MEGAFON Annual Report 2016

5. Additional Notes

5.1.   Share-based compensation

Accounting policies

Equity-settled transactions

The cost of equity-settled transactions, such as stock options under the CEO long-term incentive plan referred to below, is determined by the fair value at the date when the grant is made using an appropriate valuation model. That cost is recognised, together with a corresponding increase in other reserves in equity, over the period in which the service conditions are fulfilled in employee benefits and related social charges expense (Note 2.3). No expense is recognised for awards that do not ultimately vest. The dilutive effect of outstanding options is reflected as additional share dilution in the computation of diluted earnings per share, although there were no potentially dilutive securities outstanding at 31 December 2016 or 2015.

Cash-settled transactions

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

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


Long-term incentive programmes 2012 and 2013

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

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

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

  LTI 2012 LTI 2013
  2016 2015 2016 2015
Employee benefits expense/(reversal) recognised during the year ended 31 December, including related social charges — 569 149 98
The fair value of rights  outstanding at 31 December, Rubles per right to phantom share — — — 102
The carrying amount of the liability at 31 December, including related social charges — — — 102

CEO long-term incentive plan

During his time as the CEO of the Company, Mr. Ivan Tavrin, among other options, was granted 15,500,000 options to buy up to 2.5% of the total issued shares at the IPO price ($20 per share). The options could be exercised up until May 2017.

In December 2014 Mr. Tavrin exchanged his 2.5% interest in the Company and the 15,500,000 unexercised options for an interest in USM Holdings Limited (“USMHL”) (Note 5.2). The options are currently out-of-the-money and remain unexercised as at 31 December 2016.

5.2.   Related parties

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

  For the years ended
31 December
  2016 2015
Revenues from USM group  16   52
Revenues from Telia group  557   640
Revenues from Euroset  401   110
  974 802
Services from USM group  1,144   979
Services from Telia group  983   1,436
Services from Euroset  1,226   1,228
Services from Garden Ring  1,567   320
  4,920 3,963
Other non-operating expenses from USM group  1,293   1,826
  31 December
  2016 2015
Due from USM group  4   477
Due from Telia group  253   305
Due from Euroset  333   403
Due from Garden Ring  4,509   4,643
  5,099 5,828
Due to USM group  1,468   809
Due to Telia group  322   414
Due to Euroset  27   12
Due to Garden Ring —    63
  1,817 1,298

Terms and conditions of transactions with related parties

Outstanding balances at the years ended 31 December 2016 and 2015 are unsecured. There have been no guarantees provided or received for any related party receivables or payables. As of 31 December 2016 and 2015, the Group has not recorded any impairment of receivables relating to amounts owed by related parties. This assessment is undertaken each financial year by examining the financial position of the related party and the market in which the related party operates.

USM group

The outstanding balances and transactions with USM group relate to operations with Garsdale Services Investment Limited (“Garsdale”), the Group’s parent, USMHL, an indirect owner of Garsdale, and their consolidated subsidiaries.

The Group purchased billing system and related support services from PeterService, another member of the USM group, in the amount of 7,254 and 5,343 during 2016 and 2015, respectively.

The Group is a member of the Not-for-profit Partnership “Development, Innovations, Technologies” (the “Partnership”) which was established by companies in the USM group. The Partnership is required to incur education, science and other social costs as well as to maintain certain social infrastructure assets in Skolkovo Innovation Centre which are not owned by MegaFon and not recorded in the consolidated statement of financial position. The Group’s accrued contributions to the Partnership of 1,293   during the year ended 31 December 2016 (2015: 1,826) are included into other non-operating expenses in the consolidated income statement.

Telia group

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


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

Garden Ring

Garden Ring, which owns and operates an office building in the center of Moscow, is the Group’s joint venture with Sberbank. The Group has a lease agreement with Garden Ring which qualifies as a related party transaction. This building will become the new corporate headquarters of the Group, permitting the consolidation of the Group’s operations in Moscow into a single location. The Group also has a loan receivable from Garden Ring. The balance due from Garden Ring at 31 December 2016 consists of the loan receivable.

Compensation to key management personnel

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

  2016 2015
Short-term employee benefits 402  520   
Share-based compensation (Note 5.1) 81 246
Long-term incentive programme 158 179
Total 641  945

5.3.   Business combinations

Accounting policies

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

The identification of assets acquired and liabilities assumed as a result of those acquisitions, determining the fair value of assets acquired and liabilities assumed as well as any contingent consideration and quantification of resulting goodwill requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to

future cash inflows and outflows, discount rates, terminal growth rates, licence and other asset useful lives and market multiples, among other items.

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

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

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

2016 acquisitions

In 2016 the Group acquired 100% interest in LLC Atlant Telecom, an alternative wireline and broadband internet service provider in Moscow and Moscow region, for a cash consideration of 62. The resulting goodwill is 40.

2015 acquisitions


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

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

Contingent consideration in the amount of $5 million (325 at the exchange rate as of the payment date), based on operating results, was paid in full in 2016 (Note 3.4). Deferred consideration of approximately $4.3 million (261 at the exchange rate as of 31 December 2016) is payable on or prior to the second anniversary of the acquisition date.

The valuation of certain assets acquired and liabilities assumed had not been finalised as of the date the 2015 consolidated financial statements were authorised for issue; therefore certain intangible and tangible assets, deferred taxes and goodwill of GARS recognised in the 2015 consolidated financial statements were based on a provisional assessment of their fair values. In September 2016 the valuation was completed and the acquisition date fair values did not change.

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

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

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


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

5.4.   Financial risk management

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

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

The Company’s Board of Directors reviews and agrees policies for managing each of these risks, which are summarised below.

Market risk

Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market price risks that mostly impact the Group comprise two types of risk: interest rate risk and currency risk. Financial instruments affected by market risk include: loans and borrowings, deposits and derivative financial instruments.

The sensitivity analyses in the following sections relate to the position as of 31 December in 2016 and 2015. The sensitivity analyses have been prepared on the basis that the amount of net debt, the ratio of fixed-to-floating interest rates of the debt and derivatives and the proportion of financial instruments in foreign currencies are all constant and on the basis of the hedge designations in place at 31 December 2016 and 2015.

Interest rate risk

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

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

At 31 December 2016 approximately 80% of the Group’s borrowings are at a fixed rate of interest (2015: 78%).

Interest rate sensitivity

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

in basis points
Effect on profit
before tax
Year ended 31 December 2016    
US Dollar +20 (79)
US Dollar -20 79
Year ended 31 December 2015    
US Dollar +95 (418)
US Dollar -95 418

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

Foreign currency risk

Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Group’s exposure to the risk of changes in foreign exchange rates relates primarily to the Group’s financing activities (when cash deposits and loans and borrowings are denominated in a different currency from the Group’s functional currency).

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

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

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

Before 2015 the Group entered into three long-term cross-currency swaps and in 2016 it entered into a number of foreign currency forward purchase agreements. These derivative financial instruments were used to limit exposure to changes in foreign currency exchange rates on certain of the Group’s long-term debts denominated in foreign currencies (Note 3.4.3).

Overall, the share of Ruble loans (including the effect of foreign currency forwards and cross-currency swaps) amounted to 89% as of 31 December 2016 (63% at 31 December 2015).

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

Foreign currency sensitivity

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

  Change in foreign
exchange rates
Effect on profit
before tax
Year ended 31 December 2016    
US Dollar +20% 3,935
US Dollar -20% (3,935)
Euro +20% (1,606)
Euro -20% 1,606
Year ended 31 December 2015    
US Dollar +50% (24,807)
US Dollar -50% 24,807
Euro +50% (2,063)
Euro -50% 2,063

The movement in the pre-tax effect is a result of monetary assets and liabilities denominated in currencies other than the functional currency of the Company.

Credit risk

Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. The Group is exposed to credit risk from its operating activities (primarily for trade receivables) and from its financing activities, including deposits with banks and financial institutions and other financial instruments.

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

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

The maximum exposure to credit risk at the reporting date is the carrying value of each class of financial assets disclosed in Note 3.4. The Group considers the concentration of risk with respect to trade receivables to be low, as its customers are located in several jurisdictions and industries and operate in largely independent markets. Concentrations of credit risk with respect to trade receivables are limited given that the Group’s customer base is large and unrelated. Due to this management believes there is no further credit risk provision required in excess of the normal impairment allowance for trade and other receivables.

The Group monitors its credit risk with regards to loans extended to Garden Ring (Notes 3.3, 5.2) and Strafor (Note 3.4). This assessment is undertaken each financial year by examining the financial position of the debtor and the market in which the debtor operates. As at 31 December 2016 and 2015, no impairment losses were identified.

Liquidity risk

The Group monitors its risk relating to a shortage of funds using a recurring liquidity planning tool. The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of bank loans. Approximately 17% of the Group’s loans and borrowings will mature in less than one year at 31 December 2016 (2015: 21%) based on the carrying value of borrowings reflected in the consolidated financial statements. The Group assessed the concentration of risk with respect to refinancing its debt and concluded it to be low.

As of 31 December 2016 and 2015, the Group has net current liability position. The Group believes it will continue to be able to generate significant operating cash flows and that adequate access to sources of funding and significant amount of available credit lines are sufficient to meet the Group’s requirements. Additionally, the Group can defer capital expenditures if necessary in order to meet short-term liquidity requirements. Accordingly, Group management believes that cash flows from operating and financing activities will be sufficient for the Group to meet its obligations as they become due.

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

Less than 1 year 1-3 years 4-5 years More than 5 years Total
31 December 2016
Loans and borrowings 61,614 105,147 70,427 83,730 320,918
Trade and other payables 43,581 — — — 43,581
Finance lease obligations 464 827 827 7,214 9,332
Derivative financial liabilities 3,248 2,151 — — 5,399
Long-term accounts payable — 335 — — 335
Deferred consideration 284 — — — 284
Total 31 December 2016 109,191 108,460 71,254 90,944 379,849
31 December 2015
Loans and borrowings 61,582 147,587 48,135 4,248 261,552
Trade and other payables 45,961 — — — 45,961
Finance lease obligations 387 925 925 5,986 8,223
Deferred and contingent consideration 2,865 399 — — 3,264
Long-term accounts payable — 986 107 — 1,093
Derivative financial liabilities 63 — — — 63
Total 31 December 2015 110,858 149,897 49,167 10,234 320,156

Capital management

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

The Net Debt to Adjusted OIBDA ratio is an important measure to assess the capital structure in light of the need to maintain a strong credit rating. Net Debt represents the carrying amount of interest-bearing loans and borrowings less cash and cash equivalents and current and non-current bank deposits. As of 31 December 2016 the Net Debt to Adjusted OIBDA ratio was 1.62 (2015: 1.37).

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


The Group did not pledge collateral as security for its financial liabilities at 31 December 2016 or 2015, except certain assets purchased under finance leases or on deferred payment terms (Note 3.1 and 3.4).

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

5.5.   Group information

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

Legal entity   Principal activities Country of incorporation % equity interest
OJSC MegaFon Retail subsidiary Retail Russia 100 100
LLC NetByNet Holding subsidiary Broadband internet Russia 100 100
LLC Scartel subsidiary Wireless services Russia 100 100
LLC MegaFon Finance subsidiary Financing Russia 100 100
MegaFon Investments (Cyprus) Limited subsidiary Transactions with treasury shares Cyprus 100 100
JSC MegaLabs subsidiary New telecom services development Russia 100 100
CJSC TT mobile subsidiary Integrated telecom Tajikistan 75 75
LLC Euroset-Retail (Note 3.3) joint venture Retail Russia 50 50
JSC Sadovoe Koltso (Note 3.3) joint venture Corporate office Russia 49.999 49.999

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

5.6.   Segment information

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

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

Operating segments with similar economic characteristics, such as forecasted Adjusted OIBDA, have been aggregated into an integrated telecommunication services segment, which is the only reportable segment. Around 1.4% of the Group’s revenues and results are generated by segments outside of Russia. No single customer represents 10% or more of the consolidated revenues.

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

  2016 2015
Adjusted OIBDA 121,139  132,357
Depreciation  (51,925)  (48,173)
Amortisation  (7,881)  (7,313)
Goodwill impairment (3,400) —
Loss on disposal of non-current assets  (849)  (913)
Finance costs  (19,094)  (14,779)
Finance income  1,810  2,508
Share of loss of associates and joint ventures  (2,651)  (649)
Other non-operating loss  (2,906)  (2,949)
(Loss)/gain on financial instruments, net  (235)  1,502
Foreign exchange gain/(loss), net  1,822  (10,041)
Profit before tax 35,830  51,550

5.7.   Commitments, contingencies and uncertainties

Russian operating environment

During 2015 and 2016, the Russian economy was negatively impacted by a significant drop in crude oil prices and a devaluation of the Russian Ruble, as well as sanctions imposed on Russia by several countries. As at 31 December 2016 the key rate of the Central Bank of Russia was at 10%.


The combination of the above resulted in reduced access to capital, a higher cost of capital, increased inflation and uncertainty regarding economic growth, which could negatively affect the

 Group’s future financial position, results of operations and business prospects. Management believes it is taking appropriate measures to support the sustainability of the Group’s business in the current circumstances.

4G/LTE licence capital commitments

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

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

Equipment purchases agreements

In 2014 the Group entered into two separate 7-year agreements with two suppliers to purchase equipment and software for 2G/3G/4G network construction and modernisation. The software usage agreements contain various termination options, however the Group is specifically committed under the agreements to pay at least 3 years’ worth of fees plus an amount equal to 50-60% of the fees due for years four through seven of the agreements for each base station in use as at the date of termination while receiving a credit against these commitments for fees already paid. The amount of the commitments at 31 December 2016 is 7,459 (2015: 14,406).

Social infrastructure expenses

From time to time, the Group may determine to maintain certain social infrastructure assets which are not owned by the Group and not recorded in the consolidated financial statements as well as to incur education, science and other social costs. Such activities may be conducted in collaboration with non-governmental organisations. These expenses are presented in other non-operating loss in the consolidated income statement (Note 5.2).


Russian and Tajik tax, currency and customs legislation, including transfer pricing legislation, are subject to varying interpretations and changes, which can occur frequently. Management’s interpretation of such legislation as applied to transactions and activities of the Group may be challenged by the relevant regional and federal authorities. Recent events within Russia and Tajikistan suggest that the tax authorities are taking a more assertive position in their interpretation and enforcement of the legislation and as a result, it is possible that transactions and activities that have not been challenged in the past may now be challenged. Therefore, significant additional taxes, penalties and interest may be assessed.

Fiscal periods remain open to review by the authorities in respect of taxes for the three calendar years preceding the current year. Under certain circumstances reviews may cover longer periods.

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

As of 31 December 2016 the Group’s management estimated the possible effect of additional taxes, before fines and interest, if any, on these consolidated financial statements, if the authorities were successful in enforcing different interpretations being taken by them, to be in the amount of up to approximately 558.

Finance lease commitments

The Group has finance lease contracts for various items of telecommunications assets. Under these leases the lessor retains title to the leased assets as security for the Group’s obligations thereunder. Future minimum lease payments under finance leases together with the present value of the net minimum lease payments as of 31 December 2016 are as follows:

  2016 2015
value of
value of
Within one year  464  428  387  387
After one year but not more than five years  1,654  1,157 1,850 1,239
More than five years  7,214  2,588 5,986 1,878
Total minimum lease payments  9,332  4,173  8,223  3,504
Less amounts representing finance charges  (5,159) —  (4,719) —
Present value of minimum lease payments  4,173  4,173  3,504  3,504

Operating lease commitments

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

The Group normally enters into operating leases with a term not exceeding one year. Accordingly, the Group’s operating lease commitments at 31 December 2016 and 2015 approximate the annual lease expense (Note 2.3).

 MegaFon has a ten-year lease agreement with Garden Ring for a part of the building (Note 3.3). Future minimum rentals payable under this non-cancellable operating lease as at 31 December is, as follows:

  2016 2015
Within one year 1,508 1,478
After one year but not more than five years 6,338 6,214
More than five years 6,861 8,493
  14,707 16,185


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

Anti-terror laws

On 7 July 2016 the President of the Russian Federation signed a package of anti-terror laws. The package requires telecommunications operators to store all data, including that from phone calls, messages, and data transmitted by customers for certain time periods, effective from 1 July 2018. This would require the Group to establish additional data centers and invest in data-processing technologies. The potentially significant capital expenditures required to do this would negatively impact the Group’s cash flow generation, diverting resources from investment in growth, which could potentially impact future revenues and Adjusted OIBDA.

The details of the package are currently under discussion and may undergo changes. The Group will estimate the potential effects of the laws on its capital commitments when more information about the final form of the anti-terror package is received.

5.8.   Events after the reporting date

MGL acquisition

On 9 February 2017 the Group completed acquisition of 15.2% of the shares, representing 63.8% voting rights of Group Limited (“MGL”), which is a leading company in the Russian-speaking internet market, from three entities owned by USM group, the Group’s indirect controlling shareholder, for a total consideration of $740 million (44,154 at the respective exchange rates), consisting of cash consideration of $640 million (38,088 at the exchange rate as of the payment date) and deferred consideration of $100 million (6,066 at the exchange rate as of 31 December 2016) payable on or prior to the first anniversary of the acquisition date.

The primary reason for the acquisition was to achieve significant synergies for both companies, including enhancement of MegaFon’s digital offering and its distribution, launch of special VKmobile offering for users of VK social network, and other potential initiatives.

Based on the current set-up of the Board of Directors of MGL, the Company concluded that it has ability to direct relevant activities of MGL and therefore has control over the investee. Accordingly, the Group will consolidate the investee from the beginning of 2017 when control was obtained.

The Company is currently evaluating the purchase price allocation between the specific assets acquired and liabilities assumed.

In February 2017 the Group signed a new Ruble denominated credit facility agreement for the total amount of 35,000 maturing in 2024, which has been drawn in full to finance MGL acquisition.

SMARTS acquisition

In February 2017 MegaFon acquired 1,800 MHz band spectrum in the Ulyanovsk and Penza regions and the Republic of Mordovia through the purchase of 100% of the shares of JSC SMARTS-Ulyanovsk, JSC SMARTS-Penza and JSC SMARTS-Saransk, the subsidiaries of Russian regional mobile operator JSC SMARTS. The Group’s management concluded that the assets and activities of the acquired companies are not capable of being conducted and managed as a business, accordingly the acquisition of SMARTS will be accounted for as an acquisition of assets (similar to the 2015 SMARTS acquisition as per Note 3.2.1). The purchase price totaled 780 at the date of acquisition, consisting of cash consideration of 480 and a deferred payment of 300 which is due to be paid within two months from the date of acquisition.