MEGAFON Annual Report 2016
BRINGING THE FUTURE CLOSER

Independent Auditors’ Report

To the Board of Directors and Shareholders PJSC MegaFon

OPINION

We have audited the consolidated financial statements of PJSC MegaFon (the “Company”) and its subsidiaries (the “Group”), which comprise the consolidated statement of financial position as at 31 December 2016, the consolidated statements of income and other comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising significant accounting policies and other explanatory information.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 31 December 2016, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS).

BASIS FOR OPINION

We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the independence requirements that are relevant to our audit of the consolidated financial statements in the Russian Federation and with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code), and we have fulfilled our other ethical responsibilities in accordance with the requirements in the Russian Federation and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

KEY AUDIT MATTERS

KEY audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

REVENUE RECOGNITION - TECHNICAL COMPLEXITY
Please refer to the Note 2.1 in the consolidated financial statements.
The key audit matter How the matter was addressed in our audit
Revenue is a material amount consisting of a high volume of individually low value transactions. There are a number of complex IT systems used to process revenue-related data and the Group relies on the output of these IT systems. The major risks of distortion of revenue arise from:
  • the capture, processing and transfer of data on the parameters of services between the switching equipment, billing system and accounting system; and
  • the correct application of the tariffs, as these continuously change during the year.
Our audit procedures included an assessment of the Group’s policies and controls in place over the IT system environment to determine their effectiveness in preventing and/or detecting revenue-related data distortion or loss. We tested the following key controls over the revenue-related systems:
  • we checked how often back-ups were taken and inspected the server rooms to ensure appropriate physical safeguards were in place;
  • we checked that only authorised access can be made to the systems by inspecting approved access requests for compliance with the internal policy;
  • we checked that only authorised system program changes can be made, and that these authorised changes were appropriately made, by inspecting documentation relating to the testing of these changes before implementation;
  • for new tariffs introduced in the year we inspected documentation relating to the application of the new tariffs in ‘test’ mode before going ‘live’ in the commercial operation;
  • we inspected the data processing on parameters of services from initial capture of data by the switching equipment and further transfer of data to the billing system by tracing a number of connection entries. Further, we inspected the Group’s end-to-end revenue reconciliations between the data in the billing system and the accounting system.
We performed the following key substantive procedures:
  • we checked that valid metrology certificates were issued by appropriately specialized organizations for the switching equipment and billing system;
  • we recalculated the amounts billed to subscribers by multiplying the parameters of services rendered and the appropriate tariffs;
  • we reconciled the data on subscribers’ payments taken from the payment agents’ confirmations with the relevant amounts in the billing system.
All the procedures listed above involved our own IT specialists. We also performed analytical procedures to check that the trends in revenue by type of service were in line with our understanding of the Group’s business and the wider industry.
GOODWILL IMPAIRMENT TESTING - CASH GENERATING UNIT “BROADBAND INTERNET”
The key audit matter How the matter was addressed in our audit
Please refer to the Note 3.2.2 in the consolidated financial statements.
Part of the Group’s goodwill is allocated to the “Broadband internet” cash generating unit (CGU).

In addition to an annual goodwill impairment test required by International Financial Reporting Standards, the Group identified impairment indications in respect of the “Broadband internet” CGU at 31 December 2016.

Impairment testing is complex and based on highly judgmental assumptions.
We involved KPMG valuation specialists to assist us in testing the appropriateness of the Group’s methodology and key assumptions applied to determine the recoverable amount of the “Broadband internet” CGU. We checked the key assumptions used by the Group in its discounted cash flow model as follows
  • we assessed the historical forecasting accuracy for average revenue per user (ARPU), market share, and operating and capital expenditures (capex);
  • we compared forecasted ARPU, and capex to revenue and EBITDA margin ratios to external market data and consensus forecasts; we assessed the appropriateness of the market share forecast based on analysts’ expectations of the subscribers’ growth rate;
  • we compared the first forecast year in the model to the Group’s approved budget for 2017.
We performed our own sensitivity analysis and assessed the impact of changes in key assumptions which we consider reasonably possible based on our industry knowledge. We determined the recoverable amount on a market approach based on recent actual deals over similar companies in the industry. We assessed whether the related disclosures in the consolidated financial statements are appropriate.

OTHER INFORMATION

Management is responsible for the other information. The other information comprises the information included in the Annual Report other than the consolidated financial statements and our auditors’ report thereon. The Annual Report is expected to be made available to us after the date of this auditors’ report.

Our opinion on the consolidated financial statements does not cover the other information and we will not express any form of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above when it becomes available and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.

RESPONSIBILITIES OF MANAGEMENT AND THOSE CHARGED WITH GOVERNANCE FOR THE CONSOLIDATED FINANCIAL STATEMENTS

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is responsible for assessing the Group’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 Group or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Group’s financial reporting process.

AUDITORS' RESPONSIBILITIES FOR THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ 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 consolidated financial statements.

As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

  • Identify and assess the risks of material misstatement of the consolidated 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 Group’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 Group’s ability to continue as a going concern. If we conclude that a material YERKOZHA AKYLBEK JSC “KPMG” Moscow, Russia 15 March 2017 uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the consolidated 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 auditors’ report. However, future events or conditions may cause the Group to cease to continue as a going concern.
  • Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated 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 Group to express an opinion on the consolidated 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.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditors’ report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

The engagement partner on the audit resulting in this independent auditors’ report is:

YERKOZHA AKYLBEK

JSC “KPMG”
Moscow, Russia
15 March 2017