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TRANSCRIPT
Annual report 2015
Contents
2
4.Financial results
p. 20
5.Risk management
p. 27
6.Social responsibility
p. 30
7.Corporate governance
p. 32
ANNUAL REPORT 2015
Message from General Director
p. 3
1.Company overview
p. 5
2.2015 key indicators
p. 11
3.Operating results
p. 13
8.Financial statements
p. 37
Contacts
p. 69
Message from General Director (1/2)
3
Dear investors, shareholders and partners!
Last year was marked by a significant turmoil in the global economy, financial markets and geopolitical tensions, which certainly affected Kazakhstani rail transportation market. Reportedly, in 2015, the total volume of cargo load on the local rail network decreased by 10% year-on-year.
Reflecting a toughening competition, the market eventually produced lower railcar rental rates.Additionally, the volatility of exchange rates and national currency devaluation in the second half of the year negatively affected the Company's financial results.
On the back of these unfavourable factors, sales revenue of the Company in 2015 amounted to KZT26.5 bln, EBITDA — to KZT19.4 bln (EBITDA margin: 73%). At the same time, a substantial drop in value of Kazakhstani tenge led to foreign exchange losses, which in turn resulted in net loss.
However adverse circumstances have been, the team of Eastcomtrans LLP yet demonstrated its professional potential and leadership. Tackling the declining and highly competitive market, we increased cargo load of the managed railcar fleet by 2% year-on-year up to 16.7 mln tons. What is more, in 2015, the empty run ratio was lowered to its historical minimum — 0.6. In general, by results of 2015, the Company sustained its market position and reached all key operational targets as well as refined the quality of client relations, competitiveness and reliability of our services.
Taking into account that transportation services similarly to other sectors are steadily moving online, we have launched Client Office, a web service that is primarily oriented to large industrial enterprises.
I am confident that regardless of the current decline in rail transportation volumes, its service quality and usability will remain a key competitive advantage of the Company.
ANNUAL REPORT 2015
Message from General Director (2/2)
4
The above mentioned initiatives in excelling our client servicing got an official appreciation and recognition. In 2015, our Company was honoured with the President's Altyn Sapa Award as the Best Service Company.
Having run the business for the past 13 years, Eastcomtrans LLP has been expanding geographically. By the end of the last year, for example, the branch and representative office network covered 10 regions of the republic.
The quality of the financial function of the Company was acknowledged by the international credit agency Fitch Ratings, which in the time of economic volatility affirmed the Company's credit rating at ‘B’.
In the upcoming year of 2016, the top management and all Company employees will take on the new challenges set by the shareholders. Under these conditions, the key collective goal is being centered as the use of the advantages of the Company’s own business model for the following competitiveness improvement, market share strengthening, further client servicing development and optimal utilisation of opportunities raised by the changing market environment.
In its relatively short history, our Company numerously has encountered various challenges, however, always emerging more confident, skilled and determined. I believe that due to the coordinated and intensive approach of the Company’s team we will fulfill the trust of our clients, partners and shareholders.
Evgeniy D. Plakhotin
General DirectorEastcomtrans LLP
ANNUAL REPORT 2015
5
Company overview
1.
ANNUAL REPORT 2015
6
Eastcomtrans LLP — the largest private rail freight operator in Kazakhstan and Central Asia
MISSION
To become the largest and one of the most efficient rail freight operators on the market, which offers a wide range of transportation and logistics services.
ST RAT EGIC GOALS
ANNUAL REPORT 2015
• To secure sustainable development of its business and long term growth of company’s value
• To provide only high quality services to our clients at competitive prices
• To support the development of Kazakhstan’s rail freight transportation market
7
Leadership drivers
ANNUAL REPORT 2015
1
Our fleet under management amounts to about 13,5 thousand units. Its size, various rail car types and presence in all key market segments secure the necessary diversification of business.
The largest private rail freight operator in Kazakhstan and Central Asia based on the fleet size
2
The regional network of the Company consists of 9 branches and representative offices located all over the country.
Wide geographic coverage
3
We continuously strive for operational excellence through client service improvement and decreasing fleet repair and maintenance costs.
Leadership through continuous efficiency improvement
4
We use the most up-to-date fleet management system in Kazakhstan, which allows us to track railcars all over the ‘1520area’, conduct cargo planning and monitor fleet’s technical conditions.
Automatization and IT systems development
5
We implement the best corporate governance practices. The company has one of the strongest management team in the industry.
High corporate governance standards and qualified management team
General information
8
• US$20 mln as an equity capital investment;
• US$30 mln as a loan.
The Company provides its clients with a wide range of rail transportation and logistics services:
The Company was established in the form of LLP in 2002.
In 2013 International Finance Corporation provided ECT with a US$50 mln financing in the following form:
• Rail freight transportation
• Operating lease and forwarding services
• Consignor and consignee services in Aktau Seaport
• Transportation of oversize cargoes
• Railcars repair and maintenance
• Enterprise internal logistics management
• Pre-loading preparation
The well-balanced client portfolio of the Company includes about 40 large consignors, of which 80% are the leading sectoral companies of Kazakhstan. Eastcomtrans LLP provides transportation services to major enterprises in oil and gas, metals and mining, coal and other industries.
Eastcomtrans LLP operates more than 13 500 railcars, of which 90% is owned by the Company.
Head office of the Company is located in Almaty. It also has branches in Astana and structural units in rail stations all of the country.
As of 31.12.2015, the Company’s headcount amounted to 155 people.
The current credit ratings: “B”, Negative outlook (Fitch Ratings); “B3”, Negative outlook (Moody’s).
ANNUAL REPORT 2015
Award of the President of Republic of Kazakhstan for the quality achievement
Best Service Enterprise
Altyn Sapa
Company recent achievements
History timeline
9
2002–2004
Company’s establishment
• The Company is founded by a group of private investors• Railcars fleet is 700 units• The first contract with Tengizchevroil is signed
2005–2007
Fleet expansion, operating portfolio diversification
• Railcars fleet is raised to 2 025 units• Client base expansion: operating lease and forwarding contracts are signed
with large oil and gas companies• Financial statements are prepared in accordance with IFRS and audited by Big 4 company
2008
Credit portfolio diversification, optimization of business processes
• Railcars fleet is raised to 2 597 units• Start of cooperation with Raiffeisen Leasing Kazakhstan• Credit agreement for US$25 mln is signed with HSBC Bank Kazakhstan• ISO audit is passed
2009 Fleet expansion
• Railcars fleet is raised to 2 822 units• Start of cooperation with DBK Leasing• The Company becomes a member of FIATA
2010Fleet expansion, credit rating assignment
• Railcars fleet is raised to 5 253 units• A 7-year contract with Zhaikmunai is signed• Fitch Ratings assigned a Long-Term IDR at ‘B−’, outlook is Stable
2011–2012
Fleet expansion, foreign loan, new market
• Railcars fleet is raised to 9 782 units• Diversification of client base — new clients from mining industry are attracted• US$100 mln syndicated loan from BNP Paribas is attracted• Fitch Ratings raised its Company’s rating to ‘B’ with Stable outlook
2013Fleet expansion, new shareholder, debut placement
• Railcars fleet reached 10 894 units• IFC made equity investment in the Company and a got 6.67% stake • Debut US$100 mln Eurobonds were placed on LSE• Moody’s assigned ‘B3’ credit rating, outlook is Stable
2014–2015
Fleet expansion, credit portfolio diversification
• The Company’s owned railcars fleet reached 12 235 units• In 2014, Gazprombank provided a 9-year US$50 mln loan on acquisition of 853 railcars• In 2014, EBRD provided a US$130 mln loan• In 2015, DBK Leasing provided US$36 mln within a lease-back agreement• Credit rating outlooks by Moody’s and Fitch Ratings were changed to Negative
ANNUAL REPORT 2015
Railcars fleet
10
As of 31.12.2015, the Company’s owned railcars fleet amounted to 12 235 units, about half of them were oil tanks.
In 2015, the Company’s railcars fleet increased by 200 gondolas.
In 2003–2015, the Company’s railcars fleet rose at a CAGR of 61%.
In 2003–2015, the Company’s total volume of capital investments (CAPEX) reached US$715 mln.
In 2015, the average age of the Company’s railcars is about 5 years.
0
2 000
4 000
6 000
8 000
10 000
12 000
14 000
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Company’s railcars fleet dynamics, 2003–2015
Number of units at YE
5 995
Railcars fleet structure, 31.12.2015
Total fleet: 12 235 units
49%
17%
23%
1%6%
2% 2%
Oil tanks
LPG tanks
Gondolas
Platforms
Boxcars
Dump cars
Cement hoppers
2 102 2 803 135 700 300 200
40
12 235
Oil tanks LPG tanks Gondolas Platforms Boxcars Dump cars Cement hoppers
ANNUAL REPORT 2015
11
2015 key indicators
2.
ANNUAL REPORT 2015
2015 key indicators
12
GDP growth slowdown in Kazakhstan, Russia and China
Oil and base metals’ price decline
General negative situation on the market: cargo load volume drop by −10%, freight turnover volume drop by −16%
Completion of CPC pipeline expansion, which led to decrease in oil shipped by rail by −63%
The National Bank’s switch to the free floating exchange rate policy in August 2015
Macro environment
Company’s revenue reached KZT26.5 bln (−17% y/y), gross margin: 59%
EBITDA reached KZT19.4 bln (−19% y/y), EBITDA margin: 73%
Net Loss amounted to KZT26.9 bln
Financial results
Acquisition of 200 new boxcars in 1Q2015
Extension of contracts with Tengizchevroil for providing oil, LPG tanks and gondola rental services
Decrease in railcar fleet utilization rate
Operating results
On 19 May 2015, the Company’s Supervisory Board (SB) was extended from 3 to 4 members and MrKuznetsov M.Y. was elected as independent member of the SB.
On 1 June 2015, the SB and top management changes were as follows: former General Director MrMalakhov V.A. was elected to be a new Chairman of the SB and replaced Mr Sarsenov M.Zh. in the SB; former First Deputy of the General Director Mr Plakhotin Y.D. was promoted to be a new General Director.
Corporate governance
In 2015, the Company purchased part of its Eurobonds for a total of US$27.1 mln in nominal terms
In 2015, the Company fully refinanced BNP Paribas loan for a total of $66.4 mln
In December 2015, the Company raised US$36 mln within the financial lease back deal from DBK Leasing
As a result of realized currency risk, financials of the Company did not comply with covenants starting 3Q2015.
Credit portfolio
On 18 May 2015, Moody’s Investors Service confirmed its Long-term rating of the Company and its Eurobonds at B3 with Positive outlook. In January 2016, the Outlook was changed to Negative.
On 18 December 2015, Fitch Ratings confirmed its Long-term Issuer Default Ratings of the Company in foreign and national currency at B and changed rating outlook from Stable to Negative.
Credit ratings
ANNUAL REPORT 2015
13
Operating results
3.
ANNUAL REPORT 2015
Macroeconomic overview
14
According to the updated in February 2016 Social-Economic Development Forecast of Kazakhstan 2016–2020, on the back of oil and metals prices slump and GDP growth deceleration in Russia and China (IMF forecast: −1.5% and 6.5% in 2016, respectively), the GDP growth dynamics of Kazakhstan will continue its slowing trend. Based on this Forecast, GDP growth in 2016 will be 0.5% (at the oil price of US$30/bbl and 360 KZT/US$ exchange rate).
Considering these factors, the majority of forecasts for 2016–2017 were worsened. The average GDP growth rate based on our selected forecasts equals 0.3% in 2016 and 1.9% in 2017.
Sources: Statistics Committee of Kazakhstan, Ministry of National Economy, IMF (World Economic Outlook – Apr 2015), economic reports of international institutes of development and rating agencies
Kazakhstan GDP dynamics, 2010–2016F
7.3% 7.2%
4.6%
5.8%
4.1%
1.2%0.5%
0,0
10,0
20,0
30,0
40,0
50,0
2010 2011 2012 2013 2014 2015 2016П
GDP, KZT trillion Growth rate
Kazakhstan GDP forecasts, 2016–2017F
2016F 2017F
Ministry of Economy 0.5% –
EIU (1.3%) 0.8%
World Bank 1.1% 3.3%
EBRD 1.1% 2.4%
ADB 0.7% 1.0%
Fitch Ratings (1.0%) –
S&P 0.0% 1.5%
Moody’s 1.0% 2.5%
Average 0.3% 1.9%
Median 0.6% 2.0%
In 2015, the real GDP growth amounted to 1.2% y/y and reached KZT40 878 bln (≈US$184 bln based on the 2015 annual average KZT/US$ exchange rate), index of physical volume of industrial production almost remained unchanged (0.1% y/y), service sector grew by 2.4%. The GDP growth rate slowed by –2.9 p.p. y/y (1.2% vs 4.1% in 2014).
Kazakhstan GDP structure, 2015
13%
10%
17%
9%9%6%5%
32%
Extracting industry
Processing industry
Trade
Real estate
Transportation and warehousing
Construction
Agriculture
Others
Kazakhstan is considered to be on of the most cargo driven countries in the region due to its economic and geographic characteristics. Because of this, the success of the Company is strongly dependent on general economy growth, industrial production and having a wide cargo base.
ANNUAL REPORT 2015
Change, y/y Share in total
Industrial sector, total −1.6% 100%
Coal mining −7.2% 1%
Oil and gas production −1.7% 40%
Iron ore mining −22.0% 1%
Non-ferrous ore mining +4.6% 4%
Oil products manufacturing −5.3% 3%
Ferrous metallurgy +0.9% 5%
Precious metal manufacturing +23.6% 9%
Литье металлов −27.9% <1%
Macroeconomic overview
15
By results of 2015, the total volume of industrial production was equal to KZT14.6 trillion (US$66.0 bln) vs KZT18.5 trillion in 2014 (−21% y/y). The main reason of this decline in monetary terms were drop in oil prices (average Brent price in 2015 was US$54/bbl vs US$100/bbl in 2014) and non-ferrous metal prices (price of copper decreased from US$6861/t in 2014 to US$5512/t in 2015, zinc: from US$2162/t to US$1932/t, aluminum: from US$1866/t to US$1664/t). In physical volume terms, the drop in production was demonstrated by oil and gas industry (−1.7% y/y), while production growth was revealed by manufacturing and non-ferrous ore mining industries (+23.6% and 4.6%, respectively).
Sources: Statistics Committee of Kazakhstan, National Bank of Kazakhstan, Bloomberg
Index of physical volume of industrial production by industries, 2015*
* Only main industries are presented
Kazakhstan CPI dynamics, 2014–2015
In 2015, the level of annual inflation rate (CPI) increased and amounted to 13.6% vs 7.4% in 2014. The National Bank’s switching to free float policy of exchange rates in August 2015 was the main driver of its acceleration.
According to the forecast of the National Bank of Kazakhstan, annual inflation in 2016 will be closer to the upper bound of the CPI corridor (6–8%) and by 2020 — in the range of 3–4%.
In 2015, the external trade turnover of Kazakhstan amounted to US$75.9 bln vs US$120.8 bln in 2014 (−37% y/y): exports volume decreased by −42% (from US$79 to US$46 bln), imports volume — by −37% (from US$41 to US$30 bln).
In 2015, the share of fuel and energy products in total volume of exports amounted to 68% (US$31 bln), share of metals and metal products — 13% (US$6 bln). By results of 2014, these figures were 76% (US$61 bln) and 9% (US$7 bln), respectively.
0,0%
2,0%
4,0%
6,0%
8,0%
10,0%
12,0%
14,0%
16,0%
01-2
014
03-2
014
05-2
014
07-2
014
09-2
014
11-2
014
01-2
015
03-2
015
05-2
015
07-2
015
09-2
015
11-2
015
Switching to free float policy of exchange rates by the National Bank
The end of super cycle on commodities market in conjunction with lowered demand for Kazakhstan’s exports from the key trade partners led to GDP growth slowdown in 2015–2016. The economy growth forecasts in the medium term are quiet conservative. However, the Government’s measures in infrastructure investments, stock market development and industrial production rebound could accelerate local economy and reach the pre-crisis growth level.
ANNUAL REPORT 2015
Rail freight transportation market overview
16
In 2015, the total volume of freight transportation in Kazakhstan reached 3 729 mln t (−0.4% y/y vs 7% growth in 2014). In the period of 2010–2015, the compounded annual growth rate (CAGR) of freight transportation volume was 9%. The rail transport freight volume in 2015 amounted to 335 mln tons (−14% y/y vs 35% growth in 2014), CAGR in 2010–2015 was 5%.
By results of 2015, the share of rail transport in the total structure of freight transportation was 9% (−1 p.p. y/y). Automobile transport remains a key type of transportation in Kazakhstan (its share equals to 85%) due to its higher flexibility in short distance deliveries. Nevertheless, the rail transport should be preferred in transportation of industrial cargoes (more efficient, lower cost).
In 2015, the total volume of freight turnover amounted to 512 bln t∙km (−8% y/y vs 21% growth in 2014). The rail transport freight turnover was 236 bln t∙km (−16% y/y vs 22% growth in 2014) with CAGR of 2% in 2010–2015.
Freight transportation volume dynamics in Kazakhstan, 2010–2015
-5%
0%
5%
10%
15%
20%
25%
0
500
1000
1500
2000
2500
3000
3500
4000
2010 2011 2012 2013 2014 2015
mln t
Rail transportation dynamics in Kazakhstan, 2010–2015
-20%
-10%
0%
10%
20%
30%
40%
0
100
200
300
400
500
2010 2011 2012 2013 2014 2015
mln t
Freight transportation volume structure by types, 2015
85%
9%6%
Automobile
Rail
Pipeline
Marine (share: <1%)
JOINT LEGEND FOR THE GRAPH AND PIECHART:
Freight turnover dynamics in Kazakhstan, 2010–2015
-10%
-5%
0%
5%
10%
15%
20%
0
100
200
300
400
500
600
2010 2011 2012 2013 2014 2015
bln t·km
Rail transport freight turnover dynamics in Kazakhstan, 2010–2015
-20%
-10%
0%
10%
20%
30%
0
50
100
150
200
250
300
2010 2011 2012 2013 2014 2015
bln t·km
Freight turnover structure, 2015
31%
46%
23%
Automobile
Rail
Pipeline
Marine(share: <1%)
JOINT LEGEND FOR THE GRAPH AND PIECHART:
ANNUAL REPORT 2015
Sources: Statistics Committee of Kazakhstan
17
In 2015, unfavorable market conditions, which include dropping commodity prices, slowing export demand from Russia and China, escalation of geopolitical risks and increased competition from oil pipelines, have led to decline in cargo load volume and hence the slowdown of railway freight transportation.
In 2015, the total volume of cargo load decreased by −10.4% y/y (or −25.2 mln t) to 217 mln t. The worst decline was demonstrated by iron ore, construction materials and coal (−21.4 mln t in total).
The worst decline rate in relative terms is shown by oil transportation: −63% y/y, a decline from 5.9 mln tons in 2014 down to 2.2 mln tons in 2015. The main reason behind this is increased capacity of CPC pipeline, which allowed Tengizchevroil to increase export through this route.
ANNUAL REPORT 2015
Rail freight transportation market overview
Sources: Statistics Committee of Kazakhstan, Kazakhstan Temir Zholy NC
Coal
Iron ore
Non-ferrous ore and metals
Oil and oil products
Construction materials
Cargo load dynamics by types of cargoes, 2012–2015
-
25
50
75
100
125
150
175
200
225
250
2012 2013 2014 2015
44%
9%9%9%7%
3% 3%3%
60
70
80
90
100
110
120
2012 2013 2014 2015
Grain
Chemical products
Ferrous metals (incl. scrap)
Fertilizers
Other
Cargo load dynamics change, 2013–2015 to 2012 base
Oil and oil products
Iron ore
Ferrous metals (incl. scrap)
Coal
Non-ferrous ore and metals
mln t
Competitive environment
18
The current rail freight transport market of Kazakhstan is presented by state-owned Kaztemirtrans, captive operators (transport units of large holdings and industrial groups) and private operators. Besides that, the market is inhabited by large Russian operators.
The group of captive operators that primarily serve its parent companies include Transsystem, Transcom, Bogatyr Trans and others. The largest private operators are Eastcomtrans, Tengiz Trans Gas, Olzha and others. According to Kazakhstan Temir Zholy NC, the total railcar fleet of Kazakhstan totals 118.2 th units.
Source: Kazakhstan Temir Zholy NC
Structure of Kazakhstani fleet owners by railcar type, 2015 / units
39%
32%
10%
2%3% 6%
3% 4%
Key Company’s clients include: 1) Metals and mining products transportation: ArcelorMittal Temirtau, Ekibastuz GRES-1, KSP Steel, Casting, Kazzinc, KAZ Minerals Plc; 2) Oil, LPG and oil products transportation: Tengizchevroil, LUKoil, Zhaikmunai, Sibur, Pavlodar Refinery, Atyrau Refinery, PetroKazakhstan Oil Products; 3) Construction materials and chemical products transportation: Shymkentcement, HeidelbergCement Group.
ANNUAL REPORT 2015
Structure of Kazakhstani railcar fleet owners, 2015 г. / units
10%
42%
7%
3%
3%
3%
3%
29%
Eastcomtrans
Kaztemirtrans
Transcom
GE Logistics
Texol Trans
Petroleum
Bogatyr Trans
Others
Gondolas
Oil/LPG tanks
Boxcars
Platforms
Fitting platforms
Grain hoppers
Cement hoppers
Others
Operational highlights
19
Presently, the Company’s main business directions include railcar rental services and operating services in proportion of 73%/25% (on a monetary 2015FY basis). The remaining part is accounted by forwarding and other services. The Company is operating all over the ‘1520 area’.
By results of 2015, the Company’s total freight transportation volume amounted to 16.7 mln tons (+2% y/y).
In 2015, the average rental and operating services rates decreased due to a continuing slump in the CIS rail freight industry on the back of strengthened geopolitical tensions, lower economy growth rates in the region, industrial activity drop and rail car surplus.
In 2015, the Company won a number of large tender offers for operating and cargo forwarding services, and secured its further cooperation with its main client.
The Company formed a new Logistics Unit with goals of optimizing routes and empty run minimization. Besides that, the Company also strengthened its dispatchers’ office, which led to improvement of operational results. As a result of these initiatives, the empty run ratio was lowered to its historical minimum — 0.6.
The Company’s strategy in 2016 will be to protect its market share, reach full utilization of railcar fleet and optimization of operations. However if current trend remains unchanged, the Company’s results will deteriorate.
ANNUAL REPORT 2015
20
Financial results
4.
ANNUAL REPORT 2015
Revenue
21
The total revenue of the Company in 2015 amounted to KZT26 537 mln (US$120 mln based on the annual average exchange rate of KZT221.73/US$), which is less than in 2014 by 17% in KZT terms and 32% in US$ terms.
The revenue structure by types of services did not change much: share of rental revenue in 2015 reached 73%, share of operating services — 25% (+2 p.p. y/y), share of other services — 2% (−2 p.p. y/y).
Share of US$ denominated revenue amounted to 62% in 2015 vs 66% in 2014.
Revenue dynamics, 2010–2015
9 807 17 051 22 476 25 513 31 897 26 537
66.5
114.9
149.1 165.6
175.9
119.7
2010 2011 2012 2013 2014 2015
Revenue, KZT mln Revenue, US$ mln
Revenue structure: type of services, 2014–2015
73% 73%
23% 25%
4% 2%
2014 2015
Rental Operating Other
Rental revenue in 2015 amounted to KZT19 349 mln (−17% y/y, 73% of the total revenue).
Revenue from operating services amounted to KZT6 525 mln (−11% y/y, 25% of the total).
Revenue from forwarding and consignor & consignee services amounted to KZT559 mln (−57% y/y, 3% of the total).
Revenue from other services in 2015 reached KZT103 mln (+24% y/y) and its share in the total is insignificant (≈0.4% in 2015 vs ≈0.3% in 2014).
ANNUAL REPORT 2015
Cost of sales
22
In 2015, cost of sales (COGS) amounted to KZT10 817 mln (US$48.8 mln), which is almost equal to the previous year results (−1% y/y or −KZT113 mln).
COGS dynamics, 2010–2015
2 037 5 704 8 767 7 710 10 931 10 817
13.8
38.4
57.0 50.0
60.3
48.8
2010 2011 2012 2013 2014 2015
COGS, KZT mln COGS, US$ mln
52% 55%
24% 14%
8%10%
2014 2015
COGS structure, 2014–2015
6%6%
4%4%7%
DDA
Repair and technical maintenance of railcars
Use of railway infrastructure
Insurance of railcars
Maintenance of railcars
Payroll and related expenses
Other
In 2015, the structure of cost of sales changed: repair and technical maintenance costs decreased due to a drop of depot and overhaul repairs; use of railway infrastructure costs increased due to a rise of oil tanks in layover; insurance costs increased due to a growth of voluntary insurance premiums.
Sum (KZT mln), 2015 Sum (KZT mln), 2014 Growth rate, y/y Share, 2015 Share, 2014 Change, y/y
DDA 5 919 5 631 5% 55% 52% +3 p.p.
Repair and TM 1 517 2 671 −43% 14% 24% −10 p.p.
Use of railways 1 067 906 18% 10% 8% +2 p.p.
Insurance 689 109 6.3х 6% 1% +5 p.p.
Maintenance 596 419 42% 6% 4% +2 p.p.
Payroll 397 415 −4% 4% 4% –
Other 633 780 −19% 6% 7% −1 p.p.
Total 10 817 10 931 −1% 100% 100% –
ANNUAL REPORT 2015
Due to the ageing of the railcar fleet, it is expected that overhaul and depot repair costs will rise in the medium term.
Gross profit margin decreased from 66% in 2014 to 59% in 2015.
General and administrative expenses
23
In 2015, general and administrative expenses amounted to KZT2 249 mln (US$10.1 mln), which is less than in the previous year by −20% y/y or KZT545 mln.
SGA expenses dynamics,2010–2015
832 980 1 127 1 685 2 794 2 249
5.6 6.6 7.3
10.9
15.4
10.1
2010 2011 2012 2013 2014 2015
SGA, KZT mln SGA, US$ mln
34% 31%
33%21%
18%33%
2014 2015
Structure of SGA expenses, 2014–2015
8%7%
12%3%
Insurance of risks
Payroll and related expenses
Bank fees
Taxes other than income tax
Consulting services
Other
In 2015, the main drivers of decrease of selling and administrative expenses were drop in insurance expenses (−27% y/y due to a high base effect from the high voluntary insurance costs in 2014), payroll costs (−48% y/y, bonuses were not paid) and taxes other than CIT (−45% y/y due to a smaller tax base effect, which arose after revision of contracts with some counter agents).
Sum (KZT mln), 2015 Sum (KZT mln), 2014 Growth rate, y/y Share, 2015 Share, 2014 Change, y/y
Insurance of risks 691 946 −27% 31% 34% −3 p.p.
Payroll 476 915 −48% 21% 33% −12 p.p.
Taxes other than CIT 179 325 −45% 8% 12% −4 p.p.
Consulting 157 82 92% 7% 3% +4 p.p.
Bank fees 10 33 −71% 0.4% 1% −1 p.p.
Other 737 492 +50% 33% 18% +15 p.p.
Total 2 249 2 794 −20% 100% 100% –
ANNUAL REPORT 2015
EBITDA
24
The Company’s EBITDA in 2015 decreased by −19% in KZT terms and amounted to KZT19 393 mln vs KZT23 876 mln in 2014. In US$ terms, EBITDA decreased by −34%: from US$132 mln in 2014 to US$87 mln in 2015.
EBITDA margin amounted to 73%, –2 p.p. y/y.
If current market trends, operational and revenue results deterioration remain unchanged, EBITDA margin will continue its decline.
EBITDA formation (KZT mln), 2015
26 537
Revenue COGS SGA Other
operating
income
Other
operating
expense
EBITDADDA
(10 817)
(2 249) 187 (239)
5 975 19 393
EBITDA dynamics, 2010–2015
7 732 13 007 17 361 21 863 23 876 19 393
52.5
88.7
116.4
143.7 131.6
87.0
2010 2011 2012 2013 2014 2015
EBITDA, KZT mln EBITDA, US$ mln
79%
76%77%
86%
75%73%
2010 2011 2012 2013 2014 2015
EBITDA margin dynamics, 2010–2015
ANNUAL REPORT 2015
Finance income and expenses
25
Total amount of finance expenses reached KZT41 510 mln (US$187 mln, increase by 2.8х y/y). 85% of this sum is attributed to FX loss due to a substantial drop in value of Kazakhstani tenge after the National Bank of Kazakhstan switched to free float exchange rate policy in August 2015.
As of 31.12.2015, the share of foreign currency in the total structure of credit portfolio was equal to 91%.
Sum (KZT mln), 2015 Sum (KZT mln), 2014 Growth rate, y/y Share, 2015 Share, 2014
Finance costs 6 189 5 820 +6% 15% 40%
Foreign exchange loss 35 320 8 752 4.0х 85% 60%
Total 41 510 14 572 2.8х 100% 100%
Finance income in 2015 increased by 19.5 times y/y and reached KZT688 mln vs 35 mln in 2014.
Source: National Bank of Kazakhstan
ANNUAL REPORT 2015
KZT/US$ exchange rate dynamics, 2014–2015
050
100
150200250300350400
Jan-
14
Mar
-14
May
-14
Jul-1
4
Sep
-14
Nov
-14
Jan-
15
Mar
-15
May
-15
Jul-1
5
Sep
-15
Nov
-15
Jan-
16
184.50
13.02.14
255.26
21.08.15
349.12
22.12.15KZT/US$
Finance costs and credit portfolio (CP) size dynamics, 2014–2015
64
349
632
101
298
628
CP in KZT bln at YE CP in US$ mln at YE Finance costs in KZT bln Finance costs in US$ mln
2014 2015
By results of 2015, the Company breached a number of financial covenants on which it got waivers for the medium term period. If financial results worsen, the Company intends to continue its negotiations with creditors to prolong waivers’ terms and softening of covenants.
If negative trends in rail freight transportation market remain unchanged, the Company may face with difficulty to pay off its debt obligations in 2018.
Bottom line
26
Net Loss of the Company in 2015 amounted to (KZT26 868) mln vs KZT2 749 mln of Net Income in 2014. It is the first time the Company gets a negative bottom line result for its entire history of existence.
The decrease in Equity by 2.4 times is attributed to the FX loss.
2013 2014 2015 2013 2014 2015
KZT mln KZT mln KZT mln US$ mln US$ mln US$ mln
Revenue 25 513 31 897 26 537 168 176 120
Gross profit 17 803 20 966 15 703 117 116 71
EBITDA 21 863 23 876 19 393 144 132 87
Net income (loss) 8 158 2 749 (26 868) 54 15 (121)
Cash & cash equivalents 3 554 5 437 12 795 23 30 38
Account receivables 4 922 6 776 7 327 32 37 22
Current assets 11 773 14 444 36 323 77 79 107
PPE 99 313 105 243 95 813 647 577 282
Total assets 111 249 119 756 132 196 724 657 389
Total financial liabilities 56 133 63 577 101 186 365 349 298
Equity 44 121 44 830 18 552 287 246 55
Cash flow from operating activities
18 805 20 945 17 910 124 115 81
Cash flow from investing activities
(14 679) (11 399) (3 507) (96) (63) (16)
Cash flow from financing activities (incl. finance costs)
(3 900) (8 915) (14 869) (26) (49) (67)
Gross margin 70% 66% 59% 70% 66% 59%
EBITDA margin 86% 75% 73% 86% 75% 73%
Net debt / EBITDA 2.40 2.43 3.91 2.40 2.39 2.45
Debt / Equity 1.52 1.67 6.13 1.52 1.67 6.13
Key financials of the Company
KZT/US$ exchange rate, average
KZT/US$ exchange rate, end of period
152.13
153.61
181.38
182.35
221.73
340.01
FX loss (1 003) (8 752) (35 320)
ANNUAL REPORT 2015
27
Risk management
5.
ANNUAL REPORT 2015
Risk management system
28
The Risk Management Policy (hereinafter referred to as the “Policy”) was approved by the Supervisory Board in May 2015. It defines the following areas: 1) risk identification procedure; 2) risk assessment; 3) risk management; 4) exchange of information and risk monitoring; 5) confidentiality and information disclosure requirements.
The Policy is targeted to define potential risks negatively affecting operations, reputation, financial standing of the Company and diminishing the probability of its occurrence.
Policy goals:
• Develop and implement consistent approach to risk determination and management;
• Determine and rapid response on emerging risk events;
• Make targeted risk management actions aimed at bringing risks to acceptable level;
• Determine risk reporting minimum requirements;
• Determine minimum requirements on risk assessment procedures.
Main objectives for the Policy:
• Forecast an occurrence of negative events;
• Develop action plans in case of negative event occurrence to minimize potential harm;
• Ability to react fast on unexpected events and make managerial decisions to take control on the situation;
• Deliver timely information on reaction options to parties involved;
• Disseminate information to all employees and interested parties concerning their responsibilities on identification, monitoring and reaction on risks.
Risk management system is a two-level system: 1st level — Supervisory Board (approves Policy, levels of responsibility, risk register, rules and procedures on monitoring, risk reports and internal audit plans); 2nd level — General Director (responsible for organization of effective risk management system and development of risk control system). The Company is considering to establish a risk management unit in the future.
The Company defines seven type of risk groups:
• Operational risk
• Financial risk
• Market risk
• Risk of fraud
• Reputational and confidential information disclosure risk
• Concentration risk
• Sole decision making risks
ANNUAL REPORT 2015
Key risks register
29
O P E R A T I O N A L R I S K S
F I N A N C I A L R I S K S
M A R K E T R I S K S R I S K S O F F R A U D
R E P U T A T I O N A L R I S K S
C O N C E N T R A T I O N R I S K S
S O L E D E C I S I O N M A K I N G R I S K S
• Rolling stock availability to meet contractual obligations
• Fail to deliver or late delivery of railcars to consumers
• Sending railcars to the wrong route
• Accidents, derailment
• Untimely repair
• Signing contracts with insolvent clients
• Noncompliance with financial terms set by creditors
• Interest rates increase risk
• Devaluation and imbalanced credit portfolio risk
• Risk of financial and tax reports late delivery
• Falling market prices in oil & gas and mining sectors
• Decline of production volumes in oil & gas and mining sectors
• Export restrictions
• Increase in Kazakhstan TemirZholy’s tariffs
• Rental rates decline
• Oil pipelines capacity expansion
• Signing contracts for the purchase of goods and services at higher than market prices
• Signing contracts for the delivery of services at lower than market prices
• Theft of goods and materials from the office or warehouses
• Raiding
• Negative information influence on reputation due to breach of contractual obligations (financial, operating)
• Unauthorized disclosure of rental rates and tariffs
• Disclosure of commercial secrets
• Law violation risks
• Dependence on a single financial institution
• Dependence on a single supplier in the delivery of spare parts and/or repair works
• Customer concentration risk
• Key person risk
• Sole decision making when signing contracts
• Sole decision making on strategy
ANNUAL REPORT 2015
30
Social responsibility
6.
ANNUAL REPORT 2015
HR policy and social responsibility
31
The Company has a qualified management and production personnel with extensive experience in the railway industry. 97% of employee hold higher education and 3% earned MBA.
As at year end 2015, the Company employed 155 person, the number of employee has doubled compared to 2009. 26% of employee serve from 3 to 5 years in the Company, average age is under 36.
The Company has developed and approved the Code of Ethics, which states equal respect for every employee irrespective of nationality, gender or religion.
As at year end 2015, women has accounted for 49% of employee. Seven women hold managerial positions in the Company.
The Company is interested in competent, pro-active staff and continuously improves the professional level of its workforce. In 2015, 35 employees attended trainings, seminars, including professional education for certification programs (CFA, ACCA). Company has adopted ‘Personal Training Program 2016’ in order to further support educational initiatives.
Company sponsors Charity Fund Zhakiya. In 2015, KZT30 mln were transferred to the fund. It provides educational grants and medical help for youth and children from poor families and orphanages.
The following initiatives were realized in 2015: 1) educational grants program named after Zhakiya Sarsenov (9 grantee and 2 fellows); 2) Give a Smile dental help program; 3) educational institutions support program
ANNUAL REPORT 2015
32
Corporate governance
7.
ANNUAL REPORT 2015
Corporate governance
33
New strategic international investor entry, leading position on the market, debut Eurobonds placement on KASE and LSE, geographic expansion and future plans on going public encourage the Company to move to the new level of its development. This also leads to more serious and competent attention to the corporate governance issues.
Corporate governance structure of the Company
1 level G E N E R A L M E E T I N G O F S H A R E H O L D E R S
Supreme body consisting of Shareholders or their representatives
2 level S U P E R V I S O R Y B O A R D
Strategic management and control body
3 level G E N E R A L D I R E C T O R
Sole executive body
Decisions are being made by responsible bodies within their competence, which is stated in founding documents.
• Accountability: the Code states that the Company should report to all shareholders. The Code secures guiding principles in respect of the Supervisory Board’s competencies in regard to strategy development, ways of business development, top management team monitoring and control.
• Fairness: the Company ensures compliance of rights and equality of rights of all shareholders (including minority shareholders). All shareholders in case of their rights’ violation have equal access to rights protection procedures with the participation of the Supervisory Board.
The Company developed and approved the Corporate Governance Code, which is based on the following principles:
• Transparency: the Company ensures timely, reliable and affordable disclosure of corporate information regarding all significant issues of the Company’s business including information about shareholders composition, management structure and financial results.
• Responsibility: the Company accepts rights of the shareholders and other interested parties, which is aimed at ensuring compliance with social and ecological standards. This in turn leads to continuous solid growth and financial stability of the Company.
ANNUAL REPORT 2015
Corporate structure
34
G E N E R A L D I R E C T O R
Deputy General Director for Commercial Affairs and Operations
S T R A T E G I C D E V E L O P M E N T D E P A R T M E N TC O M M E R C I A L
D E P A R T M E N T
T E C H N I C A L D E P A R T M E N T
L O G I S T I C S D E P A R T M E N T
L E G A L D E P A R T M E N T
A S T A N A R E P R E S E N T A T I V E O F F I C E
F I N A N C E D E P A R T M E N T
I T D E P A R T M E N T
A D M I N I S T R A T I V E D E P A R T M E N T
H R D E P A R T M E N T
As of 31.12.2015
ANNUAL REPORT 2015
Supervisory Board
35
Supervisory Board (SB) is a body of strategic management and control of the Company. The number of SB members is determined by the General Meeting of Shareholders and shall consist of no more than five people.
In 2015, Supervisory Board consisted of four members:
Vadim Malakhov
Chairman of the SB
Yuri Lavrinenko
Independent member of the SB
Ekaterina Benjamin
Independent member of the SB
Mikhail Kuznetsov
Independent member of the SB
On 01.06.2015, Mr Vadim A. Malakhov was elected as a new Chairman of the SB. Mr Malakhov graduated from Kazakh Polytechnic Institute in 1982 with a specialty of ‘Geochemist’. In 1996–1998, he served as a Head and Chief Quality Officer in BEST LLP. In 2002–2015, Mr Malakhov was a General Director of Eastcomtrans LLP.
Mr Yuri I. Lavrinenko was elected as an Independent Director of the SB in 2013. Mr Lavrinenko is a Candidate of Economic Sciences. Starting 2010, acted as an advisor to the President of Kazakhstan TemirZholy NC. In 2007–2008, Mr Lavrinenko was a General Director of Kamkor Repair Corporation LLP; in 2006–2007: Managing Director, Director of KTZh NC’s Branch – Direction of Magistral Routes; in 2002–2006: First Vice-Minister, Vice-Minister of Transport and Communications; in 1999–2002: Deputy of Mazhilis of the Parliament of RK.
Ms Ekaterina Y. Benjamin was elected as an Independent Director of the SB in December 2014. MsBenjamin holds a solid experience in financial institutions, among them are Citibank Kazakhstan, BankPetrocommerce, KazInvestBank, HSBC Bank Kazakhstan, Altyn Bank. In 2005–2011, Ms Benjamin acted as Independent Director of Visor Capital, Kazakhmys Pensions Fund and Altaipolymetall.
Mr Mikhail Y. Kuznetsov was named a new Independent Director of the SB in May 2015. Mr Kuznetsov is a Candidate of Economic Sciences, he is a Chartered Director (UK Institute of Directors) and Executive MBA by the IE Business School (Madrid, Spain). Mr Kuznetsov held managing positions in Aviacor, LUKOIL-Volga, Promsvyaz and IFC. At the current moment, Mr Kuznetsov acts as an Independent Director at the Board of Directors of Energosetproject OJSC, EHO JSC (Roscosmos), Credit Bank of Moscow OJSC. He is also a General Director and Managing Partner of the Center for Corporate Development and Acting Director of the Association of Corporate Directors.
ANNUAL REPORT 2015
Corporate governance
36
The sole managing body of the Company is presented by General Director. Mr Malakhov V.A. acted as General Director until 1 June 2015, after that date Mr Plakhotin E.D. (born on 06.07.1979) succeeded Mr Malakhov on this post. Mr Plakhotin does not have any shares in the Company and/or its related parties and subsidiaries.
Managing body
On 4 March 2016, the Audit Committee consisting of independent members of Supervisory Board Mr Kuznetsov M.Y. and Ms Benjamin E.Y. has been formed by the decision of the SB. There were no Supervisory Board committees during the last reporting period.
The Supervisory Board committees and their functions
The Company is in the process of implementing selected internal control and risk management practices. In particular, internal control rules concerning the use and dissemination of insider information have been adopted.
The Company is implementing IT related incidents management system in order to assess efficiency and formalize processing of requests in IT Department.
The Company adopted an internal Insurance policy in order to defend its property interests as it operates in a complicated and risky industry. This policy is considered to be an efficient instrument of risk mitigation.
The Company’s risk management policy has been approved by the Supervisory Board decision dated 29.05.2015.
Internal audit and control
In 2015, Eastcomtrans LLP paid dividends in the amount of KZT687 mln for the financial year 2014. In 2015, the Supervisory Board and General Director remuneration amounted to KZT106 mln (the share of SB: 37%).
Dividends
The Company fully and timely discloses information affecting interests of current and potential investors. The Information Policy defining the process of information disclosure by the Company, its financial and operational results was approved by the Supervisory Board on 06.11.2015.
The corporate governance policy was adopted on 25.08.2015; it is developed in accordance with recommendations from IFC.
Existing and potential investors policy, corporate governance principles
ANNUAL REPORT 2015
37
Financial statements
8.
ANNUAL REPORT 2015
Independent auditors’ report
38
To Management of Eastcomtrans LLP
We have audited the accompanying financial statements of Eastcomtrans LLP (the “Company”), which comprise the statement of financial position as at 31 December 2015, and the statements of profit or loss and other comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit 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 financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements 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 entity’s 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 financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as at 31 December 2015, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.
Yelena Kim
Certified Auditorof the Republic of Kazakhstan,Auditor’s Qualification CertificateNo. МФ-0000042 от 8 August 2011
Assel Khairova
General Directorof KPMG Audit LLCacting on the basis of the Charter
30 April 2016
KPMG Audit LLC
State License to conduct audit # 0000021 dated 6 December 2006 issuedby the Ministry of Finance of the Republic of Kazakhstan
ANNUAL REPORT 2015
39
STATEMENT OF FINANCIAL POSITION
A s a t 3 1 D e c e m b e r 2 0 1 5
ANNUAL REPORT 2015
40
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
F o r t h e y e a r e n d e d 3 1 D e c e m b e r 2 0 1 5
ANNUAL REPORT 2015
41
STATEMENT OF CHANGES IN EQUITY
F o r t h e y e a r e n d e d 3 1 D e c e m b e r 2 0 1 5
ANNUAL REPORT 2015
42
STATEMENT OF CASH FLOWS
F o r t h e y e a r e n d e d 3 1 D e c e m b e r 2 0 1 5
ANNUAL REPORT 2015
43
STATEMENT OF CASH FLOWS (CONTD.)
F o r t h e y e a r e n d e d 3 1 D e c e m b e r 2 0 1 5
On 30 December 2015 the Company received KZT 12,278,588 thousand under the finance lease contract, and the entire amount was entered to a special account (Note 10). As the money on this account is restricted in use, it is not presented in this statement of cash flows.
ANNUAL REPORT 2015
Approved by the Company’s management on 30 April 2016 and were signed on its behalf by:
E. Plakhotin
General Director
Zh. Kolobayeva
Financial Director
Zh. Koishibekova
Chief Accountant
Notes to the financial statements
44
1. REPORTING ENTITY
(а) Organization and operations
Eastcomtrans LLP (the “Company”) is a limited liability partnership established underthe laws of the Republic of Kazakhstan on 4 October 2002.
The principal activity of the Company is rendering of the services in the sphere of oiland gas freight operations by railway over the territory of the Republic ofKazakhstan.
The registered office of the Company is located at: office 11a, 77/7 Al-FarabiAvenue, Almaty, 050040, Republic of Kazakhstan.
The Company is owned by Mr. M.Zh. Sarsenov (55.998%), a citizen of Republic ofKazakhstan, and Steinhardt Holding N.V (37.332%), a company established underthe laws of the Netherlands, and International Finance Corporation (6.67%). Theultimate controlling party is Mr. M.Zh. Sarsenov.
On 18 May 2015, Moody's Rating Agency confirmed B3 corporate credit rating underthe international and national scales to Eastcomtrans LLP. The credit rating outlookis “Positive”.
On 18 December 2015, Fitch Ratings confirmed the Company’s long-term creditratings at B level according to the international scale, and at BB(kaz) according tothe local scale. The credit rating outlook is “Negative”.
(b) Kazakhstan business environment
The Company’s operations are primarily located in Kazakhstan. Consequently, theCompany is exposed to the economic and financial markets of Kazakhstan whichdisplay characteristics of an emerging market. The legal, tax and regulatoryframeworks continue development, but are subject to varying interpretations andfrequent changes which together with other legal and fiscal impediments contributeto the challenges faced by entities operating in Kazakhstan. In addition, the recentsignificant depreciation of the Kazakhstan tenge, and the reduction in the globalprice of oil, have increased the level of uncertainty in the business environment.
The financial statements reflect management’s assessment of the impact of theKazakhstan business environment on the operations and the financial position of theCompany. The future business environment may differ from management’sassessment.
(c) Going concern
The financial statements have been prepared on the going concern basis, whichcontemplates the realisation of assets and discharge of liabilities in the normalcourse of business. During the year ended 31 December 2015 the Companyincurred net loss of KZT 28,867,712 thousand (2014: net income of KZT 2,748,632thousand). The Company’s operations are also affected by the loans andborrowings, bonds and finance lease liabilities, which amounted to KZT 101,185,523thousand as at 31 December 2015 (2014: KZT 63,576,739 thousand) as comparedto the founders’ equity of KZT 18,552,061 thousand (2014: KZT 44,830,240thousand). Despite of decrease in the volume of the services provided in 2015, theCompany’s operations remained profitable and were able to generate positive cashflows from operating activities. The borrowings were also serviced in accordancewith the schedule of payments and in full amounts.
The Company management believes that the Company has a sound portfolio ofclients, including export-oriented companies of the Republic of Kazakhstan; and haslong-terms contracts signed with local and international companies (see Note 19); asignificant and diversified fleet of wagons, which allows transporting various types ofcargoes by railroad; and highly qualified staff having experience in railroadtransportation. Therefore, according to the Company management, currently there isno material uncertainty concerning the Company’s ability to continue as a goingconcern.
ANNUAL REPORT 2015
45
2. BASIS OF ACCOUNTING
(а) Statement of compliance
These financial statements have been prepared in accordance with InternationalFinancial Reporting Standards (“IFRSs”).
(b) Basis of measurement
These financial statements are prepared based on historic (primary) cost, except formachinery and equipment, accounted at the revalued amount and embeddedfinancial instruments are stated at fair value.
Information about assumptions and estimation uncertainties that have a significantrisk of resulting in a material adjustment within the next financial year is included inthe following notes:
3. FUNCTIONAL AND REPRESENTATION CURRENCY
The national currency of the Republic of Kazakhstan is the Kazakh tenge (“KZT”),which is the Company’s functional currency and the currency in which these financialstatements are presented. All financial information presented in KZT, unlessotherwise specified, has been rounded to the nearest thousand.
4. USE OF ESTIMATES AND JUDGMENTS
The preparation of financial statements in conformity with IFRSs requiresmanagement to make judgments, estimates and assumptions that affect theapplication of accounting policies and the reported amounts of assets, liabilities,income and expenses. Actual results may differ from those estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisionsto accounting estimates are recognised in the period in which the estimates arerevised and in any future periods affected.
Information about critical judgments in applying accounting policies that have themost significant effect on the amounts recognised in the financial statements isincluded in the Note 6 - Property, plant and equipment.
• Note 6 and Note 29 (b) – Property, plant and equipment;
• Note 15 – Bonds;
• Note 16 – Finance lease liabilities;
• Note 24 – Income tax benefit/(expense).
Measurement of fair values
A number of the Company’s accounting policies and disclosures require thedetermination of fair value, for both financial and non-financial assets and liabilities.
The Company has an established control framework with respect to themeasurement of fair values. As a part of the control framework the Company’sFinancial Director has overall responsibility for overseeing all significant fair valuemeasurements, including Level 2 fair values, and reports directly to the managementof the Company.
The Finance Department specialists regularly review significant unobservable inputsand valuation adjustments. If third party information, such as broker quotes or pricingservices, is used to measure fair values, then the Finance Department specialistassesses the evidence obtained from the third parties to support the conclusion thatsuch valuations meet the requirements of IFRS, including the level in the fair valuehierarchy in which such valuations should be classified.
When measuring the fair value of an asset or a liability, the Company uses marketobservable data as far as possible. Fair values are categorised into different levels ina fair value hierarchy based on the inputs used in the valuation techniques asfollows:
ANNUAL REPORT 2015
Notes to the financial statements
46
• Level 1: quoted prices (unadjusted) in active markets for identical assets orliabilities.
• Level 2: inputs other than quoted prices included in Level 1 that are observablefor the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derivedfrom prices).
• Level 3: inputs for the asset or liability that are not based on observable marketdata (unobservable inputs).
If the inputs used to measure the fair value of an asset or a liability might becategorised in different levels of the fair value hierarchy, then the fair valuemeasurement is categorised in its entirety in the same level of the fair value hierarchyas the lowest level input that is significant to the entire measurement.
The Company recognises transfers between levels of the fair value hierarchy at theend of the reporting period during which the change has occurred.
Further information about the assumptions made in measuring fair values is includedin the following notes:
• Note 6 – Property, plant and equipment;
• Note 15 – Bonds;
• Note 16 – Finance lease liabilities;
• Note 25 – Fair value and risks management.
5. OPERATING SEGMENTS
The management of the Company considers the Company as one segment, whichleases out the wagons and renders the services of routine maintenance and freightforwarding. The Company’s assets are registered in Kazakhstan. All revenues of theCompany are generated in Kazakhstan.
The Company’s management analyses the segment performance based onstatement of profit or loss and other comprehensive income prepared in accordancewith IFRS.
The major client of the Company in 2015 and 2014 is Tengizchevroil LLP.Information on sales is disclosed in Note 19.
6. PROPERTY, PLANT AND EQUIPMENT
Depreciation expense of KZT 5,935,859 thousand (2014: KZT 5,631,469 thousand)has been charged to cost of sales and KZT 48,761 thousand to administrativeexpenses (2014: KZT 59,323 thousand).
(а) Revaluation of machinery and equipment
Machinery and equipment are mainly represented by the railway wagons andgondola wagons. Machinery and equipment have been revalued to their marketvalue as at 31 December 2015. The revaluation has been performed based on thereport of an independent appraiser, American Appraiser LLP, which has a requiredqualification and sufficient experience in evaluation of such assets. The fair valuewas determined based on the analysis of the CIS secondary market, which wasclassified as an active secondary market by the appraiser and represent Level 2 offair value hierarchy.
ANNUAL REPORT 2015
Measurement of fair values (contd.)
Notes to the financial statements
47
(а) Revaluation of machinery and equipment (contd.)
Net effect from revaluation as at 31 December 2015 was decrease in the netcarrying amount of property, plant and equipment by KZT 4,469,508 thousand withKZT 6,065,371 thousand decrease recognised in profit or loss as impairment lossand increase in value of certain items in class of machinery and equipment in KZT1,595,864 thousand as increase in revaluation reserve in other comprehensiveincome.
As at 31 December 2015 the carrying amount of machinery and equipment wouldhave been KZT 82,654,000 thousand (2014: KZT 92,482,901 thousand), ifmachinery and equipment had been recognized at cost less the accumulateddepreciation and impairment.
(b) Security
As at 31 December 2015 machinery and equipment with a net carrying amount ofKZT 64,620,539 thousand (2014: KZT 63,411,094 thousand) are subject to aregistered debenture to secure bank loans and borrowings (see Note 13); machineryand equipment with a net carrying amount of KZT 15,664,912 thousand (2014: KZT18,959,645 thousand) are subject to a registered debenture to secure theCompany’s bonds (see Note 14). Moreover, as at 31 December 2015 machinery andequipment with a net carrying amount of KZT 5,665,161 thousand (2014: KZT6,467,714 thousand) are subject to a registered debenture to secure the loans andborrowings received by Center of Wagon Service – Yeskene LLP, an enterpriseunder common control of the ultimate controlling party of the Company.
(c) Leased property, plant and equipment
Machinery and equipment are mainly represented by the railway wagons andgondola wagons. Machinery and equipment include wagons acquired under financelease contracts signed with banks, with a net carrying amount of KZT 8,693,780thousand (2014: KZT 9,551,123 thousand). The wagons are pledged as security ofthe respective finance lease contracts (see Note 16).
7. TRADE AND OTHER RECEIVABLES
As at 31 December 2015 the trade receivables of the Company’s major customer –Tengizchevroil LLP – accounted for 24% of the total trade receivables (2014: 32%).
The movement in the provision for doubtful debt during the years ended 31December was as follows:
As at 31 December 2015 the trade receivables not overdue and not impairedamounted to KZT 6,777,822 thousand (2014: KZT 6,383,635 thousand), and tradereceivables accounting to KZT 155,942 thousand were overdue from 90 to 365 days(2014: KZT 392,739 thousand) and KZT 392,739 thousand for more than one year.
As at 31 December the Company’s trade receivables were denominated in thefollowing currencies:
The Company’s exposure to credit risk related to trade receivables is disclosed inNote 25.
ANNUAL REPORT 2015
Notes to the financial statements
48
8. ADVANCES PAID AND OTHER CURRENT ASSETS
As at 31 December 2015 and 31 December 2014 there were no advances paid forwagons.
As at 31 December the advances paid were as follows:
The movements in the impairment allowance for the years ended 31 December wereas follows:
9. SHORT-TERM BANK DEPOSITS
On 8 May 2015 the Company placed a deposit of USD 3,000 thousand with SBSberbank JSC (Fitch’s long-term IDR in foreign and national currency – “ВВ+”,outlook – “Negative”), with maturity on 8 May 2016 and bearing an interest rate of6% per annum.
On 30 and 31 December 2014 the Company opened a deposit in USD in SBSberbank JSC in the total amount of KZT 3,282,300 thousand with an interest rate6% per annum. The term deposit matured on 1 April 2015.
The Company's exposure to credit risk and interest rate risks and a sensitivityanalysis for financial assets and liabilities are disclosed in Note 25.
10. CASH ON SPECIAL ACCOUNTS
As at 31 December 2015, the total amount of such cash placed on a special accountin Bank CenterCredit JSC was KZT 12,360,382 thousand (see Note 16).
Cash was received as a part of implementation of the Finance lease ContractsNo.77-ФЛ dated 30 December 2015 concluded with DBK Leasing JSC.
Bank CenterCredit JSC (Fitch’s long term IDR – “В”, outlook – “Stable”) has a right toset restrictions with respect to cash placed on a special account, consider andapproves any Company’s transactions with this cash. In accordance with the terms ofthe contract the cash is written off as soon as the wagons are transferred for financialleasing, with the date of completion of the transfer and, accordingly, the use of cash,before 15 May 2016.
In 2016, up to date the Company has used KZT 7,564,178 thousand from the specialaccount with Bank CenterCredit JSC.
As at 31 December 2015 the total cash placed with Altyn Bank JSC was KZT159,965 thousand (see Note 16). Altyn Bank JSC (Fitch’s long-term IDR – “ВВ”,outlook – “Stable”) has a right to set restrictions with respect to this cash, if theCompany fails to observe the payment schedule of the principal or interest on theloans from International Finance Corporation.
The Company’s exposure to credit risk and interest rate risk and a sensitivity analysisfor financial assets and liabilities are disclosed in Note 25.
ANNUAL REPORT 2015
Notes to the financial statements
49
11. CASH AND CASH EQUIVALENTS
As at 31 December cash and cash equivalents are denominated in the followingcurrencies:
On 31 December 2015 the Company placed a deposit of KZT 200,000 thousandwith Altyn Bank JSC (former SB Halyk Bank of Kazakhstan JSC), which bears aninterest rate of 30% per annum. The deposit matures on 5 January 2016.
The Company’s exposure to credit risk and interest rate risk and a sensitivityanalysis for financial assets and liabilities are disclosed in Note 25.
12. CHARTER CAPITAL AND RESERVES
(а) Charter capital
(b) Dividends
The founders are entitled to receive dividends as declared from time to time and areentitled to vote at meetings of the Company prorated to their ownership interests inthe charter capital.
According to the Kazakhstani law reserves to distributions are limited by retainedearnings reported in the financial statements of the Company, prepared inaccordance with IFRS.
As at 31 December 2015 the Company had retained earnings, including the loss forthe current year, of KZT 1,654,738 thousand (2014: income in the amount of KZT28,370,829 thousand).
During the year 2015 the Company declared dividends to the partners in the amountof KZT 687,158 thousand, prorated to their ownership interests in the Company’scapital (2014: KZT 2,039,543 thousand).
(c) Security
As at 31 December 2015 the partners did not provide any Company’s shares as asecurity for loans and borrowings of the Company (2014: 37.332%) (see Note 14).
(d) Revaluation of property, plant and equipment
Revaluation reserve is meant to reflect the results of property, plant and equipmentrevaluation less deferred tax.
13. CAPITAL MANAGEMENT
The Company has no formal policy for capital management but management seeksto maintain a sufficient capital base for meeting the Company’s operational needs,and to maintain confidence of market participants and investors, creditors and toensure future business development. This is achieved with efficient cashmanagement, constant monitoring of Company’s revenues and profit, and long-terminvestment plans mainly financed by the Company’s operating cash flows. With thesemeasures the Company aims for steady profits growth.
The management of the Company monitors the return on capital, which the Companydefines as net operating income divided by total shareholders’ equity.
The management seeks to maintain a balance between the higher returns that mightbe possible with higher levels of borrowings and the advantages and securityafforded by a sound capital position.
There were no changes in the Company’s approach to capital management duringthe year.
The Company is not subject to externally imposed capital requirements.
ANNUAL REPORT 2015
Notes to the financial statements
50
14. LOANS AND BORROWINGS As at 31 December 2015 Mr. M.Zh. Sarsenov provided the guarantees on theCompany’s loans provided by Islamic Bank Al Hilal JSC and Gazprombank JSC inthe amount of KZT 6,781,701 thousand (2014: KZT 5,799,790 thousand) and KZT16,527,751 thousand (2014: KZT 9,028,045 thousand), respectively (see Note 27).
As at 31 December 2015 the partners did not provide any Company’s shares as asecurity for loans and borrowings of the Company (2014: 37.332%) (see Note 12).
This note provides information about the contractual terms of the Company’s loansand borrowings. For more information about the Company’s exposure to interest rateand foreign currency risk, see Note 25.
(а) Security
As at 31 December 2015 the Company’s property, plant and equipment of theamount of KZT 64,620,539 thousand are subject to a registered debenture to securethe loans and borrowings (2014: KZT 63,411,094 thousand) (see Note 6).
Altyn Bank JSC has a right to set restrictions with respect to cash placed with thebank, if the Company fails to observe the payment schedule of the principal orinterest on the loans from International Finance Corporation. As at 31 December2015 the total of such cash placed with Altyn Bank JSC was KZT 159,965 thousand(2014: on accounts with Altyn Bank JSC: KZT 260,211 thousand).
(b) Covenants
During 2015 the Company breached a few financial covenants on credit contractswith European Bank for Reconstruction and Development and Gazprombank JSC,related to collateral security ratio and capital adequacy ratio. In spite of this breach asat 31 December 2015 the Company received waivers from creditors related tocovenants mentioned above. As a result as at 31 December 2015 loans andborrowing from these creditors are classified as non-current liabilities.
15. BONDS
On 22 April 2013 the Company placed bonds for the total amount of KZT 14,782,727thousand with nominal value of USD 100,000 thousand, with the coupon of 7.75%per annum payable once every six months and maturity of 5 year, which expire inOctober 2018.
In April and December 2015 the Company repurchased the bonds in accordance withthe terms and provision of the Prospectus in the amount of KZT 2,319,937 thousandand KZT 4,915,236 thousand, respectively (in nominal value). The bonds wererepurchased at market prices, with discount of KZT 368,984 thousand recognized asincome on repurchase of bonds (see Note 23). According to the requirements of theProspectus, the bonds repurchased by the Company must be annulled. Thus, during2015 the Company has annulled KZT 7,235,173 thousand (in nominal value). As at31 December 2015, the carrying value of outstanding bonds was KZT 24,808,137thousand (2014: KZT 17,889,584 thousand).
The bonds are rated at B3 Positive by Moody’s and B Negative by Fitch. Bondobligations are secured by a pledge of rolling stock with net carrying amount of KZT15,664,912 thousand as at 31 December 2015 (31 December 2014: 18,959,645thousand).
ANNUAL REPORT 2015
Notes to the financial statements
51
(а) Embedded financial instrument – option of early repayment of the remaining debt
In accordance with terms of the Prospectus for bond issue the Company may at anytime, at its own discretion, having sent the notification to the bondholders, redeemthe bonds in full scope at the price, which represents the principal and compensationof loss of profit due to bond calling. Compensation for the loss of profit is estimatedas the greater of (a) 1% of the nominal value of all outstanding bonds, or (b) futurecoupon payments till maturity from the calling date discounted at the rate stipulatedin the Prospectus for bond issue.
Given the terms and conditions of the Prospectus and the current market situation,the Company management believes that the fair value of the embedded financialinstrument is close to zero. The Company’s exposure to liquidity risk related to thebonds is disclosed in Note 25.
On 30 December 2015 the Company signed a finance lease contract with DBK-Leasing JSC; the liabilities under this transaction amounted to KZT 12,281,896thousand as at 31 December 2015, the loan matures in 9 years and the loan isindexed at the KZT/USD exchanged rate. Repayment of investments in finance leaseis tied to the USD appreciation against KZT. Should the USD appreciate against theKZT, the amount payable increases by a respective index; however, if the USDdepreciates against KZT, the amount payable remains unchanged if the level of initialamount in KZT is achieved.
This embedded instrument was recognised at fair value in the financial statementswithin finance lease liabilities. The estimated value of the embedded instrumentincluded in the finance lease liability as at 31 December 2015 was KZT 4,157,048thousand; the fair value was measured using forward exchange rates.
The principal debt on this finance lease liability was recognised at a discounted valueand as at 31 December 2015 and amounted to KZT 8,124,848 thousand.
The following assumptions are used by management to assess the embeddedfinancial instrument:
16. FINANCE LEASE LIABILITIES
The Company entered into agreements to purchase property, plant and equipment,primarily railway wagons and semi-wagons under deferred payment schedule.These agreements transfer the ownership over the leased assets to the Company atthe end of the lease term.
Finance lease liabilities comprised the following as at 31 December:
ANNUAL REPORT 2015
Below are the amounts of future minimum lease payments and their discountedvalue:
• Volatility in the model has been assessed on the basis of historic observations ofchanges in the actual forward exchange rates during one year;
• The model does not include transaction costs.
Should the forward exchange rates decreases by 1% for the contract, the fair value ofthe embedded financial derivative decreases by KZT 162,414 thousand.
As at 31 December 2015 and 31 December 2014, Mr. M.Zh. Sarsenov providedguarantees on the Company’s finance lease liabilities in the amount of KZT 305,874thousand and KZT 529,643 thousand, respectively (see Note 27).
Notes to the financial statements
52
The Company’s exposure to liquidity risk related to finance lease liabilities isdisclosed in Note 25.
At 31 December other taxes payable included the following:
At 31 December the Company’s trade payables were denominated in the followingcurrencies.
19. REVENUE
During 2015 approximately 52% of the total revenue was derived from the servicesrendered to one customer – Tengizchevroil LLP (2014: 57%). The operating leasecontracts on wagons expire in 2019 but all of them are not non-cancellable:
ANNUAL REPORT 2015
17. TRADE PAYABLES
The Company entered into agreements to purchase property, plant and equipment,primarily railway wagons and semi-wagons under deferred payment schedule.These agreements transfer the ownership over the leased assets to the Company atthe end of the lease term.
Finance lease liabilities comprised the following as at 31 December:
The Company’s exposure to liquidity risk related to trade payables is disclosed inNote 25.
18. OTHER CURRENT LIABILITIES
20. COST OF SALES
Notes to the financial statements
53
21. ADMINISTRATIVE EXPENSES
The Company signed two agreements with Insurance Company Amanat InsuranceJSC on compensation for harm caused to life, health or property of third parties aswell as environmental damaged caused by a sudden and unintentional accidentalrelease, combustion (fire), discharge (effluent), spraying, release or leakage of anypollutants occurring during professional activities. On 31 March 2015 theagreements were renegotiated until 31 March 2016.
23. FINANCE INCOME/(EXPENSE)
ANNUAL REPORT 2015
22. PERSONNEL COSTS
Personnel costs in the amount of KZT 397,415 thousand (2014: KZT 414,626thousand) are charged to the cost of sales and in the amount of KZT 475,669thousand (2014: KZT 915,176 thousand) – to administrative expenses.
24. INCOME TAX (BENEFIT)/EXPENSE
For the years ended 31 December the reconciliation of income tax expense related toprofit before income tax estimated using the official tax rate of 20% (2014: 20%) withthe current income tax expense was as follows:
Notes to the financial statements
54
24. INCOME TAX (BENEFIT)/EXPENSE (CONTD.)
As at 31 December the components of the deferred tax assets and liabilities includethe following:
ANNUAL REPORT 2015
Tax losses carry-forward
Recognised deferred tax assets related to the tax loss carry-forwards are theamounts the utilisation of which is highly probable based on management’sestimates of future taxable income. When determining the estimated value of futuretaxable income against which the deductible differences may be utilised,management has taken into account the availability of taxable temporary differencesthat will be recovered in the same period as the deductible differences and alsoconsidered tax planning opportunities.
The nearest offset of losses will take place in 2025 with regard to the losses thatarose during 2015 in the amount of KZT 4,229,385 thousand. According tomanagement estimate the Company will generate sufficient future taxable incomefrom operating activities to be offset against the tax losses.
25. FAIR VALUE AND RISK MANAGEMENT
(a) Classification in the financial statements and fair values
Management of the Company believes that the fair value of its financial assets andliabilities approximates their carrying amounts.
(b) Financial risk management
The Company has exposure to the following risks from its use of financialinstruments:
• Credit risk;
• Liquidity risk;
• Market risk.
(i) Risk management framework
The Management of the Company has overall responsibility for the establishmentand oversight of the Company’s risk management framework. Management isresponsible for developing and monitoring the Company’s risk management policies.
The Company’s risk management policy has been designed, based on the specificsof its operations the Company is building a risk management system by integratingthe principles of risk management with the business processes of its structural units,thus creating a risk management culture, in which the Company’s structural units andpersonnel are involved at the Company’s level.
(ii) Credit risk
Credit risk is the risk of financial loss to the Company if a customer or counterparty toa financial instrument fails to meet its contractual obligations. The Company tradesonly with recognised creditworthy parties. It is the Company's policy that allcustomers who wish to trade on credit terms are subject to credit verificationprocedures. In addition, receivable balances are monitored on an ongoing basis withthe result that the Company's exposure to bad debts is not significant.
Notes to the financial statements
55
25. FAIR VALUE AND RISK MANAGEMENT (CONTD.)
Market risk is the risk that changes in market prices, such as foreign exchange ratesand interest rates will affect the Company’s income or the value of its holdings offinancial instruments. The objective of market risk management is to manage andcontrol market risk exposures within acceptable parameters, while optimising thereturn.
The Company accepts all financial liabilities to manage market risk. All suchtransactions are carried out within the guidelines set by the Supervisory Board.
The Company does not apply hedge accounting in order to manage volatility in profitor loss.
(b) Financial risk management (contd.)
(ii) Credit risk (contd.)
The carrying amount of financial assets represents the maximum credit exposure.The maximum exposure to credit risk at the reporting date was:
(iii) Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulty in raising funds tomeet commitments associated with financial instruments. Liquidity requirements aremonitored on a regular basis and management ensures that sufficient funds areavailable to meet any commitments as they arise.
The Company aims to maintain the level of cash and cash equivalents and otherhighly marketable instruments at an amount in excess of expected cash outflows onfinancial liabilities over the next 30 days.
As at 31 December 2015 the current assets of the Company exceeded its currentliabilities by KZT 5,990,242 thousand (2014: current assets of the Companyexceeded current liabilities by KZT 3,361,714 thousand).
Management is addressing the Company’s liquidity needs by implementing thefollowing measures:
(iv) Market risk
ANNUAL REPORT 2015
• Making long-term arrangements with customers to ensure sufficient cash flowsfrom operating activities;
• Making arrangements with financial institutions.
The tables below shows general information on contract payments on financialliabilities of the Company as at 31 December by the maturity period of theseliabilities:
The Company is exposed to currency risk on sales, purchases and borrowings thatare denominated in a currency other than KZT. The currency in which thesetransactions primarily are denominated is US Dollars (USD). Generally, borrowingsare denominated in currencies that match the cash flows generated by the underlyingoperations of the Company, primarily USD.
In respect of other monetary assets and liabilities denominated in foreign currencies,the Company’s policy is to ensure that its net exposure is kept to an acceptable levelby buying or selling foreign currencies at spot rates when necessary to addressshort-term imbalances.
Currency risk
Notes to the financial statements
56
Currency risk (contd.)
The Company does not account for any fixed-rate financial instruments as fair valuethrough profit or loss or as available-for-sale. Therefore, a change in interest rates atthe reporting date would not have an effect on profit or loss or on equity.
On 20 August 2015, the National Bank and the Government of the RK decided toproceed with a new monetary policy based on inflation targeting, cancel theexchange rate corridor and let the national currency tenge to free float.
The table below shows the sensitivity of the Company’s profit before taxes to changeof USD exchange rate, which can be reasonably forecasted, with all other variablesremain unchanged. These factors do not affect the Company’s equity.
Fair value sensitivity analysis for fixed rate instruments
ANNUAL REPORT 2015
(v) Interest rate risk
Changes in interest rates impact primarily loans and borrowings by changing eithertheir fair value (fixed rate debt) or their future cash flows (variable rate debt). Themanagement of the Company, when managing interest risks investigates thechanges of the rates on financial instruments, which may significantly affect thepositions with respect to this risk. For that the Company performs the analysis of thescenarios, including potential effects of the changes in the interactions between thetypes of interest risks and the general level of the exposure to interest risk, inparticular, the ratio of allocation of the interest risks of the Company between theloans with the fixed and variable interest rates. However, at the time of raising newloans or borrowings management uses its judgment to decide whether it believesthat a fixed or variable rate would be more favourable to the Company over theexpected period until maturity.
Exposure to interest rate risk
At the reporting date, the interest rate profile of the Company’s interest-bearingfinancial instruments was as follows:
A reasonably possible change of 100 basis points in interest rates at the reportingdate would have increased (decreased) equity and profit or loss, net of taxes, by theamounts shown below. This analysis assumes that all other variables, in particularforeign currency rates, remain constant.
Cash flow sensitivity analysis for variable rate instruments
(c) Master netting or similar agreements
The Company may enter into sales and purchase agreements with the samecounterparty in the normal course of business. The related amount receivable andpayable do not always meet the criteria for offsetting in the statement of financialposition. This is because the Company may not have any legally enforceable right tooffset recognised amounts, because the rights to offset may be enforceable only onthe occurrence of future events. In particular, in accordance with the Kazakhstan civillaw an obligation can be settled by offsetting against a similar claim if it is due, has nomaturity or is payable on demand however such offset is not possible in case ofinsolvency of one of the parties.
Notes to the financial statements
57
(c) Master netting or similar agreements (contd.)
The table below shows financial assets and financial liabilities subject to enforceable master netting arrangements and similar arrangementsas at 31 December 2015:
ANNUAL REPORT 2015
The table below shows financial assets and financial liabilities subject to enforceable master netting arrangements and similar arrangementsas at 31 December 2014:
Notes to the financial statements
58
26. CONTINGENCIES
In accordance with the terms of loan agreements, signed between the Company andits creditors, the Company shall observe certain financial and non-financialcovenants. Penalties may be charged for breach of such covenants, or the banksmay demand early repayment of financial liabilities. In order to control such risks, theCompany performs monitoring of such financial and non-financial covenants.
(а) Insurance
The insurance industry in the Kazakhstan is in a developing state and many forms ofinsurance protection common in other parts of the world are not yet generallyavailable. The Company coverage for its third party liability in respect of property orhealth damage arising from accidents on Company property or relating to Companyoperations. The Company have has coverage for its liability in respect ofenvironmental damage arising from the Policyholder operations accompanied itsprofessional activity.
(d) Loan covenants
(b) Taxation contingencies in Kazakhstan
The taxation system in Kazakhstan is relatively new and is characterised by frequentchanges in legislation, official pronouncements and court decisions, which are oftenunclear, contradictory and subject to varying interpretation by different taxauthorities. Taxes are subject to review and investigation by various levels ofauthorities, which have the authority to impose severe fines and penalties. A taxyear generally remains open for review by the tax authorities for five subsequentcalendar years but under certain circumstances a tax year may remain open longer.
Management believes that it has provided adequately for tax liabilities based on itsinterpretations of applicable tax legislation, official pronouncements and courtdecisions.
In 2012, the Company signed a lease agreement for office premises. The period ofthis agreement is 5 years.
In February 2016, the Company extended the lease agreement for office premisesfor two years. The agreement does not specify any limitations with respect to theCompany.
The future minimum lease payments under non-cancellable leases were payable asfollows:
(c) Operating lease liabilities – the Company as a lessee
Management is unaware of any significant actual, pending or threatened claimsagainst the Company.
(e) Litigation
27. RELATED PARTIES
(а) Ultimate controlling party
Mr. M. Zh. Sarsenov is the main stakeholder and ultimate controlling party of theCompany.
(b) Transactions with key management personnel
Key management remuneration
In 2015, the compensation to key management personnel included salary and short-term payments in the amount of 105,624 thousand (2014: KZT 230,001 thousand),which are charged to personnel costs (Note 22).
ANNUAL REPORT 2015
Notes to the financial statements
(c) Other related party transactions
59
Below is the information on the transactions of the Company with other relatedparties.
Related party transactions were made on terms agreed to between the parties thatmay not necessarily be at market rates. Outstanding balances as at the end of theyear are unsecured, short-term and the settlements are performed in cash.
In 2015 and 2014, the Company did not detect any impairment of trade receivablesof related parties. This assessment is undertaken each financial year throughexamining the financial position of the related party and the market in which therelated party operates.
Sales and purchases with related parties and the balances with related partiesduring 2015 and 2014 were as follows:
Table contd.
On 17 July 2012 the Company provided 440 items of property, plant and equipmentwith total carrying value of KZT 3,107,736 thousand to Eurasian Development Bankas a security under a loan agreement concluded between Eurasian DevelopmentBank and "Center for Wagon Service – Eskene" LLP, an entity under common controlof the Company’s ultimate controlling party (see Note 6). In addition, under a tripartiteproject support agreement concluded between the Company, "Center for WagonService – Eskene" LLP and Eurasian Development Bank on 16 July 2012, theCompany committed to provide technical and personnel support to a project carriedout by "Center for Wagon Service – Eskene" LLP related to construction of wagonservice center in Atyrau Oblast (see Note 6).
In December 2013, the Company additionally provided to Eurasian DevelopmentBank 500 items of machinery and equipment as a security for the loan agreement.
As at 31 December 2015 940 items of machinery and equipment, with a carryingamount of KZT 6,048,660 thousand (in 2014: KZT 6,467,714 thousand) wereprovided to secure the loans received by the "Center of Wagon Service – Eskene"LLP.
ANNUAL REPORT 2015
Notes to the financial statements
(c) Other related party transactions (contd.)
60
On 15 November 2013, the Company and "Center of Wagon Service – Eskene" LLPsigned a pledge agreement. According to the terms of the agreement the "Center ofWagon Service – Eskene" LLP shall pay a one-off fee in the amount KZT 262,000thousand to the Company for providing the security, and a fee calculated as 5% perannum during the period from 1 January 2014 and ending on date of the release ofthe collateral.
On 22 January 2014, the Company and "Center for Wagon Service – Eskene" LLPsigned an additional agreement on abolishment of interest calculated as 5% perannum during the period from 1 January 2014 and ending the date of the release ofthe collateral.
28. SUBSEQUENT EVENTS
On 18 February 2015, Moody's Rating Agency confirmed a "B3" corporate familyrating assigned to Eastcomtrans LLP, under the international and national scale. Therating forecast was changed from Positive to Negative.
On 16 February 2016, the Company and DBK-Leasing JSC concluded IjarahMuntahia (Islamic financing) agreement No. 1-ИФ/ФЛ of KZT 1,143,810 thousand. InFebruary 2016, the funds were fully utilised and directed to compensate full earlyrepayment of debt of KZT 611,542 thousand under the finance lease agreementsNo. 09/10 (FLA) of 17 March 2010 and No. №37/10 (FLA) of 29 September 2010concluded between the Company and "Raiffeisen Leasing Kazakhstan" LLP, and tobuy out its own Eurobonds in the market of total nominal value of USD 14,000thousand at the market price and annulled thereof in accordance with theProspectus of Eurobonds Issue.
On 7 April 2016, the Company converted USD 7,500 thousand of a portion ofGazprombank loan, with simultaneous repayment thereof (repayable in February2021), from US dollars to Russian rubles at the market rate.
29. SIGNIFICANT ACCOUNTING POLICIES
The accounting policies set out below have been applied consistently to all periodspresented in these financial statements.
(а) Foreign currency translation
The financial statements are presented in tenge, which is the Company’s functionaland presentation currency.
Transactions in foreign currencies are initially recorded at their respective functionalcurrency spot rates at the date the transaction first qualifies for recognition.
Monetary assets and liabilities denominated in foreign currencies are retranslated atthe functional currency rate of exchange ruling at the reporting date. Any exchangegains and losses arising from assets and liabilities denominated in foreign currenciessubsequent to the date of the underlying transaction are credited or charged to thestatement of profit or loss and other comprehensive income.
Non-monetary items that are measured in terms of historical cost in a foreigncurrency are translated using the exchange rates as at the dates of the initialtransactions.
Non-monetary items valued by historical value in foreign currency revalued byexchange rates on the dates of transactions.
Weighted average currency exchange rates established by the Kazakhstan StockExchange (“KASE”) are used as official currency exchange rates in the Republic ofKazakhstan.
The currency exchange rate of KASE as at 31 December 2015 was 340.01 tenge to1 US Dollar, 4.61 tenge to 1 Russian Ruble and 371.46 tenge to 1 Euro. These rateswere used to translate monetary assets and liabilities denominated in US Dollars,Russian Rubles and Euro as at 31 December 2015 (2014: 182.35 tenge to 1 USDollar, 3.17 tenge to 1 Russian Ruble and 221.97 tenge to 1 Euro, respectively).
ANNUAL REPORT 2015
Notes to the financial statements
(b) Property, plant and equipment
61
Property, plant and equipment, except for machinery and equipment, are initiallyrecorded at cost, net of accumulated depreciation and accumulated impairmentlosses, if any. Such cost includes the cost of replacing part of the property, plantand equipment and borrowing costs for long-term construction projects if therecognition criteria are met. When significant parts of property, plant and equipmentare required to be replaced at intervals, the Company recognizes such parts asindividual assets with specific useful lives and depreciates them accordingly.Likewise, when a major inspection is performed, its cost is recognised in the carryingamount of the plant and equipment as a replacement if the recognition criteria aresatisfied. All other repair and maintenance costs are recognised in profit or loss asincurred.
Subsequent to initial recognition, machinery and equipment are measured atrevalued amounts, being their fair value at the date of revaluation less anysubsequent accumulated depreciation and impairment losses. Valuations areperformed with sufficient frequency to ensure that the fair value of a revalued assetdoes not differ materially from its carrying amount.
A revaluation surplus is recorded in other comprehensive income and credited to theasset revaluation reserve in equity. However, to the extent that it reverses arevaluation deficit of the same asset previously recognised in profit or loss, theincrease is recognised in profit and loss. A revaluation deficit is recognised in thestatement of profit or loss and other comprehensive income, except to the extentthat it offsets an existing surplus on the same asset recognised in the assetrevaluation reserve.
An annual transfer from the asset revaluation reserve to retained earnings is madefor the difference between depreciation based on the revalued carrying amount ofthe asset and depreciation based on the asset’s original cost. As at the revaluationdate the accumulated depreciation is restated proportionately with the change in thegross carrying amount of the asset so that the carrying amount of the asset afterrevaluation equals its revalued amount. Upon disposal, any revaluation reserverelating to the particular asset being sold is transferred to retained earnings.
Depreciation is calculated on a straight-line basis over the estimated useful lives ofthe assets as follows:
An item of property, plant and equipment and any significant part initially recognisedis derecognised upon disposal or when no future economic benefits are expectedfrom its use or disposal. Any gain or loss arising on derecognition of the asset(calculated as the difference between the net disposal proceeds and the carryingamount of the asset) is included in the statement of profit or loss and othercomprehensive income when the asset is derecognised. The residual values, usefullives and methods of depreciation of property, plant and equipment are reviewed ateach financial year end and adjusted prospectively, if appropriate.
ANNUAL REPORT 2015
(c) Impairment of non-financial assets
The Company assesses at each reporting date whether there is any indication thatan asset may be impaired. If any indication exists, or when annual impairment testingfor an asset is required, the Company estimates the asset’s recoverable amount. Anasset’s recoverable amount is the higher of an asset or cash-generating unit (CGU)fair value less costs to sell and its value in use. Recoverable amount is determinedfor an individual asset, unless the asset does not generate cash inflows that arelargely independent of those from other assets or group of assets. When the carryingamount of an asset or CGU exceeds its recoverable amount, the asset is consideredimpaired and is written down to its recoverable amount.
In assessing value in use, the estimated future cash flows are discounted to theirpresent value using a pre-tax discount rate that reflects current market assessmentsof the time value of money and the risks specific to the asset. In determining fairvalue less costs to sell, recent market transactions are taken into account. If no suchtransactions can be identified, an appropriate valuation model is used. Thesecalculations are corroborated by valuation multiples, quoted share prices for publiclytraded companies or other available fair value indicators.
The Company bases its impairment calculation on detailed budgets and forecastcalculations, which are prepared separately for each of the Company’s CGUs towhich the individual assets are allocated. These budgets and forecast calculationsgenerally cover a period of five years. For longer periods, a long-term growth rate iscalculated and applied to project future cash flows after the fifth year.
Notes to the financial statements
(c) Impairment of non-financial assets (contd.)
62
Impairment losses of continuing operations, including impairment on inventories, arerecognised in the statement of comprehensive income in expense categoriesconsistent with the function of the impaired asset, except for a property previouslyrevalued when the revaluation was taken to other comprehensive income. In thiscase, the impairment loss is also recognised in other comprehensive income up tothe amount of any previous revaluation.
For assets an assessment is made at each reporting date to determine whetherthere is an indication that previously recognised impairment losses no longer exist orhave decreased. If such indication exists, the Company estimates the asset’s orCGU’s recoverable amount. A previously recognised impairment loss is reversedonly if there has been a change in the assumptions used to determine the asset’srecoverable amount since the last impairment loss was recognised.
The reversal is limited so that the carrying amount of the asset does not exceed itsrecoverable amount, nor exceed the carrying amount that would have beendetermined, net of depreciation, had no impairment loss been recognised for theasset in prior years. Such reversal is recognised in the statement of profit or lossand other comprehensive income unless the asset is carried at a revalued amount,in which case, the reversal is treated as a revaluation increase.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinablepayments that are not quoted in an active market. After initial measurement, suchfinancial assets are subsequently measured at amortised cost using the effectiveinterest rate method (EIR). Amortised cost is calculated by taking into account anydiscount or premium on acquisition and fees or costs that are an integral part of theEIR. The EIR amortisation is included in finance income in the statement of profit andloss and other comprehensive income. The losses arising from impairment arerecognised in the statement of profit and loss and other comprehensive income infinance costs for loans and in cost of sales or other operating expenses forreceivables.
ANNUAL REPORT 2015
(d) Financial assets
Initial recognition and measurement
Financial assets within the scope of IAS 39 are classified as loans and receivablesor held-to-maturity investments, as appropriate. The Company determines theclassification of its financial assets at initial recognition.
All financial assets are recognised initially at fair value plus transaction costs, exceptin the case financial assets recorded at fair value through profit or loss.
The Company’s financial assets include cash and short-term deposits, trade andother receivables and loans receivable.
Subsequent measurement
The subsequent measurement of financial assets depends on their classification asdescribed below:
Cash and cash equivalents
Cash and cash equivalents in the statement of financial position comprise cash atbanks and on hand. For the purpose of the statement of cash flows, cash and cashequivalents consist of cash and short-term deposits with maturities of three monthsas defined above, net of outstanding bank overdrafts.
(e) Impairment of financial assets
The Company assesses at each reporting date whether there is any objectiveevidence that a financial asset or a group of financial assets is impaired. A financialasset or a group of financial assets is deemed to be impaired if there is objectiveevidence of impairment as a result of one or more events that has occurred since theinitial recognition of the asset (an incurred ‘loss event’) and that loss event has animpact on the estimated future cash flows of the financial asset or the group offinancial assets that can be reliably estimated.
Evidence of impairment may include indications that the debtors or a group ofdebtors is experiencing significant financial difficulty, default or delinquency in interestor principal payments, the probability that they will enter bankruptcy or other financialreorganisation and observable data indicating that there is a measurable decrease inthe estimated future cash flows, such as changes in arrears or economic conditionsthat correlate with defaults.
Notes to the financial statements
(e) Impairment of financial assets (contd.)
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Financial assets carried at amortised cost
Financial liabilities within the scope of IAS 39 are classified as financial liabilities atfair value through profit or loss, and other financial liabilities, as appropriate. TheCompany determines the classification of its financial liabilities at initial recognition.
All financial liabilities are recognised initially at fair value and, in the case of loans andborrowings, net of directly attributable transaction costs.
The Company’s financial liabilities include trade and other payables, finance leaseliabilities and borrowings.
For financial assets carried at amortised cost, the Company first assesses whetherobjective evidence of impairment exists individually for financial assets that areindividually significant, or collectively for financial assets that are not individuallysignificant. If the Company determines that no objective evidence of impairmentexists for an individually assessed financial asset, whether significant or not, itincludes the asset in a group of financial assets with similar credit risk characteristicsand collectively assesses them for impairment. Assets that are individually assessedfor impairment and for which an impairment loss is, or continues to be, recognisedare not included in a collective assessment of impairment.
If there is objective evidence that an impairment loss has incurred, the amount of theloss is measured as the difference between the asset’s carrying amount and thepresent value of estimated future cash flows (excluding future expected credit lossesthat have not yet been incurred). The present value of the estimated future cashflows is discounted at the financial assets original effective interest rate. If a loanhas a variable interest rate, the discount rate for measuring any impairment loss isthe current EIR.
The carrying amount of the asset is reduced through the use of an allowanceaccount and the loss is recognised in the statement of comprehensive income.Interest income continues to be accrued on the reduced carrying amount and isaccrued using the rate of interest used to discount the future cash flows for thepurpose of measuring the impairment loss. The interest income is recorded asfinance income in the statement of profit or loss and other comprehensive income.Loans together with the associated allowance are written off when there is norealistic prospect of future recovery and all collateral has been realised or has beentransferred to the Company. If, in a subsequent year, the amount of the estimatedimpairment loss increases or decreases because of an event occurring after theimpairment was recognised, the previously recognised impairment loss is increasedor reduced by adjusting the allowance account. If a future write-off is laterrecovered, the recovery is credited to finance costs in the statement of profit or lossand other comprehensive income.
(f) Financial liabilities
ANNUAL REPORT 2015
Initial recognition and measurement
Subsequent measurement
The measurement of financial liabilities depends on their classification as describedbelow:
• Loans and borrowings
After initial recognition, interest bearing loans and borrowings are subsequentlymeasured at amortised cost using the EIR method. Gains and losses are recognisedin the statement of profit and loss and other comprehensive income when theliabilities are derecognised as well as through the EIR amortisation process.
Amortised cost is calculated by taking into account any discount or premium onacquisition and fees or costs that are an integral part of the EIR. The EIRamortisation is included in finance costs in the statement of profit or loss and othercomprehensive income.
• Trade and other payables
Liabilities for trade and other amounts payable are recognized at cost which is the fairvalue of the consideration to be paid in the future for goods and services received,whether or not billed to the Company.
Notes to the financial statements
(g) Embedded derivatives
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When it has neither transferred nor retained substantially all of the risks and rewardsof the asset, nor transferred control of the asset, the asset is recognised to the extentof the Company’s continuing involvement in the asset. In that case, the Companyalso recognises an associated liability. The transferred asset and the associatedliability are measured on a basis that reflects the rights and obligations that theCompany has retained.
Continuing involvement that takes the form of a guarantee over the transferred assetis measured at the lower of the original carrying amount of the asset and themaximum amount of consideration that the Company could be required to repay.
An embedded derivative is separated from the host contract and is accounted for asa derivative if, and only if the economic characteristics and risks of the embeddedderivative are not closely related to the economic characteristics and risks of thehost contract, a separate instrument with the same terms as the embeddedderivative would meet the definition of a derivative; and the combined instrument isnot measured at fair value with changes in fair value recognised in profit or loss.Derivatives embedded in financial assets or financial liabilities at fair value throughprofit or loss are not separated.
Derivatives are initially recognised at fair value on the date on which a derivativecontract is entered into and are subsequently remeasured at fair value. Allderivatives are carried as assets when their fair value is positive and as liabilitieswhen their fair value is negative.
Changes in the fair value of derivatives are recognised immediately in profit or loss.
Although the Company trades in derivative instruments for risk hedging purposes,these instruments do not qualify for hedge accounting.
(h) Derecognition of financial assets and liabilities
Financial assets
A financial asset (or, where applicable a part of a financial asset or part of a group ofsimilar financial assets) is derecognised when:
Financial liabilities
A financial liability is derecognised when the obligation under the liability isdischarged or cancelled or expires.
When an existing financial liability is replaced by another from the same lender onsubstantially different terms, or the terms of an existing liability are substantiallymodified, such an exchange or modification is treated as the derecognition of theoriginal liability and the recognition of a new liability. The difference in the respectivecarrying amounts is recognised in the statement of other comprehensive income.
Financial assets and financial liabilities are offset and the net amount is reported inthe statement of financial position if there is a currently enforceable legal right tooffset the recognised amounts and there is an intention to settle on a net basis, torealise the asset and settle the liability simultaneously.
ANNUAL REPORT 2015
• the rights to receive cash flows from the asset have expired;
• the Company has transferred its rights to receive cash flows from the asset orhas assumed an obligation to pay the received cash flows in full without materialdelay to a third party under a ‘pass-through’ arrangement; and either (a) theCompany has transferred substantially all risks and rewards of the asset, or (b)the Company has neither transferred nor retained substantially all the risks andrewards of the asset, but has transferred control of the asset.
When the Company has transferred its rights to receive cash flows from an asset orhas entered into a pass-through arrangement, it evaluates if and to what extent ithas retained the risks and rewards of ownership.
(i) Offsetting of financial instruments
The fair value of financial instruments that are traded in active markets at eachreporting date is determined by reference to quoted market prices or dealer pricequotations (bid price for long positions and ask price for short positions), without anydeduction for transaction costs.
(j) Fair value of financial instruments
Notes to the financial statements
(j) Fair value of financial instruments (contd.)
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A leased asset is depreciated over the useful life of the asset. However, if there is noreasonable certainty that the Company will obtain ownership by the end of the leaseterm, the asset is depreciated over the shorter of the estimated useful life of the assetand the lease term.
For financial instruments not traded in an active market, the fair value is determinedusing appropriate valuation techniques. Such techniques may include:
(k) Inventories
Inventories are valued at the lower of cost or net realisable value. Costs includecharges incurred in bringing inventory to its present location and condition. Netrealisable value is the estimated selling price in the ordinary course of business, lessthe estimated costs of completion and estimated costs necessary to make the sale.The same cost formula is used for all inventories having a similar nature and use. Allinventories are valued on the FIFO basis.
ANNUAL REPORT 2015
• Using recent arm’s length market transactions;
• Reference to the current fair value of another instrument that is substantially thesame;
• A discounted cash flow analysis or other valuation models.
Analysis of fair value of financial instruments and additional information of themethods of its measurement are disclosed in Note 25.
(l) Leases
The determination of whether an arrangement is, or contains, a lease is based onthe substance of the arrangement at inception date. The arrangement is assessedfor whether the fulfilment of the arrangement is dependent on the use of a specificasset or assets or the arrangement conveys a right to use the asset, even if thatright is not explicitly specified in an arrangement.
Company as a lessee – finance lease
Finance leases that transfer substantially all the risks and benefits incidental toownership of the leased item to the Company, are capitalised at the commencementof the lease at the fair value of the leased property or, if lower, at the present valueof the minimum lease payments. Lease payments are apportioned between financecharges and reduction of the lease liability so as to achieve a constant rate ofinterest on the remaining balance of the liability. Finance charges are recognised infinance costs in the statement of other comprehensive income.
Company as a lessee – operating lease
Operating lease payments are recognised as an operating expense in the statementof other comprehensive income on a straight-line basis over the lease term.
Company as a lessor – operating lease
Leases in which the Company does not transfer substantially all the risks andbenefits of ownership of an asset are classified as operating leases. Initial directcosts incurred in negotiating an operating lease are added to the carrying amount ofthe leased asset and recognised over the lease term on the same basis as rentalincome. Contingent rents are recognised as revenue in the period in which they areearned.
(m) Provisions
General
Provisions are recognised when the Company has a present obligation (legal orconstructive) as a result of a past event, it is probable that an outflow of resourcesembodying economic benefits will be required to settle the obligation and a reliableestimate can be made of the amount of the obligation. Where the Company expectssome or all of a provision to be reimbursed, for example under an insurancecontract, the reimbursement is recognised as a separate asset but only when thereimbursement is virtually certain. The expense relating to any provision ispresented in the statement of other comprehensive income net of anyreimbursement.
If the effect of the time value of money is material, provisions are discounted using acurrent pre-tax rate that reflects, where appropriate, the risks specific to the liability.Where discounting is used, the increase in the provision due to the passage of timeis recognised as a finance cost.
Notes to the financial statements
(n) Employee benefits
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The Company does not have any pension arrangements separate from the statepension system of the Republic of Kazakhstan, which requires current contributionsby the employer calculated as a percentage of current gross salary payments; suchexpense is charged in the period the related salaries are earned. The Company hasno post-retirement benefits or other compensated benefits requiring accrual. TheCompany pays social tax according to the current statutory requirements of theRepublic of Kazakhstan. Social tax is expensed as incurred.
(q) Expense recognition
Expenses are accounted for at the time the actual flow of the related goods orservices occur, regardless of when cash or its equivalent is paid, and are reported inthe financial statements in the period to which they relate.
(o) Dividends
Dividends are recognised as a liability and deducted from equity at the reportingdate only if they are approved before or on the reporting date. Dividends aredisclosed when they are proposed before the reporting date or proposed or declaredafter the reporting date but before the financial statements are authorised for issue.
ANNUAL REPORT 2015
(p) Revenue recognition
Revenue is recognised to the extent that it is probable that the economic benefits willflow to the Company and the revenue can be reliably measured, regardless of whenthe payment is being made. Revenue is measured at the fair value of theconsideration received or receivable, taking into account contractually defined termsof payment and excluding taxes or duty. The Company assesses its revenuearrangements against specific criteria in order to determine if it is acting as principalor agent. The Company has concluded that it is acting as a principal in all of itsrevenue arrangements. The following specific recognition criteria must also be metbefore revenue is recognised:
• Rental income
Rental income arising from operating leases of rolling stock is accounted for on astraight line basis over the lease term and is included in revenue line in the statementof other comprehensive income.
• Rendering of services
In respect of services revenue is recognised by reference to the stage of completionat the reporting date provided that the stage of completion and the amount ofrevenue can be measured reliably.
(r) Finance income and costs
The Company’s finance income and finance costs include:
• interest income;
• income from subsidies;
• discount of loans issued to employees;
• interest expense.
Interest income and expense shall be recognised by the effective interest ratemethod.
(s) Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production ofan asset that necessarily takes a substantial period of time to get ready for itsintended use or sale are capitalised as part of the cost of the respective assets. Allother borrowing costs are expensed in the period they occur. Borrowing costsconsist of interest and other costs that an entity incurs in connection with theborrowing of funds.
(t) Income tax expense
Current income tax
Current income tax assets and liabilities for the current period are measured at theamount expected to be recovered from or paid to the taxation authorities. The taxrates and tax laws used to compute the amount are those that are enacted orsubstantively enacted, at the reporting date in the countries where the Companyoperates and generates taxable income.
Current income tax relating to items recognised directly in equity is recognised inequity and not in the statement of profit or loss and other comprehensive income.Management periodically evaluates positions taken in the tax returns with respect tosituations in which applicable tax regulations are subject to interpretation andestablishes provisions where appropriate.
Notes to the financial statements
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Deferred income tax
Deferred tax is provided using the liability method on temporary differences betweenthe tax bases of assets and liabilities and their carrying amounts for financialreporting purposes at the reporting date.
Deferred income tax liabilities are recognised for all taxable temporary differences,except:
The carrying amount of deferred income tax assets is reviewed at each balancesheet date and reduced to the extent that it is no longer probable that sufficienttaxable profit will be available to allow all or part of the deferred income tax asset tobe utilised. Unrecognised deferred income tax assets are reassessed at eachbalance sheet date and are recognised to the extent that it has become probable thatfuture taxable profit will allow the deferred tax asset to be recovered.
Deferred income tax assets and liabilities are measured at the tax rates that areexpected to apply to the year when the asset is realised or the liability is settled,based on tax rates (and tax laws) that have been enacted or substantively enacted atthe reporting date.
Deferred tax relating to items recognised outside profit or loss is recognised outsideprofit or loss. Deferred tax items are recognised in correlation to the underlyingtransaction either in other comprehensive income or directly in equity.
Deferred income tax assets and deferred income tax liabilities are offset if a legallyenforceable right exists to set off current tax assets against current income taxliabilities and the deferred taxes relate to the same taxable entity and the sametaxation authority.
Tax benefits acquired as part of a business combination, but not satisfying the criteriafor separate recognition at that date, are recognised subsequently if new informationabout facts and circumstances changed. The adjustment is either be treated as areduction to goodwill (as long as it does not exceed goodwill) if it incurred during themeasurement period or recognised in profit or loss.
ANNUAL REPORT 2015
• When the deferred income tax liability arises from the initial recognition ofgoodwill or of an asset or liability in a transaction that is not a businesscombination and, at the time of the transaction, affects neither the accountingprofit nor taxable profit or loss; and
• In respect of taxable temporary differences associated with investments insubsidiaries, associates and interests in joint ventures, where the timing of thereversal of the temporary differences can be controlled and it is probable thatthe temporary differences will not reverse in the foreseeable future.
Deferred tax assets are recognised for all deductible temporary differences, thecarry forward of unused tax credits and any unused tax losses. Deferred tax assetsare recognised to the extent that it is probable that taxable profit will be availableagainst which the deductible temporary differences, and the carry forward of unusedtax credits and unused tax losses can be utilised, except:
• When the deferred income tax asset relating to the deductible temporarydifference arises from the initial recognition of an asset or liability in atransaction that is not a business combination and, at the time of thetransaction, affects neither the accounting profit nor taxable profit or loss;
• In respect of deductible temporary differences associated with investments insubsidiaries, associates and interests in joint ventures, deferred income taxassets are recognised only to the extent that it is probable that the temporarydifferences will reverse in the foreseeable future and taxable profit will beavailable against which the temporary differences can be utilised.
Notes to the financial statements
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30. NEW STANDARDS AND INTERPRETATIONS NOT YET ADOPTED
For lessors the currently used accounting rules will be preserved in general – thelessors will continue classifying the lease as finance lease and operating lease. IFRS16 is effective for annual reporting periods beginning on or after 1 January 2019, withearly adoption permitted provided that IFRS 15 Revenue from Contracts withCustomers is also applied.
A number of new Standards, amendments to Standards and Interpretations are notyet effective as at 31 December 2015, and have not been applied in preparing thesefinancial statements. Of these pronouncements, potentially the following will have animpact on the Company’s operations. The Company plans to adopt thesepronouncements when they become effective.
ANNUAL REPORT 2015
• IFRS 9 Financial Instruments, published in July 2014, replaces the existingguidance in IAS 39 Financial Instruments: Recognition and Measurement.IFRS 9 includes revised guidance on the classification and measurement offinancial instruments, including a new expected credit loss model forcalculating impairment on financial assets, and the new general hedgeaccounting requirements. It also carries forward the guidance on recognitionand derecognition of financial instruments from IAS 39. IFRS 9 is effective forannual reporting periods beginning on or after 1 January 2018, with earlyadoption permitted.
• IFRS 15 Revenue from Contracts with Customers establishes acomprehensive framework for determining whether, how much and whenrevenue is recognised. It replaces existing revenue recognition guidance,including IAS 18 Revenue, IAS 11 Construction Contracts and IFRIC 13Customer Loyalty Programmes. The core principle of the new standard is thatan entity recognises revenue to depict the transfer of promised goods orservices to customers in an amount that reflects the consideration to which theentity expects to be entitled in exchange for those goods or services. The newstandard results in enhanced disclosures about revenue, provides guidance fortransactions that were not previously addressed comprehensively andimproves guidance for multiple-element arrangements. IFRS 15 is effective forannual reporting periods beginning on or after 1 January 2017, with earlyadoption permitted.
• IFRS 16 Leases replaces the current guidance for the lease accounting,including IAS 17 Leases, IFRIC 4 Determining Whether an ArrangementContains a Lease, SIC-15 Operating Leases - Incentives and SIC-27Evaluating the Substance of Transactions Involving the Legal Form of a Lease.The new standard cancels a currently used dual lessee accounting model. Thismodel requires classification of the lease as on-balance finance lease and off-balance operating lease. It will be replaced by a single accounting model,which implies that the lease is recognised on balance and is similar to thecurrent accounting of the finance lease
• IFRS 16 Leases replaces the current guidance for the lease accounting,including IAS 17 Leases, IFRIC 4 Determining Whether an ArrangementContains a Lease, SIC-15 Operating Leases - Incentives and SIC-27Evaluating the Substance of Transactions Involving the Legal Form of a Lease.The new standard cancels a currently used dual lessee accounting model. Thismodel requires classification of the lease as on-balance finance lease and off-balance operating lease. It will be replaced by a single accounting model,which implies that the lease is recognised on balance and is similar to thecurrent accounting of the finance lease
Notes to the financial statements
Eastcomtrans LLP050040, Republic of Kazakhstan, Almaty, Al-Farabi Ave., 77/7, Esentai Tower BC, 11th floorPhone: +7 (727) 3-555-111E-mail: [email protected]
The Integrated Securities Registrar JSC050040, Republic of Kazakhstan, Almaty, Satpayev Str, 30А/3, Tengiz Towers RCPhone: +7 (727) 272-47-60E-mail: [email protected] www.tisr.kz
REGISTRAR
KPMG Audit LLP050051, Republic of Kazakhstan, Almaty, Dostyk Ave., 180Phone: +7 (727) 298-08-98E-mail: [email protected]
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