MEGAFON Annual Report 2016
BRINGING THE FUTURE CLOSER

1. General

1.1.   About the Company

Public Joint Stock Company MegaFon (“MegaFon”, the “Company” and, together with its consolidated subsidiaries, the “Group”) is a company incorporated under the laws of the Russian Federation (“Russia”) and registered in the Unified State Register of Legal Entities under number 1027809169585. Its registered office is at 30 Kadashevskaya Embankment, Moscow, 115035, Russian Federation.

MegaFon is a leading integrated telecommunications operator in Russia and provides a broad range of voice, data and other telecommunication services to retail customers, businesses, government clients and other telecommunication services providers.

MegaFon lists its ordinary shares on the Moscow Exchange and its ordinary shares represented by Global Depositary Receipts, or GDRs, on the London Stock Exchange, in each case under the symbol ‘‘MFON’’.

As of 31 December 2016, the Group is primarily owned by USM group, which is an indirect controlling shareholder, and by Telia Company and affiliates (Telia group), another major shareholder with significant influence over the Group.  Telia Company is a publicly owned Swedish company.

1.2.   Basis of preparation

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

The consolidated financial statements have been prepared on a historical cost basis, unless disclosed otherwise. The consolidated financial statements are presented in millions of Rubles, except for per share amounts which are in Rubles or unless otherwise indicated.

The consolidated financial statements were authorised for issue by the Company’s Chief Executive Officer (“CEO”) and Chief Accountant on 15 March 2017.

Foreign currency translation

The Group’s consolidated financial statements are presented in Rubles, which is also the functional currency of PJSC MegaFon and its principal subsidiaries.

The functional currency of CJSC “TT mobile”, the Company’s 75% owned subsidiary in Tajikistan, is the US dollar as a majority of its revenues, costs, property and equipment purchases, debt and trade liabilities is either priced, incurred, payable or otherwise measured in US dollars.

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or fair value measurement where items are re-measured to their fair value. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year‑end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the ‘Foreign exchange gain/(loss), net’ line in profit or loss.

The assets and liabilities of foreign operations are translated into Rubles at the rate of exchange prevailing on the reporting date and their statements of comprehensive income are translated at exchange rates prevailing on the dates of the transactions. The exchange differences arising on the translation are recognised in other comprehensive income (“OCI”).

Change in presentation

The Company changed the presentation of interest paid and interest received in its consolidated statement of cash flows to more directly link interest paid or received to the loans or other financial assets and liabilities to which it relates. Interest paid has been moved from operating activities to financing activities in the amount of 19,219 (2015: 13,100), interest paid and capitalised has been moved from investing activities to financing activities in the amount of 1,755 (2015: 1,499); and interest received has been moved from operating activities to investing activities in the amount of 1,152 (2015: 2,571).

1.3.   Basis of consolidation

The consolidated financial statements comprise the financial statements of the Company and its subsidiaries as of 31 December 2016.

Subsidiaries are consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date when such control ceases. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies.

Profit or loss and each component of OCI are attributed to the equity holders of the Company and to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance.

All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation.

1.4.   Significant accounting judgments, estimates and assumptions

The preparation of these consolidated financial statements required management to make judgments, estimates and assumptions that affect the amounts reported in the consolidated statement of financial position, the consolidated income statement, the consolidated statement of other comprehensive income and the accompanying disclosures. Subsequent revisions or

corrections made to these assumptions and estimates hereafter could result in outcomes that require a material adjustment to the carrying amount of affected assets or liabilities in future periods.

In the process of applying the Group’s accounting policies, management has made various judgments. Those which management has assessed to have the most significant effect on the amounts recognised in the consolidated financial statements have been discussed in the individual notes for the related financial statement line items: revenue, income taxes, property and equipment, intangible assets, investments in associates and joint ventures, financial assets and liabilities, provisions, share-based compensation, and business combinations.

The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are also described in the individual notes for the related financial statement line items below. The Group based its assumptions and estimates on parameters available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising that are beyond the control of the Group. Such changes are reflected in the assumptions when they occur.

1.5.   Significant accounting policies

The significant accounting policies have been discussed in the individual notes for the related financial statement line items.

Changes in accounting policies and disclosures

During 2016 the Group applied the following amendments to accounting standards for the first time:

IAS 1 Disclosure Initiative – Amendments to IAS 1

The amendments gave more guidance on disclosing information in the financial statements, presenting the line items and aggregating information in the financial statements, including the notes, and ordering and grouping of the notes. The amendments did not impact the Group’s consolidated financial statements.

1.6.   Standards issued but not yet effective

The standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Group’s consolidated financial statements, and are applicable to the Group, are disclosed below. The Group intends to adopt these standards when they become effective unless otherwise stated below.

IFRS 15 Revenue from Contracts with Customers

In May 2014 the IASB issued IFRS 15, Revenue from Contracts with Customers, a comprehensive revenue recognition guidance that replaces the following previous revenue recognition standards: International Accounting Standards (“IAS”) 18, Revenue, IAS 11, Construction Contracts, International Financial Reporting Interpretations Committee (“IFRIC”) Interpretation 13, Customer Loyalty Programmes, IFRIC 15, Agreements for the Construction of Real Estate, IFRIC 18, Transfers of Assets from Customers, and SIC-31, Revenue – Barter Transactions Involving Advertising Services.

The core principle of the Standard 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.

During 2015 the IASB issued an amendment to IFRS 15, which deferred the effective date of the Standard by one year to 1 January 2018. Earlier application is permitted. The Standard provides a choice of transition methods.

The Group will adopt IFRS 15 from 1 January 2018. The Group is evaluating the possible effect of the Standard on its consolidated financial statements and the transition method to be used.

IFRS 9 Financial Instruments 

In July 2014 the IASB completed its process to replace IAS 39, Financial Instruments: Recognition and Measurement, with the issuance of the final amendments to IFRS 9. IFRS 9 (July 2014) is effective for annual periods beginning on or after 1 January 2018. Earlier application is permitted. IFRS 9 (July 2014) should be applied retrospectively in accordance with IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors. IFRS 9 (July 2014) should not be applied to items that have been derecognised at the date of initial application.

The Group will adopt IFRS 9 (July 2014) from 1 January 2018. The Group is evaluating the effect of the Standard on its consolidated financial statements.

IFRS 16 Leases

In January 2016 the IASB issued IFRS 16, Leases, which sets out the principles for the recognition, measurement, presentation and disclosure of leases and replaces previous guidance on leases. The Standard requires lessees to present right-of-use assets and lease liabilities on the balance sheet for all leases (with limited exceptions).

The Standard is effective for annual reporting periods beginning on or after 1 January 2019. Earlier application is permitted for entities that apply IFRS 15, Revenue from Contracts with Customers, at or before the date of initial application of IFRS 16.

A lessee should apply IFRS 16 to its leases either: (a) retrospectively to each prior reporting period presented applying IAS 8; or (b) retrospectively with the cumulative effect of initially applying IFRS 16 recognised at the date of initial application.

The Group is evaluating the possible effect of the Standard on its consolidated financial statements, the best date for its adoption and the transition method to be used.

Sale or Contribution of Assets between an Investor and its Associate or Joint Venture – Amendments to IFRS 10 and IAS 28

In September 2014 the IASB issued, Sale or Contribution of Assets between an Investor and its Associate or Joint Venture – Amendments to IFRS 10 and IAS 28, which contains narrow-scope amendments to IFRS 10, Consolidated Financial Statements, and IAS 28, Investments in Associates and Joint Ventures. The main consequence of the amendments is that full gain or loss is recognised when a transaction involves a business (whether it is held in a subsidiary or not).

A partial gain or loss is recognised when a transaction involves assets that do not constitute a business, even if those assets are held in a subsidiary.

Originally, the amendments were effective for annual periods beginning on or after 1 January 2016. In December 2015 the IASB issued amendments which extended the effective date to a date to be determined by the IASB. The Group does not expect these amendments to have a material impact on the Group’s consolidated financial statements.

Recognition of Deferred Tax Assets for Unrealised Losses – Amendments to IAS 12

In January 2016 the IASB issued, Recognition of Deferred Tax Assets for Unrealised Losses – Amendments to IAS 12, which clarifies how to account for deferred tax assets related to debt instruments measured at fair value. The amendments are effective for annual periods beginning on or after 1 January 2017. The Group will adopt them from that date. The Group does not expect these amendments to have an impact on the Group’s consolidated financial statements.

Disclosure Initiative – Amendments to IAS 7

In February 2016 the IASB issued, Disclosure Initiative – Amendments to IAS 7, which requires companies to provide information about changes in their financing liabilities. The amendments will help investors to evaluate changes in liabilities arising from financing activities, including changes from cash flows and non-cash changes. The amendments are effective for annual periods beginning on or after 1 January 2017. The Group will adopt them from that date. The amendments affect presentation and disclosure only and have no impact on the Group’s financial position or performance.

Classification and Measurement of Share-based Payment Transactions – Amendments to IFRS 2

In June 2016 the IASB issued, Classification and Measurement of Share-based Payment Transactions – Amendments to IFRS 2, which clarifies how to account for certain types of share-based payment transactions.

The amendments are effective for annual periods beginning on or after 1 January 2018. The Group will adopt them from that date. The Group does not expect these amendments to have a material impact on the Group’s consolidated financial statements.

Transfers of Investment Property – Amendments to IAS 40

In December 2016 the IASB issued, Transfers of Investment Property – Amendments to IAS 40, which clarifies that an entity shall transfer a property to, or from, investment property when, and only when, there is an observable evidence of the change in use. The amendments give examples of the relevant evidence. In isolation, a change in management’s intentions for the use of a property does not provide evidence of a change in use. The amendments are effective for annual periods beginning on or after 1 January 2018. The Group will adopt them from that date. The Group does not expect these amendments to have a material impact on the Group’s consolidated financial statements.

IFRIC 22 Foreign Currency Transactions and Advance Consideration

In December 2016 the IASB issued IFRIC Interpretation 22, Foreign Currency Transactions and Advance Consideration, which clarifies IAS 21, The Effects of Changes in Foreign Exchange Rates, specifying that on payment or receipt of advance consideration, the respective asset, expense or income to which this consideration relates should subsequently be recorded using the exchange rate as of the date the advance consideration was paid or received. The Interpretation is effective for annual periods beginning on or after 1 January 2018. The Interpretation has no impact on the Group’s financial position or performance as it does not change the way the Group has been accounting for advance consideration paid or received in foreign currencies.

Improvements to IFRSs (December 2016)

The amendments issued as a result of the Annual Improvements to IFRSs 2014-2016 Cycle introduced relatively minor changes to clarify guidance in existing standards. The amendments are effective for annual periods beginning on or after 1 January 2018. The Group does not expect these amendments to have a material impact on the Group’s consolidated financial statements.