Public Joint Stock Company “National Joint Stock Company ... FS 2012-2013_ENG_FINAL_wi“National Joint Stock Company ... SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ... 2013 of Public Joint Stock Company “National Joint Stock Company “Naftogaz

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  • Public Joint Stock Company

    National Joint Stock Company

    NAFTOGAZ OF UKRAINE

    Consolidated Financial Statements

    as at 31 December 2013 and 2012

    and for the Years Ended

  • 1

    PUBLIC JOINT STOCK COMPANY NATIONAL JOINT STOCK COMPANY

    NAFTOGAZ OF UKRAINE

    CONTENTS

    Page

    INDEPENDENT AUDITORS REPORT 2-5

    CONSOLIDATED FINANCIAL STATEMENTS

    Consolidated Statements of Financial Position 6

    Consolidated Statements of Profit or Loss 7

    Consolidated Statements of Comprehensive Income 8

    Consolidated Statements of Changes in Equity 9

    Consolidated Statements of Cash Flows 10-11

    Notes to the Consolidated Financial Statements

    1. THE ORGANISATION AND ITS OPERATIONS...................................................................... 12 2. OPERATING ENVIRONMENT .................................................................................................. 13 3. RESTATEMENT OF COMPARATIVE INFORMATION ......................................................... 17 4. SEGMENT INFORMATION ....................................................................................................... 21 5. BALANCES AND TRANSACTIONS WITH RELATED PARTIES ......................................... 29 6. PROPERTY, PLANT AND EQUIPMENT .................................................................................. 30 7. INVESTMENTS IN ASSOCIATES AND JOINT VENTURES ................................................. 32 8. OTHER NON-CURRENT ASSETS............................................................................................. 37 9. INVENTORIES ............................................................................................................................ 38 10. TRADE ACCOUNTS RECEIVABLE ......................................................................................... 38 11. PREPAYMENTS MADE AND OTHER CURRENT ASSETS .................................................. 40 12. CASH AND CASH EQUIVALENTS .......................................................................................... 40 13. SHARE CAPITAL ........................................................................................................................ 41 14. BORROWINGS ............................................................................................................................ 42 15. PROVISIONS ............................................................................................................................... 43 16. ADVANCES RECEIVED AND OTHER CURRENT LIABILITIES ......................................... 45 17. COST OF SALES ......................................................................................................................... 46 18. OTHER OPERATING EXPENSE ............................................................................................... 46 19. FINANCE COSTS ........................................................................................................................ 47 20. INCOME TAX .............................................................................................................................. 47 21. CONTINGENCIES, COMMITMENTS AND OPERATING RISKS .......................................... 50 22. FINANCIAL RISK MANAGEMENT ......................................................................................... 54 23. FAIR VALUE ............................................................................................................................... 58 24. SUBSEQUENT EVENTS............................................................................................................. 60 25. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES .................................................... 64 26. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS.............................................. 77 27. ADOPTION OF NEW OR REVISED STANDARDS AND INTERPRETATIONS .................. 80

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    PUBLIC JOINT STOCK COMPANY NATIONAL JOINT STOCK COMPANY

    NAFTOGAZ OF UKRAINE

    INDEPENDENT AUDITORS REPORT

    To the shareholder of Public Joint Stock Company National Joint Stock Company Naftogaz of

    Ukraine:

    We have audited the accompanying consolidated statement of financial position as at 31 December 2013 of Public Joint Stock Company National Joint Stock Company Naftogaz of Ukraine

    (the Company) and its subsidiaries (collectively, the Group), and we were engaged to audit the

    consolidated statement of financial position as at 31 December 2012, and the consolidated statements of profit or loss, the consolidated statements of comprehensive income, consolidated statements of

    changes in equity and the consolidated statements of cash flows of the Group for the years ended

    31 December 2013 and 2012, and a summary of significant accounting policies and other explanatory

    information.

    Managements Responsibility for the Consolidated Financial Statements

    Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards (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.

    Auditors Responsibility

    Our responsibility is to express an opinion on the consolidated statement of financial position as at 31 December 2013 based on our audit.

    Because of the matters described in the Basis for Qualified Opinion and Disclaimer of Opinion paragraphs below, we were not able to obtain sufficient and appropriate audit evidence to provide a

    basis for an audit opinion on the Groups consolidated financial position as at 31 December 2012, and

    the consolidated results of its operations and cash flows of the Group for the years ended 31 December 2013 and 2012.

    We conducted our audit of the consolidated statement of financial position as at 31 December 2013 in

    accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the

    consolidated statement of financial position is free from material misstatement.

    An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated statement of financial position. The procedures selected depend on the auditors

    judgment, including the assessment of the risks of material misstatement of the consolidated statement

    of financial position, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the consolidated

    statement of financial position 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 entitys internal control. An audit also includes evaluating the appropriateness of accounting policies used and

    the reasonableness of accounting estimates made by management, as well as evaluating the overall

    presentation of the consolidated statement of financial position.

  • 3

    We believe that the audit evidence we have obtained in our audit is sufficient and appropriate to

    provide a basis for our qualified audit opinion on the Groups consolidated financial position as at

    31 December 2013.

    Basis for Qualified Opinion on the Consolidated Financial Position of the Group as at 31 December 2013 and Disclaimer of Opinion on the Consolidated Financial Position of the Group as at

    31 December 2012, and on the Consolidated Results of its Operations and Cash Flows for the Years

    Ended 31 December 2013 and 2012

    1) As discussed in Note 25 to the consolidated financial statements, the Group has adopted the revaluation model for measurement of property, plant and equipment, which requires revaluations to

    be carried out with sufficient regularity so that the carrying amount of property, plant and equipment

    as at the reporting date does not differ materially from its fair value. The Groups property, plant and

    equipment were last independently revalued on 31 December 2009. Significant economic developments since that date, including changes in natural gas transportation tariffs and costs, selling

    prices of the Groups own extracted natural gas, and construction costs provide indications of

    a possible material change in the fair values of property, plant and equipment. In the absence of a current independent revaluation, we were unable to obtain sufficient and appropriate audit evidence

    about the impact of these matters on the Groups property, plant and equipment with carrying amounts

    of UAH 89,526 million and UAH 93,460 million as at 31 December 2013 and 2012, respectively, and

    the related impact on revaluation reserve and deferred tax liabilities as at those dates, the depreciation, depletion and amortization expense and deferred tax expense for the years then ended. As a result of

    these matters we were unable to determine whether any adjustments to these amounts were necessary.

    2) As discussed in Note 25 to the consolidated financial statements, oil and gas assets are depleted

    using a unit-of-production method in proportion to proved developed hydrocarbon reserves. The Groups hydrocarbon reserves were last independently revalued on 31 December 2010. Management

    has applied judgment in making estimates of hydrocarbon reserves as at 31 December 2013 and 2012.

    In the absence of a current independent revaluation, we were unable to obtain sufficient and appropriate audit evidence about the impact of this matter on the Groups oil and gas assets with

    carrying amounts of UAH 20,416 million and UAH 20,524 million as at 31 December 2013 and 2012,

    respectively, and the related impact on deferred tax liabilities as at those dates, the depreciation,

    depletion and amortization expense and deferred tax expense for the years then ended. As a result of these matters we were unable to determine whether any adjustments to these amounts were necessary.

    3) As discussed in Note 24 to the consolidated financial statements, in March 2014 the Group lost

    control over one of its subsidiaries, JSC Chornomornaftogaz, the majority of whose assets are located

    in the territory of Autonomous republic of Crimea. As at 31 December 2013 and 2012 the total assets of this subsidiary were UAH 15,744 million and UAH 16,136 million, total liabilities were

    UAH 14,089 million and UAH 14,322 million, respectively, total revenues were UAH 525 million and

    UAH 550 million, and total expenses were UAH 1,399 million and UAH 1,219 million for the years

    then ended, respectively. We were not provided with access to the financial information of this subsidiary. Additionally, we were not able to get access to other assets of the Group located in the

    territory of Autonomous republic of Crimea amounting to UAH 2,898 million and UAH 2,643 million

    at 31 December 2013 and 2012, respectively. As a result of these matters we were unable to determine whether any adjustments to these amounts were necessary.

    4) We were appointed as auditors of the Group after 31 December 2013 and thus, did not observe the

    counting of the physical inventories as at 31 December 2013 and 2012. Other than with regard to

    natural gas, we were unable to satisfy ourselves by alternative means concerning inventory quantities held at 31 December 2013 and 2012 in the amount of UAH 607 million and UAH 6,115 million, and

    the related impact of this matter on the consolidated results of operations and opening balance of

    accumulated deficit for the years ended 31 December 2013 and 2012, respectively. As a result of this matter, we were unable to determine whether any adjustments to these amounts were necessary.

  • 4

    5) As presented in Note 7 to the consolidated financial statements, the Group has investments in

    associates and joint ventures which are accounted for using the equity method of accounting. The

    carrying amounts of investments in joint ventures were UAH 777 million and UAH 606 million as at 31 December 2013 and 2012, respectively, and the Groups related share of after tax results of joint

    ventures in the amount of UAH 329 million and UAH 351 million is included in the net loss for the

    years then ended, respectively. We were unable to obtain sufficient and appropriate audit evidence about: the expenses incurred by associates and included in the after tax results of associates for the

    year ended 31 December 2013 with the Group share of such expenses amounting to UAH 925 million;

    and the carrying amount of the Groups investment into joint ventures as at 31 December 2013 and

    2012, and the Groups share of their after tax results for the years then ended as we were not provided access to the financial information of the joint ventures. As a result of these matters, we were unable to

    determine whether any adjustments to these amounts were necessary.

    6) As discussed in Notes 17, 18 and 25, during the years ended 31 December 2013 and 2012, respectively, the Group has incurred expenditures for:

    The purchase of services and inventories amounting to UAH 1,082 million and UAH 1,983 million, which are included into cost of sales for which the source documents were sequestered

    and are under investigation by the office of State Prosecutor of Ukraine;

    Research, development and exploration amounting to UAH 455 million and UAH 2,169 million, which are included into other operating expenses, and the Group made prepayments for above

    mentioned services of UAH 37 million and UAH 488 million recorded in the consolidated

    statements of financial position as at 31 December 2013 and 2012, respectively, for which the source documents were sequestered and are under investigation by the office of State Prosecutor

    of Ukraine;

    The purchase of property, plant and equipment of UAH 4,335 million and UAH 11,097 million; and

    The purchase of services and inventories included into cost of sales and other operating expenses of UAH 2,927 million and UAH 3,366 million.

    As stated in Notes indicated above the substance of these expenditures may not reflect the actual legal form of the source documents. We were unable to obtain sufficient and appropriate audit evidence to

    satisfy ourselves as to the amounts and nature of the above expenditures and...

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