity investments 2 388 878
Accrual of provisions for litigations (Note 14) (5 259 136)
Unallocated income, net 897 122
Profit before income tax 23 898 989
Material non-cash items included in
segment results:
Unrealised foreign exchange differences 17 798 (4 658 401) (240 539) (4 881 142) Depreciation of property, plant, and
equipment and amortisation of intangible
assets (Note 18 and 19) (34 728) (56 334) (2 245) (93 307) Net movement in provision for impairment of
trade and other receivables, prepayments
made, and other current assets (Note 19) - (4 606 822) 60 640 (4 546 182) Adjustment of inventories to net realisable
value (Note 8) - (1 541 524) - (1 541 524)
Reversal of impairment of natural gas - 245 132 - 245 132 Segment assets 6 493 539 113 949 371 8 376 200 128 819 110 Non-current financial investments (Note 6) 448 077 061
Deferred tax assets (Note 22) 2 630 000
Income tax prepaid (Note 7) 1 317 274
Cash and cash equivalents (Note 11) 17 660 966
Unallocated assets 1 288 052
Total assets 599 792 463
External customers concentration exceeded 10% of total revenues
During the years ended 31 December 2017 and 2016, the external customers with concentration of
revenue exceeding 10% of total revenues were Gazprom and “Ukrtransgaz” PJSC.
Revenue from sales to “Gazprom” OJSC is attributable to the segment of gas transit for these periods
and amounted to UAH 73 937 144 thousand and 59 986 448 thousand, respectively.
Revenue from sales to “Ukrtransgaz” PJSC is attributable to the segment of wholesale gas trading for
these periods and amounted to UAH 24 542 275 thousand and UAH 16 307 679 thousand, respectively.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY “NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
25
4. SEGMENT INFORMATION (Continued)
Revenues, gross profit/(loss), profit/(loss) before tax and receivables of the wholesale gas trading segment by main groups of customers are as follows:
31 December 2017
In thousands of Ukrainian hryvnias Revenue
Gross (loss)
profit
(Loss) / profit
before income
tax
Accounts receivable
gross
provision for
impairment
carrying
amount
District heating companies for the needs of
households 22 770 150 (1 825 785)
(4 796 216) 13 698 477 (3 802 650) 9 895 827
Regional gas distribution companies for resale
to households and religious organisations 55 552 665 467 772
(6 068 210) 29 922 927 (1 205 641) 28 717 286
District heating companies for the needs of other
entities 6 352 051 769 790
203 530 3 390 514 (26 747) 3 363 767
Odessa Port Plant - - - 1 374 772 (1 374 772) -
Total public service obligation performance
(Note 2) 84 674 866 (588 223)
(10 660 896) 48 386 690 (6 409 810) 41 976 880
Regional gas distribution companies for resale
to other customers 201 606 46 265
(8 239) 105 658 (105 658) -
Industrial and other customers 28 083 254 5 173 583 2 874 356 14 865 561 (6 366 167) 8 499 394
District heating companies for the needs of other
customers 569 043 148 453
270 201 6 339 928 (6 339 928) -
„Gas Ukraiiny” SE for the needs of other
customers - -
145 3703 11 695 647 (11 695 647) -
Total performance of gas trading at non-
regulated prices for the needs of other
customers 28 853 903 5 368 301
3 281 688 33 006 794 (24 507 400) 8 499 394
Total 113 528 769 4 780 078 (7 379 208) 81 393 484 (30 917 210) 50 476 274
3 Reversal of provision for doubtful debts at partial accounts receivable settlement by „Gas Ukraiiny” SE
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY “NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
26
4. SEGMENT INFORMATION (Continued)
31 December 2016
In thousands of Ukrainian hryvnias Revenue
Gross profit
(Loss) / profit
before income
tax
Accounts receivable
gross
provision for
impairment
carrying
amount
District heating companies for the needs of
households 18 870 996 348 814
(2 802 220) 14 144 679 (3 083 175) 11 061 504
Regional gas distribution companies for resale
to households and religious organisations 50 075 658 12 597 879
3 862 150 21 617 203 (147 046) 21 470 157
District heating companies for the needs of
budget other entities 2 254 559 443 875
77 083 1 496 510 - 1 496 510
Odessa Port Plant 1 145 644 229 897 (1 331 359) 1 374 772 (1 374 772) -
Total public service obligation performance
(Note 2) 72 346 857 13 620 465
(194 346) 38 633 164 (4 604 993) 34 028 171
Regional gas distribution companies for resale
to other customers 551 254 63 372
(34 693) 252 436 (159 138) 93 298
Industrial and other customers 21 931 803 2 964 732 (2 495 021) 19 722 748 (6 521 900) 13 200 848
District heating companies for the needs of other
customers 4 760 898 765 208
(372 735) 7 244 514 (6 464 265) 780 249
„Gas Ukraiiny” SE for the needs of other
customers - -
200 1184 11 841 017 (11 841 017) -
Total performance of gas trading at non-
regulated prices for the needs of other
customers 27 243 955 3 793 312
(2 702 331) 39 060 715 (24 986 320) 14 074 395
Total 99 590 812 17 413 777 (2 896 677) 77 693 879 (29 591 313) 48 102 566
4 Reversal of provision for doubtful debts at partial accounts receivable settlement by „Gas Ukraiiny” SE
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
27
5. BALANCES AND TRANSACTIONS WITH RELATED PARTIES
Parties are generally considered to be related if one party has the ability to control the other party, is
under common control, or can exercise significant influence or joint control over the other party in
making financial and operating decisions. In considering each possible related party relationship,
attention is directed to the substance of the relationship, and not merely the legal form.
As discussed in Note 1, the Company is controlled by the Government of Ukraine and, therefore, all
state-controlled entities or entities under significant influence of the state are considered as related
parties under common control with the Company.
Transactions with related parties may be performed on terms that would not necessarily be available to
unrelated parties.
Transactions with state-controlled entities. The Company performs significant transactions with the
entities controlled, jointly controlled or significantly influenced by the Government of Ukraine. These
entities include State Savings Bank of Ukraine, Ukreximbank, Ukrgazbank, district heating companies
and part of regional gas distribution companies.
For the year ended 31 December 2017, about 36% of the Company’s revenue (2016: 41%) were earned
from transactions with the entities controlled, jointly controlled or influenced by the Government of
Ukraine. Outstanding trade accounts receivable related to these transactions as at 31 December 2017
and 2016 are about 52% та 49%, respectively, of the total trade accounts receivable balance. Revenues
from gas sales to “Ukrtransgaz” PJSC in 2017 was 22% of total revenues in the wholesale gas trading
segment (2016: 16%).
For the year ended 31 December 2017, about 49% of the Company’s expenses (2016: 54%) occurred
from transactions with the entities controlled, jointly controlled or influenced by the Government of
Ukraine. Outstanding trade accounts payable related to these transactions as 31 December 2017 and
2016 are about 43% and 73%, respectively, of the total accounts payable balance. Purchase of gas from
the Company’s subsidiary “Ukrgasvydobuvannya” PSJC during 2017 amounted to 57% of total gas
purchases (2016: 54%).
Provision for litigations and other provisions with the entities controlled, jointly controlled or influenced
by the Government of Ukraine as at 31 December 2017 and 2016 are about 4% і 32%, respectively, of
the total provisions.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
28
5. BALANCES AND TRANSACTIONS WITH RELATED PARTIES (Continued)
As at 31 December 2017 and 2016, about 99% of cash and bank balances were placed in the banks
controlled, jointly controlled or influenced by the Government of Ukraine. About 91% of finance income
in 2017 relate to balances in these banks (2016: 91%).
As at 31 December 2017, about 66% of all borrowings were provided by the banks controlled, jointly
controlled or influenced by the Government of Ukraine (31 December 2016: 54%). About 78% of
finance costs in 2017 relate to borrowings obtained from these banks (2016: 69%).
In December 2017 the Company has completed redemption of bonds amounting to
UAH 4 800 000 thousand that were issued in 2013 guaranteed by the State.
In 2017 the Company has concluded additional agreements with two state-owned banks in respect of
decreasing interest rates and changes to the borrowings repayment schedules prolonging their maturities,
and converting one loan to a revolving credit line.
Pledges. As at 31 December 2017 and 2016, borrowings from related parties (state-owned banks) were
secured by inventories and proceeds from future sales.
Guarantees. Amount of guarantees, provided by the Government of Ukraine, as at 31 December 2017
and 2016 equalled to UAH 20 981 549 thousand and UAH 28 524 443 thousand, respectively (Note 13).
Key management remuneration. During 2017 key management personnel consisted on average of
6 Executive Board members and 9 directors (2016: 4 Executive Board members and 6 directors).
Compensation to the key management personnel included into administrative expense consists of salary
and additional current bonuses and comprises UAH 179 521 thousand in 2017 (2016:
UAH 86 587 thousand).
Conditions and amounts of the Chairman and members of the Executive Board remuneration meet
requirements of the Resolution of the Cabinet of Ministers of Ukraine dated 19 May 1999 №859 (as
amended). According to this Resolution, the following types of remuneration could be generally set for
the heads and members of executive boards of public joint stock companies created as a result of
corporatisation of the state entities:
basic salary,
quarterly and annual performance bonuses,
bonus for effective management of the state property,
extra payments for scientific degree and academic rank.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
29
5. BALANCES AND TRANSACTIONS WITH RELATED PARTIES (Continued)
According to this Resolution, basic salary of the chief executive officer is defined with the reference to
the average annual number of employees in full employment equivalent, total assets or revenue
according to the most recent annual financial statements, and is linked to the minimal basic salary of the
essential position of an entity. Currently effective contracts with the Chairman and members of the
Executive Board of the Company do not assume extra payments for scientific degree and academic rank.
According to the Company’s Charter, decisions on quarterly and annual performance bonus payments
and bonus for effective management of the state property for the Chairman and members of the
Executive Board stay within competence of the Supervisory Board. As at the date of these financial
statements there was no such decision taken, and thus, such bonuses were not accrued or paid.
During 2017 the Company also incurred UAH 25 547 thousand of expenses on operations of the
Supervisory board (2016: UAH 20 070 thousand). This amount includes UAH 20 253 thousand in
service fees accrued (2016: UAH 15 302 thousand), and UAH 5 294 thousand in compensation of
expenses incurred by the Board members during performance of their duties (2016:
UAH 4 768 thousand), as well as directors and officers liability insurance procured and paid by the
Company to insure the liability of these officers after their appointment.
Fixed service fees of the independent non-executive directors – Supervisory Board members is set in
the individual contracts. Additionally to the fixed fees the Supervisory Board members are compensated
for certain justifiable expenses incurred by the Supervisory Board members during performance of their
duties (travel expenses, hotels, communication etc.). Compensations are made for justified and properly
documented expenses, net of taxes and based on original documents confirming such payments as
prescribed by the Ukrainian legislation and provisions of the individual contracts.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
30
6. NON-CURRENT FINANCIAL INVESTMENTS
The Company’s non-current financial investments were as follows:
In thousands of Ukrainian hryvnias 31 December
2017
31 December
2016
Investment in subsidiaries 413 207 938 447 116 458
Investment in associates 772 234 857 346
Other investments 103 257 103 257
Total 414 083 429 448 077 061
Investment in subsidiaries were as follows:
31 December 2017 31 December 2016
Name of investee/principal
activities
Country of
incorporation
and place of
business
Ownership
interest, %
Carrying
amount
Ownership
interest, %
Carrying
amount
Production of gas, oil, and refinery products
“Ukrgazvydobuvannia” PJSC Ukraine 100.00% 114 527 062 100.00% 69 351 826
“Ukrnafta” PJSC
Ukraine
50.0%+1
share 2 710 655
50.0%+1
share 2 506 411
“Zakordonnaftogaz” SE Ukraine 100.00% 1 019 862 100.00% 1 045 936
Oil and gas transmission and transportation
“Ukrtansgaz” PJSC Ukraine 100.00% 276 465 888 100.00% 353 806 314
“Ukrtransnafta” PJSC Ukraine 100.00% 16 604 047 100.00% 18 488 955
“Ukrspetstransgaz” PJSC Ukraine 100.00% 150 922 100.00% 184 260
Wholesale and retail trade of oil, gas, and refinery products
“Ukravtogaz” SE Ukraine 100.00% 1 231 615 100.00% 1 305 295
Other investments in
subsidiaries miscellanious
49.00%-
100.00% 497 887
49.00%-
100.00% 427 461
Total 413 207 938 447 116 458
Investments in associates were as follows:
31 December 2017 31 December 2016
Name of investee/principal
activities
Country of
incorporation
and place of
business
Ownership
interest, %
Carrying
amount
Ownership
interest, %
Carrying
amount
Production of gas, oil, and refinery products
“Ukrtatnafta” PJSC Ukraine 43.05% - 43.05% -
Other
“Gaztransit” PrJSC Ukraine 40.22% 772 234 40.22% 857 346
Total 772 234 857 346
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
31
7. NON-CURRENT ACCOUNTS RECEIVABLE AND OTHER NON-CURRENT ASSETS
The Company’s non-current accounts receivable and other non-current assets were as follows:
In thousands of Ukrainian hryvnias 31 грудня
2017 року
31 грудня
2016 року
Accounts receivable on product sharing agreement 4 865 530 4 203 539
Restructured accounts receivable of gas consumers 363 894 577 068
Income tax prepaid - 1 317 274
Other non-current assets 1 477 497 1 734 468
Less: provision for impairment (211 570) -
Total 6 495 351 7 832 349
Accounts receivable on product sharing agreement. The Company entered into a concession
agreement for hydrocarbon exploration and development with the Arab Republic of Egypt and Egyptian
General Petroleum Corporation (“EGPC”) on 13 December 2006. Under the terms and conditions of the
concession agreement, the Company has the right to recover all exploration and development costs
incurred in connection with the concession agreement in equal parts during five years starting from the
date of the first delivery of oil or gas (Note 27). As at 31 December 2017 and 2016, included in other
non-current assets were research and development expenditures in the amount of
UAH 1 170 709 thousand and UAH 1 442 883 thousand, respectively, incurred by the Company in
connection with the concession agreement for hydrocarbon exploration and development, but not yet
included for recovery under the agreement terms and conditions.
In 2017 the Company engaged independent consultants to evaluate exploration and evaluation assets
and hydrocarbon exploration and development assets in the Arab Republic of Egypt. The Company
plans to make a decision in respect of viability of its future activities within the Concession Agreement
per results of such evaluation, including, but not limited to potential exit from this project.
Restructured accounts receivable of gas consumers. In 2011, the Law of Ukraine №3319-VI “On
Certain Matters of Indebtedness for Natural Gas and Electricity Consumed” was adopted. According to
this Law, accounts receivable due from the entities supplying natural gas at the regulated tariff that were
originated in 2010 were restructured for the period from 1 to 20 years and stated at amortised cost using
the effective interest rate method which, at the restructuring date, varied from 14% to 15%.
Commercial courts can make an award to restructure or postpone execution of the court decision, in case
of circumstances making this execution impossible or in case of motion of the debtor to postpone
execution. After the court decides on restructuring, accounts receivable are accounted at amortised cost
using the effective interest rate method that equals to average deposit interest rate for the month prior
the month when such decision was taken. Effective interest rates vary from 14% to 19%.
Movements in provision for impairment of non-current accounts receivable were as follows:
In thousands of Ukrainian hryvnias 2017 2016
Balance as at 1 January - -
Reversal of provision (9 815) -
Other changes (reclassification of provision between current and non-
current accounts receivable) (Note 9) 221 385 -
Balance as at 31 December 211 570 -
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
32
8. INVENTORIES
The Company’s inventories were as follows:
In thousands of Ukrainian hryvnias 31 December
2017
31 December
2016
Natural gas 74 292 971 59 388 456
Other inventories 60 304 61 612
Total 74 353 275 59 450 068
Management estimates the necessity of write-down of inventories to their net realisable value taking
into consideration the aging of inventories and indications of economic, technical, and physical
obsolescence. In 2017, the natural gas adjustment to its net realisable value amounted to
UAH 1 190 955 thousand (2016: UAH 1 541 524 thousand) and was included in cost of sales.
As at 31 December 2017, included in the inventories balance is natural gas with the carrying value of
UAH 6 327 thousand that was arrested according to the court decision in Slovak Republic.
As at 31 December 2017, inventories with the carrying value of UAH 37 061 723 thousand
(31 December 2016: UAH 42 545 343 thousand) were pledged as a collateral for borrowings (Note 13).
9. TRADE ACCOUNTS RECEIVABLE
The Company’s trade accounts receivable as follows:
In thousands of Ukrainian hryvnias 31 December
2017
31 December
2016
Trade accounts receivable 89 015 736 84 943 402
Less: provision for impairment (31 541 364) (30 224 224)
Total 57 474 372 54 719 178
Out of the total carrying value of trade accounts receivable as at 31 December 2017, accounts receivable
for natural gas sales amounted to UAH 50 476 274 thousand (31 December 2016:
UAH 48 102 566 thousand) (Note 4).
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
33
9. TRADE ACCOUNTS RECEIVABLE (Continued)
Movements in provision for impairment of trade accounts receivable were as follows:
In thousands of Ukrainian hryvnias 2017 2016
Balance as at 1 January 30 224 224 25 615 914
Provision for impairment recognised during the year 3 300 257 6 228 186
Reversal of provision (1 761 732) (1 617 905)
Other changes (reclassification of provision between current and non-
current accounts receivable) (Note 7) (221 385) -
Amounts written off during the year as uncollectible - (1 971)
Balance as at 31 December 31 541 364 30 224 224
Analysis of credit quality of trade accounts receivable was as follows:
In thousands of Ukrainian hryvnias 31 December
2017
31 December
2016
Neither past due nor impaired 28 697 818 29 300 394
Past due but not impaired:
Less than 30 days overdue 11 547 125 14 517 849
31 to 90 days overdue 5 454 580 6 117 217
91 to 180 days overdue 3 124 306 1 675 640
181 to 365 days overdue 8 297 962 2 199 228
Over 365 days overdue 352 581 908 850
Past due and individually impaired (gross):
Less than 30 days overdue - 993 505
31 to 90 days overdue 295 658 381 267
91 to 180 days overdue 480 368 142 955
181 to 365 days overdue 1 811 319 1 634 575
Over 365 days overdue 28 954 019 27 071 922
Less: Provision for impairment (31 541 364) (30 224 224)
Total 57 474 372 54 719 178
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
34
10. ACCOUNTS RECEIVABLE ON PREPAYMENTS MADE, SETTLEMENTS WITH THE
STATE BUDGET, OTHER CURRENT ACCOUNTS RECEIVABLE AND OTHER
CURRENT ASSETS
The Company’s accounts receivable on prepayments made, settlements with the state budget, other
current accounts receivable and other current assets were as follows:
In thousands of Ukrainian hryvnias 31 December
2017
31 December
2016
Indebtedness under the Gas Transit Arbitration 57 125 342 -
Refundable financial aid to subsidiaries 12 079 067 12 079 067
Balance at the electronic account for VAT 2 969 330 112 132
Prepayments to suppliers for materials, works, and services 2 529 958 7 723 658
VAT advance in respect of customs registration of imported natural gas 1 980 547 -
Receivables under assignment agreements in respect of natural gas sales 1 569 405 1 619 287
Cash collateral for participation in the State procurement procedures 1 489 567 -
Promissory notes receivable 1 413 229 1 416 416
Other 2 623 006 2 459 963
Less: provision for impairment (18 094 571) (18 157 404)
Total 65 684 880 7 253 119
On 28 February 2018 the Arbitral Tribunal rendered the Final Award in the Gas Transit Arbitration
(Note 23), where, amongst other, it supported Naftogaz’s claim in respect of Gazprom failure to deliver
minimum contractual volume of gas transit (underdeliveries) during 2009-2017. As a result, the Tribunal
awarded USD 4 674 million to be paid in favour of Naftogaz by Gazprom as a compensation of losses
in this respect. As further described in Note 23, the Company has received a legal right to set-off the
amounts owing between the parties pursuant to the Gas Sales Arbitration and Gas Transit Arbitration,
supporting a respective Naftogaz request. Amount of such set-off as at 31 December 2017 amounts to
UAH 57 125 342 thousand, and is recognised in other current assets.
Net amount receivable from Gazprom after the set-off amounts to UAH 71 861 428 thousand (equivalent to
USD 2 560 million at the exchange rate as at 31 December 2017, Note 23). As at the date when these separate
financial statements were authorised for issue, this amount was not settled, and the Company does not
recognise it as an asset as at 31 December 2017 (Note 23).
As at 31 December 2017 and 2016, included to the provision for impairment UAH 12 022 196 thousand
of provision for refundable financial aid to “Chornomornaftogaz” PJSC.
Movements in provision for impairment for prepayments made and other current assets were as follows:
In thousands of Ukrainian hryvnias 2017 2016
Balance as at 1 January 18 157 404 18 222 454
Provision for impairment recognised during the year 26 998 57 199
Reversal of provision (47 695) (121 298)
Amounts written off during the year as uncollectible (42 136) (951)
Balance as at 31 December 18 094 571 18 157 404
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
35
11. CURRENT FINANCIAL INVESTMENTS AND CASH AND CASH EQUIVALENTS
Current financial investments and cash and cash equivalents were as follows:
In thousands of Ukrainian hryvnias 31 December
2017
31 December
2016
Cash in banks 18 485 661 17 660 966
Restricted cash - 679 771
Total 18 485 661 18 340 737
Current financial investments. As at 31 December 2016 current financial investments included
restricted cash amounting to UAH 679 771 thousand. In 2017 this amount was transferred by the agent
bank to settle balance due by the Company to its contractor, as prescribed by the court decision.
12. SHARE CAPITAL
As at 31 December 2017 and 2016, registered, issued, and fully paid share capital of the Company was
UAH 190 150 481 thousand and UAH 160 450 481 thousand, respectively, comprising 190 150 481
ordinary shares and 160 450 481 ordinary shares, respectively, at a par value of UAH 1 000 per share.
As at 31 December 2017 and 2016, the Company’s additional capital has been adjusted for the effect of
hyperinflation in accordance with the requirements of IAS 29 “Financial Reporting in Hyperinflationary
Economies” by UAH 4 156 259 thousand.
Contributions to unregistered statutory capital
In 2015, according to resolutions of the Cabinet of Ministers of Ukraine adopted during 2014-2015
years, the Government issued UAH 29 700 000 thousand of the State treasury bonds in exchange to the
new share issue of the Company. As at 31 December 2016 the Company has registered the Temporary
share placement certificate. In April 2017 the Company obtained the Permanent share placement report.
Profit share payable to the state budget
For the year ended 31 December 2016, the Company’s subsidiaries paid the profit share to the state
budget in the amount of UAH 1 021 364 thousand.
Profit distribution
Profit available for distribution to the shareholders for each reporting period is determined by reference
to the separate financial statements prepared in accordance with International Financial Reporting
Standards. Under Ukrainian legislation, the amount of dividends is limited to net profit of the reporting
period or other distributable reserves, but not exceeding retained earnings as calculated in the financial
statements prepared in accordance with International Financial Reporting Standards.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
36
12. SHARE CAPITAL (Continued)
According to the Resolution of the Cabinet of Ministers of Ukraine dated 26.04.17 № 282-р share of
the Company’s net profit for 2016 amounting to UAH 13 264 495 thousand was distributed as dividends,
and UAH 1 326 450 thousand forwarded to the Legal reserve. The Company paid this amount together
with respective advance payment of income tax in June 2017.
At the date when these financial statements were authorised for issue, basic allowance for profit
distribution per results of 2017 was set at 75% of net profit. The Company has accrued respective
provision in respect of the portion of net profit attributable to the State Budget of Ukraine in current
provisions (Note 14). According to the Ukrainian legislation, the Company has to make a decision in
respect of profit distribution up to 30 April, and make payment to the State Budget of Ukraine up to 30
June of the year following the reporting year.
13. BORROWINGS
The Company’s borrowings were as follows:
In thousands of Ukrainian hryvnias 31 December
2017
31 December
2016
Non-current
Bank borrowings 14 117 317 22 971 585
Total non-current portion 14 117 317 22 971 585
Current
Bank borrowings 25 009 792 24 889 042
Current portion of long-term borrowings and bonds 17 101 897 19 388 256
Interest accrued 474 809 622 988
Total current portion 42 586 498 44 900 286
Total 56 703 815 67 871 871
In 2017 the Company has concluded additional agreements with two state-owned banks in respect of
decreasing interest rates and changes to the borrowings repayment schedules prolonging their maturities
to 2018-2020, and converting one loan to a revolving credit line. The Company analysed the impact of
such changes to the financial obligations and concluded that they lead to no material changes in their
value.
In December 2017 the Company has completed redemption of bonds amounting to
UAH 4 800 000 thousand that were guaranteed by the State. The Company has fulfilled all its
obligations during the bonds circulation period.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
37
13. BORROWINGS (Continued)
The effective interest rates and currency denomination of borrowings were as follows:
In thousands of Ukrainian hryvnias
31 December 2017 31 December 2016
Carrying
amount % per annum
Carrying
amount % per annum
US dollars 25 559 046 6.4 41 746 656 7.7
UAH 20 551 422 17.6 26 125 215 18.9
Euro 10 593 347 1.9 - -
Total 56 703 815 67 871 871
Pledges
As at 31 December 2017 and 2016 the Company’s borrowings were secured by the following assets:
In thousands of Ukrainian hryvnias 31 December
2017
31 December
2016
Proceeds from future sales 34 574 649 136 966 120
Inventories (Note 8) 37 061 723 42 545 343
Guarantees. As at 31 December 2017, the Company’s borrowings were guaranteed by the State in the
amount of UAH 20 981 549 thousand (31 December 2016: UAH 28 524 443 thousand).
Reconciliation of liabilities arising from financing activities
In thousands of
Ukrainian hryvnias 1 January
2017
Cash flows
from
financing
activities
Non-cash
transactions
Interest
expense
(Note 21)
31 December
2017
Bank borrowings 63 071 871 (37 327 066) 24 352 888 6 606 122 56 703 815
Bonds 4 800 000 (5 278 672) - 478 672 -
Total 67 871 871 (42 605 738) 24 352 888 7 084 794 56 703 815
Non-cash transactions relate to payment for the natural gas acquired by a lending bank to suppliers and
foreign exchange differences on borrowings attracted in foreign currencies.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY “NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
38
14. NON-CURRENT AND CURRENT PROVISIONS
Movements in provisions were as follows:
In thousands of Ukrainian hryvnias Provision for
litigations
Employee benefit
obligation
Portion of net profit
attributable to the
State Budget of
Ukraine (Note 12)
Other provisions Total
Balance as at 1 January 2016 2 672 215 99 489 - - 2 771 704
Non-current 2 672 215 82 626 - - 2 754 841
Current - 16 863 - - 16 863
Charge for the year 5 259 136 143 040 13 264 495 - 18 666 671
Unwinding of discount (Note 21) - 10 198 - - 10 198
Used or paid during the year (165) (41 898) - - (42 063)
Remeasurements - (38 327) - - (38 327)
Balance as at 31 December 2016 7 931 186 172 502 13 264 495 - 21 368 183
Non-current 7 300 148 45 276 - - 7 345 424
Current 631 038 127 226 13 264 495 - 14 022 759
Charge for the year 125 614 120 555 29 497 614 1 220 290 30 964 073
Unwinding of discount (Note 21) - 5 762 - - 5 762
Used or paid during the year - (108 091) (13 264 495) - (13 372 586)
Provisions reversed during the year (7 300 148) - - - (7 300 148)
Remeasurements - 92 848 - - 92 848
Balance as at 31 December 2017 756 652 283 576 29 497 614 1 220 290 31 758 132
Non-current - 135 283 - - 135 283
Current 756 652 148 293 29 497 614 1 220 290 31 622 849
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
39
14. NON-CURRENT AND CURRENT PROVISIONS (Continued)
Provision for litigation
The Company is involved in a number of litigation both as a plaintiff and as a defendant. Provision for
litigation represents management assessment of probable outflow of the Company’s resources arising
from a negative (adverse) outcome of court and arbitration procedures.
In 2017 provision for litigations amounting to UAH 7 300 148 thousand was reversed after the court
decision was received in favour of the Company.
Employee benefit obligations
The Company has certain obligations to its employees prescribed by the provisions of collective
agreements. Those benefits include lump sum benefits payable upon retirement and post-retirement
benefit programs. Those employee benefits plans are not funded, and there are no plan assets.
Current provisions for employee benefits consist of provision for performance bonuses per results of
2017 and provision for unused vacations (Note 18).
Other provisions
Other provisions include a current provision for gas storage services.
15. ADVANCES RECEIVED AND OTHER CURRENT LIABILITIES
Advances received and other current liabilities of the Company were as follows:
In thousands of Ukrainian hryvnias 31 December
2017
31 December
2016
Indebtedness under the Gas Sales Arbitration 57 125 342 -
Contributions to the subsidiaries’ statutory capitals payable 3 035 075 3 349 588
Advances received for natural gas 1 185 856 776 957
Advances received on geophysical surveys 236 706 239 716
Accounts payable per court decisions 43 746 481 718
Other advances received and current liabilities 642 982 732 831
Total 62 269 707 5 580 810
On 22 December 2017 the Company received the Final Award of the Arbitral Tribunal in the Gas Sales
Arbitration (Note 23). As at 31 December 2017 the Company recognised its obligations in respect of
this award in other current liabilities. In February 2018 the Company received a legal right to set-off the
amounts owing between the parties pursuant to the Gas Sales Arbitration and Gas Transit Arbitration
(Notes 23 та 26).
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
40
16. COST OF SALES
Cost of sales for the years ended 31 December was as follows:
In thousands of Ukrainian hryvnias 2017 2016
Cost of natural gas sold 108 748 691 82 177 035
Gas transmission costs 22 133 710 20 692 744
Non-refundable VAT on gas transit via Ukraine in customs regime 14 788 027 11 997 848
Others 969 136 1 409 771
Total 146 639 564 116 277 398
17. OTHER OPERATING INCOME
Other operating income for the years ended 31 December was as follows:
In thousands of Ukrainian hryvnias 2017 2016
Income recognised under the Gas Transit Arbitration 57 125 342 -
Net movement in provision for litigations 5 954 244 -
Penalties and fines received 177 750 838 085
Income from transfer of geological surveys to the State
information geological fund 3 010 22 380
Write off of accounts payable 96 13 872
Reversal of provision for impairment of natural gas - 245 132
Other 63 107 80 688
Total 63 323 549 1 200 157
The Arbitral Tribunal decisions dated 22 December 2017 and 28 February 2018 had an effect on the
Company’s separate financial statements as at 31 December 2017 (Note 23). As a result, the Company
recognised income and expense amounting to UAH 57 125 342 thousand and UAH 44 528 046
thousand, respectively (Note 19).
18. ADMINISTRATIVE EXPENSES
In thousands of Ukrainian hryvnias 2017 2016
Staff costs and related social charges 671 397 544 695
Legal and audit fees 454 531 390 864
Accrual of employee related provisions (Note 14) 120 555 143 040
Depreciation and amortisation 67 806 92 506
Other 246 922 229 683
Total 1 561 211 1 400 788
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
41
19. OTHER OPERATING EXPENSES
Other operating expense for the years ended 31 December was as follows:
In thousands of Ukrainian hryvnias 2017 2016
Expense recognised under the Gas Sales Arbitration (Note 23) 44 528 046 -
Net movement in provision for impairment of trade accounts receivable,
non-current accounts receivable, prepayments made, other current
assets, and direct write-offs (Notes 7, 9 and 10) 1 508 013 4 546 182
Fines and penalties 310 832 129 386
Net operating foreign exchange loss 103 179 1 150 336
Research, development, and exploration costs 45 302 -
Professional fees 21 047 48 555
Write off of VAT receivable 190 77 109
Change in provision for litigations - 5 259 136
Depreciation and amortisation - 801
Other 15 870 61 955
Total 46 532 479 11 273 460
20. OTHER EXPENSES
In 2017, other expenses included net non-operating foreign exchange loss in the amount of
UAH 1 291 851 thousand (2016: net losses in the amount of UAH 4 890 400 thousand).
21. FINANCE COSTS
In thousands of Ukrainian hryvnias 2017 2016
Interest expenses on bank borrowings and bonds 7 084 794 8 083 575
Bank commissions and fees 268 981 23 451
Unwinding of discount on employee benefit obligations (Note 14) 5 762 10 198
Loss on initial recognition of financial assets at amortised cost - 59 865
Other 4 597 4 548
Total 7 364 134 8 181 637
22. INCOME TAX
The components of income tax expense/(benefit) for the years ended 31 December were as follows:
In thousands of Ukrainian hryvnias 2017 2016
Current income tax 10 035 127 -
Deferred income tax 1 921 167 (2 630 000)
Income tax expense/(benefit) 11 956 294 (2 630 000)
The Company is subject to taxation in Ukraine. In 2017 and 2016, the Ukrainian corporate income tax
was levied on taxable profit, less allowable income and expenses that are not deductible for tax purposes
at the rate of 18%. According to the Tax Code of Ukraine, dividend payment has certain income tax
implications for the Company. As a result, during 2017 the Company has performed an advance payment
on income tax of UAH 2 387 609 thousand, representing 18% of dividend payment.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
42
22. INCOME TAX (Continued)
Reconciliation between the expected and actual tax charges is provided below:
In thousands of Ukrainian hryvnias 2017 2016
Profit before income tax 51 286 446 23 898 989
Income tax expense at the statutory rate of 18% 9 231 560 4 301 818
Tax effect of items that are non-deductible or non-taxable for taxation
purposes:
- Permanent differences, net (63 993) (55 540)
- Change in unrecognised deferred tax asset 2 788 727 (6 876 278)
Income tax expense/(benefit) 11 956 294 (2 630 000)
Net deferred tax asset as at 31 December 2017 was as follows:
In thousands of Ukrainian hryvnias 31 December
2016
Recognised in
profit or loss
Recognised in
other
comprehensive
income
31 December
2017
Provisions - 363 488 16 713 380 201
Inventories - 263 682 - 263 682
Trade accounts payable and
deferred income - 56 638 - 56 638
Property, plant and equipment - 25 025 - 25 025
Tax losses carried forward 2 630 000 (2 630 000) - -
Net deferred tax asset 2 630 000 (1 921 167) 16 713 725 546
As at 31 December 2017 and 2016, unrecognised deductible temporary differences were:
У тисячах гривень 31 December
2017
31 December
2016
Provisions 45 529 008 8 977 422
Inventories 9 326 698 11 057 125
Tax losses carried forward - 19 328 233
Total 54 855 706 39 362 780
Unrecognised deductible temporary differences as at 31 December 2016 were subsequently adjusted as
in 2017 the Company has submitted amended corporate income tax return in relation to prior periods.
These adjustments did not have an impact to the current income tax expense in 2016.
The Company has recognised deferred tax assets based on assumption that the future taxable profits will
be available to realise respective temporary differences in future periods.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
43
23. CONTINGENCIES AND CONTRACTUAL COMMITMENTS AND OPERATING RISKS
Tax legislation. Ukraine’s tax environment is characterised by complexity in tax administering,
arbitrary interpretation by tax authorities of tax laws and regulations that, inter alia, can increase fiscal
pressure on taxpayers. Inconsistent application, interpretation, and enforcement of tax laws can lead to
litigation, which, as a consequence, may result in the imposition of additional taxes, penalties, and
interest, and these amounts could be material. Management believes that the Company has been in
compliance with all requirements of the effective tax legislation.
In the course of regular business activities, the Company enters into transactions, which can be treated by tax
authorities contrary to the way they are interpreted by the Company. In the event a probability of outflow of
financial resources related to such transactions is high, and its amount can be reliably measured, the Company
accrues a provision for such obligations. When the Company’s management estimates the probability of
outflow of financial resources as likely, the Company discloses contingent liabilities.
As at 31 December 2017, the Company’s management estimated a potential impact of such
transactions in the total amount of UAH 87 288 thousand (31 December 2016:
UAH 88 624 thousand). Additionally, the Company is involved in litigation with the tax authorities
in respect of its VAT obligations on total amount of UAH 60 426 thousand.
Arbitral Tribunal requests
Gas Sales Arbitration
The Gas Sales Arbitration was initiated by both Naftogaz and Gazprom on 16 June 2014 under the
auspices of the Arbitration Institute of the Stockholm Chamber of Commerce. In its Request for
Arbitration, Gazprom claimed payment of unpaid invoices for gas delivered under the Gas Sales
Contract from November 2013 to May 2014, while Naftogaz claimed a retroactive revision of the price
under the Gas Sales Contract, and compensation for previous overpayments under the prices applied
before the revision.
In addition, Gazprom has later added a claim for payment of gas which Gazprom did not deliver, but
which Naftogaz allegedly nevertheless was obliged to pay for under the Contract (the “take or pay”
claim).
On 31 May 2017 The Arbitral Tribunal rendered a separate award in the Gas Sales Arbitration. The
separate award is final and legally binding, and sets all legal and factual issues required to resolve the
parties’ claims except for certain elements and/or values of a numeric or quantifiable nature that had to
be defined before the Final Award. The Tribunal in its award of 31 May 2017: (a) totally rejected
Gazprom’s “take or pay” monetary claim; (b) declared “take or pay” claim invalid from the date of the
Contract; (c) decided that Naftogaz is entitled to a market-reflective reduction of the sales price and to
gas market indexation of the price formula, with retrospective effect from April 2014; (d) has declared
invalid provisions in the Gas Sales Contract in respect of a destination clause, illegally prohibiting sales
of the gas outside of Ukraine.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
44
23. CONTINGENCIES AND CONTRACTUAL COMMITMENTS AND OPERATING RISKS
(Continued)
The Tribunal has obliged the parties to determine the elements of gas price formula to be used for gas
supplies starting from 27 April 2014 through negotiations. Such negotiations took place during June-
August 2017, but the parties failed to reach agreement on remaining issues, and thus, the Tribunal had
to decide on such issues on its own. After additional oral hearings in October 2017, all remaining issues
and any resulting monetary claims were left for the final award.
On 7 November 2017 Gazprom has challenged the separate award on Gas Sales Arbitration in the Court
of Appeal of Svea (Stockholm).
On 22 December 2017 the Arbitral Tribunal rendered the Final Award in the Gas Sales Arbitration,
stating the following:
Contract price for natural gas shall be calculated with 100% reference to the European hub price
under the revised price formula.
Gazprom “take or pay” claim was fully rejected.
Annual contract quantity (“ACQ”) of gas that Naftogaz is obliged to purchase during 2018-2019
was set at the level of 5.0 billion cubic metres. This Final Award also contains a quarterly
distribution of gas deliveries in 2018.
The contractual annual volume of gas on “take or pay” terms (“MAQ”) was set as 80% of ACQ.
It is not responsibility of Naftogaz to pay for gas volumes delivered to occupied territories of the
Donetsk and Luhansk regions to the parties other than Naftogaz.
As a result, as set in the Final Award, and taking the obligation to pay for gas consumed but not
paid for in 2014, Naftogaz was ordered to pay to Gazprom USD 2 019 million and late payment
interest in amount equal to 0.03% on any amount overdue for each day of delay in payment after
22 December 2017 until the payment has been made. Later, on 17 January 2018, the Arbitral
Tribunal has amended this amount, and has set a net payable from Naftogaz to Gazprom at the level
of USD 2 030 million plus respective late payment interest after 22 December 2017.
During January-February 2018 Naftogaz and Gazprom had a number of negotiations to agree the gas
supply process in 2018. Following the Final Award in this case, in February 2018 Naftogaz has made a
prepayment for gas deliveries to be made in March 2018. However, Gazprom has returned this payment
and refused to make gas supplies in March 2018. Such actions from Gazprom currently prevent Naftogaz
from fulfilling the Final Award requirements in respect of offtaking MAQ volumes in 2018, and could
result in a new claim from Naftogaz in respect of compensation for losses against Gazprom. The
Company considers Gazprom’s refusal to supply gas as a contractual violation and non-compliance with
the Tribunal’s Final Award.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
45
23. CONTINGENCIES AND CONTRACTUAL COMMITMENTS AND OPERATING RISKS
(Continued)
Gas Transit Arbitration
Naftogaz initiated the Gas Transit Arbitration on 13 October 2014 under the auspices of the Arbitration
Institute of the Stockholm Chamber of Commerce. In its Statement of Claim, Naftogaz claimed a
revision of the transit tariff with retroactive effect, compensation for underpayments as a result of tariff
revision, compensation for underdeliveries, amendments to the Gas Transit Contract authorising
Naftogaz to assign its rights and obligations under the Contract to “Ukrtransgas” PJSC or any other
entity designated as transmission system operator, and certain other adjustments to the Contract.
As at 31 December 2017, Naftogaz’s maximum monetary claim stood at more than USD 12.5 billion
including interest (up to USD 10.6 billion excluding interest). Gazprom has submitted a counterclaim
in amount of approximately USD 7.0 million including interest (up to USD 5.3 million excluding
interest), but has reserved the right to make additional counterclaims after receiving the award in the
Gas Sales Arbitration.
Both the Gas Sales Arbitration and the Gas Transit Arbitration were initiated by Naftogaz following
unsuccessful efforts to reach agreement with Gazprom in negotiations. The monetary claims in both
Arbitrations have been updated on a continuous basis until the awards, inter alia in respect of interest
calculations.
On 28 February 2018 the Arbitral Tribunal rendered the Final Award in the Gas Transit Arbitration,
stating the following:
Naftogaz’s claim for minimum contractual volume of gas transit (underdeliveries) during 2009-
2017 was decided in favour of Naftogaz. As a result, the Tribunal awarded USD 4 674 million to
be paid in favour of Naftogaz by Gazprom for its failure to deliver minimum gas transit contract
volumes. This amount represents compensation of losses in this respect, plus interest up to
28 February 2018.
Naftogaz also claimed compensation of VAT that arises on damages awarded to Naftogaz for
underdeliveries, taking effect since 1 January 2016. However, the Tribunal has rejected such claim
from Naftogaz.
Naftogaz’s claim for underpayments were not supported, as Naftogaz in its request for transit tariff
revision in 2009 did not follow the contractual requirements. At the same time, transit tariff was
retrospectively revised in relations to the adjustment to the transit tariff as a result of the gas price
made by the Tribunal in the Gas Sales Arbitration.
The Tribunal rejected Naftogaz claim in respect of the possibility to assign its rights and obligations
under the Contract to “Ukrtransgas” PJSC or any other entity designated as transmission system
operator.
The Tribunal has also rejected Naftogaz claim in respect of adjustments to the Gas Transit Contract
according to the EU competition and energy law, stating that it is not the role of the Tribunal to
implement reforms in Ukraine but should be decided by the Ukrainian government.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
46
23. CONTINGENCIES AND CONTRACTUAL COMMITMENTS AND OPERATING RISKS
(Continued)
Further, the Tribunal has performed a set-off in respect of amounts owing between the parties pursuant
to the Gas Sales Arbitration and Gas Transit Arbitration, supporting a respective Naftogaz request.
Consequently, a single amount of USD 2 560 million payable by Gazprom in favour of Naftogaz was
ordered by the Tribunal. This amount also bears a late payment interest. There was no settlement of this
amount performed by the date of these separate financial statements. Taking numerous public statements
by Gazprom to appeal the final award in the Gas Transit Arbitration, and the fact that the amount was
not settled by the date of these separate financial statements, management follows a prudent approach
and does not recognise the amount owed by Gazprom after the set-off, as decided by the Tribunal, as
receivable as at 31 December 2017.
As stated above, after both Final Awards were rendered, Gazprom representatives officially declared a
refusal to resume deliveries to Ukraine as ordered by the Tribunal in the Gas Sales Arbitration.
Additionally, Gazprom refused to confirm its intention to settle outstanding amount as decided by the
Tribunal in the Gas Transit Arbitration. Instead, Gazprom has officially suggested to amend both
contracts or to terminate them, and thus to reverse the awards of the Tribunal. Gazprom actions violate
and neglect the awards rendered by the Tribunal that are final and binding for Gazprom. Naftogaz finds
this position unacceptable and has rejected Gazprom’s proposals to make amendments to the contracts.
At the date of these separate financial statements Naftogaz is waiting for Gazprom’s answer to
Naftogaz’s request in respect of the tariff revision for gas transit from the Russian Federation to the EU
after the contract expiry in 2019.
Despite the fact that the Tribunal has rejected Naftogaz claim on VAT compensation of losses for
underdeliveries after 1 January 2016, Naftogaz treats the amount awarded as a contractual price of
services adjustments, that is subject to VAT under the Tax Code of Ukraine. As a result, Naftogaz has
recognised respective VAT liabilities amounting to UAH 4 751 million in March 2018, payable by
30 April 2018.
Claim to the Russian Federation regarding assets in Crimea. In October 2016, Naftogaz and its
subsidiaries –“Chornomornftogaz” PJSC, “Ukrtransgaz” PJSC, “Likvo” SE, “Ukrgasvydobyvannia”
PJSC, “Ukrtransnafta” PJSC and “Gas Ukraiiny” SE – initiated Arbitration proceeding against the
Russian Federation about reimbursement of losses caused by unlawful occupation of their assets in
Crimea by the Russian Federation. This arbitration proceeding was initiated under Agreement between
the Cabinet of Ministers of Ukraine and the Government of the Russian Federation on mutual
encouragement and protection of investments.
On 15 September 2017, Naftogaz and its subsidiaries named above submitted the Statement of Claim to
the Tribunal under the auspices of Permanent Court of Arbitration in Hague. Total damage caused by
unlawful expropriation of Crimea is estimated at over USD 5.0 billion. The tribunal’s final award is
expected by the end 2018.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
47
23. CONTINGENCIES AND CONTRACTUAL COMMITMENTS AND OPERATING RISKS
(Continued)
Claim to the Cabinet of Ministers of Ukraine in respect of compensation for performing the public
service obligations. In May 2017, the Company initiated a claim against the Cabinet of Ministers of
Ukraine in respect of its failure to identify formula and sources of financing the compensation for
performing public service obligations when approving the PSO Resolution (Note 2).
Legal proceedings. From time to time and in the normal course of business, claims against the Company
arise. Where the risk of outflow of financial resources associated with such claims is assumed as
probable, a respective liability is recognised as a component of provision for litigation. Where
management estimates the risk of outflow of financial resources associated with such claims as possible,
or amount of outflow cannot be measured reliably, no provision is recognised, and the respective amount
is disclosed in the separate financial statements. Management believes that it has provided for all
material losses in these separate financial statements.
The Company and certain suppliers are in the process of claims settlement on return and/or pay for the
natural gas consumed in prior years. Management estimated the liabilities under such claims in the
amount of UAH 3 757 157 thousand as at 31 December 2017 and UAH 4 678 264 thousand as at
31 December 2016. Management cannot reliably estimate the amount of potential losses on these
obligations, if any.
Possible transfer of the Company’s equity interest in subsidiaries to the state. In 1998, upon creation
of the Company, the Government of Ukraine contributed certain shares of joint stock companies to the
share capital of the Company. These joint stock companies included “Long-Distance Pipeline
“Druzhba” JSC and “Prydniprovskyi Long-Distance Pipeline” JSC that were reorganised in 2001 into
“Ukrtransnafta” JSC, “Ukrspetstransgaz” JSC, “Chornomornaftogaz” JSC, “Ukrnafta” JSC, and fifty
four regional gas distribution entities. The Government of Ukraine may transfer ownership or control
over all or part of the Company’s equity interest in those joint stock companies and/or other state-owned
oil and gas transportation and storage facilities to other companies or government agencies, and those
actions could have a material adverse effect on the Company’s operations.
State property not subject to privatisation. In 1998, the Company entered into an agreement “On the
Use of State Owned Property not Subject to Privatization” (the “Agreement”) with the State Property
Fund of Ukraine, and received oil and gas transportation system into its operational control. The
Agreement was signed for one year, and its term is prolonged automatically for one year, unless
terminated by a notice from either party, and is binding on the legal successor of each party. Historically,
the Agreement was prolonged automatically, as neither party initiated its termination. As the state
property not subject to privatisation forms an essential part of the Company’s business, the future
operations and financial performance of the Company depend on the prolongation of the Agreement.
The Company’s management believes that the Company will continue to operate with this property in
the foreseeable future.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
48
23. CONTINGENCIES AND CONTRACTUAL COMMITMENTS AND OPERATING RISKS
(Continued)
Pursuant to the Agreement, the Company is required, inter alia, to handle oil and gas transportation and
distribution pipelines owned by the state of Ukraine, keep the state property in adequate operational
condition, and transfer 50% share of profits received from using those assets to the state. The amount
of such a transfer could be reduced by the amount of capital investments of those assets. The Agreement
does not provide a mechanism for such calculations and, historically, there were no payments from the
Company to the state in respect of using such assets. The Company believes that had the mechanism for
calculating the state share in profits from using the assets been determined by the state, the capital
investments performed by the Company would be greater, and no payment in favour of the state would
occur. Accordingly, no liability for such payment was recognised in these separate financial statements.
24. FINANCIAL RISK MANAGEMENT
The Company’s activities expose it to a variety of financial risks: market risk (including currency risk
and interest rate risk), concentration risk, credit risk, and liquidity risk. The Company reviews and
agrees risk management policies to minimise the potential adverse effects on the Company’s financial
performance for those risks.
Major categories of financial instruments were as follows:
In thousands of Ukrainian hryvnias Note
31 December
2017
31 December
2016
Accounts receivable for products, goods, works, services 9 57 474 372 54 719 178
Other current accounts receivable 10 264 160 189 287
Other current assets 10 1 489 567 -
Current financial investments 11 - 679 771
Cash and cash equivalents 11 18 485 661 17 660 966
Non-current financial investments accounted for under the
equity method 6 413 980 172 447 973 804
Other non-current financial investments 6 103 257 103 257
Non-current accounts receivable and other non-current assets 7 459 112 821 750
Total financial assets 492 256 301 522 148 013
In thousands of Ukrainian hryvnias Note
31 December
2017
31 December
2016
Borrowings 13 (56 703 815) (67 871 871)
Trade accounts payable (43 940 911) (49 679 418)
Other current liabilities 15 (3 657 119) (4 065 959)
Total financial liabilities (104 301 845) (121 617 248)
Market risk. The Company is exposed to market risks. Market risks arise from open positions in
(a) foreign currencies, (b) interest bearing assets and liabilities, and (c) equity investments, all of which
are exposed to general and specific market movements.
Currency risk. The Company operates within Ukraine and its exposure to foreign currency risk is
determined mainly by purchase of natural gas from foreign suppliers, which are denominated in USD
and EUR. The Company also receives borrowings in foreign currencies. The Company does not hedge
its foreign currency positions.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
49
24. FINANCIAL RISK MANAGEMENT (Continued)
The Company’s exposure to foreign currency risk is as follows, based on the carrying amounts of
respective foreign currency denominated assets and liabilities:
In thousands of
Ukrainian hryvnias
31 December 2017 31 December 2016
USD EUR Other USD EUR Other
Trade accounts
receivable 6 989 190 - - 6 616 570 - -
Other current
accounts receivable 3 112 - - - - -
Other current assets 538 857 950 710 - - - -
Current financial
investments - - - 679 771 - -
Cash and cash
equivalents 16 805 531 1 199 940 48 721 15 579 615 438 797 66 661
Non-current accounts
receivable and
other non-current
assets - 306 788 - - 244 682 -
Borrowings (25 559 046) (10 593 347) - (41 746 656) - -
Trade accounts
payable (3 377) (3 549 325) (3 776) (13 240 277) (265 328) (3 776)
Other current
liabilities (136 526) (67 492) - (87 293) (7) -
Net (short) long
currency position (1 362 259) (11 752 726) 44 945 (32 198 270) 418 144 62 885
The following table presents sensitivities of profit or loss before tax and equity, to reasonably possible
changes in exchange rates applied at the reporting dates, with all other variables held constant.
The exposure was calculated only for monetary balances denominated in foreign currencies, other than
the functional currency of the Company. Since the most significant impact on the Company’s operations
is fluctuations in USD/EUR exchange rates against UAH, the risk exposure was calculated only for the
balances denominated in those currencies.
In thousands of Ukrainian hryvnias
31 December 2017
Impact on
profit or loss
before income
tax
Impact on
equity before
income tax
USD strengthening by 20% (272 452) (272 452)
USD weakening by 10% 136 226 136 226
EUR strengthening by 20% (2 350 545) (2 350 545)
EUR weakening by 10% 1 175 273 1 175 273
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
50
24. FINANCIAL RISK MANAGEMENT (Continued)
In thousands of Ukrainian hryvnias
31 December 2016
Impact on
profit or loss
before income
tax
Impact on
equity before
income tax
USD strengthening by 20% (6 439 654) (6 439 654)
USD weakening by 10% 3 219 827 3 219 827
EUR strengthening by 20% 83 629 83 629
EUR weakening by 10% (41 814) (41 814)
Interest rate risk. The Company normally has no significant interest bearing assets, and its income and
operating cash flows are substantially independent of changes in market interest rates. The Company’s
interest rate risk exposure arises from borrowings at variable interest rates. Borrowings at fixed rates
expose the Company to fair value interest rate risk.
The Company attracts borrowings at both fixed and floating interest rates. As at 31 December 2017
almost 34% of the Company’s borrowings were provided to the Company at floating rates
(31 December 2016: 12%). The risk of increase in market interest rates is monitored by the Treasury
department of the Company. The key objective of managing interest rate risk is to get financing at
a minimum costs, and match the liquidity needs with the proceeds from borrowings.
The borrowing activities are reviewed during annual budgeting process. Long-term investing activities
and associated funding are considered separately and are subject to approval of the Government of
Ukraine.
The maturity dates of financial instruments are further disclosed in this Note.
Re-pricing for fixed rate financial instruments occurs at their maturity. Re-pricing for floating rate
financial instruments occurs continually.
If floating interest rates on USD and EUR denominated borrowings had been 100 basis points higher as
at 31 December 2017 with all other variables remaining constant, net profit for 2017 would have been
UAH 149 450 thousand lower (2016: UAH 40 099 thousand lower).
Concentration risk. During the years ended 31 December 2017 and 2016, the external customers
revenues from whom exceeded 10% of total revenues were “Gazprom” PJSC and “Ukrtransgaz” PJSC.
Revenue from sales to “Gazprom” PJSC is attributable to the segment of gas transit for these periods
and amounted to UAH 73 937 144 thousand and UAH 59 986 448 thousand, respectively.
Revenue from sales to “Ukrtransgaz” PJSC is attributable to the segment of gas trading for these periods
and amounted to UAH 24 542 275 thousand and UAH 16 307 679 thousand, respectively.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
51
24. FINANCIAL RISK MANAGEMENT (Continued)
Credit risk. The Company takes on exposure to credit risk, which is the risk that one party to a financial
instrument will cause a financial loss for the other party by failing to discharge an obligation. Exposure
to credit risk arises as a result of the Company’s sales of products on credit terms and other transactions
with counterparties giving rise to financial assets. The Company’s policies are that the customers that
wish to pay on credit terms are subject to the solvency review. Significant outstanding balances are also
reviewed on an ongoing basis. At the same time, the Company must follow the state regulations as a
guaranteed supplier of natural gas to the households and state-owned entities irrespective whether they
are settling their obligation or not.
The Company establishes a provision for impairment that represents its estimate of incurred losses in
respect of trade accounts receivable. The main components of this provision are a specific loss
component that relates to individually significant exposures.
The Company does not hold any collateral as a security for its credit risks related to financial assets.
Liquidity risk. Prudent liquidity management implies maintaining sufficient cash and the availability
of funding to meet the existing obligations as they fall due. The Company’s objective is to maintain a
balance between the continuity of funding and flexibility through the use of credit terms provided by
suppliers and banks. Prepayments are commonly used to manage both liquidity and credit risks. The
Company analyses ageing of its assets and maturity of its liabilities and plans liquidity depending on
their expected repayment.
The following table analyses the Company’s financial liabilities into relevant maturity groupings based
on the remaining period at the reporting date to the contractual maturity date. The amounts disclosed in
the table are undiscounted cash flows of principal and interest payments. The maturity analysis of
financial liabilities as at 31 December was as follows:
31 December 2017 In thousands of
Ukrainian hryvnias Up to 6
months
6-12
months 1-2 years 2-5 years
Over
5 years Total
Borrowings 24 631 600 22 124 853 6 015 292 10 937 442 - 63 709 187
Trade accounts
payable 43 940 911 - - - - 43 940 911
Other current
liabilities 3 657 119 - - - - 3 657 119
Total 72 229 630 22 124 853 6 015 292 10 937 442 - 111 307 217
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
52
24. FINANCIAL RISK MANAGEMENT (Continued)
31 December 2016 In thousands of
Ukrainian hryvnias Up to 6
months
6-12
months 1-2 years 2-5 years
Over
5 years Total
Borrowings 31 276 618 19 293 101 15 976 033 12 122 577 - 78 668 329
Trade accounts
payable 49 679 418 - - - - 49 679 418
Other current
liabilities 4 029 706 - - - - 4 029 706
Total 84 985 742 19 293 101 15 976 033 12 122 577 - 132 377 453
Gearing ratio. Consistent with others in the industry, the Company monitors capital on the basis of a
gearing ratio. This ratio is calculated as net liabilities divided by total capital under management. Net
debt is calculated as total borrowings (current and long-term as shown in the separate statement of
financial position), less cash and cash equivalents. Total capital under management equals equity as
shown in the statement of financial position.
The gearing ratio at the end of the reporting period was as follows:
In thousands of Ukrainian hryvnias 31 December
2017
31 December
2016
Borrowings (Note 13) 56 703 815 67 871 871
Less: Cash and cash equivalents (Note 11) (18 485 661) (17 660 966)
Total net debt 38 218 154 50 210 905
Total equity 431 503 975 447 838 047
Gearing ratio 0.09 0.11
25. FAIR VALUE
IFRS define fair value as the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date.
The estimated fair values have been determined by the Company using available market information,
where it exists, and appropriate valuation methodologies. However, judgment is required to interpret
market data to determine the estimated fair value. Management has used all available market information
in estimating the fair value. The estimates presented herein are not necessarily indicative of the amounts
the Company could realise in a market exchange from the sale of its full holdings of a particular
instrument or pay in the transfer of liabilities.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
53
25. FAIR VALUE (Continued)
Fair value of the Company’s financial assets and financial liabilities that are not measured at fair
value on a recurring basis (but fair value disclosure is required)
Except as detailed in the following table, management considers that the carrying amounts of financial
assets and financial liabilities recognised in the separate financial statements approximate their fair
values:
In thousands of Ukrainian hryvnias
31 December 2017 31 December 2016
Carrying
amounts Fair value
Carrying
amounts Fair value
Restructured accounts receivable of
gas consumers net of provision
(Note 7) 152 324 149 410 577 068 582 692
Borrowings (Note 13) 56 703 815 57 197 807 67 871 871 68 047 850
The following table provides information about how the fair value of financial assets and liabilities is
determined (in particular, the valuation techniques and inputs used):
Financial assets/liabilities Fair value
hierarchy
Valuation techniques and key inputs
Restructured accounts
receivable of gas
consumers net of
provision
2 Discounted cash flows.
Future cash flows are estimated based on the inputs that
are observable, either directly or indirectly, and the
estimates use one or more observable quoted prices for
orderly transactions in the markets that are not considered
active. The fair value of restructured accounts receivable
was estimated using interest rates for UAH denominated
deposits of 11.5% per annum (31 December 2016: 10.9%).
Borrowings 2 Discounted cash flows.
Future cash flows are estimated based on the inputs that
are observable, either directly or indirectly, and the
estimates use one or more observable quoted prices for
orderly transactions in the markets that are not considered
active. The fair value of borrowings was estimated using a
range of interest rates for UAH denominated borrowings,
15.0%-19.7% per annum (31 December 2016: 15.7%-
21.1%% per annum), USD denominated borrowings,
4.9%-5.9% per annum (31 December 2016: 6.6%-9.1%
per annum) and EUR denominated borrowings 6.6%-9.1%
per annum).
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
54
26. SUBSEQUENT EVENTS
Refusal of “Gazprom” PJSC from fulfilling the Final Award requirements rendered by the
Arbitration Institute of the Stockholm Chamber of Commerce. On the Tribunal rendered the Final
Award in respect of the Gas Transit Arbitration, and supported Naftogaz’s position in respect of
Gazprom failure to deliver minimum contractual volume of gas transit (underdeliveries) during 2009-
2017. As a result, the Tribunal awarded USD 4 674 million to be paid in favour of Naftogaz by Gazprom
as a compensation of losses in this respect (Note 23). Additionally, according to the Final Award of the
Tribunal in the Gas Sales Arbitration, Naftogaz is obliged to resume purchases of gas from Gazprom
according to the current Gas Sales Contract. Following the Final Award in this case, in February 2018
Naftogaz has made a prepayment of USD 127 624 thousand for gas deliveries to be made in
March 2018.
However, Gazprom has returned this payment and refused to make gas supplies in March 2018, and has
decreased pressure level in transmission gas lines at their side of the gas transmission system by 20% at
1 March 2018. As a result, the Company had to cover deficit in gas volumes from more expensive
sources of supply at the Western border of Ukraine.
As described in Note 23, such actions from Gazprom currently prevent Naftogaz from fulfilling the
Final Award requirements in respect of offtaking MAQ volumes in 2018.
Recognition of the Arbitral Tribunal Final Awards. The Company has received a legal right to set-off
the amounts owing between the parties pursuant to the Gas Sales Arbitration and Gas Transit Arbitration
in February 2018, and further accounts for the amounts recognised as at 31 December 2017 in current
assets and current liabilities on a net basis in its statement of financial position (Notes 10, 15 and 23).
Claim against “Ukrtransgaz” PJSC in respect of debt settlement. In February 2018 the Company has
initiated a claim against “Ukrtransgaz” PJSC in respect of settling its debts of UAH 5 187 400 thousand
under the gas sales agreement for gas supply for technological needs during January-April 2017. Court
hearings are planned for April 2018.
Prolongation of the PSO Resolution. The Cabinet of Ministers of Ukraine with its Resolution dated
28 March 2018 №228 has prolonged the period of performing public service obligations by the
Company (Note 2) up to 1 June 2018.
Loans repayment. Subsequent to the balance sheet date and up to the date of these separate financial
statements the Company repaid UAH 22 981 982 thousand of bank borrowings. This amount includes
redemption of financing facility from the EBRD concluded in October 2015 that was completed by the
Company on 22 January 2018.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
55
27. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Statement of compliance. These financial statements represent the Company’s separate financial
statements prepared in accordance with International Financial Reporting Standards (“IFRS”) in respect
of preparation and presentation of separate financial statements of entities as it is required by law. Thus,
these separate financial statements differ from the consolidated financial statements also prepared by
the Company which incorporate the financial statements of the Company and its subsidiaries and present
them as a single entity by consolidating similar items of assets and liabilities, income and expense, and
cash flows of the Company with similar items of its subsidiaries. In these separate financial statements,
investments in subsidiaries are accounted for using equity method.
Basis of preparation. The separate financial statements have been prepared on the historical cost basis,
except for certain property, plant and equipment that are measured at revalued amounts, as explained in
the accounting policies below. Historical cost is generally based on the fair value of the consideration
given in exchange for goods and services.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date regardless of whether that price is
directly observable or estimated using another valuation technique.
These policies have been consistently applied to all periods presented, unless otherwise indicated.
Functional and presentation currency. Items included in the separate financial statements of the
Company are measured using the currency of the primary economic environment in which the Company
operates (the “functional currency”). The separate financial statements are presented in Ukrainian
Hryvnias (“UAH”), which is the Company’s functional currency. All amounts presented in the separate
financial statements are presented in UAH rounded to the nearest thousand, unless otherwise indicated.
Transactions denominated in currencies other than the relevant functional currency are translated into
the functional currency using the exchange rate prevailing at the date of the transaction. Foreign
exchange gains and losses arising from settlement of such transactions and from translation of monetary
assets and liabilities denominated in foreign currency at the end of year are recognised in the statement
of profit or loss. Translation at year-end does not apply to non-monetary items, including equity
investments. The effects of exchange rate changes on the fair value of equity securities are recorded as
part of the fair value gain or loss.
As at 31 December, the exchange rates used for translating foreign currency balances were as follows:
In Ukrainian hryvnias 2017 2016
USD 1.00 28.07 27.19
EUR 1.00 33.50 28.42
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
56
27. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Foreign exchange restrictions in Ukraine are limited to compulsory receipt of foreign currency
denominated receivables within 180 days of sales and to compulsory conversion of 50% of proceeds in
foreign currency to UAH. At present, UAH is not freely convertible outside Ukraine.
Investments in subsidiaries and associates. Investments in subsidiaries and associates comprise:
subsidiaries and associates with the ownership interest of 50% and more, over which the Company
has a significant influence in managing their business activities;
associates are entities over which the Company has a significant influence but not control.
The above investments are accounted for by the Company using equity method of accounting, with the
Company’s respective interest in net gains or losses of subsidiaries and associates recorded in the
statement of profit or loss and the Company’s respective interest in other comprehensive income of such
entities recorded in comprehensive income.
Interest in joint operations. A joint operation is a joint arrangement whereby the parties that have joint
control of the arrangement have rights to the assets and obligations for the liabilities relating to the
arrangement. Joint control is the contractually agreed sharing of control of an arrangement which exists
only when decisions about the relevant activities require unanimous consent of the parties sharing
control.
When the Company undertakes its activities under joint operations, the Company as a joint operator
recognises in relation to its interest in a joint operation:
its assets, including its share of any assets held jointly;
its liabilities, including its share of any liabilities incurred jointly;
its revenue from the sale of its share of the output arising from the joint operation;
its share of the revenue from the sale of the output by the joint operation; and
its expenses, including its share of any expenses incurred jointly.
The Company accounts for assets and liabilities, income and expense relating to its interest in a joint
operation in accordance with IFRSs applicable to particular assets, liabilities, income, and expense.
When the Company’s entity transacts with a joint operation in which the Company’s entity is a joint
operator (such as a sale or contribution of assets), the Company is considered to be conducting the
transaction with the other parties to the joint operation, and gains and losses resulting from the
transactions are recognised in the Company’s separate financial statements only to the extent of other
parties’ interests in the joint operation.
Concession agreement (product sharing agreement). The Company entered into a concession
agreement for hydrocarbon exploration and development (the “Concession Agreement”) with the Arab
Republic of Egypt and Egyptian General Petroleum Corporation (“EGPC”) on 13 December 2006.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
57
27. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Concession Agreement includes the following terms and conditions:
Subject to the procedure under the Concession Agreement, the Company shall recover on a quarterly
basis all exploration and development costs to the extent and out of 25% of all petroleum produced
and accumulated from all production areas and not used in petroleum operations (“Cost Recovery”).
Petroleum products under the Concession Agreement include crude oil or gas and LPG.
The remaining 75% of the petroleum produced is shared by the Company and EGPC depending on
the volume of production and the product type (crude oil or gas and LPG). The Company’s share
varies from 15% to 19%.
EGPC shall become the owner of all the Company’s assets acquired and owned within the
Concession Agreement, which assets were charged to Cost Recovery by the Company in connection
with the operations carried out by the Company: the land shall become the property of EGPC as
soon as it is purchased; title to fixed and movable assets shall be transferred automatically and
gradually from the Company to EGPC as they become subject to Cost Recovery.
The development period under the Concession Agreement is limited to maximum 25 years from the date
of commercial oil discovery or from the date of first gas deliveries started in 2010.
Accounting for all exploration and evaluation and other costs and income related to the product sharing
agreement is similar to accounting for a normal production process, as described in this Note.
Segment reporting. Operating segments are reported in a manner consistent with the internal reporting
provided to the Company’s Chief operating decision maker. Segments whose revenue, results, or assets
are ten percent or more of all the segments are reported separately. Segments falling below this threshold
can be reported separately at management’s decision.
Property, plant, and equipment. The Company uses the revaluation model to measure property, plant,
and equipment. Fair value was based on valuations by external independent appraisers. The frequence
of revaluations depends on the movements in the fair values of the assets being revalued. The last
independent valuation of the fair value of the Company’s property, plant, and equipment was performed
as at 31 December 2015.
Subsequent additions to property, plant, and equipment are recorded at cost. Cost includes expenditure
directly attributable to acquisition of the items. The cost of self-constructed assets includes the cost of
materials, direct labor, and an appropriate portion of production overheads. Сost of acquired and self-
constructed qualifying assets includes borrowing costs.
Any increase in the carrying amounts resulting from revaluations are credited to other reserves in equity
through other comprehensive income. Decreases that offset previsouly recognised increases of the same
asset are charged against other reserves in equity through other comprehensive income; all other
decreases are charged to the statement of profit or loss.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
58
27. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
To the extent that an impairment loss on the same revalued asset was previously recognised in the
statement of profit or loss, a reversal of that impairment loss is also recognised in the statement of profit
or loss.
Expenditure incurred to replace a component of an item of property, plant, and equipment that is
accounted for separately is capitalised with the carrying amount of the replaced component being written
off. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as
appropriate, only when it is probable that future economic benefits associated with the item will flow to
the Company and the cost of the item can be measured reliably. The carrying amount of the replaced
part is derecognised. All other repairs and maintenance are charged to the statement of profit or loss
during the financial period in which they are incurred. Property, plant, and equipment are derecognised
upon disposal or when no future economic benefits are expected from the continued use of the asset.
Gains and losses on disposal determined by comparing proceeds with carrying amount of property, plant,
and equipment are recognised in the statement of profit or loss. When revalued assets are sold, the
amounts included in other reserves are transferred to retained earnings.
Construction in progress includes also prepayments for property, plant and equipment.
Exploration expense. Exploration expenses comprise the costs associated with unproved reserves.
These include geological and geophysical costs for the identification and investigation of areas with
possible oil and gas reserves and administrative, legal, and consulting costs in connection with
exploration.
Research and development expenses. Research and development (R&D) expenses include all direct
and indirect materials, personnel and external services, costs incurred in connection with the focused
search for new development techniques and significant improvements in products services and
processes, and in connection with research activities. Expenditure related to research activities is shown
as R&D expenses in the period in which it is incurred. Development costs are capitalised if the
recognition criteria according to IAS 38 “Intangible Assets” are fulfilled.
Depreciation. Depreciation is charged to the statement of profit or loss on a straight-line basis to allocate
costs of individual assets to their residual values over their estimated useful lives. Depreciation
commences on the date of acquisition or, in respect of self-constructed assets, from the time an asset is
completed and ready for use. Other property, plant, and equipment are depreciated on a straight line
basis over their expected useful lives. The typical useful lives of the Company’s other property, plant,
and equipment are as follows:
Useful lives, years
Machinery and equipment 5-12
Buildings 20-40
Other fixed assets 3-6
Construction in progress is not depreciated.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
59
27. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Intangible assets. Intangible assets have definite useful lives and primarily include capitalised computer
software. Acquired computer software is capitalised on the basis of the costs incurred to acquire and
bring them to use. Intangible assets are carried at cost, less accumulated amortisation and impairment
losses, if any. If impaired, the carrying amount of intangible assets is written down to the higher of value
in use and fair value, less costs to sell.
Leases. Leases in which a significant portion of the risks and rewards of ownership are retained by a
lessor are classified as operating leases. Payments made under operating leases (net of any incentives
received from the lessor) are charged to the statement of profit or loss on a straight-line basis over the
period of the lease. Finance leases are capitalised at the lease commencement at the lower of the fair
value of the leased property and the present value of the minimum lease payments.
Impairment of non-financial assets. Assets are reviewed for impairment whenever events and changes
in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is
recognised for the amount by which the assets carrying amount exceeds its recoverable amount.
The recoverable amount is the higher of fair value, less cost to sell, and value in use. For purposes of
assessing impairment, assets are grouped to the lowest levels for which there are separately identifiable
cash flows (cash generating units). Non-financial assets that have suffered impairment are reviewed for
possible reversal of the impairment at each reporting date.
Classification of financial assets. The Company classifies its financial assets into the following
measurement categories: (a) loans and receivables, and (b) available-for-sale financial assets.
Loans and receivables include financial receivables created by the Company by providing cash, goods,
or services directly to a debtor, other than those receivables which are created with the intention to be
sold immediately or in the short term, or which are quoted in an active market. Loans and receivables
comprise primarily loans and trade and other accounts receivable, including purchased loans and
promissory notes. All other financial assets are included in the available-for-sale category.
Initial recognition of financial instruments. Financial assets and financial liabilities are initially
measured at fair value.
The Company’s principal financial instruments comprise available-for-sale investments, borrowings,
cash and cash equivalents, and short-term deposits. The Company has various other financial
instruments, such as accounts receivable and payables from trade debtors and trade creditors, which
arise directly from its operations.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
60
27. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
All purchases and sales of financial instruments that require delivery within the time frame established
by regulation or market convention (“regular way” purchases and sales) are recorded at trade date, which
is the date that the Company commits to deliver a financial instrument. All other purchases and sales
are recognised on the settlement date with the change in value between the commitment date and
settlement date not recognised for assets carried at cost or amortised cost, and recognised in equity for
assets classified as available-for-sale.
Subsequent measurement of financial instruments. Subsequent to initial recognition, the Company’s
financial liabilities, loans, and receivables are measured at amortised cost. Amortised cost is calculated
using the effective interest rate method and, for financial assets, is determined net of any impairment
losses. Premiums and discounts, including initial transaction costs, are included in the carrying amount
of the related instrument and amortised based on the effective interest rate of the instrument.
The carrying 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 Company for similar financial instruments.
Gains and losses arising from a change in the fair value of available-for-sale assets are recognised
directly in other comprehensive income. In assessing the fair value of financial instruments, the
Company uses a variety of methods and makes assumptions based on market conditions existing at the
reporting date.
When available-for-sale assets are sold or otherwise disposed of, recognised in other comprehensive
income the cumulative gain or loss is included in the determination of net profit. When a decrease in
fair value of available-for-sale assets has been recognised in equity and there is objective evidence that
the assets are impaired, the loss recognised in other comprehensive income is transferred and included
in the determination of net profit, even though the assets have not been derecognised.
Interest income on available-for-sale debt securities is calculated using the effective interest method and
recognised in the statement of profit or loss. Dividends on available-for-sale equity instruments are
recognised in the statement of profit or loss when the Company’s right to receive payment is established
and the inflow of economic benefits is probable. Impairment losses are recognised in the statement of
profit or loss when incurred as a result of one or more events that occurred after the initial recognition
of available-for-sale investments. A significant or prolonged decline in the fair value of an instrument
below its cost is an indicator that it is impaired. The cumulative impairment loss measured as the
difference between the acquisition cost and the current fair value, less any impairment loss on that asset
previously recognised in the statement of profit or loss, is removed from equity and recognised in the
statement of profit or loss.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
61
27. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Impairment losses on equity instruments are not reversed through the statement of profit or loss. If, in
a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the
increase can be objectively related to an event occurring after the impairment loss was recognised in the
statement of profit or loss, the impairment loss is reversed through current period’s statement of profit
or loss.
A provision for impairment of loans and accounts receivable is established when there is objective
evidence that the Company will not be able to collect all amounts due according to the original terms.
Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or
financial reorganisation, and default or delinquency in payments are considered to be indicators that the
trade receivable is impaired.
The amount of the provision is the difference between the asset’s carrying amount and the present value
of estimated future cash flows. The carrying amount of the asset is reduced through the utilisation of an
allowance account, and the amount of the loss is recognised in the statement of profit or loss. When
receivable is uncollectible, it is written off against the allowance account for receivables. Subsequent
recoveries of amounts previously written off are credited in the statement of profit or loss.
Derecognition of financial instruments. The Company derecognises financial assets when (i) the assets
are redeemed or the rights to cash flows from the assets have otherwise expired, or (ii) the Company has
transferred substantially all the risks and rewards of ownership of the assets, or (iii) the Company has neither
transferred nor retained substantially all risks and rewards of ownership but has not retained control. Control
is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated
third party without needing to impose additional restrictions on the sale.
Income tax. Income tax have been provided for in the separate financial statements in accordance with
the Ukrainian legislation enacted or substantively enacted by the reporting date. The income tax charge
comprises current tax and deferred tax and is recognised in the statement of profit or loss unless it relates
to transactions that are recognised, in the same or a different period, in other comprehensive income.
Current tax is the amount expected to be paid to or recovered from the taxation authorities in respect of
taxable profits or losses for the current and prior periods. Taxes other than income tax are recorded
within operating expenses.
Deferred income tax is provided using the balance sheet liability method for tax loss carry forwards and
temporary differences arising between the tax bases of assets and liabilities and their carrying amounts
for financial reporting purposes.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
62
27. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In accordance with the initial recognition exemption, deferred taxes are not recorded for temporary
differences on initial recognition of an asset or a liability in a transaction other than a business
combination, if the transaction, when initially recorded, affects neither accounting nor taxable profit.
Deferred tax liabilities are not recorded for temporary differences on initial recognition of goodwill and
subsequently for goodwill which is not deductible for tax purposes. Deferred tax balances are measured
at tax rates enacted or substantively enacted at the reporting date which are expected to apply to the
period when the temporary differences will reverse or the tax loss carry forwards will be utilised.
Deferred tax assets and liabilities are netted only within the individual companies of the Company.
Deferred tax assets for deductible temporary differences and tax loss carry forwards are recorded only
to the extent that it is probable that future taxable profit will be available against which the deductions
can be utilised.
Inventories. Inventories are recorded at the lower of cost and net realisable value. The cost of
inventories includes expenditures incurred in acquiring the inventories, production or conversion costs,
and other costs incurred in bringing them to their existing location and condition.
The cost of inventory is determined using the following methods: weighted average cost for natural gas
and “first-in, first-out” basis for other inventories. Net realisable value is the estimated selling price in
the ordinary course of business, less the cost of completion and selling expenses.
Trade accounts receivable. Trade accounts receivable are recognised initially at fair value and
subsequently measured at amortised cost using the effective interest rate method, less allowance for
impairment.
Prepayments made and other current assets. Prepayments are carried at cost, less allowance for
impairment. A prepayment is classified as non-current when the goods or services relating to the
prepayment are expected to be obtained after one year or when the prepayment relates to an asset which
will itself be classified as non-current upon initial recognition.
Other prepayments are charged to the statement of profit or loss when the goods or services relating to
the prepayments are received. If there is an indication that the assets, goods, or services relating to a
prepayment will not be received, the carrying value of the prepayment is written down accordingly and
a corresponding impairment loss is recognised in the statement of profit or loss.
Promissory notes. Some purchases may be settled by promissory notes or bills of exchange which are
negotiable debt instruments. Purchases settled by promissory notes are recognised based on
management’s estimate of the fair value to be given up in such settlements. The fair value is determined
with reference to observable market information.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
63
27. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash and cash equivalents. Cash and cash equivalents include cash on hand, deposits held at call with
banks, and other short-term highly liquid investments with original maturities of three months or less.
Cash and cash equivalents are carried at amortised cost using the effective interest rate method.
Restricted balances are excluded from cash and cash equivalents for the purposes of the statement of
cash flows. Balances restricted from being exchanged or used to settle a liability for at least twelve
months after the reporting date are included in other non-current assets.
Share capital. Ordinary shares are classified as equity. Incremental costs directly attributable to the
issue of new shares are shown in equity as a deduction, net of tax, from the proceeds.
Dividends and mandatory budget contribution of profit share. Dividends and mandatory budget
contribution of profit share are recognised as a liability and deducted from equity at the reporting date
only if they are declared before or on the reporting date. Dividends are disclosed when they are proposed
before the reporting date or proposed or declared after the reporting date but before the separate financial
statements are authorised for issue.
Value added tax („VAT”). In Ukraine, VAT is levied at two rates: 20% on sales and imports of goods
within the country works and services and 0% on the export of goods and provision of works or services
to be used outside Ukraine. A taxpayer’s VAT liability incurs on the earlier of the date of shipping goods
to a customer or the date of receiving payment from the customer. A VAT credit is the amount that a
taxpayer is entitled to offset against its VAT liability in a reporting period. Rights to VAT credit arise
when a VAT invoice registered in the Unified register of VAT invoices, and can be issued on the earlier
of the date of payment to the supplier or the date goods are received. VAT liabilities and credit are
registered in the electronic system separately for each tax payer and in accordance with the rules set out
by the Cabinet of Ministers of Ukraine.
Borrowings. Borrowings include bank borrowings and bonds.
Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are
subsequently stated at amortised cost using the effective interest rate method. Bank overdrafts are
included into borrowings line item in the statement of financial position.
Trade accounts payable. Trade accounts payable are recognised and initially measured under the policy
for financial instruments mentioned above. Subsequently, instruments with a fixed maturity are re-
measured at amortised cost using the effective interest rate method. Amortised cost is calculated by
taking into account any transaction costs and any discount or premium on settlement.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
64
27. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Advances received. Advances received are carried at the amounts originally received. Amounts of
advances received are expected to be realised through the revenue received from ordinary activities of
the Company.
Provisions. Provisions are recognised when the Company has a present obligation (legal or
constructive) as a result of a past event, and it is probable that an outflow of resources embodying
economic enefits will be required to settle the obligation, and a reliable estimate can be made of the
amount of the obligation.
Where the Company expects some of all the 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 on any provision is presented in the statement of profit or loss, net of any reimbursement.
If the effect of 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 provision due to the passage of time is recognised as a finance cost.
Other liabilities. Other financial liabilities are recognised initially at fair value, net of transaction costs
incurred, and are subsequently stated at amortised cost using the effective interest rate method. Other
non-financial liabilities are measured at cost.
Contingent assets and liabilities. A contingent asset is not recognised in the separate financial
statements but disclosed when an inflow of economic benefits is probable.
Contingent liabilities are not recognised in the separate 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. Contingent liabilities are disclosed unless the possibility of an outflow of resources
embodying economic benefits is remote.
Revenue recognition. Revenues from sales of goods are recognised at the point of transfer of risks and
rewards associated with ownership of goods. If the goods are transported to a specified location, revenue
is recognised when the goods are transferred to a customer at the destination point. Revenues are
measured at the fair value of the consideration received or receivable, and are shown net of value added
tax and discounts.
Revenue from sale and resale of natural gas is recognised at the point of transfer of risks and rewards
associated with ownership of these goods. Revenues are measured at the fair value of the consideration
received or receivable, and are shown net of value added tax and discounts.
Recognition of expenses. Expenses are recorded on an accrual basis. The cost of goods sold comprises
the purchase price, transportation costs, commissions relating to supply agreements, and other related
expenses.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
65
27. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Finance income and costs. Finance income and costs comprise interest expense on borrowings, losses
on early repayment of loans, interest income on funds invested, income or loss on origination of financial
instruments, unwinding of interest of the pension obligation and provisions, and foreign exchange gains
and losses.
Borrowing costs that relate to assets that take a substantial period of time to construct are capitalised as
part of the cost of the asset. All other interest and other costs incurred in connection with borrowings
are expensed using the effective interest rate method.
Interest income is recognised as it accrues, taking into account the effective yield on the asset.
Employee benefits: Defined Contributions Plan. The Company makes statutory unified social
contributions to the State Pension Fund of Ukraine in respect of its employees. The contributions are
calculated as a percentage of current gross salary, and are expensed when incurred. Discretionary
pensions and other post-employment benefits are included in labour costs in the statement of profit or
loss.
During 2017 the Company has recognised expenses in respect of contribution to the State Pension Fund
of Ukraine amounting to UAH 49 783 thousand (2016: UAH 45 493 thousand).
Employee benefits: Defined Benefit Plan. The Company provides lump sum benefits, payments on
reaching certain age, and other benefits as prescribed by a collective agreement. The liability recognised
in the statement of financial position in respect of the defined benefit pension plan is the present value
of the defined benefit obligation at the reporting date. The defined benefit obligation is calculated
annually using the projected unit credit method.
The present value of the defined benefit obligation is determined by discounting the estimated future
cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency
in which the benefits will be paid, and that have terms to maturity approximating the terms of the related
pension liability.
Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are
charged or credited to other comprehensive income in the period in which they arise. Past service costs
are recognised immediately in the statement of profit or loss.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
66
28. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
In applying the Company’s accounting policies, management is required to make judgments, estimates,
and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from
other sources. The estimates and associated assumptions are based on historical experience and other
factors that are considered to be relevant. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting
estimates are recognised in the period in which the estimate is revised if the revision affects only that
period, or in the period of the revision and future periods if the revision affects both current and future
periods.
Critical judgments in applying accounting policies. The following are the critical judgments, apart
from those involving estimations, that the Company’s management has made in the process of applying
the Company’s accounting policies and that have the most significant effect on the amounts recognised
in the separate financial statements.
Revaluation of property, plant, and equipment. As described in Note 27, the Company applies the
revaluation model to its property, plant, and equipment. At each reporting date, the Company carries
out a review of the carrying value of those assets in order to determine whether it is materially different
from the fair value. Based on the results of the review, management concluded that carrying amounts of
property, plant and equipment as at 31 December 2017 did not differ materially from their fair values.
Key sources of estimation uncertainty. The following are the key assumptions concerning the future,
and other key sources of estimation uncertainty at the end of the reporting period, that have a significant
risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next
financial year.
Restructuring of trade accounts receivable for gas under the Law “On measures to settle the debts
for the natural gas consumed by district heating companies and distribution and water supplying
companies” №1730 (Note 2). The Company reclassifies trade accounts receivable under the
restructuring agreements for gas as non-current after three months from the date of agreement, if the
debtor has made all payments in due terms as described in the repayment schedule. Such accounts
receivable are then accounted for at amortised cost, and reverses respective provision for doubtful debts.
Such receivables are accounted for as current trade accounts receivable for products, goods and services
until that time.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
67
28. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (Continued)
Impairment of trade and other accounts receivable. Management estimates the likelihood of the
collection of trade and other accounts receivable based on an analysis of individual accounts. Factors
taken into consideration include an aging analysis of trade and other receivables with reference to the
payment history, credit terms allowed to customers, and available market information regarding the
counterparty’s ability to pay. Should actual collections be less than management’s estimates, the
Company would be required to record an additional impairment expense.
Deferred tax asset recognition. Deferred tax assets are recorded to the extent that realisation of the
related tax benefit is probable. In determining future taxable profits and the amount of tax benefits that
are probable in the future, management makes judgments and applies estimation based on historic
taxable profits and expectations of future taxable income that are believed to be reasonable under the
circumstances.
Tax legislation. Ukrainian tax, currency, and customs legislation continues to evolve. Conflicting
regulations are subject to varying interpretations. Management believes its interpretations are
appropriate and sustainable, but no guarantee can be provided against a challenge from tax authorities
(Note 23).
29. ADOPTION OF NEW OR REVISED STANDARDS AND INTERPRETATIONS
Adoption of new and revised International Financial Reporting Standards. The following standards
have been adopted by the Company for the first time for the financial year beginning on or after
1 January 2017:
Amendments to IAS 12 “Income Taxes” – Recognition of deferred tax assets for unrealised losses;
Amendments to IAS 7 “Statement of Cash Flows” – Disclosure initiative;
Annual Improvements to IFRSs 2014-2016 Cycle – amendments to IFRS 12.
The adoption of amendments to standards did not have any effect on the financial position or
performance reported in the separate financial statements and had not resulted in any changes to the
Company’s accounting policies and the amounts reported for the current or prior years.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
68
29. ADOPTION OF NEW OR REVISED STANDARDS AND INTERPRETATIONS
(Continued)
Standards and Interpretations in issue, but not yet effective. At the date of authorisation of these
consolidated financial statements, the following Standards and Interpretations, as well as amendments
to Standards were in issue but not yet effective:
Standards/Interpretations
Effective for annual
accounting period
beginning on or after
IFRS 15 “Revenue from Contracts with Customers” including amendments to
IFRS 15: Effective date of IFRS 15
Clarifications to IFRS 15 “Revenue from Contracts with Customers”
1 January 2018
1 January 2018
IFRS 9 “Financial Instruments” 1 January 2018
Amendments to IFRS 2 “Share-based Payment” – Classification and
Measurement of Share-based Payment Transactions 1 January 2018
IFRIC 22 “Foreign Currency Transactions and Advance Consideration” 1 January 2018
Amendments to IFRS 4 “Applying IFRS 9 “Financial Instruments” with IFRS 4
„Insurance Contracts“
1 January 2018
Amendments to IAS 40 “Investment Property”: Transfers of Investment Property 1 January 2018
Annual Improvements to IFRSs 2014-2016 Cycle 1 January 2018
IFRIC 23 “Uncertainty over Income Tax Treatments” 1 January 2019
IFRS 16 “Leases” 1 January 2019
Amendments to IFRSs – Annual Improvements
to IFRSs 2015 –2017 Cycle
1 January 2019
Amendments to IFRS 9 “Financial Instruments”: Prepayment Features
with Negative Compensation
1 January 2019
Amendments to IAS 28 “Investments in Associates and Joint Ventures”: Long-
term Interests in Associates and Joint Ventures
1 January 2019
Amendments to IAS 19 “Employee Benefits”: Plan Amendment, Curtailment or
Settlement
1 January 2019
IFRS 17 “Insurance Contracts” 1 January 2021
Amendment to IFRS 10 “Consolidated Financial Statements” and IAS 28
“Investments in Associates and Joint Ventures” – Sale or contribution of assets
between an investor and its associate or joint venture
Effective date to be
determined
IFRS 9 Financial Instruments
IFRS 9 issued in November 2009 introduced new requirements for the classification and measurement
of financial assets. IFRS 9 was subsequently amended in October 2010 to include requirements for the
classification and measurement of financial liabilities and for derecognition, and in November 2013 to
include the new requirements for general hedge accounting. Another revised version of IFRS 9 was
issued in July 2014 mainly to include a) impairment requirements for financial assets and b) limited
amendments to the classification and measurement requirements by introducing a ‘fair value through
other comprehensive income’ (FVTOCI) measurement category for certain simple debt instruments.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
69
29. ADOPTION OF NEW OR REVISED STANDARDS AND INTERPRETATIONS
(Continued)
The key requirements of IFRS 9 are:
Classification and measurement of financial assets. All recognised financial assets that are
within the scope of IFRS 9 are required to be subsequently measured at amortised cost or fair value.
Specifically, debt investments that are held within a business model whose objective is to collect
the contractual cash flows, and that have contractual cash flows that are solely payments of
principal and interest on the principal outstanding are generally measured at amortised cost at the
end of subsequent accounting periods. Debt instruments that are held within a business model
whose objective is achieved both by collecting contractual cash flows and selling financial assets,
and that have contractual terms that give rise on specified dates to cash flows that are solely
payments of principal and interest on the principal amount outstanding, are generally measured at
FVTOCI. All other debt investments and equity investments are measured at their fair value at the
end of subsequent accounting periods. In addition, under IFRS 9, entities may make an irrevocable
election to present subsequent changes in the fair value of an equity investment (that is not held for
trading nor contingent consideration recognised by an acquirer in a business combination) in other
comprehensive income, with only dividend income generally recognised in profit or loss;
Classification and measurement of financial liabilities. With regard to the measurement of
financial liabilities designated as at fair value through profit or loss, IFRS 9 requires that the amount of
change in the fair value of a financial liability that is attributable to changes in the credit risk of that
liability is presented in other comprehensive income, unless the recognition of such changes in other
comprehensive income would create or enlarge an accounting mismatch in profit or loss. Changes in
fair value attributable to a financial liability's credit risk are not subsequently reclassified to profit or
loss. Under IAS 39, the entire amount of the change in the fair value of the financial liability designated
as fair value through profit or loss is presented in profit or loss;
Impairment. In relation to the impairment of financial assets, IFRS 9 requires an expected credit
loss model, as opposed to an incurred credit loss model under IAS 39. The expected credit loss
model requires an entity to account for expected credit losses and changes in those expected credit
losses at each reporting date to reflect changes in credit risk since initial recognition. In other words,
it is no longer necessary for a credit event to have occurred before credit losses are recognised;
Hedge accounting. The new general hedge accounting requirements retain the three types of hedge
accounting mechanisms currently available in IAS 39. Under IFRS 9, greater flexibility has been
introduced to the types of transactions eligible for hedge accounting, specifically broadening the
types of instruments that qualify for hedging instruments and the types of risk components of non-
financial items that are eligible for hedge accounting. In addition, the effectiveness test has been
overhauled and replaced with the principle of an ‘economic relationship’. Retrospective assessment
of hedge effectiveness is also no longer required. Enhanced disclosure requirements about an
entity’s risk management activities have also been introduced.
Based on an analysis of the Company’s financial assets and financial liabilities as at 31 December 2017
based on the facts and circumstances that exist at that date, the management of the Company has assessed
the impact of IFRS 9 to the financial statements as follows:
Classification and measurement
All financial assets and financial liabilities will continue to be measured on the same basis as is currently
adopted under IAS 39. Based on its assessment, the Company believe that the new classification
requirements will not have a material impact on its accounting for financial assets and financial
liabilities.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017
70
29. ADOPTION OF NEW OR REVISED STANDARDS AND INTERPRETATIONS
(Continued)
Impairment
The Company expects to apply the simplified approach to recognise lifetime expected credit losses for
its trade and other receivables, as permitted by IFRS 9. In relation to the cash and cash equivalents, the
management of the Company considers that they have low credit risk given that 99% of the Company’s
cash and cash equivalents are placed in the state-owned banks.
Currently management is finalising its calculation of the impact from the lifetime expected credit losses
according to IFRS 9.
The Company does not apply hedge accounting under IAS 39 and does not intend to apply it under
IFRS 9.
IFRS 15 Revenue from Contracts with Customers
IFRS 15 establishes a single comprehensive model for entities to use in accounting for revenue arising
from contracts with customers. IFRS 15 will supersede the current revenue recognition guidance
including IAS 18 Revenue, IAS 11 “Construction Contracts” and the related Interpretations when it
becomes effective.
The core principle of IFRS 15 is that an entity should recognise revenue to depict the transfer of
promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services.
Specifically, the Standard introduces a 5-step approach to revenue recognition:
identify the contract with the customer;
identify the performance obligations in the contract;
determine the transaction price;
allocate the transaction price to the performance obligations in the contracts;
recognise revenue when (or as) the entity satisfies a performance obligation.
Under IFRS 15, an entity recognises revenue when or as a performance obligation is satisfied, i.e. when
‘control’ of the goods or services underlying the particular performance obligation is transferred to the
customer. Far more prescriptive guidance has been added in IFRS 15 to deal with specific scenarios.
Furthermore, extensive disclosures are required by IFRS 15.
In April 2016, the IASB issued Clarifications to IFRS 15 in relation to the identification of performance
obligations, principal versus agent considerations, as well as licensing application guidance.
The standard permits either a full retrospective or a modified retrospective approach for the adoption.
Based on five-step model defined by IFRS 15 the Company performs a review to understand how IFRS
15 applies to the Company’s business. Apart from providing more extensive disclosures on the
Company’s revenue transactions, the management does not anticipate that the application of IFRS 15
will have a significant impact on the financial position and/or financial performance of the Company.
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