kstar_god_ot4et_2012_en

Annual Report – 2011

Consolidated Financial Statements

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ConsolidatedFinancial Statements



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Contents Independent auditors’ reportConsolidated statement of comprehensive income 1

Consolidated statement of financial position 2

Consolidated cash flow statement 4

Consolidated statement of changes in equity 6

Notes to the consolidated financial statements1. Corporate information 7

2. Operating environment, risks and economic conditions in Ukraine 7

3. Basis of preparation 8

4. Changes in accounting policies 8

5. Summary of significant accounting policies 10

6. Critical accounting judgements and key sources of estimation uncertainty 20

7. IFRSs and IFRIC Interpretations not yet effective 23

8. Revenues and expenses 25

9. Income tax 27

10. Property, plant and equipment 31

11. Intangible assets 33

12. Other non-current assets 35

13. Trade and other receivables 35

14. Prepayments 36

15. Reconciliation of allowance accounts 36

16. Deferred expenses 37

17. Cash and cash equivalents 37

18. Equity 38

19. Interest-bearing loans and borrowings 39

20. Employee benefit liability 39

21. Deferred revenue 41

22. Provisions 42

23. Taxes payable, other than income tax 43

24. Trade and other payables 43

25. Advances received 44

26. Other current liabilities 44

27. Related party disclosure 45

28. Commitments and contingencies 48

29. Fair value of financial instruments 49

30. Financial instruments and risk management 49

31. Earnings per share 53

32. Events after the reporting period 53



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CONSOLIDATED STATEMENTOF COMPREHENSIVE INCOMEFor the year ended 31 December 2011 (in thousands of Ukrainian Hryvnia, except for earnings per share)

Notes 2011 2010

Revenues 8 12,332,345 11,443,025

Costs of materials and traffic charges 8 (2,192,911) (1,939,528)Salaries and personnel costs 8 (948,744) (866,243)Other operating expenses 8 (2,325,816) (2,078,358)Other income 30,636 28,552Other expenses 8 (59,917) (64,373)Depreciation and amortisation 8 (2,109,508) (1,781,469)Impairment losses 8 (12,476) (3,414)

4,713,609 4,738,192

Finance income 8 946,127 227,431Finance costs 8 (8,203) (7,217)Foreign exchange loss, net (7,889) (36,196)

Profit before tax 5,643,644 4,922,210

Income tax expense 9 (1,376,114) (1,244,330)

Profit for the year 4,267,530 3,677,880

Total comprehensive income for the year, net of tax 4,267,530 3,677,880

Earnings per share, UAH 31 417.97 344.13

Signed and authorised for release on behalf of management of Joint Stock Company Kyivstar on 26 March 2012:

President

Igor Lytovchenko

Chief Financial Officer

Artem Nitz

Deputy Chief Financial Officer/Chief Accountant

Lesya Samoylovich



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CONSOLIDATED STATEMENTOF FINANCIAL POSITIONAs at 31 December 2011 (in thousands of Ukrainian Hryvnia)

Notes 2011 2010ASSETSNon-current assetsProperty, plant and equipment 10 7,094,873 6,274,153Intangible assets 11 883,500 970,861Other non-current assets 12 44,625 44,493Deferred tax asset 9 401,487 635,940

8,424,485 7,925,447Current assetsInventories 122,228 68,990Trade and other receivables 13 510,387 320,553Prepaid income tax 642,655 -Prepaid taxes, other than income tax 14,249 401Prepayments 14 110,871 74,902Deferred expenses 16 106,211 92,583Other current financial assets 27 2,627,116 3,349,309Cash and cash equivalents 17 892,806 1,595,056

5,026,523 5,501,794

TOTAL ASSETS 13,451,008 13,427,241

As at 31 December 2011 (in thousands of Ukrainian Hryvnia)

Notes 2011 2010EQUITY AND LIABILITIESEquity Share capital 18 1,006,499 656,499Retained earnings 10,613,771 10,679,975Treasury shares 18 (370,398) -

11,249,872 11,336,474Non-current liabilitiesEmployee benefit liability 20 40,873 37,262Provisions 22 29,672 52,727

70,545 89,989Current liabilitiesInterest-bearing loans and borrowings 19 51,917 51,735Employee benefit liability 20 9,011 7,566Deferred revenue 21 741,887 736,659Provisions 22 1,767 12,986Income tax payable - 266,911Taxes payable, other than income tax 23 95,745 146,961Trade and other payables 24 904,009 480,288Advances received 25 148,810 136,207Other current liabilities 26 177,445 161,465

2,130,591 2,000,778

TOTAL EQUITY AND LIABILITIES 13,451,008 13,427,241



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CONSOLIDATEDCASH FLOW STATEMENTFor the year ended 31 December 2011 (in thousands of Ukrainian Hryvnia)

Notes 2011 2010

Operating activitiesProfit before tax 5,643,644 4,922,210Non-cash adjustments to reconcile profit before tax to net cash flows:Depreciation of property, plant and equipment 8 1,722,674 1,346,803Impairment of property, plant and equipment and intangible assets 8 12,476 3,414Amortisation of intangible assets 8 386,834 434,666Loss on disposal of property, plant and equipment and intangible as-sets 8 56,294 61,477

Interest income 8 (226,390) (150,641)Unwinding of discount on other current financial assets 8 (719,737) (76,790)Interest expense related to bank loans 8 3,959 3,942Other finance costs 8 4,244 3,275Stock-based compensation expense 1,167 -Movements in provisions and employee benefit liability (7,705) (6,254)Unrealised foreign exchange loss 3,767 7,392Working capital adjustments:Increase in inventories (53,238) (4,501)(Increase)/decrease in trade and other receivables, prepayments and other assets (244,618) 201,327

Increase in deferred expenses (13,628) (14,671)Increase in trade and other payables and taxes payable, other than income tax 63,717 132,890

Increase in deferred revenue 5,228 122,140Increase in advances received 12,603 9Increase/(decrease) in other current liabilities 15,980 (13,843)

6,667,271 6,972,845

Interest received 229,563 144,821Interest paid (3,957) (3,944)Income tax paid (1,914,201) (234,233)Net cash flows from operating activities 4,978,676 6,879,489



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For the year ended 31 December 2011 (in thousands of Ukrainian Hryvnia)

Notes 2011 2010

Investing activitiesPurchase of property, plant and equipment (2,369,543) (1,356,578)Purchase of intangible assets (267,438) (480,388)Reimbursable interest-free financial aid provided to related party 27 (105,000) (4,000,000)Reimbursable interest-free financial aid repaid by related party 27 901,000 -Cash received from accession of Storm LLC 18 590 -Proceeds from sale of property, plant and equipment 9,930 114,897Net cash flows used in investing activities (1,830,461) (5,722,069)

Financing activitiesDividends paid to equity holders of the parent (3,654,533) (743,591)Withholding tax paid on dividends (192,344) (21,625)Net cash flows used in financing activities (3,846,877) (765,216)

Net (decrease)/increase in cash and cash equivalents (698,662) 392,204Net foreign exchange difference (3,588) (7,542)Cash and cash equivalents as at 1 January 17 1,595,056 1,210,394

Cash and cash equivalents as at 31 December 17 892,806 1,595,056



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CONSOLIDATED STATEMENTOF CHANGES IN EQUITY For the year ended 31 December 2011 (in thousands of Ukrainian Hryvnia)

Attributable to the equity holders of the parentShare capital (Note 18) Retained earnings Treasury shares

(Note 18) Total equity

Balance at 1 January 2010 656,499 8,322,298 - 8,978,797

Profit for the year - 3,677,880 - 3,677,880Total comprehensive income for the year, net of tax - 3,677,880 - 3,677,880

Dividends declared (Note 18) - (765,216) - (765,216)

Distributions to shareholders - (554,987) - (554,987)

Balance at 31 December 2010 656,499 10,679,975 - 11,336,474

Profit for the year - 4,267,530 - 4,267,530Total comprehensive income for the year, net of tax - 4,267,530 - 4,267,530

Dividends declared (Note 18) - (3,846,877) - (3,846,877)

Accession of Storm LLC (Note 18) 350,000 20,880 (370,398) 482

Share-based payment transactions - 1,167 - 1,167

Distributions to shareholders (Note 27) - (508,904) - (508,904)

Balance at 31 December 2011 1,006,499 10,613,771 (370,398) 11,249,872



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1. Corporate information Joint Stock Company Kyivstar (hereinafter referred to as ‘Kyivstar’ or ’the Company’) was established and registered on 3 September 1997 under the laws of Ukraine. The Company is involved in the design, construction and operating of a dedicated cellular telecommunication network and provides a wide range of mobile communication services in Ukraine.

The Company’s registered legal address is at 51, Chervonozoryanyy Av., Kyiv, 03110, Ukraine. The Company’s head office and principal place of business is at 53, Degtyarivska St., Kyiv, 03113, Ukraine.

As at 31 December 2011 and 2010 the Company’s direct shareholders and their respective declared interests were as follows:

The Company has one wholly owned subsidiary - Joint Stock Company Staravto, which was estab-lished in order to provide transportation services to the Company. The Company and its subsidiary are hereinafter together referred to as ‘the Group’.

The Company’s ultimate parent is VimpelCom Ltd., a company headquartered in Amsterdam, the Netherlands.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS at 31 December 2011 (in thousands of Ukrainian Hryvnia)

2011 2010Interest Number of shares Interest Number of shares

VimpelCom Holdings B.V. (Netherlands) 73.723% 13,039,562 56.520% 6,040,262VimpelCom Ltd. (Bermuda) 0.004% 700 - -Storm LLC (Ukraine) - - 43.480% 4,647,127Treasury shares 26.273% 4,647,127 - -

100.000% 17,687,389 100.000% 10,687,389

2. Operating environment, risks and economic conditions in UkraineThe Ukrainian economy while deemed to be of market status continues to display certain char-acteristics consistent with that of an economy in transition. These characteristics include, but are not limited to, low levels of liquidity in the capital markets, high inflation and the existence of cur-rency controls which cause the national currency to be illiquid outside of Ukraine. The stability of the Ukrainian economy will be significantly im-pacted by the Government’s policies and actions with regard to administrative, legal, and economic reforms. As a result, operations in Ukraine involve risks that are not typical for developed markets.

The Ukrainian economy is vulnerable to market downturns and economic slowdowns elsewhere in

the world. The global financial crisis has resulted in a decline in the gross domestic product, instability in the capital markets, a significant deterioration in the liquidity of the banking sector, and tighter credit conditions within Ukraine. Whilst the Ukrai-nian Government continues to introduce various stabilisation measures aimed at supporting the banking sector and providing liquidity to Ukrainian banks and companies, there continues to be un-certainty regarding access to capital and its cost for the Group and its counterparties, which could affect the Group’s financial position, results of op-erations and business prospects.

Whilst management believes it is taking appropri-ate measures to support the sustainability of the Group’s business in the current circumstances, any unexpected further deterioration in the areas de-scribed above could negatively affect the Group’s results and financial position in a manner not cur-rently determinable.



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4. Changes in accounting policiesThe accounting policies adopted are consistent with those of the previous financial year, except for the following new and amended IFRS and IFRIC interpretations effective as of 1 January 2011:

‣ IAS 24 Related Party Disclosures (amendment) effective 1 January 2011

‣ IAS 32 Financial Instruments: Presentation (amendment) effective 1 February 2010

‣ IFRIC 14 Prepayments of a Minimum Funding Re-quirements (amendment) effective 1 January 2011

‣ Improvements to IFRSs (May 2010)

The adoption of the standards or interpretations is described below:

IAS 24 Related Party Disclosures (amendment)

The IASB issued an amendment to IAS 24 that clar-ifies the definitions of a related party. The new def-initions emphasise a symmetrical view of related party relationships and clarifies the circumstances in which persons and key management personnel affect related party relationships of an entity. In addition, the amendment introduces an exemption from the general related party disclosure require-ments for transactions with government and enti-ties that are controlled, jointly controlled or signifi-cantly influenced by the same government as the reporting entity. The adoption of the amendment did not have any impact on the financial position or performance of the Group.

IAS 32 Financial Instruments: Presentation (amend-ment)

The IASB issued an amendment that alters the definition of a financial liability in IAS 32 to en-able entities to classify rights issues and certain

options or warrants as equity instruments. The amendment is applicable if the rights are given pro rata to all of the existing owners of the same class of an entity’s non-derivative equity instruments, to acquire a fixed number of the entity’s own equity instruments for a fixed amount in any currency. The adoption of the amendment did not have any impact on the financial position or performance of the Group.

IFRIC 14 Prepayments of a Minimum Funding Re-quirement (amendment)

The amendment removes an unintended con-sequence when an entity is subject to minimum funding requirements and makes an early pay-ment of contributions to cover such requirements. The amendment permits a prepayment of future service cost by the entity to be recognised as a pension asset. The amendment of the interpreta-tion had no effect on the financial position or per-formance of the Group as the Group’s employee benefit plans are unfunded.

Improvements to IFRSs (May 2010)

In May 2010, the IASB issued its third omnibus of amendments to its standards, primarily with a view to removing inconsistencies and clarifying wording. There are separate transitional provi-sions for each standard.

The adoption of the following amendments result-ed in changes to accounting policies, but did not have a significant impact on the financial position or performance of the Group.

‣ IFRS 7 Financial Instruments — Disclosures: The amendment was intended to simplify the disclo-sures provided by reducing the volume of disclo-sures about collateral held and improving disclo-sures by requiring qualitative information to put the quantitative information in context. The Group has updated its accounting policies accordingly,

3. Basis of preparationThe consolidated financial statements have been prepared on a historical cost basis, except for cer-tain financial instruments measured in accordance with the requirements of IAS 39 Financial instru-ments: recognition and measurement.

These consolidated financial statements are pre-sented in Ukrainian Hryvnia (‘UAH’) and all values are rounded off to the nearest thousand, except when otherwise indicated.

Statement of complianceThe consolidated financial statements of the Group have been prepared in accordance with In-ternational Financial Reporting Standards (IFRS) as issued by the International Accounting Stan-dards Board (IASB).

Basis of consolidationThe consolidated financial statements comprise the financial statements of the Company and its wholly-owned subsidiary. The subsidiary is fully consolidated from the date it was incorporated by the Company. The subsidiary’s financial state-ments are prepared as at the same reporting date as the Company’s, using consistent accounting policies.

All intra-group balances, income and expenses and unrealised gains and losses resulting from intra-group transactions are eliminated in full.



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this amendment did not have an effect on the fi-nancial position or performance of the Group.

‣ IAS 1 Presentation of Financial Statements: The amendment clarifies that an entity may present an analysis of each component of other comprehen-sive income either in the statement of changes in equity or in the notes to the financial statements. The Group has updated its accounting policies ac-cordingly, but the amendment had no effect on the 2011 financial statements as the Group did not have other comprehensive income.

‣ IFRIC 13 Customer Loyalty Programmes (de-termining the fair value of award credits): The amendment clarifies that when the fair value of award credits is measured based on the value of the awards for which they could be redeemed, the amount of discounts or incentives otherwise granted to customers not participating in the award credit scheme, is to be taken into account. The amendment is effective for annual periods be-ginning on 1 January 2011. The Group has updated its accounting policies accordingly, however, this

amendment did not have an effect on the financial position or performance of the Group.

Other amendments resulting from Improvements to the following standards and interpretations did not have any impact on the accounting policies, fi-nancial position or performance of the Group:

‣ IFRS 3 Business Combinations (Contingent con-sideration arising from business combination prior to adoption of IFRS 3 (as revised in 2008))

‣ IFRS 3 Business Combinations (The measure-ment options available for non-controlling interest (NCI))

‣ IFRS 3 Business Combinations (Un-replaced and voluntarily replaced share-based payment awards)

‣ IAS 27 Consolidated and Separate Financial Statements

‣ IAS 34 Interim Financial Statements

‣ IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments

5. Summary of significant accounting policiesFunctional and presentation currenciesThe functional and presentation currency of each of the Group’s entities is Ukrainian Hryvnia.

Foreign currency translationTransactions denominated in currencies other than the relevant functional currency (foreign cur-rencies) are initially recorded in the functional cur-rency at the rate in effect at the date the transac-tion first qualifies for recognition. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency spot rate of exchange at the reporting date. Non-monetary items that were measured in terms of historical cost in a foreign currency are retranslated us-ing the exchange rate as at the date of the initial transaction. The resulting gains and losses are recognised in profit and loss.

Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair values were deter-mined. The resulting gains and losses are recog-nised in line with the recognition of gain or loss on change in fair value of the item (i.e., translation difference on items whose fair value gain or loss is recognised in other comprehensive income or prof-

it or loss is also recognised in other comprehensive income or profit or loss respectively).

Revenue recognition and measurementRevenue is recognised to the extent that it is prob-able that the economic benefits will flow to the Group and the revenue can be reliably measured. Revenues are measured at the fair value of the consideration received or receivable, excluding dis-counts, rebates and sales taxes. These taxes are regarded as collected on behalf on the authorities.

Revenues primarily comprise sales of:

‣ Services: revenue from air time charges, inter-connection fees, periodic fees, connection and one-time subscription fees, FTTB internet, fixed lines revenues, roaming, value added services;

‣ Customer equipment: telephony handsets, mo-dems, etc.

Air time revenue

The Company earns air time revenue by provid-ing its prepaid and post-paid subscribers with ac-cess to the cellular network and routing their calls through the network and its roaming partners’ networks.

Revenue from interconnection

Revenue from interconnection represents the rev-enue earned for the termination of calls from other



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telecommunications service providers’ networks on the Company’s network.

Air time and interconnection revenue is recognised in the period when the respective service is ren-dered.

Periodic fees

Periodic fees include fees for subscription to new tariff plans and fees for supplementary subscrip-tions used by subscribers in particular period, such as periodic fees for subscription to voicemail, ite-mised invoice etc. Periodic fees also include fees for transfer of money between subscribers’ bal-ances, extra money services and write-offs of un-used advances of disconnected subscribers etc.

Periodic fees are recognised in the period when the respective service is rendered.

Connection and one-time subscription fees

Connection fees are paid by subscribers for the first time activation of network service. Revenues from connection are deferred and recognised over the period that the fees are earned, which is the expected period of customer relationship and ap-proximates 10 years for contract subscribers and 4 years for prepaid subscribers (2010: 7 years and 4 years, respectively). The expected period of cus-tomer relationship is based on the past history of churn and expected development of the Company.

One-time subscription fees mainly consist of one-time fees for various supplementary subscriptions and also include fees for change of subscription type and transfer of subscriptions from one loca-tion to another. One-time subscription fees are deferred and recognised over the period that the fees are earned, which is the subscription validity period or, in case of unlimited validity period, the expected period of customer relationship, which approximates 10 years for contract subscribers and 4 years for prepaid subscribers (2010: 7 years and 4 years, respectively).

FTTB internet revenues

Revenue from FTTB services represents fixed monthly charges for the internet access provided to the Company’s subscribers. Such revenue is rec-ognised in the period when the respective service is rendered to subscribers.

Fixed lines revenues

Revenue from fixed lines services represents monthly charges to the Company’s subscribers for access to the fixed telephone lines network and for routing the subscribers’ calls through this network. Such revenue is recognised in the period when the respective service is rendered to subscribers.

Roaming revenues

Roaming revenues include (i) charges for services provided to the Company’s subscribers in the net-works of its roaming partners and (ii) charges for services provided by the Company in its network to subscribers of the Company’s roaming partners. Roaming revenues are recognised in the period when the respective services are rendered.

Value added services

Value added services include charges for outgoing SMS and MMS, circuit of switched data and packet switched data (WAP, GPRS, EDGE etc.). Revenues from value added services are recognised in the period when the respective services are rendered.

Sales of handsets and modems

Revenues from sales of handsets and modems are normally recognised when the related significant risks and rewards are transferred to the buyer.

Discounts

Discounts are often provided in the form of cash discount, free or discounted products or services delivered by external parties. Discounts are re-corded in the period when they are earned. Dis-counts are recorded as revenue reductions. Free products or services delivered by external parties are recorded as expenses.

Presentation

Where the Company’s role in a transaction is a principal, revenue is recognised on a gross basis. In this case revenue comprises the gross value of the transaction billed to the customer, after trade discounts, with any related expenditure charged as an operating cost. Where the Company’s role in a transaction is that of an agent, revenue is rec-ognised on a net basis and represents the margin earned. The evaluation of whether the Company is acting as principal or agent is based on the analy-sis of the substance of the transaction, the respon-sibility for providing the goods or services and set-ting prices and the underlying financial risks and rewards.

Interest income

Interest income is recorded using the effective in-terest rate, which is the rate that exactly discounts the estimated future cash flows through the ex-pected life of financial instruments or a shorter period, where appropriate, to the net carrying amount of the financial asset or liability. Interest income is included in finance income in the state-ment of comprehensive income.

Deferred revenue Cellular service revenue is recognised on the ba-sis of actual airtime usage by the end customer. Unused time on sold prepaid cards is recognised as deferred revenue until the related services have been provided to the subscribers or the prepaid card has expired.

Loyalty programsCustomer loyalty credits are accounted for as a separate component of the sales transaction, in which they are granted. A portion of the fair value of the consideration received is allocated to the award credits and deferred, based on estimated number of award credits that will actually be re-deemed by the customer. This is then recognised as revenue over the period that the award credits are redeemed.



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Deferred connection costsInitial direct costs incurred in earning connection fees are deferred over the same period as connec-tion revenue, limited to the amount of the deferred connection fees. Costs incurred consist primarily of the costs of the start packages and dealers’ bonuses. In some cases connection costs exceed the respective connection fees. Such excess is ex-pensed as incurred.

Advertising costs, marketing and sales commissionsAdvertising costs, marketing and sales commis-sions are expensed as incurred, unless they form a part of the costs that are deferred in relation to deferral of connection fees as described above. Expenditure on advertising and promotional activi-ties is recognised as an expense when the Group either has the right to access the goods or has re-ceived the service.

Property, plant and equipmentProperty, plant and equipment are stated at cost less accumulated depreciation and any accumulat-ed impairment losses. Cost includes professional fees and, for qualifying assets, borrowing costs are capitalised. Depreciation is calculated to re-duce the cost of assets, other than land, to their estimated residual value, if any, over their estimat-ed useful lives. Depreciation commences when the assets are ready for their intended use.

Repair and maintenance is expensed as incurred. If new parts are capitalised, replaced parts are derecognised and any remaining net book value is recorded as loss on disposal.

When the expected cost of decommissioning of an asset after its use is material to the financial statements, the present value of the expected cost of decommissioning of an asset after its use is in-cluded into the cost of the respective asset if the recognition criteria for a provision are met.

Depreciation is calculated on a straight-line basis over the estimated useful life of the asset as fol-lows:

Depreciation method, estimated useful life and re-sidual value are evaluated at least annually and ad-justed prospectively, if appropriate. Residual value is estimated to be zero for most assets, except for vehicles, which are included in corporate adminis-trative assets, as the Group does not expect to use the assets for their full economic life.

An item of property, plant and equipment is derec-ognised upon disposal or when no future economic

benefits are expected to arise from the continued use of the asset or disposal. Any gain or loss aris-ing on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in profit and loss in the year the item is derecognised.

Leasehold improvements are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, the term of the relevant lease.

Construction in progress

Assets under construction are capitalised as a separate component of property, plant and equip-ment. On completion, the constructed asset at its cost is transferred to the appropriate category of property, plant and equipment. Construction in progress is not depreciated.

Uninstalled equipment

Uninstalled equipment represents equipment pur-chased by the Group, but not yet put into opera-tion. Uninstalled equipment is not depreciated.

Land

Freehold land to which the Group has due legal ti-tle is included in the Group’s statement of financial position at its historical cost. Freehold land is not depreciated.

LeasesLeases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. The evaluation is based on the substance of the trans-action. However, there are situations that individu-ally would normally lead the Group to classify a lease as a finance lease, such as if the lease term is more than 75 percent of the estimated economic life or the present value of the minimum lease pay-ments exceeds 90 percent of the fair value of the leased asset.

The Group may enter into an arrangement that does not take the legal form of a lease but conveys a right to use an asset in return for a payment or

series of payments. Determining whether an ar-rangement contains a lease is based on the sub-stance of the arrangement and requires an assess-ment of whether: (a) fulfilment of the arrangement is dependent on the use of a specific asset; and (b) the arrangement conveys a right to use the asset.

The Group as lessee

Property and equipment acquired by way of fi-nance lease is capitalised and carried at the lower

Category Useful life (years)Local, regional & trunk networks 20Mobile telephone network and switches 5-15Radio installations 7Buildings 10-30Corporate administrative assets 5-10



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of its fair value and the present value of the mini-mum lease payments at inception of the lease, less accumulated depreciation and impairment losses. Leased assets are depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term.

Operating lease payments are charged to profit and loss on a straight-line basis over the term of the relevant lease. Benefits received and incen-tives to enter into an operating lease are also amortised on a straight-line basis over the lease term. Advance lease payments made on entering into operating leases or acquiring leaseholds are amortised to profit and loss over the lease term.

Borrowing costsBorrowing costs directly attributable to the acqui-sition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capital-ised as part of the cost of the respective asset. All other borrowing costs are expensed in the period they occur. Borrowing costs consist of interest and other costs incurred in connection with the bor-rowing of funds.

Intangible assetsIntangible assets acquired are initially measured at cost. Following initial recognition, intangible as-sets are carried at cost less accumulated amor-tisation and any accumulated impairment losses.

Internally generated intangible assets, excluding capitalised development costs, are not capitalised and expenditure is reflected in profit and loss in the period, in which the expenditure is incurred.

Intangible assets, all of which are determined as having finite useful lives, are amortised over their useful economic lives. The amortisation period and amortisation method for intangible assets is reviewed at least annually, and adjusted prospec-tively, if appropriate. Amortisation is provided us-ing the straight-line basis over the estimated use-ful lives of the related assets as follows:

Gains and losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the car-rying amount of the asset and are recognised as other expenses in the statement of comprehensive income.

Impairment of non-financial assets The Group assesses, at each reporting date, whether there is an indication that an asset may be impaired. If any such indication exists, or when

annual impairment testing for an asset is required, the Group makes an estimate of the asset's recov-erable amount. An asset's recoverable amount is the higher of an asset's or cash-generating unit's fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset or cash generating unit exceeds its recov-erable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs to sell, recent market transactions are taken into account, if available. If no such trans-actions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples or other available fair value indicators. Impairment losses of continuing opera-tions are recognised in profit and loss.

A cash generating unit is the smallest identifi-able group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Based on the specifics of the Group’s operations, the man-agement concluded that the Group has one cash generating unit, which is the Company’s network as a whole.

An assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased.

If such indication exists, the recoverable amount is estimated. A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the asset's re-coverable amount since the last impairment loss was recognised. If that is the case the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been deter-mined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such

reversal is recognised in profit and loss. After such a reversal the depreciation charge is adjusted in future periods to allocate the asset's revised car-rying amount, less any residual value, on a system-atic basis over its remaining useful life.

Financial assetsInitial recognition and measurement

Financial assets within the scope of IAS 39 are classified as financial assets at fair value through profit or loss, loans and receivables, held-to-ma-

Asset category Useful life (years)Licenses 10-15Network and billing software 5-10



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turity investments, available-for-sale financial assets, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Group determines the classification of its fi-nancial assets at initial recognition.

Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the marketplace (regular way purchases) are recognised on the trade date, i.e., the date that the Group commits to purchase or sell the asset.

The Group’s financial assets include cash and cash equivalents, trade and other receivables and inter-est-free reimbursable financial aid, all of which are classified as loans and receivables in accordance with IAS 39.

Loans and receivables are non derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are ini-tially recognised at fair value plus directly attribut-able transaction costs, if any. In the case of trans-actions with entities under common control, any excess of nominal amount over the fair values at initial recognition is charged to retained earnings.

Subsequent measurement

After initial measurement, loans and receivables are subsequently measured at amortised cost us-ing the effective interest rate method, less impair-ment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are integral part of the ef-fective interest rate. The amortisation is included in finance income in the statement of comprehen-sive income.

Financial liabilities Initial recognition and measurement

Financial liabilities within the scope of IAS 39 are classified as financial liabilities at fair value through profit or loss, loans and borrowings, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Group de-termines the classification of its financial liabilities at initial recognition.

Financial liabilities are recognised initially at fair value less, in the case of loans and borrowings, di-rectly attributable transaction costs.

The Group’s financial liabilities mainly include trade and other payables and loans and borrowings.

Subsequent measurement

After initial recognition, interest-bearing loans and borrowings and trade and other payables with fixed maturity are subsequently measured at amortised cost using the effective interest rate method.

Gains and losses are recognised in profit or loss when the liabilities are derecognised as well as through the effective interest rate method amor-tisation process. Amortised cost is computed us-ing the effective interest method by taking into account any premium or discount on acquisition

and includes transaction costs and fees that are an integral part of the effective interest rate. The effective interest rate amortisation is included in finance costs in the statement of comprehensive income.

Offsetting of financial instrumentsFinancial assets and financial liabilities are offset and the net amount reported in the consolidated statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liabilities simultaneously.

Fair value of financial instrumentsThe fair value of financial instruments that are traded in active markets at each reporting date is determined by reference to quoted market prices or dealer price quotations (bid price for long po-sitions and ask price for short positions), without any deductions for transaction costs. For financial instruments not traded in an active market, fair value is determined using appropriate valuation techniques. Such techniques may include using re-cent arm’s length market transactions; reference to the current fair value of another instrument that is substantially the same; discounted cash flow analysis or other valuation models.

Impairment of financial assets The Group assesses, at each reporting date, whether there is any objective evidence that a fi-nancial asset or a group of financial assets is im-paired. A financial asset or a group of financial as-sets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred ‘loss event’) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated.

Evidence of impairment may include indications that the debtors or a group of debtors is experi-encing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as chang-es in arrears or economic conditions that correlate with defaults.

For financial assets carried at amortised cost, the Group first assesses whether objective evidence of impairment exists individually for financial as-sets that are individually significant, or collectively for financial assets that are not individually sig-nificant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and



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for which an impairment loss is, or continues to be, recognised are not included in a collective assess-ment of impairment.

If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimat-ed future cash flows (excluding future expected credit losses that have not yet been incurred).

The present value of the estimated future cash flows is discounted at the financial asset’s original effective interest rate. If an instrument has a vari-able interest rate, the discount rate for measuring any impairment loss is the current effective inter-est rate.

The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in profit and loss for all impaired financial assets, except for reim-bursable interest-free financial aid provided to entity under common control, for which the differ-ence between the carrying amount and fair value is recognised as equity distribution to the share-holders.

Loans and receivables together with the associ-ated allowance are written off when there is no realistic prospect of future recovery and/or when the statute of limitation has expired. If, in a sub-sequent year, the amount of the estimated impair-ment loss increases or decreases because of an event occurring after the impairment was recog-nised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a future write-off is later recovered, the recovery is credited to finance costs in the state-ment of comprehensive income.

Derecognition of financial instruments Financial assets

A financial asset (or, where applicable a part of a fi-nancial asset or part of a group of similar financial assets) is derecognised when:

‣ the rights to receive cash flows from the asset have expired or

‣ the Group has transferred its rights to receive cash flows from the asset or has assumed an ob-ligation to pay the received cash flows in full with-out material delay to a third party under a ‘pass-through’ arrangement and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither trans-ferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

When the Group has transferred its rights to re-ceive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, a new asset is recognised to the ex-tent of the Group’s continuing involvement in the

asset. In that case, the Group also recognises an associated liability. The transferred asset and the associated liability are measured on the basis that reflects the rights and obligations that the Group has retained.

Continuing involvement that takes the form of a guarantee over the transferred asset, is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.

Financial liabilities

A financial liability is derecognised when the obli-gation under the liability is discharged or cancelled or expires.

When an existing financial liability is replaced by another from the same lender on substantially dif-ferent terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liabil-ity, and the difference in the respective carrying amounts is recognised in profit or loss.

Employee benefitsThe Group makes defined contributions to the State Pension fund at the relevant statutory rates in force during the year, based on gross salary pay-ments; such an expense is charged in the period when the related salaries are earned.

In addition to the above, employees of the Group are entitled to jubilee and post-employment ben-efits.

Jubilee benefits are paid out on occasion of anniver-sary, while post-employment benefits are paid out as a one-off benefit upon retirement. The amount of those benefits depends on the tenure with the Com-pany and the average salary. The benefits payable under these arrangements are unfunded. The ex-pected cost of providing employee benefits is deter-mined annually using the projected unit credit actu-arial valuation method to calculate the net present value of benefit obligations at the reporting date. The balance of employee benefit obligations equals discounted payments to be made in the future and accounts for staff turnover and relates to the period to the reporting date. Demographic information and information on staff turnover are based on histori-cal data. Gains and losses resulting from the use of actuarial valuation methodologies to calculate post-employment benefits are recognised when the cumulative unrecognised actuarial gains or losses for the plan at the end of the previous reporting period exceed 10% of defined benefit obligation at that date. These gains or losses are recognised as income or expense over the expected average re-maining working lives of the employees participat-ing in the plan. Any actuarial gains or losses relating to jubilee benefits are recognised in profit or loss in the period in which they arise.

The past service cost is recognised as an expense on a straight-line basis over the average period until the benefits become vested. If the benefits are already vested following the introduction of,



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or changes to, a pension plan, past service cost is recognised immediately.

The defined benefit liability is the aggregate of the present value of the defined benefit obligation and actuarial gains and losses not recognised reduced by past service cost not yet recognised.

Taxes Current income tax

Current tax assets and liabilities for the current and prior periods are measured at the amount ex-pected to be recovered from or paid to the taxa-tion authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the reporting date.

Deferred income tax

Deferred income tax is provided using the liability method on temporary differences at the report-ing date between the tax bases of assets and li-abilities and their carrying amounts for financial reporting purposes.

Deferred tax liabilities are recognised for all tax-able temporary differences, except:

‣ where the deferred tax liability arises from the initial recognition of goodwill or of an asset or lia-bility in a transaction that is not a business combi-nation and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

‣ in respect of taxable temporary differences as-sociated with investments in subsidiaries, where the timing of the reversal of the temporary differ-ences can be controlled and it is probable that the temporary differences will not reverse in the fore-seeable future.

Deferred income tax assets are recognised for all deductible temporary differences and carry forward of unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differenc-es and the carry forward of unused tax losses can be utilised, except:

‣ when the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

‣ in respect of deductible temporary differences associated with investments in subsidiaries, de-ferred tax assets are recognised only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the tempo-rary differences can be utilised.

The carrying amount of deferred income tax as-sets is reviewed at each reporting date and re-duced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset

to be utilised. Unrecognised deferred income tax assets are reassessed at each reporting date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred in-come tax assets and liabilities are measured at the tax rates that are expected to apply in 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 at the reporting date.

Deferred tax relating to items recognised outside profit or loss is recognised outside profit or loss. Deferred tax items are recognised in correlation to the underlying transaction either in other compre-hensive income or directly in equity.

Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.

Value-added tax

Revenues, expenses and assets are recognised net of value-added tax (VAT) except:

‣ where VAT incurred on a purchase of assets or services is not recoverable from the taxation au-thority, in which case VAT is recognised as part of the cost of acquisition of the asset or as part of expense item as applicable; and

‣ receivables and payables are stated with the amount of VAT included.

The net amount of VAT recoverable from, or pay-able to, the taxation authority is disclosed in the notes to the consolidated statement of financial position.

Current/non-current classificationAn asset/liability is classified as current, when it is expected to be realised (settled) or is intended for sale or consumption within twelve months af-ter the reporting date. Other assets/liabilities are classified as non-current. Financial instruments are classified based on expected life. Deferred rev-enues and respective costs of connection are clas-sified as current.

Cash and cash equivalentsCash and cash equivalents include cash at banks and on hand and short-term deposits with an origi-nal maturity of three months or less.

For the purpose of consolidated cash flow state-ment, cash and cash equivalents consists of cash and cash equivalents as defined above, net of out-standing bank overdrafts, if any.

ProvisionsProvisions are recognised when the Group has a present obligation (legal or constructive) as a re-sult of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable esti-



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mate can be made of the amount of the obligation. Where the Group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in profit and loss net of any reimbursement. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appro-priate, the risks specific to the liability. Where dis-counting is used, the increase in the provision due to the passage of time is recognised as a finance cost.

Contingent assets and liabilitiesA contingent asset is not recognised in the finan-cial statements, but disclosed when an inflow of economic benefits is probable.

Contingent liabilities are not recognised in the fi-nancial statements unless it is probable that an outflow of economic resources will be required to settle the obligation and it can be reasonably es-timated. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote.

InventoriesInventories are valued at the lower of cost or net realisable value for items that will be sold as a sep-arate products. Inventories that will be sold as part

of a transaction with several components, which the Group expects to earn net income from, are valued at cost even if the selling price of the inven-tory is below cost price. Cost of inventories used is determined using the weighted average method.

Treasury sharesTreasury shares are recognised at purchase price and are deducted from equity. No gain or loss is recognised in the profit and loss on the purchase, sale, issue or cancellation of the Group’s own eq-uity instruments. Any difference between the car-rying amount and the consideration, if shares are reissued, is recognised in share premium. Voting rights related to treasury shares are nullified for the Group and no dividends are allocated to them.

Events after the reporting dateEvents after the reporting date that provide ad-ditional information on the Group’s position at the reporting date (adjusting events) are reflected in the consolidated financial statements. Events after the reporting date that are not adjusting events are disclosed in the notes when material.

Reclassification of comparative informationIn 2011 the Company has made certain reclassi-fications of comparative information for 2010 in order to conform with 2011 presentation.



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6. Critical accounting judgements and key sources of estimation uncertaintyKey sources of estimation uncertainty - critical accounting estimatesCertain amounts included in or affecting the con-solidated financial statements and related disclo-sures must be estimated, requiring management to make assumptions with respect to values or conditions which cannot be known with certainty at the time the consolidated financial statements are prepared.

A ‘critical accounting estimate’ is one, which is both important to the portrayal of the Group’s financial condition and results and requires man-agement’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are in-herently uncertain.

Management evaluates such estimates on an ongoing basis, based upon historical results and experience, consultation with experts, trends and other methods, which management considers rea-sonable in the particular circumstances, as well as the forecasts as to how these might change in the future. However, uncertainty about these estimates could result in outcomes that require a material adjustment to the carrying amount of an asset or liability affected in future periods.

Revenue recognitionThe main part of the Group’s revenues is earned from mobile services, such as airtime, one-time connection fees or periodic subscriptions. The Company has many subscribers and offers a num-ber of different services with different tariff plans. The Company also provides discounts of various types, often in connection with different cam-paigns. Revenues from one-time subscriptions or

connections to the Company's network are recog-nised as deferred revenue and released to the prof-it and loss in the periods when these revenues are earned, based on the average customer relation-ship period. The management regularly reviews its estimates in respect of customer relationship period, based on the historical experience and its plans for future development of the Company. As at 31 December 2011 the management estimated the customer relationship period to be equal to 10 years for contract subscribers and 4 years for prepaid subscribers (2010: 7 years and 4 years, respectively). As a result of change in the above-mentioned accounting estimates starting from 1 January 2011, the Group’s profit before tax for the year 2011 decreased by UAH 1,487 thousand.

Employee benefitsThe cost of long-term employee benefits and other post employment benefits is determined using ac-tuarial valuations. The actuarial valuation involves making assumptions about discount rates, future salary increases and future pension increases. All assumptions are reviewed at each reporting date. In determining the discount rate, the management considers the market yields on government bonds extrapolated for the period of payments.

The turnover rate is calculated based on the past experience. Further details about the assumptions used are given in Note 20.

Provision for decommissioningIn determining the carrying value of the provi-sion for decommissioning associated with future dismantling of base stations from leased sites the Group has to make assumptions and estimates in relation to discount rates, probability of prolonga-tion of operating lease agreements, the period till dismantling, the expected cost to dismantle the base stations from the sites and the expected tim-ing of those costs. All assumptions are reviewed at each reporting date. As at 31 December 2011, the Group has revised its estimates in relation to discount rates and the expected cost to dismantle:

Assumptions used as at 31 December 2010

Assumptions used as at 31 December 2011

Cost of dismantling per site UAH 36,000 UAH 38,300Discount rate 10.70% 13.57%Inflation rate 3.99% 4.15%

The period till dismantling as at 31 December 2010 comprised 30 years. As at 31 December 2011 the Group has extended the estimated period till dismantling by one year.



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Deferred tax assets Deferred tax assets are recognised for all deduct-ible temporary differences to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Signifi-cant management judgment is required to deter-mine the amount of deferred tax assets that can be recognised, based upon the likely timing and the level of future taxable profits together with future tax planning strategies. Please refer to Note 9 for additional information on the Group’s tax position.

Depreciation and amortisationDepreciation and amortisation methods are based on management estimates of the expected useful life of property, plant and equipment and intan-gible assets. Estimates may change due to tech-nological developments, competition, changes in market conditions and other factors and may re-sult in changes in the estimated useful lives and in the amortisation or depreciation charges. Some technological developments are difficult to pre-dict and the Group’s views on the trends and pace of development may change over time. Some of the assets and technologies, in which the Group invested several years ago, are still in use and pro-vide the basis for the new technologies.

The useful lives of property, plant and equipment and intangible assets are reviewed at least an-nually taking into consideration the factors men-tioned above and all other important factors. In case of significant changes in estimated useful lives, depreciation and amortisation charges are adjusted prospectively.

In 2011 the Group has changed useful lives for the following groups for property, plant and equip-ment and intangible assets:

As a result of change in the abovementioned ac-counting estimates starting from 1 January 2011, the Company’s profit before tax for the year 2011 decreased by UAH 237,666 thousand.

Impairment of non-financial assets The Group has made significant investments in property, plant and equipment and intangible as-sets. These assets are tested for impairment when circumstances indicate there may be a potential impairment. Factors considered important which could trigger an impairment evaluation include the following: significant fall in market values, sig-nificant underperformance relative to historical or projected future operating results, significant changes in the use of assets or the strategy for the Group’s overall business, including assets that are decided to be phased out or replaced and assets that are damaged or taken out of use, significant negative industry or economic trends and signifi-cant cost overruns in the development of assets.

Estimating recoverable amounts of assets must in part be based on management’s evaluations, in-cluding determining appropriate cash generating units, estimates of future performance, revenue generating capacity of the assets, assumptions of the future market conditions and the success in marketing of new products and services. Changes in circumstances and in management’s evalua-tions and assumptions may give rise to impair-ment losses in the relevant periods.

Legal proceedings and claimsThe Group is a subject to various legal proceed-ings and claims, the outcomes of which are subject to significant uncertainty. Management evaluates, among other factors, the degree of probability of an unfavourable outcome and the ability to make a reasonable estimate of the amount of loss.

Unanticipated events or changes in these factors may require to increase or decrease the amount to be accrued for any matter or accrue for a mat-

ter that has not been previously accrued because it was not considered probable or a reasonable es-timate could not be made.

Category of asset Useful life before 1 January 2011 Useful life after 1 January 20114.1 - MSC/HLR/TSP/BSC 7 57.1 - Control and management systems 7 57.2 - Service platforms 7 5



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7. IFRSs and IFRIC Interpretations not yet effectiveA number of new standards, amendments to stan-dards and interpretations are not yet effective for the year ended 31 December 2011, and have not been applied in preparing these consolidated fi-nancial statements.

Standards issued but not yet effective up to the date of issuance of the Group’s consolidated fi-nancial statements are listed below. The Group in-tends to adopt those standards when they become effective.

IAS 1 Financial Statement Presentation – Presenta-tion of Items of Other Comprehensive Income (OCI)

The amendments to IAS 1 change the grouping of items presented in OCI. Items that could be re-classified (or ‘recycled’) to profit or loss at a future point in time (for example, upon derecognition or settlement) would be presented separately from items that will never be reclassified. The amend-ment affects presentation only and has no impact on the Group’s financial position or performance. The amendment becomes effective for annual pe-riods beginning on or after 1 July 2012.

IAS 19 Employee Benefits (amendment)

The IASB has issued numerous amendments to IAS 19. First, the corridor method is removed and, therefore, all changes in the present value of the defined benefit obligation and in the fair value of plan assets will be recognised immediately as they occur. Secondly, the amendment will eliminate the current ability for entities to recognise all changes in the defined benefit obligation and in plan as-sets in profit or loss. Thirdly, the expected return on plan assets recognised in profit or loss will be calculated based on the rate used to discount the defined benefit obligation. The amended standard shall be applied for annual periods beginning on or after 1 January 2013 and early adoption is permit-ted. The amendment generally applies retrospec-tively. The Group has not analysed the likely impact of the amended standard on its financial position or performance.

IFRS 7 Financial Instruments: Disclosures – Enhanced Derecognition Disclosure Requirements

The amendment requires additional disclosure about financial assets that have been transferred but not derecognised to enable the users of the Group’s financial statements understand the re-lationship with those assets that have not been derecognised and their associated liabilities. In ad-dition, the amendment requires disclosures about continuing involvement in derecognised assets to enable the user to evaluate the nature of, and risks associated with, the entity’s continuing involve-ment in those derecognised assets. The amend-ment becomes effective for annual periods begin-ning on or after 1 July 2011. The amendment will have no impact on the Group’s financial position or performance.

IFRS 9 Financial Instruments: Classification and Measurement

IFRS 9 as issued reflects the first phase of the IASBs work on the replacement of IAS 39 and ap-plies to classification and measurement of finan-cial assets and financial liabilities as defined in IAS 39. In December 2011 the IASB issued Mandatory Effective Date and Trasition Disclosures (amend-ments to IFRS 9 and IFRS 7) according to which entities shall apply IFRS 9 as amended for annual periods beginning on or after 1 January 2015. In subsequent phases, the IASB will address hedge accounting and impairment of financial assets. The completion of this project is expected in 2012. The adoption of the first phase of IFRS 9 will have an effect on the classification and measurement of the Group’s financial assets, but will potentially have no impact on classification and measure-ments of financial liabilities. The Group will quanti-fy the effect in conjunction with the other phases, when issued, to present a comprehensive picture.

IFRS 10 Consolidated Financial Statements

IFRS 10 replaces the portion of IAS 27 Consoli-dated and Separate Financial Statements that ad-dresses the preparation of consolidated financial statements. It also includes the issues raised in SIC-12 Consolidation — Special Purpose Entities. IFRS 10 establishes a single control model that ap-plies to all entities including special purpose enti-ties. The changes introduced by IFRS 10 will require entities to exercise judgement to determine which entities are controlled, and therefore, are required to be consolidated by a parent, compared with the requirements that were in IAS 27. This standard becomes effective for annual periods beginning on or after 1 January 2013. The Group expects that the amendment will have no impact on the Group’s financial position or performance.

IFRS 12 Disclosure of Involvement with Other Enti-ties

IFRS 12 includes all of the disclosures that were previously in IAS 27 related to consolidated finan-cial statements, as well as all of the disclosures that were previously included in IAS 31 and IAS 28. These disclosures relate to an entity’s interests in subsidiaries, joint arrangements, associates and structured entities.

A number of new disclosures are also required. This standard becomes effective for annual pe-riods beginning on or after 1 January 2013. The Group expects that the amendment will require additional disclosures in its consolidated financial statements, but will have no impact on the Group’s financial position or performance.

IFRS 13 Fair Value Measurement

IFRS 13 establishes a single source of guidance un-der IFRS for all fair value measurements. IFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under IFRS when fair value is required or permitted. The Group is currently as-sessing the impact that this standard will have on



78

the financial position and performance. This stan-dard becomes effective for annual periods begin-ning on or after 1 January 2013.

The Group expects that new standards and amend-ments listed below will have no impact on its finan-cial position, financial performance or disclosures in the consolidated financial statements:

‣ IFRS 1 First-Time Adoption of IFRSs (amended)

‣ IFRS 11 Joint Arrangements

‣ IAS 12 Income Taxes – Recovery of Underlying Assets

‣ IAS 27 Separate Financial Statements (as re-vised in 2011)

‣ IAS 28 Investments in Associates and Joint Ven-tures (as revised in 2011)

‣ IAS 32 Financial Instruments: Presentation

‣ IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine

8. Revenues and expenses2011 2010

RevenuesAir time charges 5,348,426 5,924,973Periodic fees 2,384,073 1,703,262Interconnection revenue 2,146,349 2,084,790Value added services 1,022,885 876,376Roaming and access to network 712,468 430,001Roaming revenue (subscribers) 229,756 222,621Connection and one-time subscription fees 175,903 82,671FTTB internet revenues 126,592 4,211Fixed lines 65,398 44,313Other revenue 120,495 69,807

12,332,345 11,443,025

Costs of materials and traffic chargesInterconnection 1,786,240 1,588,590Cost of materials 218,830 188,971Roaming expenses 168,802 157,860Leased line costs 19,039 4,107

2,192,911 1,939,528

Salaries and personnel costsSalaries, holiday pay and other employee benefits 739,307 663,267 Social security taxes 174,253 165,810Medical insurance 34,090 35,652Training 1,094 1,514

948,744 866,243

The average number of employees of the Group in 2011 is 4,502 (2010: 4,663).



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2011 2010Other operating expenses

Repair and maintenance 712,021 620,090Marketing and sales commission 340,688 314,110Operating leases of land and buildings 320,958 290,126Advertising 265,650 190,420Local taxes and non-refundable VAT 247,718 187,213Electricity 171,192 133,547Consultancy fees and external personnel 92,096 168,857Insurance 68,201 74,844Materials and supplies 30,476 22,976License and research fees 24,254 19,493Business trip expenses 18,962 14,401Postage, freight, distribution and telecommunication 9,100 7,861Bank charges 3,508 6,003Bad debts - 20,920Other operating expenses 20,992 7,497

2,325,816 2,078,358

Other expenses 2011 2010

Loss on disposal of property, plant and equipment and intangible assets 56,294 61,477Contributions and donations 3,623 2,896

59,917 64,373

Amortisation, depreciation and impairment losses

Details of amortisation, depreciation and impairment losses are as follows:

Property, plant and equipment Intangible assets2011 2010 2011 2010

Depreciation and amortisation 1,722,674 1,346,803 386,834 434,666Impairment losses, net of reversals 12,476 3,414 - -

1,735,150 1,350,217 386,834 434,666



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Finance income2011 2010

Interest income 226,390 150,641Total interest income 226,390 150,641

Unwinding of discount on other current financial assets 719,737 76,790

946,127 227,431 Finance costs

2011 2010

Interest charges related to bank loans 3,959 3,942Total interest charges 3,959 3,942

Other finance costs 4,244 3,275

8,203 7,217

9. Income taxThe Group’s income was subject to taxation in Ukraine only. In 2010, the Ukrainian Parliament approved the Tax Code, which superseded the Law of Ukraine on Corporate Income Tax starting from 1 April 2011. New Tax Code significantly changed the rules for tax base calculation and provided for gradual decrease in tax rates from 25% to 16% over the next few years. During the first quarter of 2011, Ukrainian corporate income tax was levied on taxable income less deductible expenses and

depreciation charge at a rate of 25%. During the second – forth quarter of 2011, corporate income tax was levied on taxable income less deductible expenses at a rate of 23%.

The Group has calculated its deferred tax position as at 31 December 2011 in accordance with cor-porate income tax rates as set out by the effective Tax Code for the periods when the deferred tax as-sets and liabilities are expected to be utilised.

The major components of income tax expense for the years ended 31 December 2011 and 2010 are:

2011 2010

Current income tax:Current income tax charge 1 004 635 1 400 636

Deferred tax:Relating to origination and reversal of temporary differences 371 479 (156 306)

Income tax expense 1 376 114 1 244 330

In 2011 the Group recognised impairment losses on property, plant and equipment in amount of UAH 25,283 thousand (2010: UAH 14,076 thousand), based on internal indications of impairment for various individual components of network equip-ment, as the Group did not plan to use this equip-ment in future. Assets identified as no longer in use were written down to their recoverable amounts, which were based on value in use determined for individual assets, usually zero.

In addition, in 2011 the Group recognised reversal of impairment losses in respect of network equip-ment in amount of UAH 12,807 thousand (2010: UAH 10,662 thousand) as a result of changes in tariff policies and respective plans for future us-age of previously impaired network equipment in accordance with adjusted capital expenditure bud-gets for future years.



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Reconciliations between tax expense and the product of accounting profit multiplied by the tax rate for the years ended 31 December 2011 and 2010 are as follows:

2011 2010

Accounting profit before tax 5 643 644 4 922 210

Income tax at actual rate (2011: till 1 April 2011 – 25%, starting from 1 April 2011 – 23%, 2010: 25%) 1 319 595 1 230 553

Non - taxable income (5 619) (12 966)Non - deductible expenses for tax purposes 20 022 31 708Other changes (reassessment of temporary differences, effect of changes in tax rules, effect of changes in tax rates) 42 116 (4 965)

1 376 114 1 244 330

Deferred tax assets and liabilities relate to the following items in 2011:

31-Dec-11Recognised in profit and loss

Recognised in equity 31-Dec-10

Deferred tax liabilities:Deferred expenses (iii) 17,395 (2,990) - 20,385Prepayments (iii) 627 (16,012) - 16,639Trade and other receivables (iv) 7,226 3,907 - 3,319

25,248 (15,095) - 40,343Deferred tax assets: Property, plant and equipment (i) 104,715 (43,698) - 148,413Intangible assets (i) 27,907 (27,649) - 55,556Other current financial assets (iv) 121,146 (169,176) 137,026 153,296Other current liabilities (iv) 36,671 (525) - 37,196Employee benefits (iii) 8,527 568 - 7,959Advances received and deferred revenue (iii) 47,105 (164,674) - 211,779Inventories (ii) 40 40 - -Trade and other payables (iii) 53,543 2,599 - 50,944Provisions (iii) 4,747 (3,689) - 8,436Taxes payable, other than income tax (iii) - (2,704) - 2,704Other liabilities 22,334 22,334 - -

426,735 (386,574) 137,026 676,283

Net deferred tax asset 401,487 (371,479) 137,026 635,940



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Deferred tax assets and liabilities relate to the following items in 2010:

31-Dec-10Recognised in profit and loss

Recognised in equity 31-Dec-09

Deferred tax liabilities:Intangible assets (i) - (26,087) - 26,087Deferred expenses (iii) 20,385 907 - 19,478Prepayments (iii) 16,639 (330) - 16,969Trade and other receivables (iv) 3,319 1,613 - 1,706

40,343 (23,897) - 64,240

Deferred tax assets: Property, plant and equipment (i) 148,413 22,578 - 125,835Intangible assets (i) 55,556 55,556 - -Other current financial assets (iv) 153,296 (19,198) 172,494 -Other current liabilities (iv) 37,196 34,887 - 2,309Employee benefits (iii) 7,959 (3,573) - 11,532Advances received and deferred revenue (iii) 211,779 24,101 - 187,678Inventories (ii) - (2,979) - 2,979Trade and other payables (iii) 50,944 9,897 - 41,047Provisions (iii) 8,436 8,436 - -Taxes payable, other than income tax (iii) 2,704 2,704 - -

676,283 132,409 172,494 371,380

Net deferred tax asset 635,940 156,306 172,494 307,140

The nature of the temporary differences is as fol-lows:

(i) Property, plant and equipment and intangible assets – differences in depreciation and amortisa-tion patterns and estimates of the remaining use-ful lives, differences in capitalisation principles;

(ii) Inventories - differences in inventories mea-surement basis and the periods of recognition;

(iii) Advances received and deferred revenue, pre-payments and deferred expenses, employee bene-fits, trade and other payables, provisions, taxes pay-able, other than income tax, other current financial assets – differences in period of recognition;

(iv) Trade and other receivables, other current fi-nancial assets and other current liabilities – differ-ences in measurement and recognition principles.

As at 31 December 2011 the Company did not rec-ognise deferred tax asset in respect of temporary differences of UAH 52,955 thousand (2010: UAH 50,502 thousand) related to the investment in JSC Staravto because the Company may control the period of realisation of such temporary differ-ences.



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10. Property, plant and equipmentThe movement of property, plant and equipment is as follows:

Local, regional & trunk networks

Mobile telephone network and switches

Radio installa-tions

Buildings Land

Corporate administ-rative assets

Construc-tion in progress, uninstalled and disman-tled equip-ment (ii)

Total

Cost:At 1 January 2010 772,124 5,314,851 2,482,445 949,592 104,004 671,057 1,311,294 11,605,367

Additions 2,127 25,656 77,616 - 2,505 10,042 1,244,628 1,362,574Disposals (1,230) (182,993) (18,738) (36,821) - (27,688) (93,050) (360,520)Transfers,re-classi-fica-tions and other changes (i)

49,440 635,342 139,726 361,693 - 76,628 (1,262,829) -

At 31 December 2010 822,461 5,792,856 2,681,049 1,274,464 106,509 730,039 1,200,043 12,607,421

Additions 4,186 50,937 19,078 3,791 - 21,983 2,551,783 2,651,758Disposals - (277,363) (306,022) (490) - (35,778) (24,329) (643,982)Transfers,re-classi-fica-tions and other changes (i)

96,948 1,262,697 431,489 182,427 2 155,955 (2,160,989) (31,471)

At 31 December 2011 923,595 6,829,127 2,825,594 1,460,192 106,511 872,199 1,566,508 14,583,726

Accumulated depreciation and impairment losses: At 1 January 2010 123,070 2,707,356 1,367,583 181,219 - 447,051 430,057 5,256,336

Depreciation charge for the year 39,510 702,017 326,954 84,428 - 129,766 64,128 1,346,803

Impairment (Note 8) - - - - - - 3,414 3,414Disposals (1,001) (120,486) (13,956) (28,388) - (19,048) (90,406) (273,285)Transfers,re-classi-fica-tions and other changes (i)

1,004 (27,774) (71,464) 2,844 - (31,614) 127,004 -

At 31 December 2010 162,583 3,261,113 1,609,117 240,103 - 526,155 534,197 6,333,268

Depreciation charge for the year 42,614 1,056,608 352,221 69,656 - 106,436 95,139 1,722,674

Impairment (Note 8) - - - - - - 12,476 12,476Disposals - (234,828) (290,711) (259) - (29,438) (24,329) (579,565)Transfers,re-classi-fica-tions and other changes (i)

(1) (80,713) 93,162 (517) - 20,424 (32,355) -

At 31 December 2011 205,196 4,002,180 1,763,789 308,983 - 623,577 585,128 7,488,853

Net book value:At 1 January 2010 649,054 2,607,495 1,114,862 768,373 104,004 224,006 881,237 6,349,031At 31 December 2010 659,878 2,531,743 1,071,932 1,034,361 106,509 203,884 665,846 6,274,153

At 31 December 2011 718,399 2,826,947 1,061,805 1,151,209 106,511 248,622 981,380 7,094,873



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(i) Transfers, reclassifications and other changes in 2011 include the change in provision for decommis-sioning costs in amount of UAH 31,471 thousand as a result of changes in estimates (i.e. discount rate, inflation rate and the cost of dismantling). Please refer to Note 6 for further details.

(ii) Temporarily dismantled equipment is continued to be depreciated over the estimated remaining useful life.

11. Intangible assetsThe movement of intangible assets is as follows:

Licenses Network and billing software Total

Cost:At 1 January 2010 411,746 2,564,446 2,976,192

Additions 1,510 326,369 327,879Disposals - (38,012) (38,012)

At 31 December 2010 413,256 2,852,803 3,266,059

Additions 18,848 282,432 301,280Disposals (114,003) (16,625) (130,628)

At 31 December 2011 318,101 3,118,610 3,436,711

Accumulated amortisation and impairment losses:At 1 January 2010 197,199 1,698,427 1,895,626

Amortisation charge for the year 42,734 391,932 434,666Disposals - (35,094) (35,094)

At 31 December 2010 239,933 2,055,265 2,295,198

Amortisation charge for the year 37,085 349,749 386,834Disposals (113,317) (15,504) (128,821)

At 31 December 2011 163,701 2,389,510 2,553,211

Net book value:At 1 January 2010 214,547 866,019 1,080,566At 31 December 2010 173,323 797,538 970,861At 31 December 2011 154,400 729,100 883,500



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The Group’s major licenses as at 31 December are as follows:

License # Coverage License Acquisition date Expiration date

Net book value as at 31 De-cember 2011

Net book value as at 31 De-cember 2010

N/A National 1800 MHz (GSM) fre-quencies usage licenses (i) 67,719 78,118

N/A National 900 MHz (GSM) fre-quencies usage licenses (ii) 15,269 18,519

АА № 009503 National900 MHz (GSM) and 1800 MHz (GSM) cel-lular license

Apr-01 Oct-11 - 6,756

ЛВ № 593094 National 900 MHz (GSM) cellular license Oct-11 Oct-26 9,078 -

АВ № 593093 National 1800 MHz (GSM) cel-lular license Oct-11 Oct-26 9,078 -

АГ № 506983 International International communi-cation Aug-04 Aug-19 4,588 5,187

АГ № 506984 Inter city Inter city communica-tion Aug-04 Aug-19 4,684 5,295

АГ № 506986 City Fixed city communica-tion Aug-10 Aug-15 1,010 1,285

N/A National Other licenses Mar-01 Apr-26 42,974 58,163154,400 173,323

(i) 1800 MHz (GSM) frequencies usage licenses com-prise a number of licenses that were acquired in the period from February 2001 to January 2007. The valid-ity period of such licenses varies from 10 to 15 years.

(ii) 900 MHz (GSM) frequencies usage licenses com-prise a number of licenses that were acquired in the period from June 1999 to October 2008. The validity period of such licenses varies from 10 to 15 years.

In October 2011, the Company’s 900 MHz (GSM) and 1800 MHz (GSM) cellular licenses, which were granted in 2001, were expired. At the same time the Company acquired new 900 MHz (GSM) and 1800 MHz (GSM) cellular licenses for operation in Ukraine using GSM standard for the next 15 years.



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12. Other non-current assetsOther non-current assets as at 31 December are as follows:

2011 2010

Prepayments for property, plant and equipment 37 668 30 047Prepayments for intangible assets 558 9 840Other non-current assets 6 399 4 606

44 625 44 493

13. Trade and other receivablesTrade and other receivables consist of the following as at 31 December:

2011 2010

Trade receivables - interconnection and access to network 243 429 141 389Trade receivables - subscribers 108 246 102 590Trade receivables - roaming 101 844 85 361Trade receivables - dealers for prepaid cards and packages 90 150 35 630Interest receivable 4 760 7 933Trade receivables - dealers for post-paid subscribers’ advances 568 168Other receivables 16 941 21 545

565 938 394 616

Allowance for impairment (55 551) (74 063)

510 387 320 553

Trade and other receivables, net of allowance for impairment as at 31 December are denominated in the following currencies:

2011 2010

UAH 328 849 160 135EUR 114 318 103 463USD 67 220 56 955

510 387 320 553

As at 31 December 2011 and 2010 trade and other receivables are non-interest bearing and are settled in the normal course of business.



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14. PrepaymentsPrepayments as at 31 December are denominated in the following currencies:

2011 2010

UAH 110 122 74 597EUR 389 215USD 348 69RUR 12 21

110 871 74 902

15. Reconciliation of allowance accountsThe reconciliation of changes in allowance accounts is as follows:

Trade and other receiv-ables Prepayments Total

As at 1 January 2010 76,854 516 77,370

Charge for the year 21,929 31 21,960Utilised (23,680) - (23,680)Unused amounts reversed (1,040) - (1,040)

As at 31 December 2010 74,063 547 74,610

Charge for the year 8,353 3 8,356Utilised (17,940) (465) (18,405)Unused amounts reversed (8,925) (12) (8,937)

As at 31 December 2011 55,551 73 55,624

In 2011 reversal of doubtful debt allowance in amount of UAH 581 thousand is included in other income (2010: bad debt ex-penses of UAH 20,920 thousand were recognised in other expenses, please refer to Note 8).



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The movement in deferred connection costs is as follows:

2011 2010

At 1 January 80 928 68 052

Deferred during the year 50 782 43 907Released to profit and loss (40 921) (31 031)

At 31 December 90 789 80 928

16. Deferred expensesAs at 31 December deferred expenses consist of the following:

2011 2010Deferred connection costs (i) 90 789 80 928Deferred costs of start packages and scratch-cards (ii) 15 422 11 655

106 211 92 583

(i) As at 31 December 2011 and 2010 deferred connection costs mainly consisted of costs of start packages and dealers’ bonuses for connection of new subscribers, limited to the amount of deferred connection fees.

(ii) Deferred costs of start packages and scratch-cards represent costs of start packages and scratch-cards sold to dealers, but not yet activated by subscribers.



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In 2011 and 2010 cash at current bank accounts earned interest at fixed rates varying from 0.25 to 2.00 % per annum.

As at 31 December short-term deposits split by contractual maturity, currency and interest rate earned is as follows:

Currency Maturity date Interest rate p.a. 2011 2010UAH 0-30 days 8-25% 110,000 125,000

31-60 days 8-21% 140,000 745,03561-92 days 10-22% 145,000 330,000

395,000 1,200,035

USD 31-60 days 5.5-6.5% - 54,93661-92 days 5.5-7% 175,776 123,406

175,776 178,342

EUR 31-60 days 3-10% - 82,47161-92 days 4-6.75% 111,219 -

111,219 82,471

681,995 1,460,848

17. Cash and cash equivalentsCash and cash equivalents consist of the following as at 31 December:

2011 2010

Short-term deposits 681 995 1 460 848Cash at banks 210 787 134 182Cash on hand 24 26

892 806 1 595 056

As at 31 December cash on hand and cash at banks are denominated in the following currencies:

2011 2010

UAH 205 128 124 437EUR 3 156 5 095USD 2 527 4 676

210 811 134 208



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18. Equity Share capital

As at 31 December 2011 the authorised and fully paid share capital comprised 17,687,389 ordinary shares (2010: 10,687,389 ordinary shares) at a par value of UAH 50 each. The carrying value of share capital differs from par by UAH 122,130 thousand being the currency translation difference, accumu-lated till 1 May 2004 when the Company changed its functional currency from US dollar to Ukrainian Hryvnia.

Treasury shares and accession of Storm LLC

On 19 October 2010 the Company’s shareholders approved the restructuring plan whereby Storm LLC, one of the Company's shareholders, shall be merged into Kyivstar and cease to exist as a legal entity.

On 21 October 2010 Kyivstar and Storm LLC en-tered into the accession agreement requiring Storm LLC to transfer to Kyivstar all its assets and liabilities, including the Company's shares it owned. At the same time, Kyivstar issued written commitments to VimpelCom Holdings B. V. and VimpelCom Ltd. to issue additional 7,000,000 of shares with total nominal value of UAH 350,000 thousand.

Pursuant to the abovementioned resolutions, on 18 January 2011 the Company obtained all prop-erty rights and liabilities of Storm LLC, including (i) treasury shares of Kyivstar with carrying value of UAH 370,398 thousand; (ii) retained earnings of Storm LLC in amount of UAH 20,880 thousand; (iii) cash in amount of UAH 590 thousand; (iv) property, plant and equipment in amount of UAH 189 thou-sand; (v) trade and other receivables in amount of UAH 42 thousand.

On 07 June 2011 the Company issued 7,000,000 of additional shares with total nominal value of UAH 350,000 thousand. These additional shares were allocated between Storm’s shareholders (Vimpel-Com Holdings B.V. (Netherlands) and VimpelCom Ltd. (Bermuda)) on a pro rata basis to their inter-ests in Storm LLC.

Dividends declared

In 2011, the Company has declared dividends in total amount of UAH 3,846,877 thousand (UAH 295 per share) (2010: UAH 765,216 thousand (UAH 71.60 per share)). As at 31 December 2011 and 2010 dividends declared were fully paid by the Company to its shareholders in cash, net of with-holding tax.



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19. Interest-bearing loans and borrowingsCurrent interest-bearing loans and borrowings consist of the following as at 31 December:

2011 2010

Interest-bearing borrowings from Commerzbank AG Bank, (USD-denominated, at 7.75% p. a., matures on 27 April 2012) 51 223 51 043Interest accrued 694 692

51 917 51 735

2011 2010

Post-employment defined benefit liability 30,547 27,935Jubilee payments 19,337 16,893

49,884 44,828

Less: Current portion (9,011) (7,566)

Employee benefit liability – non-current portion 40,873 37,262

20. Employee benefit liabilityThe Group, pursuant to the terms of personnel mo-tivation programme, has established post-employ-ment defined benefit pension plan, covering sub-stantially all of its employees, who achieve regular

pension age and retire from the Group companies. In addition, the Group pays jubilee benefits to its employees.

Employee benefit liability as at 31 December con-sists of the following:

On 23 November 2010, the Company entered into the agreement to provide reimbursable interest-free financial aid of UAH 4,000,000 thousand to the entity under common control. As required by the terms of the loan agreement, for this type of transactions the Company should have provided Commerzbank AG Bank (‘the Bank‘) with a fair-ness opinion from an accounting, appraisal or in-vestment banking firm of international standing.

However, this requirement was not met. Such non-compliance with the terms of the loan agreement gives the Bank the right, by notice to the Company, to demand at any time the accelerated or imme-diate repayment of the loan and accrued interest thereon. Accordingly, the loan was classified as current liability as at 31 December 2010 as the Company did not have an unconditional right to defer its settlement for at least twelve months.



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Post-employment defined employee benefitsAs at 31 December 2011 3,775 employees (2010: 3,675 employees) were entitled to benefits under post-employment defined employee benefit plan.

Changes in the present value of the defined benefit obligation as at 31 December are as follows:

2011 2010

Defined benefit obligation at 1 January 15,321 40,340Interest cost 784 3,275Current service cost 2,800 2,407Benefits paid (25) (214)Gains on curtailment (367) -Actuarial gain for the year (569) (30,487)

Defined benefit obligation at 31 December 17,944 15,321

Unrecognised actuarial gain 12,603 12,614

Defined benefit liability at 31 December 30,547 27,935

Classified asDefined benefit liability – current portion 6,090 4,650Defined benefit liability – non-current 24,457 23,285 Benefit expense 2011 2010

Interest cost 784 3,275Current service cost 2,800 2,407Net actuarial (gains)/losses recognised in the year (580) 616Gains on curtailment (367) -

Total expenses recognised in the statement of comprehensive income 2,637 6,298

Net benefit expense is included into salaries and personnel costs, except for interest cost charged to finance costs.

Benefit liability 2011 2010

Net liability at 1 January 27,935 21,851Benefits expense 2,637 6,298Benefits paid (25) (214)

Net liability at 31 December 30,547 27,935

Jubilee paymentsAs at 31 December 2011 3,745 employees are entitled to jubilee benefits (2010: 3,496 employees).

2011 2010

Present value of unfunded obligations 19,337 16,893Classified as Benefit liability - current portion 2,921 2,916Benefit liability - non-current 16,416 13,977



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The principal assumptions used in determining the post-employment defined employee benefits are shown below:

2011 2010

Discount rate 5.12% 8.12%Future benefit increases 5.92% 6.99%

2011 2010 2009 2008 2007Defined benefit obligation at 31 December 17,944 15,321 40,340 12,634 13,856Experience adjustment (2,534) (5,226) (1,230) (549) 965

21. Deferred revenueAs at 31 December deferred revenue consists of the following:

2011 2010

Deferred revenue - dealers and subscribers (i) 542,603 548,969Deferred connection and one-time subscription fees (ii) 161,248 154,006Customer loyalty programs (iii) 38,036 33,684

741,887 736,659

The movements in deferred connection and one-time subscription fees are as follows:

2011 2010

At 1 January 154,006 134,231

Deferred during the year 183,145 102,446Released to profit and loss (175,903) (82,671)

At 31 December 161,248 154,006

(i) Deferred revenue – dealers - represents deferred revenue from unused time on prepaid cards, which were sold to dealers, but have not yet been acti-vated by subscribers. Deferred revenue – dealers is recognised in the statement of financial position until the prepaid cards have been activated by sub-scribers or the prepaid card has expired. Deferred revenue – subscribers - mainly consists of deferred revenue from unused time on prepaid cards, which were activated by subscribers. Deferred revenue – subscribers is recognised as revenue in the state-ment of comprehensive income on the basis of actual airtime usage by subscribers.

(ii) Deferred connection and one-time subscription fees – mainly consist of fees for initial connection to the network and one-off payments for subscrip-tion to additional services. Deferred connection and subscription fees are recognised in the state-ment of comprehensive income over the periods that the fees are earned.

(iii) Customer loyalty programs – represent vari-ous loyalty programs, established by the Company, whereby enrolled mobile and FTTB subscribers are eligible for bonuses, which may then be used for discounts on future mobile calls, additional FTTB internet services or purchase of mobile handsets.



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22. ProvisionsThe movement in provisions is as follows:

Decommis-sioning Legal cases Potential

penalties Total

At 1 January 2010 - 5,382 9,284 14,666

Arising during the year 52,727 6,708 - 59,435Utilised - - - -Unused amounts reversed - - (8,388) (8,388)

At 31 December 2010 52,727 12,090 896 65,713

Arising during the year 5,715 448 95 6,258Utilised (758) - - (758)Unused amounts reversed - (10,866) (896) (11,762)Change in estimates (31,471) - - (31,471)Discount rate adjustment 3,459 - - 3,459

At 31 December 2011 29,672 1,672 95 31,439

At 31 December 2010 52,727 12,090 896 65,713Current - 12,090 896 12,986Non-current 52,727 - - 52,727

At 31 December 2011 29,672 1,672 95 31,439Current - 1,672 95 1,767Non-current 29,672 - - 29,672

Provision for legal cases

As at 31 December 2011 the Company recognised UAH 1,672 thousand of provision regarding legal proceeding initiated by its counterparty in respect of services provided by the counterparty, but not ac-cepted by the Company. The management believes that the risk of losing this case is probable.

Provision for potential penalties

As at 31 December 2010 the Group recognised pro-vision in respect of potential penalties, which might have arisen on VAT paid to certain suppliers at 20% rate on purchase of assets and services in amount

of UAH 896 thousand. The Group has revised its assessment of risk exposure based on information available as at 31 December 2011 and reduced the provision to UAH 95 thousand.

Decommissioning liabilities

As at 31 December 2011 the Group recognised UAH 29,672 thousand (2010: UAH 52,727 thousand) of provision for asset retirement obligation in respect of future dismantling costs related to its network equipment installed on leased sites. Please refer to Note 6 for additional information in respect of changes in estimates made by the Group.



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23. Taxes payable, other than income taxTaxes payable, other than income tax consist of the following as at 31 December:

2011 2010

VAT payable 62,122 110,287Pension fund duty for mobile services 25,210 24,133Salary tax payable 8,255 -Frequency fee 31 11,878Miscellaneous other taxes 127 663

95,745 146,961

24. Trade and other payablesAs at 31 December trade and other payables consist of the following:

2011 2010

Equipment and construction works 337,641 53,413Roaming 238,844 206,053Technical support services 82,832 70,189Advertising and promotion 46,570 13,824Interconnection 35,803 29,336Software 27,603 3,043Content services 25,262 26,280Due to employees 21,510 -Inventory 17,969 21,490Dealers 16,089 22,700Professional fees 13,654 14,726Rent 12,047 7,518Other payables 28,185 11,716

904,009 480,288

As at 31 December trade and other payables are denominated in the following currencies:

2011 2010

UAH 631,779 230,236EUR 182,215 153,948USD 86,732 94,068RUR 3,283 2,036

904,009 480,288

As at 31 December 2010 and 2009 trade and other payables are non-interest bearing and settled in the normal course of business.



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25. Advances receivedAs at 31 December advances received consist of the following:

2011 2010

Advances received from subscribers 120,001 106,657Advances received from partners 26,940 23,407Advances received from dealers 1,852 5,650Other advances received 17 493

148,810 136,207

As at 31 December advances received are denominated in the following currencies:

2011 2010

UAH 148,554 135,729USD 256 478

148,810 136,207

26. Other current liabilitiesAs at 31 December other current liabilities consist of the following:

2011 2010

Bonuses accrued 132,500 123,219Accrual for unused vacations 44,468 37,879Accruals for future dealers' reimbursement 270 347Other 207 20

177,445 161,465

As at 31 December 2011 and 2010 other current liabilities are non-interest bearing and denominated in UAH.



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27. Related party disclosureThe Group’s transactions with its related parties for the years ended 31 December are as follows:

2011 Revenue Cost of mate-rials and traf-fic charges

Salaries and personnel costs

Other operat-ing expenses

Finance in-come

Purchase of property, plant and equipment and intangible assets

VimpelCom Ltd. - - - 22,439 - -Entities under common control 892,437 282,889 - 64,518 719,737 782,701

Other related parties 86,897 10,912 - 1,369 56,875 -Key management person-nel of the Group - - 67,503 - - -

979,334 293,801 67,503 88,326 776,612 782,701

2010 Revenue Cost of mate-rials and traf-fic charges

Salaries and personnel costs

Other operat-ing expenses

Finance in-come

Purchase of property, plant and equipment

Entities under common control 615,448 177,436 - 488 76,790 36,199

Other related parties 341,883 360,152 - 79,006 69,215 -Key management person-nel of the Group - - 75,712 - - -

957,331 537,588 75,712 79,494 146,005 36,199

The outstanding balances from related parties as at 31 December were as follows:

2011 Trade and other receivables

Cash and cash equivalents

Other current financial assets Total

Entities under common control 165,969 - 2,627,116 2,793,085

Other related parties 17,580 220,154 - 237,734

183,549 220,154 2,627,116 3,030,819

2010 Trade and other receivables Prepayments Cash and cash

equivalents Other current financial assets Total

Entities under common control 50,778 416 - 3,349,309 3,400,503

Other related parties 11,846 3,435 368,850 - 384,131

62,624 3,851 368,850 3,349,309 3,784,634



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The outstanding amounts due to related parties as at 31 December are as follows:

2011

VimpelCom Ltd. 6,965Entities under common control 98,192Other related parties 6,167

111,324

2010

Entities under common control 80,497Other related parties 24,960

105,457

Terms and conditions of transactions with related parties

Outstanding balances on settlements with related parties at the year-end are unsecured, interest free and settlement occurs in cash. There have been no financial guarantees received from any related party. For the years ended 31 December 2011 and 2010, the Group has not recorded any impairment of receivables as regards to the amounts owed by related parties.

Revenue and trade receivables

In 2011 the Group sold to domestic and overseas telecom operators, being the Group’s related par-ties, roaming services, access to network, inter-connection and rental services in total amount of UAH 979,334 thousand (2010: UAH 957,331 thou-sand).

Trade receivables as at 31 December 2011 and 2010 due from related parties are non-interest bearing, unsecured and are settled in the normal course of business.

Cost of materials and traffic charges and trade pay-ables

Cost of materials and traffic charges from related parties include roaming and interconnection ser-vices, provided by entities under common control and other related parties.

Trade payables to entities under common control and other related parties comprise amounts due for interconnection and roaming services. Trade payables to related parties are non-interest bear-ing and are settled in the normal course of busi-ness.

Other operating expenses

Other operating expenses include consulting ser-vices provided by entities under common control and other related parties.

Finance income

In 2011 finance income included UAH 56,875 thou-sand of interest on short-term deposits placed in Ukrainian bank, which is the Company’s other re-lated party (2010: UAH 69,215 thousand). In addi-tion, in 2011 finance income included UAH 719,737 thousand of unwinding of discount on interest-free financial aid provided to the entity under common control (2010: UAH 76,790 thousand).

Purchase of property, plant and equipment

In 2011 the Group acquired fiber-to–the-building (FTTB) equipment from entity under common control for cash consideration of UAH 336,259 thousand (2010: 36,199 thousand), other property, plant and equipment for cash consideration of UAH 443,992 thousand (2010: nil) and intangible assets in amount of UAH 2,450 thousand (2010: nil).

Commitments to purchases from related parties

As at 31 December 2011 the Group had outstand-ing commitments in respect of purchase of prop-erty, plant and equipment and construction servic-es from entities under common control in amount of UAH 8,032 thousand (2010: nil) and from other related parties in amount of UAH 2,404 thousand (2010: UAH 2,986 thousand).

Other current financial assets

On 23 November 2010 the Company provided short-term reimbursable interest-free financial aid (the loan) of UAH 4,000,000 thousand to the entity under common control. In 2011, the entity under common control repaid UAH 901,000 thousand of this interest-free financial aid according to the agreement terms. On 14 November 2011 the Com-pany signed an amendment to the loan agreement, whereby maturity of the loan was prolonged to 31 December 2012.Therewith, the difference between fair value and nominal amount of the abovemen-tioned interest-free financial aid, net of deferred tax effect, was charged directly to equity as distri-butions to shareholders.



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On 9 December 2011 the Company provided the abovementioned entity under common control with the new tranche of reimbursable interest-free financial aid of UAH 105,000 thousand. At initial recognition this facility was stated at fair value of UAH 86,494 thousand. Loss on initial rec-ognition at fair value, net of deferred tax effect,

was charged directly to equity as distributions to shareholders.

Cash and cash equivalents

As at 31 December 2011 and 2010 some of the short-term deposits and cash in bank were placed with Ukrai-nian bank, which is the Company’s other related party.

(i) Tax risks Ukrainian legislation and regulations regarding taxation and other operational matters, including currency exchange control and custom regulations, continue to evolve. Legislation and regulations are not always clearly written and are subject to varying interpretations by local, regional and na-tional authorities, and other governmental bodies. Instances of inconsistent interpretations are not unusual.

Management believes that the Group has complied with all regulations, and paid and accrued all taxes that are applicable. Where the risk of outflow of resources is probable, the Group has accrued pro-visions based on management’s best estimate. The Group identified certain possible tax contin-gencies, which are not required to be accrued in the financial statements. Such possible tax contin-gencies could materialise and require the Group to pay additional amounts of tax. As at 31 December 2011 the Group estimates such tax contingencies

to be equal UAH 145,471 thousand (2010: UAH 45,448 thousand).

(ii) Legal mattersIn the ordinary course of business, the Group is subject to legal actions and complaints. As at 31 December 2011 the Group’s exposure to presented third parties’ claims is UAH 2,808 thousand (2010: UAH 11,993 thousand).

Management believes that the ultimate liability, arising from unasserted claims and complaints, if any, will not have a material adverse effect on the Group’s financial position or the results of its future operations and is less than probable, ac-cordingly no corresponding accrual was provided in these consolidated financial statements.

(iii) Other capital commitmentsAs at 31 December 2011 the Group had outstand-ing commitments in respect of purchase and construction of property, plant and equipment in

As at 31 December the split of the short-term deposits placed with related party bank by contractual maturity and interest rate earned is as follows:

Currency Maturity date Interest rate 2011 2010

UAH 1-3 months 21-22% 50,000 365,000USD 1-3 months 7% 36,354 -EUR 1-3 months 4.00-6.75% 62,818 -

149,172 365,000

Compensation to management personnel

As at 31 December 2011 key management personnel consisted of 46 top executives of the Group (2010: 48).

For the years ended 31 December total compensation to key management personnel included in salaries and personnel costs comprises:

2011 2010

Short-term employee benefits 65,974 75,474Long-term employee benefits 362 238Share-based payment 1,167 -

Total compensation to key management personnel 67,503 75,712

28. Commitments and contingencies



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Future minimum rentals payable under non-cancellable operating lease agreements as at 31 December are as follows:

2011 2010

Within one year 214,346 165,414After one year but not more than five years 179,710 144,823More than five years 96,003 153,197

490,059 463,434

amount of UAH 406,600 thousand (2010: UAH 209,635 thousand).

As at 31 December 2011 the Group had outstand-ing commitments in respect of purchasing intan-gible assets in amount of UAH 69,183 thousand (2010: UAH 49,577 thousand).

(iv) Lease commitmentsOperating lease – the Group as a lessee

The Group has entered into certain leases of land and buildings. These leases have an average life from one to five years with a renewal option in-cluded in the contracts.

29. Fair value of financial instrumentsFair valuesAs at 31 December 2011 and 2010 the carrying value of the Group’s financial instruments ap-proximates their fair values.

The fair value of financial assets and liabilities with a maturity of less than one year, less any estimated credit adjustments, approximate their carrying amounts due to the short-term maturi-ties of these instruments. However, when the ef-fect of time value of money is material, the fair value of short-term financial instruments is es-timated by discounting of the future contractual cash flows related to those financial instruments at current market interest rates available to the Group for similar financial instruments.

30. Financial instruments and risk managementThe Group’s principal financial instruments com-prise interest-bearing loans and borrowings, cash and cash equivalents and other current financial assets. The Group has various other financial in-struments, such as trade payables and trade re-ceivables, which arise directly from its operations.

It is the Group’s policy not to trade with financial instruments. The Group is exposed to market risk, credit risk and liquidity risk.

The Group’s overall risk management program fo-cuses on the unpredictability and inefficiency of the Ukrainian financial markets and seeks to mini-mise potential adverse effects on the financial per-formance of the Group. The Group’s senior man-agement oversees the management of these risks and financial risk-taking activities are governed by appropriate policies and procedures so that finan-cial risks are identified, measured and managed in accordance with the Group policies.

The policies for managing each of these risks are summarised below.

(v) Commitment for additional issue of sharesIn 2011 the Company's shareholders approved the additional issue of 55,000 shares with a nominal value of UAH 50 (2010: 7,000,000 shares), which were not registered and paid by the reporting date.



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Market risk Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises three types of risk: interest rate risk, currency risk and other price risk. The Group does not have significant exposure to interest rate risk as it normally borrows at fixed rates. Neither it has exposure to other price risk.

Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Group’s exposure to the risk of changes in foreign exchange rates relates primarily to the Group’s operating activities (when the Group’s trade receivables and trade payables are denomi-nated in foreign currencies) and financing activi-ties (when interest-bearing borrowings are de-nominated in foreign currencies).

The exchange rates for foreign currencies, in which the Group’s financial assets and liabilities were de-nominated, against Ukrainian hryvnia, as declared by the National Bank of Ukraine as at the dates and periods stated, are as follows:

USD Euro (‘EUR’) Russian ruble (‘RUR’)1 January 2010 7.9850 11.4489 0.2640Average for 2010 7.9356 10.5329 0.261431 December 2010 7.9617 10.5731 0.2612Average for 2011 7.9676 11.0918 0.271731 December 2011 7.9898 10.2981 0.2495

The following tables demonstrate the sensitivity to a reasonably possible change in the corresponding exchange rates, with all other variables held constant, of the Group’s profit before tax (due to changes in the fair value of monetary assets and liabilities).

The sensitivity analyses have been prepared on the basis that the proportion of financial instruments in foreign currencies are all constant at 31 December 2011 and 2010.

2011 Increase/ (decrease) in basis points

Increase/ (decrease) of profit before tax

Change in USD exchange rate +23.25% 31,528Change in EUR exchange rate +27.20% 12,967Change in RUR exchange rate +26.95% (975)

Change in USD exchange rate -23.25% (31,528)Change in EUR exchange rate -27.20% (12,967)Change in RUR exchange rate -26.95% 975

2010 Increase/ (decrease) in basis points

Increase/ (decrease) of profit before tax

Change in USD exchange rate +29.50% 27,780Change in EUR exchange rate +27.90% 10,346Change in RUR exchange rate +29.70% (605)

Change in USD exchange rate -29.50% (27,780)Change in EUR exchange rate -27.90% (10,346)Change in RUR exchange rate -29.70% 605

Liquidity riskThe Group analyses the aging of its assets and the maturity of its liabilities and plans its liquidity depend-ing on the expected repayment of various instruments. The Group’s short-term and long-term liquidity needs are funded largely through cash flow from operating activities.



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

Financial instruments, which potentially expose the Group to significant concentrations of credit risk, consist principally of cash in bank, short-term deposits, other current financial assets and trade and other receivables.

The Group’s cash is primarily held with major repu-table banks located in Ukraine.

Accounts receivable are presented net of allow-ances. The Group does not require collateral in respect of trade receivables. Concentrations of credit risk with respect to trade receivables are limited by the fact that the Company’s customer base contains significant number of small custom-ers, which are considered unrelated.

Management has a credit policy in place and the ex-posure to credit risk is monitored on an ongoing ba-sis. Credit evaluations are performed for all custom-ers requiring credit over a certain amount. Credit risk arising from financial transactions is reduced through diversification, through accepting counter-parties with high credit ratings only and through de-fining limits on aggregated credit exposure towards each counterparty. The Group’s credit risk exposure is monitored and analysed on a case-by-case basis, and the Group’s management believes that credit risk is appropriately reflected in impairment allow-ances recognised against assets.

The tables below show the maturity profile of the Group’s financial liabilities as at 31 December based on contractual undis-counted payments.

2011 On demand Less than 3 months 3 to 6 months 6 to 12 months Total

Interest-bearing loans and borrowings 51,223 - - - 51,223

Interest accrued 694 - - - 694Trade and other payables - 855,693 20,424 6,382 882,499

51,917 855,693 20,424 6,382 934,416

2010 On demand Less than 3 months 3 to 6 months 6 to 12 months Total

Interest-bearing loans and borrowings 51,043 - - - 51,043

Interest accrued 692 - - - 692Trade and other payables - 462,271 15,694 2,323 480,288

51,735 462,271 15,694 2,323 532,023

The Group’s maximum credit risk exposure at 31 December comprises:

2011 2010

Cash and cash equivalents 892,806 1,595,056Trade and other receivables 510,387 320,553Other current financial assets 2,627,116 3,349,309

4,030,309 5,264,918



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As at 31 December 2011 and 2010, the ageing of the Group’s trade and other receivables and other current financial assets is as follows:

Past due, but not impaired

TotalNeither past due, nor impaired

Less than 30 days 30-60 days 60-90 days 90-120 days More than

120 days

2011 3,137,503 3,081,733 41,233 2,417 1,385 152 10,5832010 3,669,862 3,645,030 6,087 4,828 2,479 2,386 9,052

31. Earnings per shareBasic earnings per share amounts are calculated by dividing net profit for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year.

Basic earnings per share for the years ended 31 December is as follows:

2011 2010

Net profit attributable to ordinary equity holders of the parent for basic earn-ings 4,267,530 3,677,880

Weighted average number of ordinary shares for basic earnings per share 10,210,018 10,687,389

Basic earnings per share, UAH 417.97 344.13

As at 31 December 2011 and 2010 there are no potential ordinary shares. On 7 June 2011, the State Se-curities and Exchange Commission of Ukraine registered issue of 7,000,000 shares made by the Company pursuant to the resolutions of the Company’s shareholders. Please refer to Note 18 for details.

Capital managementThe Group considers shareholders’ equity as pri-mary capital source. Also the Group can incur debt either through shareholder loans or through exter-nal funding. The Group’s objectives when manag-ing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other

stakeholders as well as to provide financing of its operating requirements, capital expenditures and sustain the Group’s development strategy.

Management monitors on a regular basis the Group’s capital structure and may adjust its capi-tal management policies and targets following changes in its operating environment, market sen-timent or its development strategy.

32. Events after the reporting period(i) Additional share issueOn 22 November 2011, the Company’s General Meeting of Shareholders has approved additional issue of 55,000 shares with nominal value of UAH 50 each. In February 2012, these shares were placed with the existing shareholder - VimpelCom Holdings B. V. in accordance with para. 22 of Law of Ukraine ’On Joint Stock Companies’ at their market price of UAH 1,910.69 per share, determined by an independent appraiser appointed by the Compa-

ny’s Board. In return for these shares, VimpelCom Holdings B. V. has invested into the Company USD 13,152,928.35, of which USD 13,152,210.72 were received as payment for 54,997 ordinary shares, which comprised UAH 105,082,217.99, based on the NBU exchange rate at the date of payment (7 February 2012), and USD 717.63 were received as payment for 3 ordinary shares, which comprised UAH 5,732.07, based on the NBU exchange rate at the date of payment (17 February 2012).

As a result of the additional issue of shares, the Company’s share capital was increased by UAH 2,750 thousand, while share premium was in-creased by UAH 102,338 thousand.

For notes

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