KvK-nr 2-4 '\ \ 38 s- Datum vastst~ling : ·28 - 7__ \~ Reg1stratiedatum : 11 MRT 2014 Aantal pagma's: -:+ ~ -.. Boek1aar/Grootte: 2C>\ '2.. Kamer van Koophandel
FINTUR HOLDINGS B.V.
ANNUAL REPORT 2012
adopted by the general meeting of shareholders by resolution passed on 28 February 2014 vastgesteld door de algemene vergadering van aandeelhouders bij besluit op 28 februari 2014
PricewaterhouseCoopers Accountants N. V For Identification purposes only ,~ pwc CONTENTS PAGES
REPORT OF THE BOARD OF DIRECTORS...... 1-3
CONSOLIDATED BALANCE SHEETS...... 4-5
CONSOLIDATED STATEMENTS OF INCOME...... 6
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME...... 7
CONSOLIDATED STATEMENTS OF CHANGES JN EQUITY...... 8
CONSOLIDATED STATEMENTS OF CASH FLOWS...... 9
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ...... 10-60
NOTE I ORGANISATION AND NATURE OF OPERATIONS ...... 10-11 NOTE2 BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT RELEVANT ACCOUNTING POLICIES ...... :.. ,..... :c ...... 12-29 NOTE3 SEGMENT INFORMATION ...... c...... 30-34 NOTE4 CASH AND CASH EQUIVALENTS ...... :.: ...... 35 NOTE5 TRADE RECEIV ABLES ...... :.: ...... c...... 3j-37 NOTE6 TRANSACTIONS AND BALANCES WITH SllAREHOLDERS AND OTHER RELATED PARTIES ...... :.:.: ...... ;..... "··············································· 37-38 NOTE? INVENTORIES ...... :: ...... '.:~:.: ...... 39 NOTES OTHER CURRENT ASSETS ...... :.;.:·:., ...... 39 NOTE9 PROPERTY AND EQUIPMENT ...... '..::.: ...... 40-41 NOTEIO INTANGIBLE ASSETS ...... :: .. :...... '..!>., ...... 42-44 NOTE 11 BORROWINGS ...... :... '.:::.:.' .. :., ...... ':./ ...•.. ,.. :...... 45 NOTE 12 TRADE PAYABLES ...... ::.::.c .. :...... :.:,:.:.:: ...... 45 NOTE 13 TAXATION ON INCO.ME ...... :.c ...... / ...... 46-48 NOTE 14 OTHER CURRENT LIABILITIES ...... :.'...... :.. :...... :..... :..... ::.: ...... 49 NOTE 15 OTHER NON-CURRENT LIABILITIES ...... :...... c...... 49-50 NOTE 16 50 NOTE 17 ~~~~~~Iz~t:::::::::::::::::?::\;:::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::: 51 NOTE18 GENERAL AND ADMINISTRATIVE EXPENSES ...... 51 NOTE 19 52 NOTE20 ~~~~c~:~1~~0AJ:-~p~~f;l~~i~~.::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::: 52 NOTE21 COMMITMENTS AND CONTINGENCIES.; .. i... :.. :...... 52-59 NOTE 22 EMPLOYEE B~NEFIT EXPi:;N~ES ...... :.' ... ~:.: ...... 59 NOTE 23 DEPRECIATION J\'NP AMOR.TISA TION EXPENSES ...... 59 NOTE 24 EVENTS AFTER BALANCE SHEET DA TE ...... 60 .· . : - .-.... · :·.·: COMPANY'."ONLY FINANCIAL STATEMENTS...... 61-67
COMPANY-ONLY BALANCE SHEETS...... 62
COMPANY-ONLY STATEMENTS OF INCOME...... 63
NOTES TO THE COMPANY-ONLY FINANCIAL STATEMENTS ...... 64-67
NOTE 25 GENERAL...... 64 NOTE 26 INTANGIBLE ASSETS ...... 64 NOTE 27 FINANCIAL ASSETS ...... 65 NOTE 28 RECEIVABLES ...... 65 NOTE 29 SHAREHOLDERS' EQUITY ...... 66 NOTE 30 NON-CURRENT LIABILITIES ...... 66 NOTE 31 CURRENT LIABILITIES ...... 66 NOTE 32 EMPLOYEES ...... 66 NOTE 33 REMUNERATION OF THE BOARD ...... 67 NOTE 34 RELATED PARTIES ...... 67
OTHER INFORMATION...... 68 PricewaterhouseCoopers Accountants N.V. For Identification purposes only Jb ])MIC FINTUR HOLDINGS B.V.
REPORT OF THE BOARD OF DIRECTORS General In accordance with the Articles of Association of the Company, the Board of Directors of Fintur Holdings B.V. ("the Company"') hereby submits the Annual Accounts for the year ended 31 December 2012.
Activities The major activity of the Company during the financial year was running mobile telecom operations through participation and investment in various businesses in telecommunications (GSM) in several countries in the so-called "Eurasia region". As at year-end 20 I 2 management has no plans to change the activities of the Company and holds interests in the following GSM businesses: Kcell in Kazakhstan, Azercell (including internet service provider Azeronline) in Azerbaijan, Geocell in Georgia and Moldcell in Moldova.
Developments during the year
Results During the financial year 2012:
• Revenues increased by 3.5% to USO 2,027.3 million (2011: USO 1,957.9 million). The increase is mainly driven by Azercell in Azerbaijan.
• The Company made a (consolidated) profit to the amount of USO 224,522,000 (20 I 1: USD 369,615,000). This profit resulted mainly from the Company's participation in the GSM business in Kazakhstan and in Azerbaijan. During 2012 the Company's GSM activities in all countries realised a profit. The main reasons for decline on profit are FX Losses and increase in Interconnect Expenses in Kazakhstan.
• The amount of distributable reserves is USD 747 million as at 31 December 2012. As at 31 December 2012, Fintur has a sound financial position evidenced by the fact that shareholders' equity amounts to 47% of total assets, which is lower than as in the previous financial year (63%).
• In Georgia, despite continued regulatory pressure in 2012, Geocell recorded growth in revenue of5% (2011negative9%).
• In Kazakhstan, Kcell lPO was successful (USO 525 million raised for 25% of Kee II).
• In Azerbaijan, Azercell lost a court case against Bakcell on historical interconnect payments with a cost of 15.2 MAZN.
• In Moldova, Moldcell became the 1st operator 111 Moldova to acquire the 4G license m November 2012.
Cash flows During 2012 the GSM act1v1t1es of the Company rendered pos1t1ve cash flows. Cash and cash equivalents are lower than 2011 mainly due to higher dividend payments.
In the year 2012, the Company invested approximately USO 313 million in tangibles and USO 74 million in intangibles.
PricewaterhouseCoopers /.\ccountants N. \I. For Identification pumoses only Jn pwc FINTUR HOLDINGS B.V.
REPORT OF THE BOARD OF DIRECTORS Personnel As at the end of December 2012 the number of personnel of the Company (on a consolidated basis) was 3,220 which is an increase of 4% compared to 2011. The increase was primarily in Kcell and was necessary to support the growing business in this country.
Research and development The Company does not engage in any research and development activities.
Risk Management
Risk management is carried out by management under policies approved by the Board of Directors. The Board of Directors provides written principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk and investment of excess liquidity.
Foreign exchange risk The Group operates internationally and is exposed to foreign exchange risk ansmg from various currency exposures, primarily with respect to the USO. These risks are monitored and limited by the analysis of foreign currency position. Due to undeveloped market of financial instruments in countries where the subsidiaries operate, the management does not hedge the Company's foreign exchange risk.
Cash flow andfair value interest rate risk The Group is exposed to changes in market interest rates based on the existence of interest bearing assets. The Group has significant interest-yielding assets, therefore the Group's income and operating cash flows are dependent on changes in market interest rates.
Credit risk Credit risk arises from cash and cash equivalents and deposits with banks, as well as credit exposures to customers, represented by corporate clients. These risks are managed by limiting the aggregate risk from any individual counter party and obtaining sufficient collateral where necessary.
Liquidity risk Due to the dynamic nature of the underlying businesses, the Group maintains flexibility in funding by maintaining availability under committed credit lines, which optimises the liquidity risk.
Outlook 2013
For the near future, management of the Company expects:
• In 2013, in local currency, a revenue growth of 2% and a decrease of 3% in profitability is forecasted. Main reason for the decrease in profitability is increase in financing expenses in Kazakhstan.
• The Company will continue to invest in the further expansion of the network. The level of investments will be 14% lower than 2012. On the other hand, cost saving programs will continue to be maintained on OPEX level.
• In addition management believes that the number of personnel of the Company will be approximately 3,234 at the end of 2013 in order to support the expected growth of the business.
• In Kazakhstan, the regulator lowered the maximum tariffs for voice and data services. Impact on 20I3 revenue is estimated at around billion 4.8 KZT (30 MUSD). 2 Pricewat~~ho7seCoopers Accountants N \I For ldent1f1cat10n nurposes only · · Jib t~M!~ FINTUR HOLDINGS B.V.
REPORT OF THE BOARD OF DIRECTORS
• In Georgia, regulator pressure is expected to continue during 2013, with a possibility of fu1ther negative impact on the mobile communications market in the country.
• In Moldova, the government was dismissed and the political instability continues.
• In Azerbaijan, all mobile operators have signed a contract specifying main rules for Mobile Number Portability. The MNP implementation is expected to be valid starting Q4 2013.
Rotterdam, 26 November 2013
Board of Directors:
C. Luiga M.S.Ciliv
de handtekening is door de l(vl< onleesbaar gemaakt @hi matt) L. Develioglu
de handtekening is door de l PricewaterhouseCoopers l-lccountants N.V 3 For Identification pnrp0ses oniv ~ < ,,...... , LilM!C FINTUR HOLDINGS B.V. REPORT OF THE BOARD OF DllRECTORS 0 In Georgia, regulator pressure is expected to continue during 2013, with a possibility of further negative impact on the mobile communications market in the country. 0 In Moldova, the government was dismissed and the political instability continues. G In Azerbaijan, all mobile operators have signed a contract specifying main rules for Mobile Number Portability. The MNP implementation is expected to be valid starting Q4 2013. Rotterdam, 26 November 20 l 3 Board of Directors: de handtekening is door de Kvl< M.S.Ciliv onleesbaar gemaakt , de handtekening L. Develioglu is door de l V. Aral wtfl 1t11I Ji l"i ft "'- (.(.. I,_ e le) ')>. r q{. A j Jn.({.fi,1 Pricb!waterliouseCoopers /.\ccoimtants 1'1.V. 3 For Identification pwrms.98 only =~ JP'wi1t<1~ FINTUR HOLDINGS B.V. REPORT OF THE BOARD OF DIRECTORS " In Georgia, regulator pressure is expected to continue during 2013, with a possibility of further negative impact on the mobile communications market in the country. o In Moldova, the government \Vas dismissed and the political instability continues. o In Azerbaijan, all mobile operators have signed a contract specifying main rules for Mobile Number Portability. The MNP implementation is expected to be valid starting Q4 2013. Rotterdam, 26 November 2013 Board of Directors: de handtekening is door de KvK onleesbaar gemaakt I I C. Luiga --···"·--'' ___ _ de handtekening de handtekening is door de l V. Aral Wt.ff lr.Ctl l'J"i ft~a.. 1..e teJl;~,.q(_ > Prie8WaterhouseCoopern Accountants i'J.V. 3 For lcleniificstion ptmJDses only ~ 1lJ%~tC FINTUR HOLDINGS B.V. CONSOLIDATED BALANCE SHEETS AT 31DECEMBER2012 AND 2011 (Amounts expressed in thousands of USO unless otherwise indicated.) Note 2012 2011 ASSETS Current assets: Cash and cash equivalents 4 96,208 241,094 Trade receivables 5 127,667 137,935 Due from related parties 6 3,010 16,044 Inventories 7 11,429 19,437 Other current assets 8 61,226 76,682 Total current assets 299,540 491,192 Non-current assets: Property and equipment 9 1,442,069 1,379,737 Intangible assets 10 1,032,183 1,025,890 Deferred income tax assets 13 17,409 13,583 Other non-current assets 1,265 1,587 Total non-current assets 2,492,926 2,420,797 Total assets 2,792,466 2,911,989 These consolidated financial statements were authorised for issue by the board of directors on 25 November 2013 and were signed on its behalf by Mr. Veysel Aral ("Chief Executive Officer") and Mr. Tolga Koh.i:lirk ("Chief Financial Officer"). PricewaterhouseCr , . Fnr ldeniificati· . CJ~Pers /.\ccoun/ants N. V ~ on flu, noses only PM!~ The notes on pages 11 to 60 fonn an integral pai1 of these consolidated financial statements. 4 FINTUR HOLDINGS B.V. CONSOLIDATED BALANCE SHEETS AT 31DECEMBER2012AND 2011 (Amounts expressed in thousands of USO unless otherwise indicated.) Note 2012 2011 LIABILITIES AND EQUITY Current liabilities: Short-term debt I I 325,003 Trade payables 12 112,546 124,754 Due to related parties 6 54,359 1,513 Current income tax liabilities 16,532 6,378 Other current liabilities 14 125,325 100,320 Total current liabilities 633,765 232,965 Non-current liabilities: Deferred income tax liabilities 13 63,348 52,805 Other non-current liabilities 15 790,940 772,435 Total non-current liabilities 854,288 825,240 Total liabilities 1,488,053 1,058,205 . Equity: Share capital 16 189,059 189,059 Additional paid-in capital 16 349,059 349,059 Retained earnings 557,065 930,543 Currency translation differences (77,674) (87,626) Equity attributable to the shareholders of Fintur Holdings B.V. 1,017,509 1,381,035 Non-controlling interests 286,904 472,749 Total equity 1,304,413 1,853,784 Total equity and liabilities 2,792,466 2,911,989 ;Jric:ewaterhouseCoopers :\ccou;1ianis I\!. \I For Identification riurooses onlv ~ . pMt~ The notes on pages 11 to 60 form an integral part of these consolidated financial statements. 5 FINTUR HOLDINGS B.V. CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED 31DECEMBER2012 AND 2011 (Amounts expressed in thousands of USO unless otherwise indicated.) Note 2012 2011 Revenues, net 3 2,027,320 1,957,904 Cost of sales 17 (882,142) (802,953) Gross profit 1,145,178 1,154,951 Selling and marketing expenses 19 (276,862) (247,066) General and administrative expenses 18 (131,209) (146,923) Other operating expenses, net (114,665) ( 12,836) Operating profit 622,442 748,126 Interest income 20 4,630 9,280 Financial (expenses)/income, net 20 (18,394) 20,202 Profit before income tax 608,678 777,608 Income tax expense 13 (175,688) (174,421) Profit for the year 432,990 603,187 Attributable to: - equity holders of Fintur Holdings B.V. 224,522 369,615 - non-controlling interests 208,468 233,572 Total 432,990 603,187 :-'ric:ewmernouseCoopers ;1ccoun1anis 1'1. V For ldenliiication r.umosec Gnly ~ JP'"Fl!VC The notes on pages I I to 60 form an integral part of these consolidated financial statements. 6 FINTUR HOLDINGS B.V. CONSOLIDATED STA TEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED 31 DECEMBER 2012 AND 2011 (Amounts expressed in thousands of USO unless otherwise indicated.) 2012 2011 Profit for the year 432,990 603,187 Currency translation differences 8,056 (7,231) Total comprehensive income for the year 441,046 595,956 Attributable to: - equity holders of Fintur Holdings B.V. 234,474 365, 797 - non-controlling interest 206,572 230,159 Total 441,046 595,956 i-'ricewaterhouseCoopers Accouniants l\J.\i For ldentifiGation riurr10se~' only ~ . JPYM/(1;: The notes on pages 11 to 60 form an integral part of these consolidated financial statements. 7 FINTUR HOLDINGS B.V. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED 31DECEMBER2012 AND 2011 (Amounts expressed in thousands of USD unless otherwise indicated.) Equity attributable to shareholders of Fintur Holdin2s B.V. Additional Cun-ency Share paid-in Retained translation Non-controlling Total ca pit&_ capital earnings differences Total interests equity Balances at I .January 2011 189,059 349,059 719,928 (83,808) 1,174,238 439,495 1,613,733 Total comprehensive income for the year 369,615 (3,818) 365,797 230, 159 595,956 Dividend declared (159,000) (159,000) ( 198,592) (357,592) Transactions with non-controlling shareholders 1,687 1,687 Balances at 31December2011 189,059 349,059 930,543 (87,626) 1,381,035 472,749 1,853,784 Balances at I January 2012 189,059 349,059 930,543 (87,~26) 1,381,035 472,749 1,853,784 Total comprehensive income for the year 224,522 9,952 234,474 206,572 441,046 Dividend declared (598,000) (598,000) (388, 749) (986,749) Transactions with non-controlling shareholders (3,668) (3,668) Balances at 31 December 2012 189,059 349,059 557,065 (77,674) 1;017,509 286,904 1,304,413 PricewaterhouseCoopers Accountants N.V. For ldentiHcation purposes only The notes on pages 11 to 60 form an integral part of these consolidated financial statements. 8 Jn pwc FINTUR HOLDINGS B.V. ·~·ricew2terhouseCoopers Accountants NV !-nr Identification ourposes only • · CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED 31DECEMBER2012 AND 2011 ~ (Amounts expressed in thousands ofUSD unless otherwise indicated.) tl=~illVC Note 2012 2011 Profit before income tax 608.678 777,608 Adjustments to reconcile profit before income tax to net cash provided by operating activities: Depreciation and amo1tisation 9, 10, 23 301,620 288,351 Change in the fair value of put option liability 15 75,190 29,073 Provision for impairment of receivables 5 34,354 2,949 Interconnect reassessment for Bakcell Lid. 14 20,077 Unrealized foreign exchange losses 3,944 Interest expense 20 3,690 325 Interest income 20 (4,630) (9,280) Change in deferred revenue 14 (10,004) (33,257) Changes in operating assets and liabilities: Dccreasc/(incrcase) in inventories 8,008 (6,229) Increase in trade receivables and due from related parties (11,006) (29,606) Decrease/( increase) in other assets 16,799 (3,805) (Increase )/decrease in restricted cash 4 (529) 28 (Decrease)/increase in trade payables and due to related parties {3,785) 10,961 Increase/(decrease) in other liabilities 23,555 (7,809) Interest paid (3,690) (325) Income taxes paid ( 157.964) ( 186,776) Net cash provided by operating activities 904,307 832,208 Investing activities: Proceeds from sale of property and equipment 9 1,172 5,650 Proceeds from sale of intangible assets 10 125 2,080 Purchase of property and equipment 9 (321,818) (340,649) Purchase of intangible assets 10 (74,216) (96,771) Interest received 4,630 9,280 Net cash used in investing activities (390,107) (420,410) Financing activities: Dividend paid to group companies (598,000) (159,000) Dividend paid to non-controlling interest (335,482) (217,806) Repayment of put option liability 15 (41,500) (30,887) Repayment of share capital to the non-controlling sharehold~r holding the put option 15 (23,808) Contribution of share capital by the non-controlling shareholder holding the put option 15 10,950 Transactions with non-controlling shareholders (3,668) 1,687 Proceeds from borrowings ~ 354,222 Repayment of borrowing (33, 163) Net cash used in financing activities (681,399) (395,056) Net (dccrcase)/increase in cash and cash equivalents (167, I 99) 16,742 Cash and cash equivalents at beginning of year 4 240.964 251.836 Effect of exchange rate changes on cash and cash equivalents 21,784 (27,614) Cash and cash equivalents at end of year 4 95,549 240,964 The notes on pages 11 to 60 fonn an integral part of these consolidated financial statements. 9 PricewaterhouseCoopers Accountants N V For Jc!entificalion pumoses only · · FINTUR HOLDINGS B.V. ~ NOTES TO THE CONSOLIDATED FINANCIAL STATEMJNif~ AT 31DECEMBER2012 AND 2011 (Amounts expressed in thousands of USO unless otherwise indicated.) NOTE 1- ORGANISATION AND NATURE OF OPERATIONS Fintur Holdings B.V. ("Fintur" or the "Company"), is a limited liability company incorporated and domiciled in the Netherlands. The address of its registered office is Rodezand 34k in Rotterdam, the Netherlands. Fintur's primary activity is the participation and investment in various businesses in the telecommunications and high technology sectors. Fintur has two primary shareholders, Turkcell ileti~im Hizmetleri A ..$. ("Turkcell") and Sonera Holding B.V. ("Sonera"). The holdings of Sonera and Turkcell in Fintur are 58.55% and 41.45%, respectively. On 3 December 2002, Sonera and the Swedish telecommunication operator Telia AB finalised a merger and a new company was organized under the name TeliaSonera AB ("TeliaSonera"). TeliaSonera owns I 00% of Sonera. The number of employees in 2012 is 3,250 (2011: 3,070). At 31 December 2012, subsidiaries of Fintur (the "Subsidiaries") and their locations are as follows: Location Azercell Telecom LLC ("Azercell") Azerbaijan Azeronline Ltd. ("Azeronline") Azerbaijan Azertel Telekomiinikasyon Yatmm ve D1~ Ticaret A ..$. ("Azertel") Turkey Geocell LLC ("Geocell") Georgia Gi.irtel Telekomiinikasyon Yatmm ve D1~ Ticaret A ..$. ("Giirtel") Turkey Kcell JSC ("Kcell") Kazakhstan AR-Telecom LLP ("AR-Telecom") Kazakhstan KT-Telecom LLP ("KT-Telecom") Kazakhstan 1.M.Moldcell S.A. ("Moldcell") Moldova Molfintur S.R.L. ("Molfintur") Moldova Azerbnijn11 operntio11s Azertel has a IOO% share in Azercell. Azercell is a cellular phone carrier and operates in accordance with a non-exclusive Global System for Mobile Communications ("GSM") licence agreement signed with the Ministry of Communication of the Azerbaijan Republic on 12 December 1996, which allows for operation throughout Azerbaijan for a twenty-year period. In 2006, Azercell obtained the right to use new 1800 GSM frequency licence for a twenty-year period. On 11 April 2012, Azercell purchased the right to use the frequency ranges that are required to render 4G services in Azerbaijan. Azercell has a 51 % share in Azeronline, an internet service provider. Georgia operations Giirtel has a l 00 % share in Geocell. Geocell is a cellular phone carrier, which operates in accordance with a non-exclusive GSM I icence. Geocell operates in accordance with the following non-exclusive licences issued by Georgian National Communications Commission: GSM 1800 I icence - issued on 2 June 2006 and expires on 13 August 2013; WCFMA/UMTS licence - issued on I 4 June 2006 and expires on 9 June 2016; GSM 900 licence - issued on 2 April 2007 and expires on 2 April 2017; GSM 900/l 800 Iicence - issued on 3 August 2009 and expires on 3 August 2019. The licences allow for operation throughout Georgia and management expects to renew the licences upon their expiration. 10 FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STA TEMENTS AT 31 DECEMBER 2012 AND 2011 (Amounts expressed in thousands of USO unless otherwise indicated.) NOTE 1- ORGANISATION AND NATURE OF OPERATIONS (Continued) Kazakhsta11 operations Keel! \Vas established as a limited liability partnership on I June 1998 with the short name, GSM Kazakhstan LLP. Kcell was formed to design, construct and operate a cellular telecommunications network in Kazakhstan. Kcell obtained a non-exclusive general licence in June 1998 for 15 years to provide mobile telephone services in accordance with GSM standard 900. Keel! acquired AR-Telecom in 2007 and KT-Telecom in 2008 for the WiMAX licences held by these companies. In 2011, KT Telecom and AR-Telecom commenced their operating activities. On l December 20 l 0, Kee II launched JG services in Astana and Almaty based on the temporary pen11ission. On 25 December 20 I 0, the competent authority signed an addendum to the existing GSM licence, which provides Keel! with a right to operate 3G network. The addendum requires Keel! to provide all locations with population over 10,000 people with mobile services using UMTS/WCDMA standards until 1January2015. On I July 2011, the Ministry of Communication and Information of Kazakhstan extended the Kcell's general licence from initial 15 years to unlimited period of time. Prior to 2 February 2012, Keel! was owned 51 % by Fintur and 49% by Kazakhtelecom JSC ("Kazakhtelecom"). On 2 February 2012, the 49% stake in Keel! owned by Kazakhtelecom was sold directly to Sonera Holding B.V. ("Sonera"), which is an entity under common control of TeliaSonera. On I July 2012, the General Meeting of Participants of Kcell approved a conversion from limited liability partnership to joint stock company with 200,000,000 common shares to be transferred to Fintur and Sonera proportionally to their ownership percentage. The meeting also approved changing Kcell's name to Keel! JSC. Pursuant to Kazakh law, upon conversion, total equity as of the date of conversion became share capital of Keel! and ceases to be available for distribution to shareholders. On 27 August 2012, the Ministry of Justice registered Kcell as a joint stock company. Keel! has successfully completed its offering of Global Depositary Receipts on the London Stock Exchange and common shares on Kazakhstan Stock Exchange on 13 December 2012. The offering consisted of a sale by TeliaSonera of 50 million shares, which represents 25 % ofKcell's share capital. Moldova operatious Moldcell was established to operate as one of the three GSM operators in the Republic of Moldova. Moldcell is licenced by the Ministry of Transport and Communications in November 1999 to provide both voice and data services over its mobile network in the 900 MHz frequency range for a period of 15 years. Moldcell obtained 3G and 4G licences in 2009 and 2012, respectively. PricewaterhouseCoo . , For ldeniification ' . ~iers ,~ccountants N. V p,1,y,cises onlJt ~ l 1 J..~ilt~J~ PricewaterhouseCoo FINTUR HOLDINGS B. V. For ldentificaiion our~e~s Accountants N. v. Sl ,JO<.es only NOTES TO THE CONSOLIDATED FINANCIAL STATEf}'liEN1'r1' AT 31DECEMBER2012 AND 2011 .f~ ~!~ (Amounts expressed in thousands of USO unless otherwise indicated.) NOTE 2 - BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT RELEVANT ACCOUNTING POLICIES 2.1 Basis of preparation The consolidated financial statements of Fintur and its subsidiaries (the "Group") at 31 December 2012 have been prepared in accordance with International Financial Reporting Standards (IFRSs). The policies set out below have been consistently applied to all periods presented, unless otherwise stated. The Group maintains their accounting records in accordance with the laws and regulations in force in the countries where they are registered. These consolidated financial statements are prepared under the historical cost convention, adjusted, where required by IFRS, to measure certain items at fair value. The preparation of financial statements in accordance with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise judgement in the process of applying the Group's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 2.6. These consolidated financial statements are prepared on a going concern basis. 2.2 Foreign currency translation (a) F1111ctio11al mu/ prese11tatio11 currency Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (the "functional currency"). The consolidated financial statements are presented in US dollars ("USO"), which is the Group's presentation currency. (b) Trm1sactions mu/ balances Foreign currency transactions are translated into the functional cu1Tency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. (c) Group companies The results and financial position of all Group entities (none of which has the currency of a hyper inflational)' economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; • income and expenses for each statement of income are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and • all resulting exchange differences are recognised in other comprehensive income. 12 FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31 DECEMBER 2012 AND 2011 (Amounts expressed in thousands of USD unless otherwise indicated.) NOTE 2- BASIS OF PREPARATION AND SVMlHARY OF SIGNIFICANT RELEVANT ACCOUNTING POLICIES (Continued) Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. Exchange differences arising are recognised in other comprehensive income. The following tables summarizes the year-end and average exchange rates of local currencies for Fintur and its subsidiaries for 1.00 US dollar at 31 December 2012 and 201 1 and for the years then ended: 2012 2011 31 December 31 December 31 December 31 December year-end average year-end average KazakJ1stan Tenge 150.7 149.l 148.4 146.6 Azeri Manat 0.79 0.79 0.79 0.79 Georgian Lari 1.66 1.65 1.67 1.69 Turkish Lira 1.78 1.79 1.89 1.67 Moldovan Lei 12.1 12.l I 1.7 11.7 Euro ("EUR") 0.76 0.78 0.78 0.72 At present, significant exchange restrictions and state controls exist in most jurisdictions in which the Group operates. The local currencies of Fintur subsidiaries in Kazakhstan, Azerbaijan, Georgia and Moldova are not convertible outside of respective countries. Future movements of exchange rates will affect the carrying values of the Group's assets and liabilities. The translation of underlying local currency amounts into USO in these consolidated financial statements should not be construed as a representation that such local currency amounts have been, could be or wiH in the future be converted into USO at the exchange rates shown or at any other exchange rate. 2.3 Principles of consolidation (a) Subsidiaries Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset and liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at the fair values at the acquisition date. The Group recognises any non-controlling interest in the acquiree on an acquisition-by- acquisition basis, either at fair value or at the non-controlling interest's proportionate share of the recognised amounts of acquiree's identifiable net assets. PricewaterhouseCoo For !dentification "', pers .i\ccountants N. \I. A ~ .. rposes onli1 13 pwr; FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2012 AND 2011 (Amounts expressed in thousands ofUSD unless otherwise indicated.) NOTE2- BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT RELEVANT ACCOUNTING POLICIES (Continued) Acquisition-related costs are expensed as incurred. Goodwill is initially measured as the excess of the aggregate of the consideration transferred and the fair value of non-controlling interest over the net identifiable assets acquired and liabilities assumed. If the consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognised in profit or loss. Intercompany transactions, balances, income and expenses on transactions between Group companies are eliminated. Profits and losses resulting from intercompany transactions that are recognised in assets are also eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. The table below sets forth Fintur's ownership percentage in subsidiaries and their business segments at 31 December2012 and 2011: 2012 2011 Name Business segment % % Azercell GSM 51 51 Azeronline Other 26 26 Azerte\ Other SI 51 Geo cell GSM 100 100 GU rte I Other 100 JOO Kcell GSM 5J 51 AR-Telecom Other SJ 5 J KT-Telecom Other 51 5J Moldcell GSM 100 JOO Molfintur Other 100 JOO Giirtel has a 100% (20Jl: 100%) interest in Geocell, Aze11el has a 100% (2011: 100%) interest in Azercell and Kcell has 100% (201 J: JOO%) interest in AR-Telecom and KT-Telecom. Azercell has a 51 % share in Azeronline. (b) No11-co11trolli11g interests The Group treats transactions with non-controlling interests as transactions with equity owners of the Group. For purchases from non-controlling interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity. Prior to the amendments to IAS 27, 'Consolidated and Separate Financial Statements', which is effective for annual periods beginning on or after I July 2009, the Group had the following accounting policy regarding transactions with non-controlling interests: !"ricewaterhouseCoopars liccountanis N. V. For Identification purposes onlv ~ - 14 Prlcew·t F a erhouseco or Identification Pu ope_rs Accountants N V FINTUR HOLDINGS B.V. ~ 100ses only · · NOTES TO THE CONSOLIDATED FINANCIAL ST ATEEf.~f1tS AT 31 DECEMBER 2012 AND 2011 (Amounts expressed in thousands of USO unless otherwise indicated.) NOTE2- BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT RELEVANT ACCOUNTING POLICIES (Continued) The Group applies a policy of treating transactions with non-controlling interests as transactions with parties external to the Group. Disposals to non-controlling interests result in gains and losses for the Group that are recorded in the statement of income. Purchases from non-controlling interests result in goodwill, being the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary. Commitments to purchase non-controlling interests and put options granted to non-controlling shareholders (including any subsequent capital contributions from non-controlling shareholders) are recognised as contingent consideration. Where the amount of the commitment exceeds the amount of the non-controlling interest, the difference is recorded as goodwill. Any changes in fair value of put options granted to non-controlling shareholders in extstmg subsidiaries are recognised in the statement of income under other operating expenses, unless the changes are derived from dividend payments to other shareholders. Dividends paid to the non controlling shareholders are treated as repayment of the put option liability (Note 15). The fair value increase in excess of the allocated dividends has been included in the consolidated statement of income under other operating expense. 2.4 Summary of significant relevant accounting policies Cash and cash equivalents Cash and cash equivalents consist of investments readily convertible into cash and have original maturities of three months or less. Trade receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. The Group periodically assesses the adequacy of valuation allowances for uncollectible accounts trade receivables by evaluating the collectability of outstanding receivables and general factors such as length of time individual receivables are past due, historical collection experience, and the economic environment. The amount of the provision is the difference between the asset's carrying amount and the present value of estimated future cash discounted at the original effective interest 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 the consolidated statement of income within cost of sales. When a trade receivable is deemed as uncollectible, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited against cost of sales in the consolidated statement of income. Related parties For the purpose of these consolidated financial statements; shareholders, key management personnel, Board members and their close family members, in each case together with, companies controlled by or affiliated with them and investments are considered and referred to as related parties. 15 PricewaterhouseCoopers Accountants For Identification purposes only N. V. FINTUR HOLDINGS B.V. .Jb · NOTES TO THE CONSOLIDATED FINANCIAL STATEM~WC AT 31 DECEMBER 2012 AND 2011 . (Amounts expressed in thousands ofUSD unless otherwise indicated.) NOTE 2 - BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT RELEVANT ACCOUNTING POLICIES (Continued) Inventories Inventories are stated at the lower of cost and net realisable value. Cost is determined using the weighted-average method. The cost of inventories comprises all costs of purchase and other costs incurred in bringing the inventories to their present location and condition. It excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. Property and equipment and related depreciation Property and equipment are recorded in the balance sheet at cost less accumulated depreciation, and impairment losses. The cost of property and equipment includes its purchase price, non-refundable taxes, and any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Borrowing costs that are directly attributable to the acquisition, construction or production of property and equipment are capitalised as part of the cost of that asset. To the extent a legal or constructive obligation to a third party exists, the acquisition cost includes estimated costs of dismantling and removing the asset and restoring the site. A change in estimated expenditures for dismantling, removal and restoration is added to and/or deducted from the carrying value of the related asset. Property and equipment consist of the following assets which are depreciated primarily on a straight line basis over the estimated useful lives shown below: Buildings 10-25 Switches and transmission devices 4-8 Network equipment 8 Furniture and fixtures 4 Motor vehicles 4 Leasehold improvements 5 Computer equipment 4 Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the statement of income during the financial period in which they are incurred. The changes in telecommunications technology may have a significant impact on the activities of the Group. These changes may lead to the replacement of major items of equipment by new technology, which provide the same or superior service capacity at substantially lower costs. In reviewing the remaining useful lives, for the purposes of these consolidated financial statements, management took into account these circumstances and the environment in which the Group operates. An asset's carrying amount is written down immediately to its recoverable amount ifthe asset's carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are detennined by comparing proceeds with the carrying amount. These are included in the statement of income. 16 FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31 DECEMBER 2012 AND 2011 (Amounts expressed in thousands ofUSD unless otherwise indicated.) NOTE 2 - BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT RELEV ANT ACCOUNTING POLICIES (Continued) Intangible assets (a) Goodwill Goodwill represents the excess of the cost of the consideration transferred over the Group's interest in net fair value of the net identifiable assets, liabilities and contingent liabilities of the acquiree and the fair value of the non-controlling interest in the acquiree. Prior to the amendments to IAS 27, which is effective for annual periods beginning on or after I July 2009, goodwill originating from purchases from non-controlling interest was calculated being the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary. The difference between the fair value of the put option granted to non-controlling shareholders and derecognised non controlling interest due to these put options was also accounted as goodwill (Note 10). Any changes in fair value of put options granted to non-controlling shareholders in existing subsidiaries are recognised in the statement of income, unless the changes are derived from dividend payments to other shareholders. Separately recognised goodwill is tested annually for impairment and whenever events or changes in circumstances indicate that the canying amount may not be recoverable and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. For the purpose of impainnent testing, goodwill acquired in a business combination is allocated to each of the cash-generating units, or groups of cash-generating units, that is expected to benefit from the synergies of the combination. Each unit or group of units to which the goodwill is allocated represents the lowest level within the entity at which the goodwill is monitored for internal management purposes. Goodwill is monitored at the operating segment level. Goodwill impairment reviews are undertaken annually or more frequently if events of changes in circumstances indicate a potential impairment. The canying value of goodwill is compared to the recoverable amount, which is the higher of value in use and the fair value less costs to sell. Any impairment is recognised immediately as an expense and is not subsequently reversed. (b) Licences and rights to use frequency spectrums Acquired licences and rights to use frequency spectrums are shown at historical cost. licences and rights to use frequency spectrums have a finite useful life and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method to allocate the cost of licences and rights to use frequency spectrums over their useful lives of9 to 25 years. (c) Computer software Acquired computer software licences are capitalised on the basis of costs incurred to acquire and bring to use the specific software. These costs are amortised over their estimated useful lives of 4 to 8 years. Pricewat~~houseCoopers /.\ccountants N \i For ldentrfrcatron pumoses only · 17 ~ pu.tc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31 DECEMBER2012 AND 2011 (Amounts expressed in thousands of USO unless otherwise indicated.) NOTE 2 - BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT RELEV ANT ACCOUNTING POLICIES (Continued) Impairment of non-financial assets Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date. Borrowings Borrowings are recognised initially at fair value, net of transaction costs incun-ed. Borrowings are subsequently carried at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method. Trade payables Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. Dividend distribution Dividend distribution to the Company's shareholders is recognised as a liability in the Group's financial statements in the period in which the dividends are approved by the Company's shareholders. Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are not recognised for future operating losses. Provisions are measured at the present value of management's best estimate of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage ohime is recognised as interest expense. Leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the statement of income, on a straight-line basis over the period of the lease. 18 FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2012 AND 2011 (Amounts expressed in thousands of USO unless otherwise indicated.) NOTE2- BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT RELEVANT ACCOUNTING POLICIES (Continued) Current and deferred income taxes The tax expense for the year comprises current and deferred taxes. Tax is recognised in the consolidated statement of income statement, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In these circumstances, the tax is also recognised in other comprehensive income or directly in equity, respectively. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the Company's subsidiaries and associates operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is recognised, using the liability method, on temporary differences ans111g between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income ta.x is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income ta.x is determined using tax rates (and Jaws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred income tax is provided on temporary differences arising on investments in subsidiaries, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. Revenue recognition Revenues are recorded on an accrual basis at the sales value, adjusted for discounts granted and sales related taxes. Revenues are measured at the fair value of the consideration received or receivable. Revenues are shown net of Value Added Taxes ("VAT") and discounts and after eliminating sales within the Group. Revenues are categorised as follows: • Voice services; • Data services; • Value added services; and • Other revenues. PricewaterhouseCoopers Accountants l\J.V. For Identification purpo.:;e:; oniy 19 J&1 1ft1Ul~~ ~#t'llV'r,~ FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STA TEMENTS AT 31 DECEMBER 2012 AND 2011 (Amounts expressed in thousands ofUSD unless otherwise indicated.) NOTE 2- BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT RELEVANT ACCOUNTING POLICIES (Continued) Voice services include call out revenue, interconnect fees, roaming revenue charged to the Group's subscribers for roaming in other wireless operators' network, and revenue charged to other wireless operators for non-Group subscribers using the Group's network. Data services include revenues from GRPS, WAP services and other data services. Value added services consist of SMS, MMS, infonnation services and providing content of third parties, fax and voice mail services. Other revenues include sales of handsets to distributors and subscribers, rental of transmission lines to other operators. Call out revenue Call out revenue is recognised based on the actual a11i1me used by the subscribers. Prepayments received for call out revenue are not recognised as revenue until the related service has been provided to the subscriber. Revenue is recognised based on the actual traffic time elapsed, at the customer selected calling plan rates. Interconnect revenues and costs The Group charges interconnect per minute fees and fixed monthly payments to other local wireless and fixed line operators for calls originated outside and terminated within the Group's network. The Group recognises such revenues when the services are provided. The Group is charged interconnect fees per minute and fixed monthly payments by other local wireless and fixed line operators for calls originated within the Group's network and terminated outside of the network. The Group recognises such costs when the services are provided. Data revenue The data service is recognised when a service is used by a subscriber based on actual data volume traffic. Roaming revenues charged to the Group's subscribers Roaming revenue from the Group's subscribers for roaming in other operators' network is charged based on information provided by other operators to the Group. Roa111ingfees charged to other wireless operators The Group charges roaming per minute fees to other wireless operators for non-Group subscribers utilising the Group's network. The Group recognises such revenues when the services are provided. Value added services Value added services mainly consist of content provided by third parties, different information services, fax and voice mail. When invoicing the end-customer for third party content service, amounts collected on behalf of the principal are excluded from revenue. ~ricewate'.houseCoopers Accorm!ants l\I. V. !-er ldentrfrcation DUiTmses only 20 Jb, FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2012 AND 2011 (Amounts expressed in thousands of USO unless otherwise indicated.) NOTE2- BASIS OF PREPARATION AND SUMMARY OF SIGNJFICANT RELEVANT ACCOUNTING POLICIES (Continued) lvlultiple deliverables The Group rriay bundle services and products into one customer offering. Offerings may involve the delivery or performance of multiple products, services, or rights to use assets (multiple deliverables). In some cases, the arrangements include initial installation, initiation, or activation services and involve consideration in the form of a fixed fee or a fixed fee coupled with a continuing payment stream. Telecom equipment is accounted for separately from service where a market for each deliverable exist and if title to the equipment passes to the end-customer. Costs associated with the equipment are recognised at the time of revenue recognised. The revenue is allocated to equipment and services in proportion to the fair value of the individual items. Services invoiced based on usage are not included in the allocation. Customised equipment that can be used only in connection with services or products provided by the Group is not accounted for separately and revenue is deferred over the total service arrangement period. Deferred revenue Prepayments received for communication services are recorded as deferred revenue. The Group recognises revenue when the related service has been provided to the subscriber. Interest income is recognised on a time-proportion basis using the effective interest method. Sales commission to dealers and distributors The Group sells part of payment scratch cards, sim cards, and handsets using various distributors and dealers. The Group pays a certain commission to distributors and dealers depending on the number of payment scratch cards, sim cards or handset sold. The commission is recognised when the item is sold to the subscriber. Customer acquisition costs The Group does not capitalise the costs of acquiring contracts as intangible assets. These costs represent commissions, bonuses and other rewards paid to distributors or dealers for connecting subscribers for service to the network. In accordance with !AS 38 "Intangible Assets", an intangible asset should be recognised if it meets the criteria of being measurable, identifiable and controlled. Management believes that while these costs are mensurable and identifiable, they are not controlled by the Group. Therefore, the Group expenses customer acquisition costs as incurred. Payroll expenses and related contributions Wages, salaries, contributions to pension funds, paid annual leave and sick leave, bonuses, and other benefits are accrued in the period in which the associated services are rendered by the employees of the Group. The Group does not incur any expenses in relation to provision of pensions or other post-employment benefits to its employees. In accordance with the legal requirements of the countries where Fintur subsidiaries operate, the Group withholds pension contributions from employee salaries nnd transfers them into state or private pension funds. Once the contributions have been paid, the Group has no further pension obligations. Upon retirement of employees, al 1 pens~on payments are administered by the pension funds directlv. F ricewaterhouseCoopers "ccow . . . • -or Identification r·r ·ro . ' i.a•it.<;1 1\1. \.'. 21 ,A '-• 1 oses uni\· f.trPtV~ FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STA TEMENTS AT 31DECEMBER2012 AND 2011 (Amounts expressed in thousands ofUSD unless otherwise indicated.) NOTE 2- BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT RELEVANT ACCOUNTING POLICIES (Continued) Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Board of Directors that makes strategic decisions. The operating segments of the Group are composed of the Group's operations of its subsidiaries Kcell, Azercell, Geocell and Moldcell, which are domiciled in these respective countries. Other operating segment is composed of Azertel, Gi.irtel and Fintur (Note 3). 2.5 Financial risk management The Group's activities expose it to a variety of financial risks: market risk (including foreign exchange risk and fair value interest rate risk), credit risk and liquidity risk. The Group's overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group's financial perfommnce. The Group does not use derivative financial instruments to hedge certain risk exposures. Risk management is carried out by management under policies approved by the Board of Directors. The Board of Directors provides written principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk and investment of excess liquidity. (i) Foreign exclumge risk The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the USO. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities. These risks are monitored and limited by the analysis of foreign currency position. Due to undeveloped market of financial instruments in countries where the subsidiaries operate, the management does not hedge the Group's foreign exchange risk. At 31 December 2012, if the USO had weakened/strengthened by I 0 percent against Kazakhstan Tenge with all other variables held constant, post-tax profit for the year ended 31 December 2012 would have been USO 282 (2011: USO 551) lower/higher, mainly as a result of foreign exchange gains/losses on translation of USO denominated bank balances, trade receivables and trade payables. At 31 December 2012, if the USO had weakened/strengthened by I 0 percent against the Azeri Manat with all other variables held constant, post-tax profit for the year ended 31 December 2012 would have been USO 281 (2011: USO 592) higher/lower, mainly as a result of foreign exchange gains/losses on translation of USO denominated bank balances, trade receivables and trade payables. At 31 December 2012, if the USO had weakened/strengthened by 10 percent against the Georgian Lari with all other variables held constant, post-tax profit for the year ended 31 December 2012 would have been USO 148 (20 l l: USD 254) higher/lower, mainly as a result of foreign exchange gains/losses on translation of USO denominated bank balances, trade receivables and trade payables. PricewaterhouseCoo er·, ~- . Fer ldeniific~tio "' p s Ac.,uunrants N. V 0 n 1AJrnoses cnll· 22 ~ f_~"if,VC Pri<;ewat~~ho~seCoopers Accountants N. V For ldenfl:rcat1on ournoses only · FINTUR HOLDINGS B.V. ~ PM!~ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2012 AND 2011 (Amounts expressed in thousands ofUSD unless otherwise indicated.) NOTE 2 - BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT RELEVANT ACCOUNTING POLICIES (Continued) (ii) Fair value illferest rate risk Borrowings issued at fixed rates expose the Group to fair value interest rate risk. As disclosed in Note 11, borrowings issued at fixed rates amounted to USO 325,003 at 31 December 2012. (iii) Credit risk Ownership of financial assets involves the risk that counterparties may be unable to meet the terms of their agreements. Credit risk arises from cash and cash equivalents and deposits with banks, as well as credit exposures to customers, represented by corporate clients. These risks are managed by limiting the aggregate risk from any individual counter party and obtaining sufficient collateral where necessary. The Group's investments in cash equivalents are limited to high-credit quality financial institutions. There are no policies that limit the amount of credit exposure to any financial institution. The Group has policies in place to ensure that sales of products and services are made to customers and distributors with an appropriate credit history. Customers that fail to settle their liabilities for mobile services provided are disconnected until the debt is paid. The carrying amount of accounts receivable, net of provision for impairment of receivables, represents the maximum amount exposed to credit risk. The Group has no significant concentrations of credit risk since the customers portfolio is diversified among a large number of customers, both private individuals and companies. Although collection of receivables could be influenced by economic factors, management believes that there is no significant risk of loss to the Group beyond the provisions already recorded. The table below shows the balances with the major banks at 31 December 2012 and 2011: 2012 2011 T. Garanti Bankasi A.$. 24,459 62,759 Bank Standard 21,908 22,292 Kazkommertsbank 15,846 4,193 ING Bank 5,995 118,969 Amrahbank 3,822 VTB Bank 3,410 3,361 Citibank 3,317 6,014 International Bank of Azerbaijan 2,276 4,407 RBS Kazakhstan 1,662 JSCB MoldovaAgroindbank 1,626 RabitaBank 1,401 446 Bank of Georgia 1,244 3, 155 Uni Bank 871 55 Kapitalbank 839 2,055 TBC Bank 633 Texnikabank 5,423 JSCB Victoriabank 673 Rabi ta Bank 446 Respublika Bank 100 A vrasiya Bank 69 Other 6,023 6,087 Total 95,332 240,504 23 FINTUR HOLDINGS B. V. NOTES TO THE CONSOLIDATED FINANCIAL ST A TEMENTS AT 31DECEMBER2012 AND 2011 (Amounts expressed in thousands of USO unless otherwise indicated.) NOTE 2 - BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT RELEVANT ACCOUNTING POLICIES (Continued) (M Liquidity risk Prudent liquidity risk management includes maintaining sufficient cash and marketable securities, the availability of funding from an adequate amount of committed credit facilities and the ability to close out market positions. Due to the dynamic nature of the underlying businesses, the Group maintains flexibility in funding by maintaining availability under committed credit lines. (v) Capital risk 111a11age111e11t The Group's objectives when managing 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 and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. (i•i) Fair value estimations Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by an active quoted market price. The estimated fair values of financial instruments have been determined by the Group using available market information, where it exists, and appropriate valuation methodologies. However, judgement is necessarily required to interpret market data to determine the estimated fair value. The countries where the Group's significant subsidiaries operate continue to display some characteristics of an emerging market and economic conditions continue to limit the volume of activity in the financial markets. Market quotations may be outdated or reflect distress sale transactions and therefore not represent fair values of financial instruments. Management has used all available market information in estimating the fair value of financial instruments. Fillancial assets carried at amortised cost The estimated fair value of fixed interest rate instruments is based on estimated future cash flows expected to be received discounted at current interest rates for new instruments with similar credit risk and remaining maturity. Discount rates used depend on credit risk of the counterparty. Carrying amounts of trade receivables and due from related parties approximate their fair values due to their short-term maturities. Fiwmcial i11str11111e11ts carried at fair value Available-for-sale investments are carried on the balance sheet at their fair values. Fair values are determined based on quoted market prices. Financial liability related to the put option granted to non controlling shareholders are carried on the balance sheet at the present value of the estimated option redemption amount, which is estimated to approximate the fair value of the entity, \Vhose shares are subject to the put option (Note 15). Pricewatemousec For ldentificat;on P~~?ers Accountants N \I ~ i-'OSe;; Only .. 24 JP Ml~ FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL ST A TEMENTS AT 31 DECEMBER 2012 AND 2011 (Amounts expressed in thousands of USO unless otherwise indicated.) NOTE 2- BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT RELEVANT ACCOUNTING POLICIES (Continued) Fiua11cial /iabilities carried at amortised cost The estimated fair value of fixed interest rate instruments with stated maturity, for which a quoted market price is not available, was estimated based on expected cash flows discounted at current interest rates for new instruments with similar credit risk and remaining maturity. Carrying amounts of trade payables and due to related parties approximate fair values due to their short-term maturities. 2.6 Critical accounting estimates and judgments Estimates and judgments are continually evaluated and are based ot1 historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, rarely equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next twelve months are outlined below. (a) Income taxes The tax legislation and practices in Kazakhstan, Azerbaijan, Georgia and Moldova are in a state of continuous development and therefore are subject to varying interpretations and frequent changes, which may be retroactive. Further, the interpretation of tax legislation by tax authorities as applied to the transactions and activities of the Group may not coincide with that of management. As a result, tax authorities may challenge transactions and the Group may be assessed additional taxes, penalties and fines. Tax periods remain open to review by the tax authorities for 3 to 5 years. Whereas the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such detennination is made. The Group management performs dividend distribution projections over unremitted earnings of subsidiaries .Were the actual final outcomes to differ by 10% from management's estimates, the Group would need to: increase the deferred income tax liability by USO 1,550, ifunfavourable; or decrease deferred income tax liability by USO 1,550, if favourable. (b) Put options The Group recognises a financial liability ongmating from put options granted to non-controlling shareholders as the present value of the estimated option redemption amount. Present value of the estimated option redemption amount is estimated to approximate the fair value of the entity, whose shares are subject to the put option. The Group management determines such fair value of the entity by using discounted cash flow techniques based on estimated future cash flow projections of the entity. PricewaterhouseCoo For Identification P""oµ_:rs Accountants N. V ~ -·• ... ,sesonly 25 J1'1YJ!~ FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2012 AND 2011 (Amounts expressed in thousands of USO unless otherwise indicated.) NOTE 2- BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT RELEVANT ACCOUNTING POLICIES (Continued) ( c) Al/0111a11ce for doubtful accounts The Group's allowance for doubtful receivables reflects estimated losses that result from the inability of customers to make required payments (Note 2.5). Management determines the size of the allowance based on the likelihood of recoverability of accounts receivable taking into account actual losses in prior years and current collection trends. Should economic or specific industry trends worsen compared to management estimates, the allowance may have to be increased, negatively impacting earnings. (d) Useful lives ofproperty mu/ equipmellt anti iuta11gible assets The estimation of the useful lives of items of property and equipment and intangible assets is a matter of judgment based on the experience with similar assets. The future economic benefits embodied in the assets are consumed principally through use. However, other factors, such as technical or commercial obsolescence and wear and tear, often result in the diminution of the economic benefits embodied in the assets. Management assesses the remaining useful lives in accordance with the current technical conditions of the assets and estimated period during which the assets are expected to earn benefits for the Group. The following primary factors are considered: (a) expected usage of the assets; (b) expected physical wear and tear, which depends on operational factors and maintenance programme; and (c) technical or commercial obsolescence arising from changes in market conditions. If management's useful life estimates for property and equipment differed I 0% from the actual trend of economic benefits inflow to the Group generated by related assets, the depreciation charge for the next twelve months would: increase by USO 22,289 if unfavourable; or decrease by USO 27,242 if favourable. If the management's useful life estimates for computer software and other intangible assets differed I 0% from the acnial trend of economic benefits inflow to the Group generated by related assets, the amortization charge for the next twelve months would: increase by USO 4,394 if unfavourable; or decrease by USO 5,690 if favourable. (e) Customer acq11isitio11 costs The Group does not capitalise the costs of acquiring contracts as intangible assets. These costs represent commissions, bonuses and other rewards paid to distributors or dealers for connecting subscribers for service to the network. In accordance with IAS 38, Intangible Assets, an intangible asset should be recognised if it meets the criteria of being measurable, identifiable and controlled. Management believes that while these costs are measurable and identifiable, they are not controlled by the Group. Therefore, the Group recognises the customer acquisition costs as expense when incurred. PricewaterhouseCoopers !\ For ld:iition o•.1rp~~e; i~~untants N.V. 26 [1J"Erl!C FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STA TEMENTS AT 31DECEMBER2012 AND 2011 (Amounts expressed in thousands of USD unless otherwise indical~d.) NOTE 2- BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT RELEVANT ACCOUNTING POLICIES (Continued) (j) Legal proceedings and claims The Group is subject to various legal proceedings and claims, the outcomes of which are subject to significant unce11ainty. The Group 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 the Group to increase or decrease the amount the Group has accrued for any matter or accrue for a matter that has not been previously accrued because it was not considered probable (Note 21 ). (g) A111111a/ impair111e11t rel'iew The Group tests annually whether goodwill has suffered any impairment, in accordance with the accounting policy stated in Note 2.4. The recoverable amounts of cash-generating units have been detem1ined based on value-in-use calculations. These calculations require the use of estimates (Note 10). If the budgeted gross margin, the estimated cost of capital and the growth rate used in the value-in-use calculation for the Azerbaijan CGU had been 1% lower (49.1% instead of 50.1%), 1% higher (14.9% instead of 13.9%) and 1% lower (2.0% instead of 3.0%), respectively than management's estimates at 31 December 2012, the Group would have not recognised any impain11ent against goodwill. If the budgeted gross margin, the estimated cost of capital and the grmvth rate used in the value-in-use calculation for the Georgia CGU had been 1% lower (39.3% instead of 40.3%), 1% higher (16.1% instead of 15.1%) and 1% lower (5.1% instead of 6.1%), respectively than management's estimates at 31 December 20 I 2, the Group would have not recognised any impaim1ent against goodwill. If the budgeted gross margin, the estimated cost of capital and the growth rate used in the value-in-use calculation for the Moldova CGU had been 1% lower (38.6% instead of 39.6%), 1% higher (17.1% instead of 16.1%) and 1% lower (3.4% instead of 4.4%), respectively than management's estimates at 31 December 2012, the Group would have not recognised any impain11ent against goodwill. (It) Jlfemormu/11111of1111dersta11dillg witlt Sonera As further discussed in Note 21, on 26 August 20 I 2, Sonera and Kcell entered into a memorandum of understanding (the Buy and Sell MoU), under which Keel! has the right to require Sonera to sell to it, and Sonera has the right to require Kcell to acquire from it, all participatory interests owned by Sonera in KazNet Media LLP ("KazNet") and in Rodnik Inc LLP ("Rodnik"). Subject to satisfaction of the applicable conditions, each of Sonera and Keel! is entitled to exercise its option at any time starting from nine months after the date of the planned offering of global depository receipts and listing on local stock exchange. The contractual right of Sonera to sell the underlying assets (debt and equity interests and related rights and obligations) to Kcell is a financial instrument (derivative) within the scope of IAS 39. The derivative instrument should be measured at fair value, with the changes in fair value recognised in income statement. Kcell does not have an unconditional right to avoid the settlement. Therefore, Kcell should recognise a liability for the written (contingent) put options and measure it at their fair value (i.e. at the future acquisition cost). As of 31 December 2012, the value of the options was assessed as nil by management. ;:.> • . ncewat~~ho_t~seCoopers Accountants 1\1. V For ldentrfrcanon purposes only · 27 co~ • ]J>MJC FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2012 AND 2011 (Amounts expressed in thousands of USO unless otherwise indicated.) NOTE 2- BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT RELEVANT ACCOUNTING POLICIES (Continued) 2.7 Recent accounting pronouncements (i) New and amended standards adopted by the Group There are no IFRSs or IFRJC interpretations that are effective for the first time for the financial year beginning on or after I January 2012 that would be expected to have a material impact on the Group. (ii) New amendments effective for annual periods beginning on or after 1 Jamt01y 2012 that are not relevant for the Group's operations !FRS 7 (amendment), "Financial instruments: Disclosures on transfers of assets", is effective for annual periods beginning on or after I July 2011. This amendment will promote transparency in the reporting of transfer transactions and improve users' understanding of the risk exposures relating to transfers of financial assets and the effect of those risks on an entity's financial position, particularly those involving securitisation of financial assets. Comparative information is not needed in the first year of adoption. Earlier adoption is pem1itted. IFRS I (amendment), "First-time adoption of lFRS", is effective for annual periods beginning on or after I July 2011. These amendments include two changes to IFRS I. The first replaces references to a fixed date of I January 2004 with 'the date of transition to IFRSs', thus eliminating the need for entities adopting IFRSs for the first time to restate derecognition transactions that occurred before the date of transition to IFRSs. The second amendment provides guidance on how an entity should resume presenting financial statements in accordance with IFRSs after a period when the entity was unable to comply with IFRSs because its functional currency was subject to severe hyperinflation. Earlier adoption is permitted. IAS 12 (amendment), "Income taxes" on deferred tax, is effective for annual periods beginning on or after I January 2012. This amendment introduces an exception to the existing principle for the measurement of deferred tax assets or liabilities arising on investment property measured at fair value. As a result of the amendments, SIC 21, "Income taxes - recovery of revalued non depreciable assets", will no longer apply to investment properties carried at fair value. The amendments also incorporate into IAS 12 the remaining guidance previously contained in SIC 21, which is withdrawn. Early adoption is pennitted. (iii) New standards and amendments that are not yet effective but relevant for the Group's operations !AS 1 (amendment), "Presentation of financial statements", is effective for annual periods beginning on or after I July 2012. The main change resulting from these amendments is a requirement for entities to group items presented in 'other comprehensive income' (OCI) on the basis of whether they are potentially reclassifiable to profit or loss subsequently (reclassification adjustments). The amendments do not address which items are presented in OCI. Early adoption is permitted. IFRS 9, "Financial instruments: Classification and Measmement", is effective for annual periods beginning on or after I January 2015. The standard addresses the classification, measurement and recognition of financial assets and financial liabilities. It replaces the parts of IAS 39 that relate to the classification and measurement of financial instruments. 28 FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31 DECEMBER 2012 AND 2011 (Amounts e;.;pressed in thousands or USO unless otherwise indicated.) NOTE 2- BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT RELEVANT ACCOUNTING POLICIES (Continued) IFRS I 0, "Consolidated financial statements", is effective for annual periods beginning on or after 1January2013. The standard builds on existing principles by identifying the concept of control as the detem1ining factor in whether an entity should be included within the consolidated financial statements of the parent company. The standard provides additional guidance to assist in !he determination of control where this is difficult to assess. IFRS 13, "Fair value measurement", is effective for annual periods beginning on or after I January 2013. The standard aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRSs. The requirements, which are largely aligned between IFRSs and US GAAP, do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within IFRSs or US GAAP. !AS 32 (amendment), "'Financial instruments: Presentation', on offsetting financial assets and financial liabilities", is effective for annual periods beginning on or after I January 2014. The amendment updates the application guidance in IAS 32, 'Financial instruments: Presentation', to clarify some of the requirements for offsetting financial assets and financial liabilities on the balance sheet. Annual Improvements to IFRSs 2011 is effective for annual periods beginning on or after I January 2013. Amendments affect five standards: IFRS I, lAS I, JAS 16, !AS 32 and JAS 34. The Group is considering the implications of the standards, the impacts on the Group and the timing of their adoption by the Group. (iv) New standards, amendments and inte1pretatio11s that are not yet effective and not relevant for the Group 's operations IFRS 7 (amendment), "Financial instnunents: Disclosures" IFRS I (amendment), "First-time adoption of IFRS" IAS 19 (amendment), "Employee benefits" IFRS 11, "Joint arrangements" IFRS 12, "Disclosures of interests in other entities" !AS 27 (revised), "Separate financial statements" IAS 28 (revised), "Associates and joint ventures" IFRS 10 (amendment), "Consolidated financial statements" IFRJC 20, "Stripping costs in the production phase of a surface mine" lFRS 10, I 1 and 12 on transition guidance (amendment) ~ricewaterhouseCoopers /-\ccountant" I-or ld:.ition purposes oni)' v N. V 29 ]Ji"Fli!l{{:' FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2012 AND 2011 (Amounts expressed in thousands of USO unless otherwise indicated.) NOTE 3 - SEGMENT INFORMATION The Group has identified four operating segments based on geographical areas, all of which operate under the GSM business. Accordingly, the geographical segmentation has been selected as the reportable segments. A geographical segment is a distinguishable component of an enterprise that is engaged in providing products or services within a particular economic environment and that is subject to risks and returns that are different from those of components operating in other economic environments. The operating segments of the Group are composed of the Group's operations of its subsidiaries Kcell, Azercell, Geocell and Moldcell which are domiciled in these respective countries. "Other" operating segment is composed of Azertel, Gi.irtel and Fintur. (a) Segment assets Segment assets consist of primarily property and equipment, intangible assets including goodwill, inventories, trade and other receivables and are allocated based on where the assets are located. Unallocated assets comprise cash and cash equivalents and deferred income tax assets. The segment assets at 31 December 2012 and 20 I I are as fol lows: 2012 2011 Kazakhstan 971,809 967,729 Azerbaijan 665,706 654,921 Georgia 212,109 221,493 Moldova 132,716 116,223 Other(*) 969,248 837,105 Segment assets 2,951,588 2,797,471 Unallocated assets 113,617 254,677 Less: inter-segment eliminations (272,739) (140,159) Total assets 2,792,466 2,911,989 (*) Segment assets of Other segment include goodwill related to Azercell among other relatively smaller items. Capital expenditure comprises additions to property and equipment and intangible assets and is allocated based on where the assets are located. The capital expenditures for the years ended 31 December 2012 and 2011 are as follows: 2012 2011 Kazakhstan 178,916 188,773 Azerbaijan 131,093 179,438 Moldova 40,772 27,265 Georgia 36,013 38,867 Other 397 513 Total 387,191 434,856 ~ricewat?'.houseCoopers Accountants f\l.V. For ldentrf1cat1on nurnosei; only 30 =En J]MJC FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31 DECEMBER 2012 AND 2011 (Amounts expressed in thousands of USO unless olhern·ise indicated.) NOTE 3 - SEGMENT INFORMATION (Continued) (b) Segment liabilities Segment liabilities comprise operating liabilities and are allocated based on where the assets are located. Unallocated liabilities comprise current and deferred income tax liabilities. The segment liabilities at 31 December 2012 and 2011 are as follows: 2012 2011 Kazakhstan 514,562 133,377 Azerbaijan 206,814 74,651 Moldova 81,963 65,631 Georgia 12,390 10,948 Other(*) 801,260 792,399 Segment liabilities 1,616,989 1,077,006 Unallocated liabilities 79,880 59,183 Less: inter-segment eliminations (208,816) (77,984) Total liabilities 1,488,053 1,058,205 (*) Segment liabilities of Other segment include put option liability among other relatively smaller items (Note 15). (c) Depreciation am/ amortisation expenses Depreciation and amortisation expenses for the years ended 31 December 2012 and 20 I 1 are as follows: I January - 31December2012 Kazakhstan Azerbaijan Georgia Moldova Other Total Depreciation 126,163 76,036 30,708 14,112 247,019 Amortisation 26,616 10,605 14,173 3,207 54,601 Total 152,779 86,641 44,881 17,319 301,620 1 January - 31 December 2011 Kazakhstan Aze1·baijan Georgia Moldova Other Total Depreciation 135,781 71,036 28,085 11,670 228 246,800 Amortisation 21,468 5,576 10,346 4,150 11 41,551 Total 157,249 76,612 38,431 15,820 239 288,351 Pricew2terhous "C F , ... . •- oopers t.\ccountants N \J 31 er ldent111cat1on n11r[Joses onlv . . ~ . 'P.1'nJ{l~ FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2012 AND 2011 (Amounts expressed in thousands ofUSD unless otherwise indicated.) NOTE 3 - SEGMENT INFORMATlON (Continued) (d) Provision for i111pair111e11t of receivables Impairment charge on receivables for the years ended 31 December 2012 and 2011 are as follows: 2012 2011 Kazakhstan 2,924 1,811 Georgia 2,280 101 Azerbaijan 28,786 800 Moldova 364 237 Total 34,354 2,949 32 FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2012 AND 2011 (Amounts expressed in thousands ofUSD unless otherwise indicated.) NOTE 3 - SEGMENT INFORMATION (Continued) (e) Segment results The segment results for the years ended 31 December 2012 and 2011 are as follows: Inter-segment 1 January - 31December2012 Kazakhstan Azerbaijan Georgia Moldova Other eliminations Total External revenue 1,220,599 578,514 149,121 79,009 77 - 2,027,320 Inter-segment revenue - 116 302 9 - (427) Total segment revenue 1,220,599 578,630 149,423 79,018 77 (427) 2,027,320 Operating expenses (700, 765) (375,377) (135,929) (69,043) (9,614) 1,193 ( 1,289,535) Other operating income/( expenses), net 2,612 ( 4 7,384) 66 1,780 (71,739) - ( 114,665) Segment result 522,446 155,869 13,560 11,755 (81,276) 766 623,120 Una Ilocated expenses (678) Operating profit 622,442 ''fj \J ~ 0 ::!. Inter-segment ' -. c:: ~ a: ct 1 January - 31 December 2011 Kazakhstan Azerbaijan Georgia Moldova Other eliminations Total """" 'J NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2012 AND 2011 (Amounts expressed in thousands of USO unless otherwise indicated.) NOTE 3 - SEGMENT INFORMATION (Continued) (/) J11jim11atio11 about products anti services at 31 December 2012 mu/ 2011 I .January- 31 December 2012 Kazakhstan Azerbaijan Georgia Moldova Other Total Voice service 983,629 536,230 116,584 63,781 1,700,224 .Value added services 101,907 30,238 16,350 l,765 150,260 Data service 125,777 4,972 8,043 9,289 148,081 Other revenues 9,286 7,074 8,144 4,174 77 28,755 External revenues 1,220,599 578,514 149,121 79,009 77 2,027,320 1 January - 31 December 2011 Kazakhstan Azerbaijan Georgia Moldova Other Total Voice service 996,294 490,406 113,164 66,908 1,666,772 Value added services 99,112 28,998 17,487 1,495 147,092 Data service 95,920 4,469 5,211 7,532 113,132 Other revenues 19,281 2,301 5,784 3,305 237 30,908 External revenues 1,210,607 526,174 141,646 79,240 237 1,957,904 0 . ricewaterhousecoopers Accountants iii. V. i=cr !deniii'icai°ion .n11rn0ses onJy e,.CJR 34 _f1.YYr"/;~1.14!:' t. .be-• FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2012 AND 2011 (Amounts expressed in thousands of USO unless otherwise indicated.) NOTE 4 - CASH AND CASH EQUIVALENTS The analysis of cash, cash equivalents and restricted cash at 31 December 2012 and 2011 is as follows: 2012 2011 Cash on hand 217 460 Banks - demand deposits 64,792 177,981 - time deposits 30,540 62,523 Restricted cash 659 130 Total 96,208 241,094 Time deposits are all sho11-term with original maturities of less than three months. The interest rate of USO denominated time deposits of USO 30,540 (2011: USO 62,523) is 3.5% per annum at 31 December 2012 (2011: 4.3% p.a.). Restricted cash of USO 659 (2011: USO 130) represents the amount deposited in a special bank account in order to receive permission for expatriate personnel to work for Kcell in Kazakhstan. Cash and cash equivalents included in the consolidated statements of cash flows are as follows: 2012 2011 2010 Cash and cash equivalents 96,208 241,094 251,994 Less: restricted cash (659) (130) (158) Total 95,549 240,964 251,836 NOTE 5 - TRADE RECEIVABLES The analysis of trade receivables at 31 December 2012 and 2011 is as follows: 2012 2011 Receivable from retailers 75,830 71,443 Interconnect receivable from local wireless and fixed line operators 54,766 41,812 Receivable from subscribers 37,611 30,996 Receivable from roaming operators 9,432 9,670 Other 601 1,341 Total 178,240 155,262 Less: provision for impairment of trade receivables (50,573) ( 17,327) Trade receivables, net 127,667 137,935 Pric;ewaterhouseCoopers /.\ccountants N.V. For ldeniification 1wr!l0ses only 35 Jib l.['j)"il/,lf~';· r L ,., "'1.1 FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31 DECEMBER 2012 AND 2011 (Amounts expressed in thousands ofUSD unless otherwise indicated.) NOTE 5 - TRADE RECEIVABLES (Continued) Provision for impainnent of trade receivables as of 31 December 2012 also includes provision for impainnent of receivables from Azerfon LLC amounting to USO 27,307 (Note 21 ). Movements on the provision for impairment of trade receivables for the years ended 31 December 2012 and 2011 are as follows: 2012 2011 At 1 January 17,327 17,318 Provision for impaim1ent of trade receivables 34,354 2,949 Collections during the year (81) Receivables written-off during the year as uncollectible (1,062) (3,214) Exchange differences, net (46) 355 At 31 December The creation and release of provisions have been included in other operating expenses in the income statement. There is no concentration of credit risk with respect to trade receivables. Additionally, carrying amounts of trade receivables approximate their fair values. The other classes within trade receivables do not contain impaired assets. As of 31 December 2012, trade receivables amounting to USO 16,558 (2011: USO 29,329) were past due but not impaired. Majority of these receivables relate to corporate subscribers where the inherent risk of default is considered low. The Group does not have any collateral over trade receivables. The ageing analysis of these trade receivables is as follows: 2012 2011 Bet\veen 30 and 60 days 4,546 2,614 Between 60 and 90 days 1,903 1,799 Bet\veen 90 and 180 days 981 4,262 More than 180 days 9,128 20,654 Total 16,558 29,329 PricewaterhouseCoopers /\ccountants N.V. For Identification r.iurpcses only 36 =~ J!::ill!!ilf~ ~ricewaterhouseco •or Identification /J11~~e;!;4ccountants N. \I. FINTUR HOLDINGS B.V. A, .,., only f(J l"-.P;tt NOTES TO THE CONSOLIDATED FINANCIAL STATEN1ENTS AT 31 DECEMBER 2012 AND 2011 (Amounts expressed in thousands ofUSD unless other\\"ise indicated.) NOTE 5-TRADE RECEIVABLES (Continued) As of 31 December 2012, trade receivables of USO 52, 128 (2011: USO 20,641) were impaired. The amount of the provision was USO 50,573 as of 31 December 2012 (2011: USO 17,327). The provision provided is mainly in respect of individual subscribers with overdue balances for a long period of time and interconnect receivables from local wireless and fixed line operators. It was assessed that a portion of the receivables is expected to be recovered. The ageing of these receivables is as follows: 2012 2011 Less than 30 days 820 959 Between 30 and 60 days:...,,, 392 587 Between 60 and 90 days 1,547 997 Between 90 and 180 days 11,631 5,563 More than 180 days 37,738 12,535 Total 52,128 20,641 NOTE 6 - TRANSACTIONS AND BALANCES WITH SHAREHOLDERS AND OTHER RELATED PARTIES Amounts due from and due to related parties at 31 December 2012 and 2011 are as follows: 2011 515 485 14,531 513 2011 Sales and purchases made by the Group to and from related parties during the years ended 31 December 2012 and 2011 are as follows: Revenues from related parties: 2012 2011 TeliaSonera International Carrier AB 5,723 15 TeliaSonera UTA Holding B.V. 3,109 3,058 Kazakhtelecom 1,558 30,342 Turkcell 2,040 2,356 Megafon 58 848 Other 2,178 685 Total 14,666 37,304 37 FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2012 AND 2011 (Amounts expressed in thousands of USO unless otherwise indicated.) NOTE 6 - TRANSACTIONS AND BALANCES WITH SHAREHOLDERS AND OTHER RELATED P ARTlES (Continued) Cost and expenses incurred with related parties: 2012 2011 TeliaSonera International Carrier AB 4,402 184 TeliaSonera 776 267 Turkcell 4,221 4,450 Kazakhtelecom 3,608 42,659 Other 3,630 2,443 Total 16,637 50,003 The carrying amount and fair value of amounts due from and due to related parties approximate each other. At 31 December 20 I I, due from Kazakhtelecom amounting to USO 14,531 represents charges of Kcell to Kazakhtelecom for all incoming calls to GSM networks from PSTN and international and local transit traffic through the equipment of Kazakhtelecom. Kazakhtelecom was not a related party at 31 December 2012. At 31 December 2012, due to Sonera amounting to USO 53,072 represents dividend payable. Costs and expenses incurred with Kazakhtelecom resulted from changes of Kazakhtelekom to Kcell for outgoing local and international PSTN calls and transit traffic from Kcell's network. Short-term employee benefits paid to key management personnel, defined as directors, for their services in full time executive management positions is made up of a contractual salary, performance bonus depending on financial performance of the Group and other compensation in fonn of reimbursement of apartment rent expenses. Short-term employee benefits paid to key management personnel included in general and administrative expenses for the year ended 31 December 2012 amounted to USO 5,899 (201 I: USO 5,622). Me111ora11d11111of111ulerstmuli11g with So11era As further discussed in Note 2 I, on 26 August 20 I 2, Son era and Kcell entered into a memorandum of understanding (the Buy and Sell MoU), under which Kcell has the right to require Sonera to sell to it, and Sonera has the right to require Keel! to acquire from it, all participato1y interests owned by Sonera in KazNet Media LLP ("KazNet") and in Rodnik Inc LLP ("Rodnik"). Subject to satisfaction of the applicable conditions, each of Sonera and Kcell is entitled to exercise its option at any time sta1ting from nine months after the date of the planned offering of global depository receipts and listing on local stock exchange. The contractual right of Sonera to sell the underlying assets (debt and equity interests and related rights and obligations) to Kcell is a financial instrument (derivative) within the scope of !AS 39. The derivative instrument should be measured at fair value, with the changes in fair value recognised in income statement. Kcell does not have an unconditional right to avoid the settlement. Therefore, Kcell should recognise a liability for the written (contingent) put options and measure it at their fair value (i.e. at the future acquisition cost). As of3 l December 2012, the value of the options was assessed as nil by management. PricewaterhouseCoopers Accouniants N.V 38 For Identification 1.Jt1mnses only ~ 11ri1~ J'(t'. FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STA TEMENTS AT 31 DECEMBER 2012 AND 2011 (Amounts expressed in thousands of USO unless otherwise indicated.) NOTE 7 - INVENTORIES The analysis of inventories at 31 December 2012 and 2011 are as follows: 2012 2011 Start packages 3,288 4,204 SIM cards and packages 1,960 1,691 Scratch cards 1,714 3,611 Edge cards 824 3,370 Spare pa11s 329 444 Handsets 2,630 Other 3,314 3,487 Total 11,429 19,437 There is no inventory carried at fair value less cost to sell at 31 December 2012 and 2011. NOTE 8 - OTHER CURRENT ASSETS The analysis of other current assets at 31 December 2012 and 2011 are as follows: 2012 2011 Value added tax ("VAT") receivable, and other prepaid taxes and funds 22,337 22,924 Prepaid income taxes 11,072 10,051 Prepaid expenses I 0,451 9,307 Advances given to suppliers 10,345 27,621 Prepayment for customs duties 482 1,840 Other 6,539 4,939 ~~~~~~~~~~~~~~~~~~~~~~~~~~~--'-~~~~~~~- _T_o~ta_1______6~1~,2~2~6 ______7_;..6,682 :•icewat~.~houseCoopers /-iccountanis N.V. ;-c,; :rJen~_caiion •.11:rnoses only 39 ~ f.N,.~!'if'.: FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2012 AND 2011 (Amounts expressed in thousands of USO unless otherwise indicated.) NOTE 9 - PROPERTY AND EQUIPMENT The movements in property and equipment and related accumulated depreciation for the year ended 31 December 2012 are as follows: Construction Land and Machinery and Furniture Motor Leasehold in progress and At I .January 2012 huihJings equipment(*) and fixtures vehicles improvements advances given Total Cost 213,936 2,054,175 162,587 5,635 6,071 344,766 2.787,170 Accumulated depreciation (35,825) ( 1,252,502) (111,249) (4,490) (3,367) - (1,407 ,433) Net hook amount 178,111 801,673 51,338 1,145 2,704 344,766 1,379,737 2012 Opening net book amount 178,111 801,673 51,338 1,145 2.704 344,766 1,379,737 Exchange differences (2,449) (6,026) (380) 3 5 (2,515) (11,362) Additions 19,571 31,943 33, 133 507 - 227,821 312,975 Transfers 21,608 272,977 12,510 463 1,158 (299,806) 8,910 Disposals (258) (331) (471) (106) - (6) (I, 172) Depreciation (9,347) (210,333) (26,549) (654) (136) - (247,019) Closing net book amount 207,236 889,903 69,581 1,358 3,731 270,260 1,442,069 At 31 December 2012 Cost 253,501 2,349,295 198,622 6,410 7,241 270,260 3,085,329 Accumulated depreciation (46,265) ( 1,459,392) (129,041) (5,052) (3,510) - ( 1,643,260) Net book amount 207,236 889,903 69,581 1,358 3,731 270,260 1,442,069 No borrowing cost was capitalized in the costs of the property and equipment during the year. Depreciation and amortisation expense of USO 275,530 (2011: USO 258, 73 7) has been charged in cost of sales (Note 17), USO 24,213 (2011: USO 27,721) in general and administrative expenses (Note 18) and USO 1,877 (2011: USO 1,893) in selling and marketing expenses (Note 19). (*) Machinery and equipment mainly comprises of switches and transmission devices, network and computer equipment. Pricewatf:irhouseCoopars Accountants ill. V. For Identification ~~i;mr.ses anl).' 40 §H = l#i!1~!1f': FINTUR HOLDJNGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31 DECEMBER 2012 AND 2011 (Amounts expressed in thousands ofUSD unless otherwise indicated.) NOTE 9 - PROPERTY AND EQUIPMENT (Continued) The movements in property and equipment and related accumulated depreciation for the year ended 31 December 2011 are as follows: Construction Land and Machinery and Furniture Motor Leasehold in progress and At I Januar~ 201 I buildings egui~ment (*) and fixtures vehicles im[!rovements advances given Total Cost 138,254 1,847,121 132,813 5,010 5,132 313,474 2,441,804 Accumulated depreciation (28,785) ( 1,032,952) (89,472) (3,800) (3,200) (I, 158,209) Net book amount 109,469 814,169 43,341 1,210 1,932 313,474 1,283,595 2011 Opening net book amount 109,469 814,169 43,341 1,210 1,932 313,474 1,283,595 Exchange differences (553) 6,368 (75) (8) 11 4,764. 10,507 Additions 64,017 16,588 25,024 687 - 231,769 338,085 Transfers 12,853 180,478 6,516 (75) 860 (200,632) Disposals ( 147) (702) ( 157) (35) - (4,609) (5,650) Depreciation (7,528) (215,228) (23,311) (634) (99) - (246,800) Closing net book amount 178,111 801,673 51,338 1,145 2,704 344,766 1,379,737 At 31 December 2011 Cost 213,936 2,054,175 162,587 5,635 6,071 344,766 2,787,170 Accumulated depreciation (35,825) ( 1,252,502) (111,249) (4,490) (3,367) - ( 1,407 ,433) Net book amount 178,111 801,673 51,338 1,145 2,704 344,766 1,379,737 ·'-'nee ;'=""' Wat~ . er /rJ,, ·"''hou "'ntificanon .. sec , 0 DPers, , iiurr-i 4c ...... ~ . ,JOS ~ •-OU· .f-;Jf.17/i![t•ft. ' e., on/~, .Jtants N. L' 41 -~ . FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2012 AND 2011 (Amounts expressed in thousands ofUSD unless otherwise indicated.) NOTE 10- INTANGIBLE ASSETS The movements in intangible assets and related accumulated a111011isation for the year ended 31 December 2012 are as follows: Licences and Computer Advances At 1 January 2012 Goodwill other rights software Other given Total Cost 713,566 292,258 199,416 24,271 6,661 1,236,172 Accumulated amortisation (109,293) (92,904) (8,085) (210,282) Net book amount 713,566 182,965 106,512 16,186 6,661 1,025,890 2012 Opening net book amount 713,566 182,965 106,512 16,186 6,661 1,025,890 Exchange differences (58) (848) (240) (3, 141) (4,287) Additions 29,463 24,082 20,671 74,216 Transfers 13,437 (2,368) 33 (20,012) (8,910) Disposals (14) ( 111) (125) Amortisation (22, 715) (30,328) (2,380) 822 (54,601) Closing net book amount 713,566 203,092 97,036 13,488 5,001 1,032,183 At 31 December 2012 Cost 713,566 334,279 219,274 23,806 5,001 1,295,926 Accumulated amortisation (131,187) (122,238) (10,318) (263,743) _N_e_t_b_oo_k_·a_m__ ou_n_t ______7_13_,_56_6 ______2_0_3_,o_9_2 ______9_7_,0_3_6 _____ 13_,4_8_8 _____ 5_,_oo_1 ______1,032,1s3 Goodwill is allocated to cash-generating units for the purpose of impairment testing. Each of those cash generating units represents the Group's investment in each country of operation by each primary reporting segment. PricewaternouseCooµers /kr;oun·umts 1-i.V For ldeniificai.ion p1 !rf:nr-:>(-:~~ or11v ~ ~J.l"Kf:l;~~ 42 FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31 DECEMBER 2012 AND 2011 (Amounts expn:ssed in thousands of USO unless oth~rl\'ise indicated.) NOTE 10 - INTANGIBLE ASSETS (Continued) The movements in intangible assets and related accumulated amortisation for the year ended 31 December 2011 are as follows: Licences and Computer Advances At I January 2011 Goodwill other rights software Other given Total Cost 713,566 219,349 171,276 23,647 3,299 I, 131, 137 Accumulated amortisation (88,994) (72,509) (5,878) (167,381) Net book amount 713,566 130,355 98,767 17,769 3,299 963,756 201 I Opening net book amount 713,566 130,355 98,767 17,769 3,299 963,756 Exchange differences 9,600 (5,848) (66) 5,308 8,994 Additions 63,015 29,556 4,200 96,771 Transfers 3,171 900 (4,071) Disposals (5) (2,075) (2,080) Amortisation (20,005) (19,134) (2,412) (41,551) Closing net book amount 713,566 182,965 106,512 16,186 6,661 1,025,890 At 31 December 2011 Cost 713,566 292,258 199,416 24,271 6,661 1,236, 172 Accumulated amortisation (I 09,293) (92,904) (8,085) (210,282) Net book amount 713,566 182,965 106,512 16,186 6,661 1,025,890 ~~~~~~~~~~~~~....:....~~~~~..;._~~~~....:....~~~..;....~~~..;....~~~--' In April 2008, the privatization of the Republic of Azerbaijan's 35.7% ownership in Azercell was completed. Azertel acquired the entire stake from the Republic of Azerbaijan for a consideration of USO 180 million, increasing Azertel's ownership in Azercell to 100%. At the same time, the non controlling shareholders in Azertel increased their ownership to 49%. Fintur's effective ownership in Azercell therefore remained at 51 %. One of the non-controlling shareholders was also granted a put option, giving the shareholder the right to sell its 42.2% stake in Azertel to Fintur at fair value in certain deadlock situations regarding material decisions at the general assembly. Fintur has initially accounted for the present value of the estimated option redemption amount as a provision of USO 925 million and derecognised the non-controlling interest (USO 240 million) related to the grantee of the put option. The difference between the present value of the estimated option redemption amount and the derecognised non-controlling interest has been accounted as goodwill (USO 685 million). A primary repo11ing segment-level summary of goodwill as of 31 December 2012 and 20 I I is presented below: 2012 2011 Azerbaijan 684,736 684,736 Georgia 24,859 24,859 Moldova 3,971 3,971 Total 713,566 713,566 ~ricewat~.~houseCoopers Accountanis l\J.\I ror ldentmca1tcm PW!Xisef; only 43 Jt . Jyfff1;{)'C!'_'. FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STA TEMENTS AT 31 DECEMBER 2012 AND 2011 (Amounts expressed in thousands of USO unless otherwise indicated.) NOTE 10- INTANGIBLE ASSETS (Continued) The recoverable amount of a cash-generating unit is detennined based on discounted future cash flows. These calculations use post-tax cash flow projections based on financial budgets approved by management covering a five-year period. Cash flows beyond the five-year period are extrapolated using the estimated growth rates stated below. The grow1h rate does not exceed the long-tenn average growth rate for the telecommunications business in which the cash-generating unit operates. The key assumptions used in discounted future cash flows are as follows: 2012 Azerbaijan Georgia Moldova EBITDA margin (*) 50% 40% 40% Growth rate (**) 3% 6% 4% Discount rate(***) 13.9% 15.1% 16.1% 2011 Azerbaijan Georgia Moldova EBITDA margin(*) 50% 41% 37% Growth rate(**) 6% 4% 4% Discount rate(***) 15.0% 17.1% 16.5% (*) Budgeted average Earnings Before Interest Tax Depreciation and Amortization ("EBITDA") margin for the 5 year projection period. (**) Weighted average growth rate used to extrapolate cash flows beyond the projection period. (***) Post-tax discount rate applied to the cash flow projections. These assumptions have been used for the analysis of each cash-generating unit in the primary reporting segment. Management determined budgeted EBITDA based on past performance and its expectations of market development. The weighted average growth rates used are consistent with the forecasts included in industry reports. The discount rates used are post-tax and reflect specific risks relating to the relevant primary reporting segments. The impact of changes in these parameters on goodwill impairment review has been presented in the sensitivity analysis in Note 2.6. P;icewaiertwuseCoopers .t-\ccount<111is f\i. \i Fer ldentiiicatinn u11«:;0se;1 only =~ 44 n:i) ff ;JJ'!f.; FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDA TEO FINANCIAL STA TEMENTS AT 31DECEMBER2012 ANO 2011 (Amounts expressed in thousands of USO unless otherwise indicated.) NOTE 11 - BORROWINGS The following table sets forth the amounts recorded for short-term debt together with effective interest rates at 31 December 2012: 2012 Effective interest Original USD rate (%) p.a. currency amount equivalent Short-tetm debt denominated in Kazakhstan Tenge 3.85 - 6.00 48,990,985 325,003 The carrying amount of borrowings approximates their fair value. NOTE 12-TRADE PAYABLES The analysis of trade payables at 31 December 2012 and 2011 are as follows: 2012 2011 Trade accounts payable I 00,083 103,448 Payable due to property and equipment purchases 12,463 21,306 ~=--~~~--'---'-~-'--~~'--''--~-"--~~~~~~~~~~~~~~~~~~~~~~ Total 112,546 124,754 The maturity analysis of trade payables and due to related parties at 31 December 20 l 2and 2011 is as follows; Between 3 Less than months and I Between 1 Overs At 31December2012 3 months year and 2 years years Total Trade payables I 03,428 9, 118 112,546 Due to related parties 1,287 53,072 54,359 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Total future payments 104,715 62,190 166,905 Between 3 Less than months and I Between I Over 5 At 31 December 2011 3 months year and 2 years years Total Trade payables 92, I 06 32,648 124, 754 Due to related parties 1,006 507 l,513 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Total future payments 93,112 33,155 126,267 ::->ricewaterhousl3Coupers tkcounia11ts i'J. V. :=or ldeniifir;;]tion p1 ""Jt)Ses ontv = ~ 45 FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31 DECEMBER 2012 AND 2011 (Amounts expressed in thousands of USO unless otherwise indicated.) NOTE 13 -TAXATION ON INCOME The analysis of taxation on income for the years ended 31 December 2012 and 2011 are as follows: 2012 2011 Current income ta..x charge (167,097) ( 160,921) _D_e_re_rr_e_d~in_c_o1_n_e_t_ax_·_cl_1a_r~g_e~~~~~~~~~~~~~~~~~~~(8~,_59--'l)~~~~~~<----'13,500) Income tax expense (175,688) (174,421) Dutch ta..x legislation does not pennit a Dutch parent company and its foreign subsidiaries to file a consolidated Dutch tax return. Dutch resident companies are taxed on their worldwide income for corporate income tax purposes at a statutory rate of 25.5% (2011: 25 .5% ). No fu11her taxes are payable on this profit unless the profit is distributed. If certain conditions are met, income derived from foreign subsidiaries is tax exempt in the Netherlands under the rules of the Dutch participation exemption. However, certain costs such as acquisition costs are not deductible for Dutch corporate income tax purposes. Furthermore, in some cases the interest payable on loans to affiliated companies is non deductible. When income derived by a Dutch company is subject to taxation in the Netherlands as well as in other countries, generally avoidance of double taxation can be obtained under the extensive Dutch tax treaty network or under Dutch domestic law. Dividend distributions are subject to I 5% Dutch withholding tax. However, under the Netherlands' extensive ta..x treaty network, this rate can, in many cases, be significantly reduced if ce11ain conditions are met. f-'ri<.;ewaterhouseCoopers /~ccountanis 1-.J.V 1=cr ldeniific3tion r.•1.1ruoses only ~ 46 ~ricewaterhouseCoo e • or Identification ~, P rs Accountants f\J V FINTUR HOLDINGS B.V. A u.irooses only . . 1 NOTES TO THE CONSOLIDATED FINANCIAL STATE1vm ~T§~· AT 31DECEl\'IBER2012 AND 2011 (Amounts expressed in thousands ofUSD unless othcmisc indicated.) NOTE 13-TAXATION ON INCOME (Continued) Deferred income la.ws Fintur recognises deferred income tax assets and liabilities based upon temporary differences arising between their financial statements as reprn1ed under IFRS and their statutory tax financial statements. These differences usually result in the recognition of revenue and expenses in different reporting periods. The breakdown of deferred income taxes at 3 I December 20 I 2 and 20 I I, using the enacted tax rates, were as follows: 2012 2011 Deferred income tax assets: Difference between the tax base and the carrying value of prope1fy and equipment and intangible assets 15,121 12,220 Deferred revenue 5,922 7,021 Impairment of receivables 5,412 6,044 Trade payables and expense accruals 4,096 5,923 Other 3,584 2,342 Defe..,.ed income tax assets 34,135 33,550 Deferred income tax liabilities: Difference between the tax base and the carrying value of property and equipment and intangible assets (64,570) (57,798) _U_n_r_e1_n_itt_e_d_e_a_n_1_i1~1g~s_o_f_D_o_re_i=g_n_s_u_bs_i_d_ia_r_ie_s~~~~~~~~~~~~~(~J_5~,5_0_4~)~~~~~~(~1....c4,974) _D_e_fe_r_r_ed~in_c_o_m_e~ta_x_l_ia_b_i_Ii_ti_e_s~~~~~~~~~~~~~~~~~(8_0~,_07_4~)~~~~~~(7__;2,772) _D_e_t_er_r_e_d_i_n_co_1_n_e_t_a_x_l_ia_b_i_li_ti_e_s,_n_e_t______(~4-5~,9-3_9~)------~(~3....;9,222) Deferred income tax liabilities of USO I 5,504 (201 I: USO 14,974) have been recognised for the withholding tax and other taxes that would be payable on the unremitted earnings of the subsidiaries. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when deferred income taxes relate to the same fiscal authority. The offset amounts at 3 I December 2012 and 20 l I are as follows: 2012 2011 Deferred income tax assets: Deferred income tax assets to be recovered after more than I 2 months 14,799 I 1,566 Deferred income tax assets lo be recovered within I 2 months 2,610 2,017 17,409 13,583 2012 2011 Defc1Ted income tax liabilities: Deferred income tax liabilities to be settled after more than 12 months 51,555 44,597 Deferred income tax liabilities to be settled within I 2 months I 1,793 8,208 63,348 52,805 47 ...... ~,·~:·-, ..... ,,usecoo e . ··. •'t'•r "+.,- P -rs 14ccou • ··- ...... ' currJoses I n1ants N V FINTUR HOLDINGS B.V. .t • · ony · · =--:~ .... tu.i ·.::.·.·.. ·; 1.:: ~-·?'i:· NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2012 AND 2011 (Amounts expressed in thousands of USO unless otherwise indicated.) NOTE 13 -TAXATION ON INCOME (Continued) The movements on the net deferred income tax liability for the years ended 31 December 2012 and 2011 are as follows: 2012 2011 At 1 January 39,222 26,604 Exchange differences ( 1,874) (882) Charge to the consolidated statement of income 8,591 13,500 ~~"'-~~~~~~~~~~~~~~~~~~~~~~~~~~~-=-~~~~~~~-' At 31 December 45,939 39,222 The statutory tax rates applicable to the parent company and subsidiaries in the respective countries at 31 December 2012 and 2011 are as follows: 2012 2011 Fintur Holdings B.V. (the Netherlands)(*) 25.5% 25.5% Kcell (Kazakhstan) 20.0% 20.0% Azercell (Azerbaijan) 20.0% 20.0% Geocell (Georgia) 15.0% 15.0% Moldcell (Moldova)(**) 12.0% Azertel and Giirtel (Turkey) (*) 20.0% 20.0% The weighted average applicable tax rate for the year ended 31 December 2012 was 21%(2011: 21 %). (*) The main revenues of Fintur Holdings B.V., Azertel and Giirtel are dividend income which is exempt from income tax in the Netherlands and Turkey, respectively. (**) Moldcell had a full tax payment exemption until I January 2012. The tax on the Group's profit before tax differs from the theoretical amount that would arise using the weighted average ta'{ rate applicable to profits of the consolidated entities for the years ended 31 December 2012 and 2011 are as follows: 2012 2011 Profit before income tax 656,062 777,608 Tax calculated at domestic tax rates applicable lo profits in the respective countries (147,173) ( 153,307) Withholding taxes on dividends and taxes over unremitted earnings of subsidiaries (28,385) (17,421) Expenses not deductible for ta'{ purposes (2,898) (3,881) Adjustment of prior year income tax(***) 2,445 ( 1, 102) Effect of changes in tax rate (669) Other, net 992 1,290 Income tax expense (175,688) (174,421) (* **) In 2012, the differences between the accrnal of income taxes for the year ended 31 December 2011 and actual income taxes which were reflected in income tax declarations of certain subsidiaries presented as adjustment of prior year income tax. 48 FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2012 AND 2011 (Amounts expressed in thousands of USO unless otherwise indicated.) NOTE 14 - OTHER CURRENT LIABILITIES The analysis of other current liabilities at 31 December 2012 and 2011 are as follows: 2012 2011 Deferred revenue(*) 29,768 39,772 Deposits received from subscribers 28,43 7 28,171 Payables to personnel 23,269 22,154 Taxes other than income taxes payable 20, 788 9,067 Interconnect reassessment for Bakcell (Note 21) 20,077 _O_tl_1e_r~~~~~~~~~~~~~~~~~~~~~~~~~-2~,9_8_6~~~~~-----'l,156 Total 125,325 100,320 (*) Deferred revenue mainly comprises the receipt of cash generated from the sale of prepaid phone cards to subscribers. Unused airtime or sold prepaid card is not recognised as revenue until the related service has been provided to the subscriber or the prepaid card has been expired. NOTE 15 - OTHER NON-CURRENT LIABILITIES The analysis of other non-current liabilities at 31 December 2012 and 2011 are as follows: 2012 2011 Financial liability(*) 778,677 768,795 Other 12,263 3,640 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Total 790,940 772,435 (*) In April 2008, the privatization of the Republic of Azerbaijan's 35.7% ownership in Azercell was completed. Azertel acquired the entire stake from the Republic of Azerbaijan, increasing Azertel's ownership in Azercell to I 00%. At the same time, the non-controlling shareholders in Azertel increased their ownership to 49%, resulting in Fintur's effective ownership in Azercell unchanged at 51%. One of the non-controlling shareholders was also granted a put option, giving the shareholder the right to sell its 42.2% stake in Azertel to Fintur at fair value in certain deadlock situations regarding material decisions at the general assembly. The valuation for initial recognition, based on discounted future cash flow model prepared in April 2008, revealed a fair value of USO 2.2 billion for Azercell, which approximate the fair value of Azertel as Azertel had been established as a holding company with no operations. The fair value of the 42.2% portion of Azercell shares subject to the put option is calculated as USO 925 million. As of 31 December 2012 and 2011, the Group re-measured the fair value of Azercell as USO 1.5 billion and USO 1.3 billion, respectively. The present value of the estimated option redemption amount corresponding to 42.2% of the fair value of Azercell as of 31 December 2012 is determined as USO 779 million (2011: USO 769 million). The dividend distribution of Azercell in respect of 42.2% shares has been accounted as a decrease of the liability whereas the fair value increase in excess of the allocated dividends has been included in the consolidated statement of incon1e under other operating expense. 49 FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2012 AND 2011 (Amounts expressed in thousands ofUSD unless otherwise indicated.) NOTE 15 - OTHER NON-CURRENT LIABILITIES (Continued) Movements of financial liability for the years ended 31 December 2012 and 2011 are as follows: 2012 At 1 January 768,795 Dividend distribution to the non-controlling shareholder holding the put option (41,500) Repayment of share capital to the non-controlling shareholder holding the put option (23,808) Charge to the consolidated statement of income 75, 190 ~--'~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~--' At 31 December 778,677 2011 At 1 January 759,659 Dividend distribution to the non-controlling shareholder holding the put option (30,887) Contribution of share capital by the non-controlling shareholder holding the put option 10,950 Charge to the consolidated statement of income 29,073 At 31 December 768,795 The key assumptions used in the valuation of put option liability are disclosed in Note I 0. NOTE 16- SHARE CAPITAL The composition of the share capital at 31 December 20 I 2and 2011 are as follows: 2012 2011 Share% USD Share% USD TeliaSonera 59 110,694 59 110,694 Turkcell 41 78,365 41 78,365 Paid-in share capital 100 189,059 100 189,059 Adjustment to share capital 349,059 349,059 Total share capital 538,118 538,118 Total number of shares authorized l ,930,000,C Total number of shares issued and outstanding 540,000,000 Pricewaterr.0useC0opers Acc;ountants i'l.V For Identification u11r;J0ses only 50 =~ 11]111~1'~.: FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31 DECEMBER 2012 AND 2011 (Amounts expressed in thousands of USO unle$S otherwise indicated.) NOTE 17 - COST OF SALES The analysis of cost of sales for the years ended 31 December 2012 and 2011 are as follows: 2012 2011 Depreciation and amortisation charges 275,530 258,?37 Interconnect fees and expenses 259,651 209,424 Radio and transmission network management and maintenance 74,256 72,245 Transmission links expenses 67,910 56,911 Roaming expenses 40,072 43,904 Staff costs 32,667 36,250 Rent expenses 32,251 26,182 Frequency usage charges 18,694 16,256 System service maintenance 17,419 39,117 Costs of SIM card and scratch card sales 15,473 12,326 Other 48,219 31,601 Total 882,142 802,953 NOTE 18 - GENERAL AND ADMINISTRATIVE EXPENSES The analysis of general and administrative expenses for the years ended 3 I December 20 I 2 and 2011 are as follows: 2012 2011 Staff costs 34,711 41,923 Taxes and duties 26,300 30,582 Depreciation and amortisation charges 24,213 27,721 Consulting expenses and professional fees 8,837 2,813 Representation expenses 4,067 3,142 Rent expenses 2,627 6,776 Charity expenses 1,827 1,015 Repair and maintenance expenses 1,533 967 Utilities expenses 1,027 4,040 Other 26,067 27,944 Total 131,209 146,923 PricewaternuuseCoopers Acccun1anis ~i. \i For ldeniificalion 1::11r,ioses onll· ~7~ • 51 FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2012 AND 2011 (Amounts expressed in thousands of USO unless othcmise indicated.) NOTE 19 - SELLING AND MARKETING EXPENSES The analysis of selling and marketing expenses for the years ended 31 December 2012 and 2011 are as follows: 2012 2011 Retailers' and dealers' commissions 92,949 81,549 Advertising and marketing expenses 81,430 78,282 Staff costs 44,254 40,717 Sales promotion 19,803 15,577 Rent expenses 5,133 3,283 Depreciation and amortisation charges 1,877 1,893 Public relation expenses 476 995 Other 30,940 24,770 Total 276,862 247,066 NOTE 20 - FINANCIAL INCOME AND EXPENSES The analysis of financial income and expenses for the years ended 3 I. December 2012 and 2011 are as follows: 2012 2011 Interest income on term deposits 4,630 9,280 Interest expense (3,690) (325) Foreign currency transaction (losses)/gains, net (13,060) 23, 137 Bank commissions (826) Other, net ( 1,644) (l,784) Total financial (expenses)/income, net (13,764) 29,482 NOTE 21 - COMMITMENTS AND CONTINGENCIES Polilical mu/ eco110111ic co11ditio11s Whilst there have been improvements in the economic situations in Kazakhstan, Azerbaijan, Georgia and Moldova in recent years, the economies in these countries continue to display some characteristics of an emerging market. These characteristics include, but are not limited to, the existence of a currency that is not freely convertible outside of the country and a low level of liquidity of debt and equity securities in the markets. Additionally, the telecommunication sector in Kazakhstan, Azerbaijan, Georgia and Moldova are impacted by political, legislative, fiscal and regulatory developments. The prospects for future economic stability in these countries are largely dependent upon the effectiveness of economic measures undertaken by the governments, together with legal, regulato1y and political developments, which are beyond the Group's control. 52 ~_!Jf.1~.J'l!"t, ....i. FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31 DECEMBER 2012 AND 2011 (Amounts expressed in thousands of USO unless otherwise indicated.) NOTE 21 - COMMITMENTS AND CONTINGENCIES (Continued) The financial condition and future operations of the Group may be adversely affected by continued economic difficulties that are characteristic of an emerging market. Management is unable to predict the extent and duration of the economic difficulties, nor quantify the impact, if any, on the consolidated financial statements. Taxatio11 The tax legislation and practice of the subsidiaries of Group is in a state of continuous development and therefore is subject to varying interpretations and frequent changes, which may be retroactive. Further, the interpretation of tax legislation by tax authorities as applied to the transactions and activities of the Group may not coincide with that of management. As a result, transactions may be challenged by tax authorities and the Group may be assessed additional taxes, penalties and interest. Tax periods remain open to retroactive review by the tax authorities for three to five years. Goi1em111e11t bwestigations at Keel/ During the period from 2010 lo 2012, Kcell was subject to a number of investigations by various government authorities aimed at reduction of Kcell's roaming tariffs and elimination of roaming threshold: Roaming threshold investigation In 2010, Kcell was subject to an investigation by the Agency of Competition Protection of the Republic of Kazakhstan (the "Agency") related to alleged infringement of the antimonopoly legislation by GSM operators of CIS countries. On 3 July 2010, the Agency filed a protocol based on respective conclusion to an administrative court charging Kcell with impingement of consumers' rights by setting threshold for the subscribers' minimum cash balance to access roaming services. The claimed penalty amount was USO l 07,007 calculated as l 0% of Kcell's total revenues generated from I January 2010 to 31 March 20 I 0. After several claims and counterclaims filed during 20 I 0, Kcell was able to defend its position and conclusion of the Agency was cancelled by the judgment of comt of cassation entered into legal force immediately. The Agency filed a claim to higher court instances and in August 2011, the Supreme Cami returned the case to the first instance for additional investigation. On 24 August 2012, the Almaty Administrative Court ruled in favour of Kcell and terminated the proceedings. The Agency is, however, entitled (but not obliged) lo file a petition to the Prosecutor's Office of Almaty or General Prosecutor's Office seeking reinstatement of the case via Prosecutor's Office or General Prosecutor's Office protest. Kcell believes it will be able to defend its position as it believes that setting such threshold for prepaid subscribers was in line with market terms and is not considered to be expression of dominant position of Kcell. Kcell's management believes that cunent legislation does not contain any restrictions on setting the thresholds for access to roaming services. Accordingly, no provision has been recorded in these consolidated financial statements as of 31 December 2012. Pricew NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31 DECEMBER 2012 AND 2011 (Amounts expressed in thousands of USO unless otherwise indicated.) NOTE 21 - COMMITMENTS AND CONTINGENCIES (Continued) Roaming tariffs i11vestigatio11 The Agency has also perfonned an examination of the Kcell's roaming tariffs for the period from January 2009 to 31 March 20 I 0. Based on the results of the examination, in November 20 I 0, the Agency issued a protocol on administrative violation alleging Kcell in misuse of its dominant position through setting overstated roaming tariffs for subscribers from the Russian Federation. The Agency applied to administrative court to initiate the administrative case. The claim amount was USO I 06,358, calculated as I 0% of Kcell's total revenues generated during the examined period, plus revenues from roaming services for the year 2009 of USO 17,217. In response, Kcell appealed the claim to the Astana Specialised Interregional Economical Court (the ASIEC). In February 201 I, the ASIEC (the court of first instance) ruled in favour of the Group with respect to the investigation of roaming tariffs. The Court's decision was appealed by the Agency for Competition Protection. On 11 May 20 I I, the AS IEC informed Kcell that the court decision of 17 February 2011 whereby it has granted the Kcell's claim to invalidate the statements of Agency for Competition Protection had entered into force. The Agency filed a claim to higher court instances and in January 2012, the Supren1e Court returned the case to the first instance court for additional investigation. On 1 March 2012, Specialized Inter District Administrative Court of Almaty ruled to tenninate the administrative case against Kcell for lack of elements of offense. Even though the Agency has a right (but not the obligation) to appeal through the General Prosecutor's Office, Kcell's management believes that it has not violated any laws and regulations with respect to roaming tariffs. Kcell has been consistently reducing its roaming tariffs recently and taking other measures in this respect. Kcell's management is confident that the Kcell's position will be fully sustained. Accordingly, no provision has been recorded in these consolidated financial statements as of3 l December 2012. PreliminmJ' examination ofrelationships with cash payments service companies Kcell has received the resolution of the Agency on preliminal)' examination of the antimonopoly legislation violation dated 22 June 2012. In accordance with the resolution the Agency considers charging Kcell with violation of the antimonopoly legislation in respect of relationships with cash payments service companies, which primarily operate self-service tenninals. In November 20 I 2, the Agency completed the investigation. On 13 November 2012, the Agency issued an order for Keel!. In its order, the Agency requested that Kcell cease its violation of antimonopoly legislation by 4 December 2012 and notify the Agency of its remediation with the order by I 0 December 2012. Kcell has provided its response to the Agency, asserting that Kcell is in compliance with antimonopoly legislation. If the Agency challenges Kcell's position, it may issue additional instructions for Kcell to cease its violation of antimonopoly legislation and assess a fine in the amount of approximately USO 21. Kcell's management believes that no provision should be recorded in these consolidated financial statements of Kc ell as of 31 December 2012 as Kc ell be! ieves that it has not violated anti monopoly legislation and that the allegations against it are unfounded. Prictiwaterlli::useCoopers .1.\ccounia11ts N.V. t=or identification nt•rqnse;; only 54 =hjh, FINTUR HOLDINGS B. V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2012 AND 2011 (Amounts expressed in thousands of USO unless otherwise intlicatctl.) NOTE 21 - COMMITMENTS AND CONTINGENCIES (Continued) Investigation 011 alleged concerted action in setting and 111ai11tai11i11g excessiveZv high !11terco1111ect tar[ffs In late 2012, the Agency initiated an inquiry into a potential violation by Kcell of antimonopoly legislation. Specifically, the Agency alleged that Kcell and Kar-tel (Beeline trademark), as dominant market participants, engaged in concerted action in setting and maintaining excessively high interconnection tariffs, which were aimed at weakening their competitors, and detennined to launch an investigation. However, by its resolution dated 7 January 2013, the Agency appointed an expert examination to be carried by the Ministry of Communication and Information of the Republic of Kazakhstan to assess the interconnect rates applied by Kar-Tel and Kcell, with a breakdown of all costs attributed by them to this service. If, in the course of its investigation, the Agency determines that Kcell violated antimonopoly legislation, it may assess penalties in the amount of 10% of total revenue generated for the period during which the violation occurred, and may seek the confiscation of income earned as a result of the monopolistic activity (subject to the limitation that the period for which the confiscation of income is sought may not exceed one calendar year). Currently, it is not possible to quantify the amount of penalties to be sought, because the Agency has not yet determined certain key factors required to calculate the amount of penalties such as the period during which the possible alleged violation occurred. As Kcell has received only the resolution on appointment of the experts, which does not constitute any further legal proceedings and used for decision making of the Agency for further actions whether to tenninate the case or impose the fine, the Kcell's management believes that no provision should be recorded in these consolidated financial statements as of 31 December 2012. Acquisitions mu/ i11vestme11ts at Keel/ A1emora11d11111 ofu11dersta11ding with Son era On 26 August 2012, Sonera and Kcell entered into a memorandum of understanding (the "Buy and Sell MoU"), under which Kcell has the right to require Sonera to sell to it, and Sonera has the right to require Kcell to acquire from it, all participatory interests owned by Sonera in KazNet Media LLP ("KazNet") together with all rights and obligations of Sonera under a framework agreement to buy all the participatory interests in the charter capital of KazNet (refer to "WIMAX Business Acquisition by Sonera" below) and all the participatory interests owned by Sonera in Rodnik Inc LLP ("Rodnik") together with all rights and obligations of Sonera under the agreements to buy participatory interests in the charter capital of Rodnik (refer to "Investment in Rodnik Inc LLP by Sonera"). Subject to satisfaction of the applicable conditions, each of Sonera and Kce11 is entitled to exercise its option at any time starting from nine months after the date of the offering of global deposita1y receipts and listing on local stock exchange, 13 December 2012. The purchase price that Kcell will pay to Sonera for the acquisition resulting from the exercise of the option will be the amount of net cost incurred by Sonera in connection with the co1Tesponding investments and acquisition transactions plus interest accrued on such amount. Sonera has the right to terminate the Buy and Sell MoU at any time by serving a written notice to Kcell. Unless otherwise agreed by Sonera and Kcell, exercise of these options is conditional upon Fintur having consented to, authorised or voted in favour of the acquisition to be made by Kcell as a result of the exercise of such right. In addition, completion of the acquisition contemplated by the exercise of options is subject to law, regulation and any requisite approvals. 55 FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL ST ATEMENTS AT 31 DECEMBER 2012 AND 2011 (Amounts expressed in thousands ofUSD unless otherwise indicated.) NOTE 21 - COMMITMENTS AND CONTINGENCIES (Continued) Sonera has the option to sell (the "Put Option") and Kcell has the option to buy (the "Call Option") the par1icipatory interest. Strike price of both the options equals net costs incurred by Sonera, annually compounded using the interest rate (interest accruals begins when the costs are incurred or the receipts are cashed and ends when the participatory interest are transferred). Neither the Put Option nor the Call Option can be exercised without the authorisation of Fintur. While Sonera owns more than 50% of the participations in Fintur, the minority holding has the power to block any significant transactions. The contractual right of Sonera to sell the underlying assets (debt and equity interests and related rights and obligations) to Kcell is a financial instrument (derivative). The agreement requires that the equity instruments will be transferred to Keel! at their fair value (i.e. at the future acquisition cost), so Kcell's management believes that the value of the options is close to nil as the net costs incurred by Sonera equal to the fair value of underlying shares acquired. Subsequent to this, the fair value of the option may change based on the variations in the value of the underlying businesses. Although the option is contingent upon Fintur's approval, this will be reflected in the fair value of the option. The value of Kcell's option to acquire the assets is nil as Sonera completed the acquisition on 14 January 2013, and the purchase price agreed at fair value at the date of transaction. In addition the exercise of the option by Keel! is conditional upon Fintur having consented to, authorized or voted in favor of the acquisition, that is currently not the case and also the option is not exercisable until 2014. rVJMAX Business Acquisition by Sonera On 13 August 2012, Sonera entered into a framework agreement with a third party to buy all the participatory interests in the charter capital of KazNet for a total consideration of USO 170 million. The acquisition was completed on 14 January 2013. As a condition precedent to Sonera's purchase of the participatory interests in KazNet, KazNet acquired two limited liability partnerships in Kazakhstan, namely Aksoran LLP ("Aksoran") and lnstaphone LLP ("lnstaphone"). Aksoran and Instaphone each holds certain radio frequency pennits that are capable of being deployed for the operation of a WIMAX business in Kazakhstan. The KazNet group will own and operate a WIMAX business in Kazakhstan. J11vest111e11t in Rodnik by Sonera Sonera negotiated an agreement with a third party to acquire 25% of the participatory interests in the charter capital ofRodnik. Rodnik owns 79.92% of the total share capital ofKazTransCom JSC ("KTC"). The purchase price for acquisition is USO 20 million, subject to adjustments to be made based on the amount of net debt of Rodnik and KTC at the time the acquisition is completed. On I 3 August 2012, Sonera entered in a call option agreement \vith a third party under which Sonera has a call option to acquire another 75% participatory interest in Rodnik. Pursuant to the terms of that call option agreement, the call option exercise price will be calculated based on fair market value of the participatory interest in Rodnik. The acquisition of 25% of the participatory interests in the charter CJ!Dital of Rodnik was completed on : 11cewaterhuuseCo . , , 14January2013. '=orirJ ,. ... • · ope1sAccounranisl\l\I ' en11 1IC8l/On Di!r:JOSG$ only . . 56 =@Hl FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2012 AND 2011 (Amounts expressed in thousands of USO unless otherwise indicated.) NOTE 21 - COMMITMENTS AND CONTINGENCIES (Continued) A11ti-1110110po~1' legislatio11 On 18 October 2011, the Agency issued an order mandating inclusion of Kc ell in the State Register of Dominant and Monopolistic Entities of the Republic of Kazakhstan (the "State Register") in respect of certain services provided by Keel!, including interconnection services. Keel! challenged its inclusion in the State Register in a lawsuit initially filed to the Specialized lnterdistrict Economic Court of Astana in October 2011. The case was remitted to the Board of Appeals of the Astana Court for examination. On 3 Januat)' 2013, the Board of appeals of the Astana Court ruled to appoint expe1tise. The Astana Court will schedule the further hearings when the experts provide their conclusion. Unless the court decides Kcell is not considered as included in the State Register. . If Kcell does not prevail on appeal it will remain on the State Register and its tariffs for interconnection services will become subject to regulation by the Ministry of Transport and Communication (the "Ministry"). The Ministry can reduce Kcell's interconnection tariffs, while interconnection tariffs of other mobile operators that have not been included in the State Register would remain unregulated. Legal proceedings am/ disputes Legal proceedings ofAzercell As of 31 December 2012, Azercell has been engaged in litigation proceedings with Bak.cell Ltd., a mobile operator. Bak.cell Ltd. filed a claim against Azercell demanding reimbursement of USD 19,323 with respect to the cumulative difference resulting from the application of allegedly incon-ect rates for interconnect traffic by Azercell since April 2009. Additionally, Bak.cell Ltd. claimed to change the interconnect rate from USO 0.06 to USO 0.03 per minute for inbound and outbound traffic with Azercell going forward. The Appeal Court conducted on 27 July 2012 approved the claim of Bak.cell Ltd. in respect of new interconnection tariff from mobile-to-mobile supposedly to be implemented from 3 April 2009 till May 2011 as USD 0.03 per minute instead of the USO 0.06 per minute defined via the existing interconnection agreement. On 19 October 2012, Azercell applied to the Supreme Court of the Azerbaijan Republic and requested to cancel above mentioned resolution of the Appeal Court and to send this issue for new investigation by Appeal Court. Related hearing was conducted on 6 February 2013 and the Supreme Court rejected Azercell's claim. Following this decision, Azercell applied to the Plenum of the Supreme Court. However hearings of the Plenum of the Supreme Court conducted on I April 2013 approved the earlier decision of the Supreme court dated 6 February 2013. As a consequence of the recent negative developments, Azercell has recorded a provision amounting to USO 20,077 in these consolidated financial statements. Staiting from I January 2013, Azercell is applying symmetric interconnection rate of USO 0.03 per minute as imposed by recent court resolution. :->rit;<:1waterhuuseCoopers !4cGourl!oints N v For identificati0n 1 )1.···!Y.lSeB onh-· . 57 Wt-, , = FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31 DECEMBER 2012 AND 2011 (Amounts expressed in thousands of USO unless otherwise indicntcd.) NOTE 21 - COMMITMENTS AND CONTINGENCIES (Continued) At 31 December 2012, Azercell has been engaged in litigation proceedings with Azerfon LLC, a mobile operator. On 27 January 2012, Azerfon LLC filed a claim in Baku City Administrative-Economic Court against the Azercell requesting repayment of USO 590 for interconnect traffic occurred during 2011, since Azerfon LLC has been applying a rate of USO 0.03 per minute to its outgoing traffic to Azercell starting from beginning of 2011. On 17 Februaiy 2012, Azercell filed a claim in Baku City Administrative-Economic Court against Azerfon LLC requesting repayment of USO 11,967 for interconnect traffic occurred during 2011, since Azercell has been applying a rate of USO 0.06 per minute for inbound and outbound traffic with Azerfon LLC starting from beginning of 2011. On 15 March 2013, Baku City Administrative-Economic Court rejected the claim of Azercell filed on 17 February 2012 and approved the claim of Azerfon LLC filed on 27 January 2012. On 15 April 2013, Azercell applied to Appeal Court to protest against the decision of Baku City Administrative-Economic Coutt dated 15 March 2013. However, hearings of the Appeal Court conducted on 18 June 2013 approved the earlier decision of Baku City Administrative-Economic Court and rejected Azercell's claim. As a consequence of the recent negative developments, Azercell has recorded a provision for impairment of receivables from Azerfon LLC amounting to USO 27,307. Starting from I January 2013 Azercell is applying asymmetric interconnection rate of USO 0.03 per minute to USO 0.06 per minute as imposed by recent comt resolution. Other legal proceedings and disputes Some of the subsidiaries are party to certain legal proceedings arising in the ordinary course of business. In management's opinion, there are no current legal proceedings or other claims outstanding which upon final disposition will have a material adverse effect on the consolidated financial position, results ofoperation or liquidity of Fintur. Operating leases Fintur leases operational and non-operational property and equipment under various non-cancellable operating leases. Future minimum commitments under operating leases at 31 December 2012 and 2011 are as follows: 2012 2011 Less than I year 32,395 27,582 Over I year not later than 3 years 64,045 27,221 ~~--'=--~~~~~~---=-~~~~~~~~~~~~~~~~~~~-=-~~~~~~~-= Aggregate minimum future lease payments 96,440 54,803 ------~~~~~~~~~~-----~~~~~~~~~~~~~~~~~~~~~~~- On 22 December 20 I 0, Kcell signed a Telecommunication Services Agreement (the "Agreement") with Kazakhtelecom. and amended it in December 2011. Based on this agreement Keel! fixed the capacity and the annual costs of lease of digital transparent communication channels and IP VPN network except for the international channels and in-city channels till the year 2020. The Agreement is non-cancellable till 3 I December 2015. ?riGe111 58 ~I J:it~tl/!1~'· . ' - FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31 DECEMBER 2012 AND 2011 (Amounts expressed in thousands of USO unless otherwise indicated.) NOTE 21 - COMMITMENTS AND CONTINGENCIES (Continued) Capital expe11dit11re co111111it111e11ts Kcell has contractual capital expenditure commitments in relation to the property and equipment amounting to USO 28,428 (2011: USO 17,575). The commitment relates to telecommunication equipment and construction of buildings. Moldcell has capital commitments in relation to the property and equipment amounting to USO 12,081 (2011: USO 6,386). The commitment relates to value added service platforms and equipment. Geocell has contractual capital expenditure commitments amounting to USO 26,925 in respect of GSM licence, licensed billing software, hardware and implernantation cost (2011: nil.) Azercell has no outstanding capital expenditure commitment as of 31 December 2012 (20 I I: USO 14,788). Commitments for future services Moldcell had commitments of USO 4, 148 (2011: USD 2,648), which includes commitments for service and maintenance of USO 2,976 (2011: USD 616) and advertising of USO I, 172 (2011: USO 2,032). NOTE 22 - EMPLOYEE BENEFIT EXPENSES The payroll costs for the years ended 31 December 2012 and 2011 were as follows: 2012 2011 Payro 11 costs I I 1,63 2 I 18,890 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ NOTE 23 - DEPRECIATION AND AMORTISATION EXPENSES The depreciation and amortisation expenses for the years ended 31 December 2012 and 2011 were as follows: 2012 2011 Depreciation 247,019 246,800 Amortisation 54,601 41,551 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~--''--~~~~~~~ Total 301,620 288,351 :"ricew 59 FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FlNANCIAL STATEMENTS AT 31DECEMBER2012 AND 2011 (Amounts expressed in thousands of USD unless otherwise indicated.) NOTE 24 - EVENTS AFTER BALANCE SHEET DATE I. As further discussed in Note 21, on 19 October 2012, Azercell applied to the Supreme Court of the Azerbaijan Republic and requested to cancel the resolution of the Appeal Court, dated 27 July 2012, which was in favour of Bakcell Ltd., and to send this issue for new investigation by Appeal Court Related hearing was conducted on 6 February 2013 and the Supreme Cou11 rejected Azercell's claim. Following this decision, Azercell applied to the Plenum of the Supreme Court. However hearings of the Plenum of the Supreme Court conducted on 1 April 2013 approved the earlier decision of the Supreme court dated 6 February 2013. As a consequence of the recent negative developments, Azercell has recorded a provision amounting to USO 20,077 in these consolidated financial statements. Stai1ing from I January 2013, Azercell is applying symmetric interconnection rate of USD 0.03 per minute as imposed by recent court resolution. 2. As fu11her discussed in Note 21, on On 17 February 2012, Azercell filed a claim in Baku City Administrative-Economic Court against Azerfon LLC requesting repayment of USO 11,967 for interconnect traffic occurred during 2011, since Azercell has been applying a rate of USO 0.06 per minute for inbound and outbound traffic with Azerfon LLC starting from beginning of 201 I. On 15 March 2013, Baku City Administrative-Economic Com1 rejected the claim of Azercell filed on 17 Februaiy 2012 and approved the claim of Azerfon LLC filed on 27 January 2012. On 15 April 2013, Azercell applied to Appeal Court to protest against the decision of Baku City Administrative-Economic Court dated 15 March 2013. However, hearings of the Appeal Court conducted on 18 June 2013 approved the earlier decision of Baku City Administrative-Economic Court and rejected Azercell's claim. As a consequence of the recent negative developments, Azercell has recorded a provision for impairment of receivables from Azerfon LLC amounting to USO 27,307. Starting from 1 Janua1}' 2013 Azercell is applying asymmetric interconnection rate of USO 0.03 per minute to USO 0.06 per minute as imposed by recent court resolution. 60 FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL ST ATEMENTS AT 31 DECEMBER 2012 AND 2011 (Amoun!s expressed in !housands of USO unless o!henvise indicated.) FINTUR HOLDINGS B.V. COMPANY-ONLY FINANCIAL STATEMENTS Prict:Jwaterr1u11st~Coopers /.\c;[.:Quntants i\l.V 61 FINTUR HOLDINGS B.V. COMPANY-ONLY FINANCIAL STATEMENTS AT 31DECEMBER2012 AND 2011 (Amounts expressed in thousands of USO unless otherwise indicated.) Balance sheets as at 31 December 2012 and 2011 (after proposed appropriation of profit) Note 2012 2011 Non-current assets: [ntangible assets 26 681,299 681,299 Financial assets 27 1,051,256 1,309,678 Total non-current assets 1,732,555 1,990,977 Current assets: Receivables 28 76,918 59,657 Cash at banks and on hand 3,53 I 115,277 Total current assets 80,449 174,934 Non-current liabilities: Financial liabilities 30 778,676 768,795 Total non-current liabilities 778,676 768,795 Current liabilities: Payables 31 16,819 16,081 Total current liabilities 16,819 16,081 Net current assets 63,630 158,853 Total assets less non-current and current liabilities 1,017,509 1,381,035 Equity: 29 Share capital 270,720 265,487 Additional paid-in capital 41,415 41,415 Currency translation reserve (77,674) (87,626) Other reserves 1,381,048 1,320,759 Dividend (598,000) (159,000) Total equity 1,017,509 1,381,035 PricewaterhouseC•jOpers i-\ccoun1ants f\J. \I r=or ldentiiicationJib n• ,..,,,1ses '::! i1v. 62 t~1Nt~ .<" FINTUR HOLDINGS B.V. COMPANY-ONLY FINANCIAL STATEMENTS AT 31DECEMBER2012 AND 2011 (Amounts expressed in thousands of USO unless other\\'isc indicated.) Profit and loss account for the years ended 31December2012 and 2011 Note 2012 2011 Result from participations after taxation 27 306, 123 414,365 Other income and expenses after taxation (81,601) (44,750) Result after taxation 224,522 369,615 Pricewmerhous;~Coopers Accountants N. \/. For ldentific2tion 111 1.. r,nse.~: ·Jnlv Flh 63 ~JIH:h FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STA TEMENTS AT 31 DECEMBER 2011 AND 2010 (Amounts expressed in thousands of USO unkss otherwise indicated.) NOTE25-GENERAL Basis ofprese11wtio11 The company-only financial statements of Fintur Holdings B.Y. (the 'Company' or 'Fintur') have been prepared in accordance with Part 9, Book 2 of the Dutch Civil Code. In accordance with subsection 8 of section 362, Book 2 of the Dutch Civil Code, the measurement principles and determination of assets, liabilities and results applied in these company-only financial statements are the same as those applied in the consolidated financial statements (see note 2 of the consolidated financial statements). Investments Subsidiaries are all ent1t1es (including special-purpose entities) over which the Company has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Company controls another entity. Associates are all entities over which the Company has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in subsidiaries and associates are valued using the equity method. The Company calculates the equity value using the accounting policies as described in note 2 to the consolidated accounts. The net equity value of the subsidiaries comprises the cost, excluding goodwill, plus the Company's share in income and losses since acquisition, less dividends received. The Company's investment in associates includes goodwill (net of any accumulated impairment loss) identified on acquisition whereas it is excluded for investment in subsidiaries. The Company's share of its associates' and subsidiaries' post-acquisition profits or losses is recognised in the income statement, and its share of post-acquisition movements in retained earnings is recognised in retained earnings. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. NOTE 26- INTANGIBLE ASSETS Goodwill 2012 2011 Book value as at 1 January 681,299 682,433 Accumulated impairments and amortisation (I, 134) Book value as at 31 December 681,299 681,299 64 FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STA TEMENTS AT 31 DECEMBER 2011 AND 2010 (Amounts expressed in thousands ur USO unless otherwise indicated.) NOTE 27 - FINANCIAL ASSETS An overview of the movements of the financial fixed assets is taken up below: Investments in group companies 2012 2011 Book value as at 1 January 1,309,678 1,154,051 Movements: Dividends received ( 459,839) (248,309) Exchange differences 9,930 (3,818) Result from participations 306, 123 414,365 Capital (decrease)/increase in subsidiary (49,337) 13,326 Repayment of share capital to the non-controlling shareholder holding the put option (23, 799) Contribution of share capital by the non-controlling shareholder holding the put option 10,950 Written put option (41,500) (30,887) Total movements during the J'ear (258,422) 155,627 Book value as at 31 December 1,051,256 1,309,678 Accumulated decreases in value and write-downs List ofparticipations Statutory seat Share in equity Consolidated using the full consolidation method Azercell Telecom LLC Baku, Azerbaijan 51 Azertel Telekomi.inikasyon Yatmm ve 01~ Ticaret A.$. Istanbul, Turkey 51 Azeronline Ltd. Baku, Azerbaijan 26 Geocell LLC Tblisi, Georgia 100 Giirtel Telekomiinikasyon Yatmm ve 01~ Ticaret A.$. Istanbul, Turkey 100 Keel! JSC Almaty, Kazakhstan 51 AR-Telecom LLP Almaty, Kazakhstan 51 KT-Telecom LLP Almaty, Kazakhstan 51 l.M. Moldcell S.A. Chisinau, Moldova 100 Molfintur S.R.L. Chisinau, Moldova 99 NOTE 28 - RECEIVABLES 2012 2011 Amounts due from group companies 76,918 59,649 Other 8 Total .. 76,918 59,657 ; ·. i .... ceoetc.1I1uuseC 1;upd/S Accouruants N. v 65 Fm Identification .... ''"'(ISO:n. crtlv ~. . FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011 AND 2010 (Amounts expressed in thousands of USO unless otherwise indicated.) NOTE 29 - EQUITY Share capital The number of authorised shares totalling 1,930,000,000 ordinary shares remained unchanged compared to the prior year. Issued share capital amounts to EUR 205,200,000 and consists of 540,000,000 ordinary shares with a nominal value of EUR 0.38 and remained unchanged compared to the prior year. The movement in equity in 2012 can be shown as follows: Issued Additionally Currency At the disposal share paid-in translation Other of the AGl\IE capital capital reserve reserves (dividend) Total Balances as at I January 2012 265,487 41,415 (87,626) 1,320,759 (159,000) 1,381,035 Transfers ( 159,000) 159,000 Dividend (598,000) (598,000) Translation of EUR share capital in USO(*) 5,233 (5,233) Translation of foreign participations 9,952 9,952 Profit for the year 224,522 224,522 Balances as at 31December2012 270,720 41,415 (77,674) 1,381,048 (598,000) 1,017,509 (*) Translation of EUR share capital in USO using an exchange rate of I EUR - USD 1.32. NOTE 30 - NON-CURRENT LIABILITIES 2012 2011 Financial liability put option (note 15) 778,676 768,795 NOTE 31 - CURRENT LIABILITIES 2012 2011 Deferred tax liability with respect to unremitted earnings 15,504 14,974 Short-term payable to related parties 61 Other liabilities 1,315 1,046 Total 16,819 16,081 NOTE32-ENlPLOYEES Similar to the prior year, there are no employees working for the Company. Pric:ewat8,'.hous1'.!C:oopers i~ccouniants l'J. \I For ldent1t1ca\k,1·~ ...,. 1 ~""·n:;;t;~;!!- :.=~· 1 :~· 66 =~±. FINTUR HOLDINGS B. V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011AND2010 (Amounts expressed in thousands of USO unless otherwise indicated.) NOTE 33 - REMUNERATION OF THE BOARD Short-term employee benefits paid to key management personnel, defined as directors, for their services in full time executive management positions is made up of a contractual salary, perfonnance bonus depending on financial performance of the Company and other compensation in fonn of reimbursement of apa1iment rent expenses. Shoti-term employee benefits paid to key management personnel included in general and administrative expenses for the year ended 31 December 2012 amounted to USO 5,899 (2011: USO 5,622). NOTE 34 - RELATED PARTIES The Company has recognised interest income on its amounts due from subsidiaries of USD 4,264 and USD 4, 102 over the years 2012 and 20 I 1, respectively. Additionally the Company incurred net operating expenses of USO 13,958 and USD 17,029 for costs charged by its subsidiaries over the years 20 I 2 and 2011, respectively. Rotterdam, 26 November 2013 Board of Directors, C. Luiga M.Ciliv L. Develioglu 67 FINTUR HOLDINGS B.V. NOTES TO THE CONSOJLIDA'lf'IEJ!) FINANCilAL STATEMENTS AT 31ID>ECEMBJER20lll ANID 2010 (Amounts expressed in thousands of USO unless otherwise indicated.) NOTJE 33 - REMUNERATION OF THE BOARD Short-term employee benefits paid to key management personnel, defined as directors, for their services in full time executive management positions is made up of a contractual salary, perfonnance bonus depending on financial perfom1ance of the Company and other compensation in form of reimbursement of apartment rent expenses. Short-term employee benefits paid to key management personnel included in general and administrative expenses for the year ended 31 December 2012 amounted to USO 5,899 (2011: USD 5,622). NOTE 34- RELATED PARTIES The Company has recognised interest income on its amounts due from subsidiaries ofUSD 4,264 and USD 4, I 02 over the years 2012 and 20 l I, respectively. Additionally the Company incurred net operating expenses of USD 13,958 and USD 17,029 for costs charged by its subsidiaries over the years 2012 and 2011, respectively. Rotterdam, 26 November 2013 de handtekening is door de Kvl< M.Ciliv onleesbaar gemaakt --- de handtekening L. Develioglu is door de Kvl< onleesbaar gemaakt Jl~ (,!. &ft l {J /t.4 ~_) d,i U'c/717 QA. J/-l1~l<1lj. 67 FINTUR HOLDINGS B. V. NOTES TO THE CONSOLIDATED FINANC~AL ST ATIEMENTS AT 31DECEMBER2011AND2010 (Amounts expressed in thousands ofUSD unless otherwise indicated.) NOTE 33 - REMUNERi\TION OF THE BOARD Short-tenn employee benefits paid to key management personnel, defined as directors, for their services in full time executive management positions is made up of a contractual salary, perfo1111a11ce bonus depending on financial performance of the Company and other compensation in form of reimbursement of apartment rent expenses. Short-tenr1 employee benefits paid to key management personnel included in general and administrative expenses for the year ended 31 December 2012 amounted to USO 5,899 (2011: USD 5,622). NOTE 34- RELATED PARTIES the Company has recognised interest income on its amounts due from subsidiaries of USD 4,264 and USO 4, 102 over the years 2012 and 2011, respectively. Additionally the Company incurred net operating e?~penses of USO 13,958 and USO 17 ,029 for costs charged by its subsidiaries over the years 2012 and 2011, respectively. Rotterdam, 26 November 2013 Board of Directors, - de handtekening !· is door de t Jii-. I } c~ (.,l. !ft. l !!J /t.4 t:.J d.J z~ch1 0 ;.. J1--t?~l~1J. 67 FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2012 AND 2011 (Amounts expressed in thousands of USO unless otherwise indicated.) OTHER lNFORMA TION '-'ricewat h c ~. e~ o~se oopers Accountants f1J v • x ldent1f1cal1on r. 1 "'Vise:; only · · 68 =hlb Til.Ml~ FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL ST A TEMENTS AT 31DECEMBER2012 AND 2011 (Amounts expressed in thousands of USD unless otherll'ise indicated.) PROFIT APPROPRIATION ACCORDING TO THE ARTICLES OF ASSOCIATION According to article 21. I of the Articles of Association the result for the year is at the free disposal of the General Meeting of Shareholders. The Company is only capable of making contributions to shareholders and other persons who are entitled to profits that qualify for distribution insofar as the Company's equity is in excess of the paid and called-up portion of the share capital increased by the reserves that must be set aside under the provisions of the law. PROPOSED PROFIT APPROPRIATION The Board proposes to add the profit of USO 224,522,000 to the other reserves. USO'OOO Addition to other reserves 224,522 Total 224,522 DIVIDENDS Based on the general meeting of shareholders dated 25 June 2013, the Company declared dividends amounting to USO I 05 million. EVENT AFTER BALANCE SHEET DA TE As further discussed in Note 21, on 19 October 2012, Azercell applied to the Supreme Court of the Azerbaijan Republic and requested to cancel the resolution of the Appeal Court, dated 27 July 2012, which was in favour of Bakcell Ltd., and to send this issue for new investigation by Appeal Court. Related hearing was conducted on 6 February 2013 and the Supreme Court rejected Azercell's claim. Following this decision, Azercell applied to the Plenum of the Supreme Comt. However hearings of the Plenum of the Supreme Court conducted on 1 April 2013 approved the earlier decision of the Supreme court dated 6 February 2013. As a consequence of the recent negative developments, Azercell has recorded a provision amounting to USO 20,077 in these consolidated financial statements. Starting from I January 2013, Azercell is applying symmetric interconnection rate of USO 0.03 per minute as imposed by recent court resolution. As further discussed in Note 21, on On 17 February 2012, Azercell filed a claim in Baku City Administrative-Economic Court against Azerfon LLC requesting repayment of USO 11,967 for interconnect traffic occurred during 2011, since Azercell has been applying a rate of USO 0.06 per minute for inbound and outbound traffic with Azerfon LLC starting from beginning of 2011. On 15 March 2013, Baku City Administrative-Economic Court rejected the claim of Azercell filed on 17 February 2012 and approved the claim of Azerfon LLC filed on 27 January 2012. On 15 April 2013, Azercell applied to Appeal Court to protest against the decision of Baku City Administrative-Economic Cou1t dated 15 March 2013. However, hearings of the Appeal Court conducted on 18 June 2013 approved the earlier decision of Baku City Administrative-Economic Court and rejected Azercell's claim. As a consequence of the recent negative developments, Azercell has recorded a provision for impairment of receivables from Azerfon LLC amounting to USO 27,307. Starting from I January 2013 Azercell is applying asymmetric interconnection rate of USO 0.03 per minute to USO 0.06 per minute as imposed by recent cou11 resolution. PricewaterhouseCoopers Accountants l\!.V. 69 For ldentificalion rn "n0se£. only ~ JDH!ifl'. FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31 DECEMBER 2012 AND 2011 (Amounts expressed in thousands of USO unless otherwise indicated.) P~ce~at~~houseCoopers .(\ccovniants f\J. V. Fur lm~nuf1cat1on ,,, 'rnoses 01111, 70 =~ pM!C pwc Independent auditor's report To: the general meeting of Fintur Holdings B.V. Report on the financial statements We have audited the accompanying financial statements 2012 of Fintur Holdings B.V., Rotterdam. The financial statements include the consolidated financial statements and the company financial statements. The consolidated financial statements comprise the consolidated balance sheet as at 31 December 2012, the consolidated statement of income, the consolidated statement of comprehensive income, changes in equity and cash flows for the year then ended and the notes, comprising a summary of significant accounting policies and other explanatmy information. The company financial statements comprise the company-only balance sheet as at 31 December 2012, the company-only statement of income for the year then ended and the notes, comprising a summary of accounting policies and other explanatory information. Board of directors' responsibility The board of directors is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards as adopted by the European Union and with Part 9 of Book 2 of the Dutch Civil Code, and for the preparation of the Report of the Board of Directors in accordance with Part 9 of Book 2 of the Dutch Civil Code. Furthermore, the board of directors is responsible for such internal control as it determines is necessary to enable the preparation of the financial statements that are free from material misstatement, whether due to fraud or error. Auditor's responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance ''tith Dutch law, including the Dutch Standards on Auditing. This requires that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the company's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the board of directors, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. PricewaterhouseCoopers Accountants N. V., Prinses Marg1·ietplantsoe11 46, 2595 BR The Hague, P.O. Box 30715, 2500 GS The Hague, The Netherlands, T: +31(o)88 792 oo 70, F: +31 (o) 88 792 95 20, www.pwc.nl 'PwC' is lhe brand under which PricewaterhouseCoopers Accounlants N.V. (Chamber of Commerce 34180285), PricewaterhouseCoopers Belastingadviseurs N.V.· (Chamber of Commerce 34180284). PricewaterhouseCoopers Advisory N.V. (Chamber of Commerce 34180287), PricewaterhouseCoopers Compliance Services B.V. (Chamber of Commerce 51414406), PricewaterhouseCoopers Pensions, Actuarial & Insurance Services B.V. (Chamber of Commerce 54226368), PricewaterhouseCoopers B.V. (Chamber of Commerce 34180289) and other companies operale and provide services. These services are governed by General Terms and Conditions ('algemene voorwaarden'), which include provisions regarding our liability. Purch<:ises by these companies are governed by General Terms and Conditions or Purchase ('algemene inkoopvoorwaarden'). At www.pwc.nl more detailed information on these companies is available. induding lhese General Terms and Conditions and the General Terms and Condilions or Purchase, which have also been filed al the Amsterdam Chamber of Commerce pwc- Opinion with respect to the consolidated.financial statements In our opinion, the consolidated financial statements give a true and fair view of the financial position of Fintur Holdings B.V. as at 31 December 2012, and of its result and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union and with Part 9 of Book 2 of the Dutch Civil Code. Opinion with respect to the company financial statements In our opinion, the company financial statements give a true and fair view of the financial position of Fintur Holdings B.V. as at 31 December 2012, and of its result for the year then ended in accordance with Part 9 of Book 2 of the Dutch Civil Code. Report on other legal and 1·egulatory requfrements Pursuant to the legal requirement under Section 2: 393 sub 5 ate and f of the Dutch Civil Code, we have no deficiencies to report as a result of our examination whether the Repo1t of the Board of Directors, to the extent we can assess, has been prepared in accordance with Part 9 of Book 2 of this Code, and whether the information as required under Section 2: 392 sub 1 at b-h has been annexed. Further we report that the Report of the Board of Directors, to the extent we can assess, is consistent with the financial statements as required by Section 2: 391 sub 4 of the Dutch Civil Code. The Hague, 27 November 2013 PricewaterhouseCoopers Accountants N.V. Original has been signed by: W.A. Schouten RA Page 2 of2