KvK Rotterdam/Rotterdam 3 1 JAN. 2013
FINTUR HOLDINGS B.V.
CONSOLIDATED FINANCIAL STATEMENfS AT 31 DECEMBER 2011 TOGETHER WITH INDEPENDENf AUDITORS' REPORT
adopted by the general meeting of shareholders by resolution passed on 29 Jamuary 2013
vastgesteld door de algemene vergadering van aandeelhouders bij besluit op 29 januari 2013
Prkt.'\\illl:rhou.sc(;oopers A<:countm11s N. \'. For idenlifirolion purpo~ouly lo pwc FINTUR HOLDINGS B.V.
CONTENTS
CONTENTS PAGES
REPORT OF THE BOARD OF DIRECTORS ...... 3-5
CONSOLIDATED FINANCIAL STATEMENTS...... 6 - 58
CONSOLIDATED BALANCE SHEETS...... 7
CONSOLIDATED STATEMENTS OF INCOME...... 9
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME...... 10
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY...... 11
CONSOLIDATED STATEMENTS OF CASH FLOWS...... 12
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS...... 13-58
NOTE I ORGANISATION AND NATURE OF OPERATIONS...... 7-8 NOTE 2 BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT RELEVANT ACCOUNTING POLICIES...... 9-33 NOTE 3 SEGMENT INFORMATION...... 34-37 NOTE 4 CASH AND CASH EQUIVALENTS...... 38 NOTE 5 TRADE RECEIVABLES...... 38-40 NOTE 6 TRANSACTIONS AND BALANCES WITH SHAREHOLDERS AND OTHER RELATED PARTIES...... 40-41 NOTE 7 INVENTORIES...... 42 NOTE 8 OTHER CURRENT ASSETS...... 42 NOTE 9 PROPERTY AND EQUIPMENT ...... 43-44 NOTE IO INTANGIBLE ASSETS...... 45-47 NOTE 11 TRADE PAYABLES...... 47-48 NOTE 12 TAXATION ON INCOME...... 48-50 NOTE 13 OTHER CURRENT LIABILITIES...... 51 NOTE 14 OTHER NON-CURRENT LIABILITIES...... 51-52 NOTE 15 SHARE CAPITAL...... 52 NOTE 16 COST OF SERVICES...... 53 NOTE 17 GENERAL AND ADMINISTRATIVE EXPENSES...... 53 NOTE 18 SELLING AND MARKETING EXPENSES...... 54 NOTE 19 FINANCIAL INCOME AND EXPENSES...... 54 NOTE 20 COMMITMENTS AND CONTINGENCIES...... 54-58 NOTE 21 EMPLOYEE BENEFIT EXPENSES...... 58 NOTE 22 DEPRECIATION AND AMORTISATION EXPENSES...... 58 NOTE 23 EVENT AFTER BALANCE SHEET DATE...... 58
COMPANY-ONLY FINANCIAL STATEMENTS...... 59-65
COMPANY-ONLY BALANCE SHEETS...... 60
COMPANY-ONLY STATEMENTS OF INCOME...... 61
NOTES TO THE COMPANY-ONLY FINANCIAL STATEMENTS ...... 62-65
NOTE 24 GENERAL...... 62 NOTE 25 INTANGIBLE ASSETS ...... 62 NOTE 26 FINANCIAL ASSETS ...... 63 NOTE 27 RECEIVABLES ...... 63 NOTE 28 SHAREHOLDERS' EQUITY ...... 64 NOTE 29 NON-CURRENT LIABILITIES ...... 64
PricC\\tlterhouseC'oo~r.; At't'OUntants N.V. For identification putpo.<'.('S on!) Jill pwc FINTUR HOLDINGS B.V.
CONTENTS
NOTE 30 CURRENT LIABILITIES ...... 64 NOTE 31 EMPLOYEES ...... 64 NOTE 32 REMUNERATION OF THE BOARD ...... 65 NOTE 33 RELATED PARTIES ...... 65
OTHER INFORMATION...... 66
•PROFIT APPROPRIATION ACCCORDING TO THE ARTICLES OF ASSOCIATION...... 67
•PROPOSED PROFIT APPROPRIATION...... 67
• DIVIDENDS...... 67
• EVENT AFTER BALANCE SHEET DATE...... 67
•AUDITOR'S REPORT...... 68
PricC'\\':tlC'rl1ouscCoopcr.: 1kt:oun1nnlS N. \'. 2 For idenlilirotion purposes only ~ pwc FINTUR HOLDINGS B.V.
REPORT OF THE BOARD OF DIRECTORS
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 2011.
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 2011 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 2011:
Revenues increased by 9.3% to USO 1,957.9 million (2010: USO 1,791.7 million). The increase is mainly driven by Kcell in Kazakhstan.
The Company made a (consolidated) profit to the amount of USO 369,615,000 (20 I 0: USO 302,320,000). This profit resulted mainly from the Company's paiticipation in the GSM business in Kazakhstan and in Azerbaijan. During 2011 the Company's GSM activities in all countries realised a profit.
The amount of distributable reserves is USO I, 116 million as at 31 December 20 I I. As at 31 December 2011, Fintur has a sound financial position evidenced by the fact that shareholders' equity amounts to 63% of total assets, which is higher than as in the previous financial year (59%).
In Georgia, due to continued regulatory pressure in 2011, introduction of 10% excise tax in late 2010 and unhealthy competition situation in the market, Geocell recorded negative growth in revenue of9%.
On 1 July 2011, the Ministry of Communication and Information Of Kazakhstan extended Kcell's general licence for an unlimited period of time.
In December 20 I I, Azercell purchased the right to use frequency ranges required to render 3G services in Azerbaijan.
In Moldova, political instability continued due to unce1tainty in presidential elections.
Cash flows During 20 I I the GSM activities of the Company rendered positive cash flows. The GSM activities of the Company are showing a strong growth.
In the year 2010, the Company invested approximately USO 34 I million in tangibles and USO 97 million in intangibles.
Piicewnlerhou."l'Coo)lf"r.I At"l'OUnlanls N.V. 3 For identification purposes only pwc FINTUR HOLDINGS B.V.
REPORT OF THE BOARD OF DIRECTORS
Personnel As at the end of December 2011 the number of personnel of the Company (on a consolidated basis) was 3, I 00 which is an increase of 6% compared to 20 I 0. 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 ans mg from various currency exposures, primarily with respect to the USO. These 1isks 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 2012
For the near future, management of the Company expects:
In 2012,, in local currency, a revenue growth of 6%, and an increase of 7,5% in profitability is forecasted.
The Company will continue to invest in the fu1ther expansion of the network and thus the level of investments will be in line with 201 I. 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, I 72 at the end of 20 I 2 in order to suppo1t the expected growth of the business.
During the first quarter of 20 I 2 another TeliaSonera AB group company acquired 49% shares in Kcell from Kazakhtelekom. Further to this acquisition Kcell and TeliaSonera group are initiating preparations for an IPO of25% of the shares (minus I share) in Kcell. PricewaterhouscCoopcrs Accounlnnts N.V. 4 For identification purpose$ only Jill pwc FINTUR HOLDINGS B.V.
REPORT OF THE BOARD OF DIRECTORS
In Georgia, regulator pressure is expected to continue during 2012, with a possibility of further negative impact on the mobile communications market in the country.
In Moldova, the new President has been elected in QI 2012. As a result, political stability is expected to positively impact the overall economy of the country.
In Moldova and Azerbaijan, a 4G license is expected to be granted within 2012. The acquisition of such 4G licence and the subsequent network roll-outs will need significant investments and this will potentially impact the profitability for the near future.
Rotterdam, 30 August 2012
Board of Directors:
T.E. Kivisaari M.S. Cllfv
Sonera Holding B.V. L. Develioglu (appointed 30 November 2011)
E.J. Rytkonen
PriccwntcrhouseC'oopcrs Au'OtlnlanlS N.\'. 5 For idcntifil-alion purposes on~·
pwc FINTUR HOLDINGS B.V.
CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011
CONSOLIDATED FlNANCIAL STATEMENTS
PrkcwalerhouseCoopers A<."COunlnnls N.\'. 6 For idcn1ifiro1ion purpos<.!'S only ~ pwc FINTUR HOLDINGS B.V.
CONSOLIDATED BALANCE SHEETS AT 31DECEMBER2011AND2010 (Amounts expressed in thousands ofUSD unless othem~se indicated.)
Note 2011 2010
ASSETS
Current assets: Cash and cash equivalents 4 241,094 251,994 Trade receivables 5 137,935 113,102 Due from related parties 6 16,044 14,220 Inventories 7 19,437 13,208 Other cu1Tent assets 8 76,682 59,074
Total current assets 491,192 451,598
Non-current assets: Prope1ty and equipment 9 1,379,737 1,283,595 Intangible assets 10 1,025,890 963,756 Deferred income tax assets 12 13,583 10,979 Other non-current assets 1,587 5,339
Total non-current assets 2,420,797 2,263,669
Total assets 2,911,989 2,715,267
These consolidated financial statements were authorised for issue by the board of directors on 17 February 2012 and were signed on its behalf by Mr. Tero Kivisaari ("Chaim1an and Chief Executive Officer") and Mr. Tolga Koktlirk ("Chief Financial Officer").
The notes on pages 13 to 58 form an integral part of these consolidated financial statei;Q;~\H~ihousceoopc»A«a•m•:u•lSN.v. For identifimtion purpO.<;l"S only 7 ~ pwc FINTUR HOLDINGS B.V.
CONSOLIDATED BALANCE SHEETS AT 31DECEMBER2011AND2010 (Amounts expressed in thousands ofUSD unless otherwise indicated.)
Note 2011 2010
LIABILITIES AND EQUITY
Current liabilities: Trade payables 11 124,754 116,860 Due to related parties 6 1,513 20,224 Current income tax liabilities 6,378 22,182 Other current liabilities 13 100,320 130,519
Total current liabilities 232,965 289,785
Non-current liabilities: Deferred income tax liabilities 12 52,805 37,583 Other non-current liabilities 14 772,435 774,166
Total non-current liabilities 825,240 811,749
Total liabilities 1,058,205 1,101,534
Equity: Share capital 15 189,059 189,059 Additional paid-in capital 15 349,059 349,059 Retained earnings 930,543 719,928 Cumulative translation adjustment (87,626) (83,808)
Equity attributable to the shareholders of Fintur Holdings B.V. 1,381,035 I, 174,238
Non-controlling interest 472,749 439,495
Total equity 1,853,784 1,613,733
Total equity and liabilities 2,911,989 2,715,267
The notes on pages 13 to 58 form an integral part of these consolidated financial statei';J;~m'.l.S~':.'.:~:;;::::;,:;.-:~~""'"' N.v. 8 FINTUR HOLDINGS B.V.
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED 31DECEMBER2011AND2010 (Amounts expressed in thousands ofUSD unless otherwise indicated.)
Note 2011 2010
Revenues, net 3 1,957,904 1,791,725 Cost of services 16 (802,953) (692,757)
Gross profit 1,154,951 1,098,968
General and administrative expenses 17 (146,923) (141,061) Selling and marketing expenses 18 (247,066) (256,418)) Other operating expenses, net (12,836) (62,320)
Operating profit 748,126 639,169
Interest income 19 9,280 6,940 Financial income, net 19 20,202 2,129
Profit before taxation on income 777,608 648,238
Taxation on income 12 (174,421) (151,741)
Profit for the year 603,187 496,497
Attributable to: - equity holders ofFintur Holdings B.Y. 369,615 302,320 - non-controlling interest 233,572 194,177
Total 603,187 496,497
The notes on pages 13 to 58 form an integral part of these consolidated financial stateft\.~j)1,,~~~:,;;:::;'.:,C:,~~···•·~·"· 9 _J~, pwc FINTUR HOLDINGS B.V.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED 31DECEMBER2011AND2010 (Amounts expressed in ~iousands ofUSD unless otherwise indicated.)
2011 2010
Profit for the year 603,187 496,497
Currency translation differences (7,231) (22,854)
Total comprehensive income for the year 595,956 473,643
Attributable to: - equity holders ofFintur Holdings B.Y. 365,797 294,363 - non-controlling interest 230,159 179,280
Total 595,956 473,643
The notes on pages 13 to 58 form an integral part of these consolidated financial statefl'ient~rhouseeoo"""'"'~"'""'""ts~.v . ._ - For idi-nt1fici.1ion purpo~t>.s ouly 10 Jill, pwc FINTUR HOLDINGS B.V.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED 31 DECEMBER 2011 AND 2010 (Amounts expressed in thousands ofUSD unless otherwise indicated.)
Equity attributable to shareholders of Fintur Holdin2s B.V. Additional Cumulative Share paid-in Retained translation Non-controlling Total capital capital earnings adjustment Total interest equity
Balances at I January 2010 189,059 349,059 677,608 {75,851} 1,139,875 405,846 1,545,721
Total comprehensive income for the year - - 302,320 (7,957) 294,363 179,280 473,643 Dividend declared - - (260,000) - (260,000) ( 145,631) (405,631)
Balances at 31 Deccm ber 2010 189,059 349,059 719,928 (83,808) 1,174,238 439,495 1,613,733
Balances at 1 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 31 December 2011 189,059 349,059 930,543 (87,626) 1,381,035 472,749 1,853,784
The notes on pages 13 to 58 form an integral part of these consolidated financial statements. Prit"f'\\ttlt'rhouseCooprrs A('('011ntan1s N.V. For identilirntion purpo..<;{'s only 11 J.@, pwc FINTUR HOLDINGS B.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED 31DECEMBER2011AND2010 (Amounts expressed in thousands ofUSD unless otherwise indicated.)
Note 2011 2010
Profit before taxation on income 777,608 648,238 Adjustments to reconcile profit before taxation on income to net cash provided by operating activities: Depreciation and arno1tisation 9, 10, 22 288,351 254,333 Interest expense 19 325 399 Change in deferred revenue 13 (33,257) 41,971 Provision for impairment of receivables 5 2,949 3,722 Interest income 19 (9,280) (6,940) Change in the fair value of put option liability 14 29,073 67,196
Changes in operating assets and liabilities: Increase in inventories (6,229) (4, 156) (lncrease)/decrease in trade receivables and due from related parties (29,606) 19,233 (Increase)/decrease in other assets (3,805) 45,817 Decrease/(increase) in restricted cash 4 28 (22) Increase/( decrease) in trade payables and due to related parties 10,961 (10,616) Decrease in other liabilities (7,809) (41,863) Interest paid (325) (2,065) Income taxes 12aid {186,776} (146,808}
Net cash provided by operating activities 832,208 868,439
Investing activities: Proceeds from sale of prope1ty and equipment 9 5,650 2,592 Proceeds from sale of intangible assets 10 2,080 3,136 Purchase of property and equipment 9 (340,649) (295,626) Purchase of intangible assets 10 (96,771) (72,171) Interest received 9,280 2,887
Net cash used in investing activities (420,410) (359,182)
Financing activities: Repayment of put option liability 14 (30,887) (48,295) Dividend paid to group companies ( 159,000) (186,100) Dividend paid to non-controlling interest (217,806) (181,095) Contribution of share capital by the non-controlling shareholder holding the put option 14 10,950 Transactions with non-controlling shareholders 1,687
Net cash used in financing activities (395,056) (415,490)
Net increase in cash and cash equivalents 16,742 93,767 Cash and cash equivalents at beginning of the period 4 251,836 170,141
Effect of exchange rate changes on cash and cash equivalents (27,614) (12,072)
Cash and cash equivalents at end of the year 4 240,964 251,836
The notes on pages 13 to 58 form an integral part of these consolidated financial statef~~J~1~i,;,::~;:;:~;;~';;:'.'''"" N.v. 12 Jill. pwc FINTUR HOLDINGS B.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011AND2010 (Amounts expressed in thousands ofUSD unless othc1wise indicated.)
NOTE 1-0RGANISATION 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 pa1ticipation and investment in various businesses in the telecommunications and high technology sectors.
Fintur has two primary shareholders, Turkcell ileti~im Hizmetleri A.S. ("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 2011 is 3,070 (20 I 0: 2,988).
At 31 December 2011, subsidiaries of Fintur (the "Subsidiaries") and their locations are as follows:
Location
Azercell Telekom B.M. ("Azercell'') Azerbaijan Azeronline B.M. ("Azeronline") Azerbaijan Aze1tel Telekomi.inikasyon Yatmm ve Di~ Ticaret A.S. ("Azertel") Turkey Geocell LLC ("Geocell") Georgia Gi.irtel Telekomi.inikasyon Yatmm ve D1~ Ticaret A.S. ("GU1tel") Turkey GSM Kazakhstan LLP OAO Kazakhtelecom ("Kcell") Kazakhstan AR-Telecom LLP ("AR-Telecom") Kazakhstan KT-Telecom LLP ("KT-Telecom") Kazakhstan l.M.Moldcell S.A. ("Moldcell") Moldova Molfintur S.R.L. ("Molfintur") Moldova
Azerbaijan operations
Aze1tel has a 100% 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 I icence for a twenty-year period. On 23 December 2011, Azercell purchased the right to use the frequency ranges that are required to render 3G services in Azerbaijan. Azercell has a 51 % share in Azeronline, an internet service provider.
Georgia operations
Gi.irtel has a I 00 % share in Geocell. Geocell is a cellular phone carrier, which operates in accordance with a non-exclusive GSM licence. Geocell operates in accordance with the following non-exclusive licences issued by Georgian National Communications Commission:
GSM 1800 licence - issued on 2 June 2006 and expires on 13 August 2013; WCFMA/UMTS licence - issued on 14 June 2006 and expires on 9 June 2016; GSM 900 licence - issued on 2 April 2007 and expires on 2 April 2017; GSM 900/1800 licence - 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. PricowaterhouscCoopcrsMrountantsS.V. f.or idcntilicrttion pul'po:>es only 13 ~ pwc FINTUR HOLDINGS B.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011 AND 2010 (Amounts expressed in thousands ofUSD unless otherwise indicated.)
NOTE 1 - ORGANISATION AND NATURE OF OPERATIONS (Continued)
Kazakhstan operations
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. Kce11 acquired AR-Telecom in 2007 and KT-Telecom in 2008 for the WiMAX licences held by these companies. In 2010, KT-Telecom and AR-Telecom commenced their operating activities.
On I December 2010, Kce11 launched 3G services in Astana and Almaty based on the temporary permission. On 25 December 20 I 0, the competent authority signed an addendum to the existing GSM licence, which provides Kcell with a right to operate 3G network. The addendum requires Kce11 to provide all locations with population over I 0,000 people with mobile services using UMTS/WCDMA standards until I January 2015.
On 1 July 2011, the Ministry of Communication and Information of Kazakhstan extended the Kcell's general licence from initial 15 years to unlimited period oftime.
Moldova operations
Moldce11 was established to operate as one of the three GSM operators in the Republic of Moldova. Moldce11 is Iicenced 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. In 2009, Moldcell obtained a 3G licence.
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 2011 have been prepared in accordance with International Financial Repotiing Standards (IFRSs) as adopted by the European Union.
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 ce11ain items at fair value.
The preparation of financial statements in accordance with IFRS requires the use of ce11ain 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.
PriccwntcrhouseCoopers t\t."l"OUnlants N,\', For identification purposes only 14 A pwc FINTUR HOLDINGS B.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011AND2010 (Amounts expressed in 01ousands ofUSD unless o01erwise indicated.)
NOTE 2 - BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT RELEVANT ACCOUNTING POLICIES (Continued)
2.2 Foreign currency translation
(a) Functional and presentation currency
Items included in the financial statements of each of the Group's ent1t1es are measured using the cu1Tency 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 cu1Tency.
(b) Transactions and balances
Foreign currency transactions are translated into the functional currency 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 period end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of income.
(c) Group companies
The results and financial position of all Group entities 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.
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 equity.
The following tables summarizes the period end and average exchange rates of local currencies for Fintur and its subsidiaries for 1.00 US dollar at 31 December 2011 and 20 I 0 and for the years then ended: 2011 2010 31 December 31 December 31 December 31 December period end average period end average
Kazakhstan Tenge 148.4 146.6 147.50 147.35 Azeri Manat 0.79 0.79 0.80 0.80 Georgian Lari 1.67 1.69 1.77 1.78 Turkish Lira 1.89 1.67 1.55 1.56 Moldovan Lei 11.7 11.7 12.1 12.3 Euro ("EUR") 0.78 0.72 0.75 0.75
Pricew:ttcrhouseCoopers Accountnnts N.V. For idcnlificalion purpo.. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011AND2010 (Amounts expressed in thousands ofUSD unless otherwise indicated.) NOTE 2 - BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT RELEVANT ACCOUNTING POLICIES (Continued) 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 USD in these consolidated financial statements should not be construed as a representation that such local currency amounts have been, could be or will in the future be converted into USD 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 transferTed, the liabilities incwTed to the fom1er 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. 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. lntercompany 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. PricewnlcrhouseCoopers An'Ounlants N.\', For identifi<.":llion purposes only 16 ~ pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011AND2010 (Amounts expressed in thousands of USO unless othe1wise indicated.) NOTE 2 - BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT RELEVANT ACCOUNTING POLICIES (Continued) The table below sets forth Fintur's ownership percentage in subsidiaries and their business segments at 31 December 2011 and 20 I 0: 2011 2010 Name Business segment O/o % Azercell GSM 51 51 Azeronline Other 26 26 Azertel Other 51 51 Geocell GSM 100 100 Gi.iltel Other 100 100 Kc ell GSM 51 51 AR-Telecom Other 51 51 KT-Telecom Other 51 51 Moldcell GSM JOO 100 Molfintur Other 100 100 Gi.irtel has a 100% (20 I 0: 100%) interest in Geocell, Azertel has a 100% (2010: 100%) interest in Azercell and Kcell has I 00% (2010: 100%) 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 canying 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: The Group applies a policy of treating transactions with non-controlling interests as transactions with patties 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 ex1st1ng subsidiaries are recognised in the statement of income, 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 14). Pril"e\\":'llcrhousC'C'oopcrs An'Ounlanls N.\'. For identificrltion purpo~s only 17 ~ pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011AND2010 (Amounts expressed in thousands ofUSD unless otherwise indicated.) NOTE 2 - BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT RELEVANT ACCOUNTING POLICIES (Continued) 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 impainnent. 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 te1111s 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 ca1Tying 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 services. 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 services 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. Inventories Inventories primarily include SIM cards, scratch cards and spare parts. 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. Price\\OllcrhouscCoopcrs ACl'OUnlants N.\'. F'or idc>nlifirotion purposes only 18 A pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011 AND 2010 (Amounts expressed in thousands of USO unless otl1erwise indicated.) NOTE2- BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT RELEVANT ACCOUNTING POLICIES (Continued) 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 prope1ty 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 pa1ty 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 determined by comparing proceeds with the carrying amount. These are included in the statement of income. Pliceh·atcrhouscCoopers Aet'Ou11ta111s N.V. For identifirotion purpo~s only 19 Jill pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31 DECEMBER 2011 AND 2010 (Amounts expressed in thousands of USO unless otherwise indicated.) NOTE 2- BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT RELEVANT 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 !AS 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 I 0). 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 carTying 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 impaim1ent reviews are undertaken annually or more frequently if events of changes in circumstances indicate a potential impairment. The carrying 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 strnight-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. Price\\ttlcrhous~oopcrs At.'OOunl:mts N.\'. For idcntifimtion purposes onlr 20 ..§1 pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011AND2010 (Amounts expressed in thousands of USO unless otherwise indicated.) NOTE 2- BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT RELEVANT ACCOUNTING POLICIES (Continued) Impairment of non-financial assets Assets that are subject to amortisation are reviewed for impaim1ent 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 repo1ting date. Trade payables Trade payables are recognised initially at fair value and subsequently measured at amo1tised 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 of time 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. 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 auti1011~ti®S,,.coope.-.Ae<0un1nn1sr-:.v. For 1den11firol1011 purposes on~· 21 Jill pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31 DECEMBER 2011 AND 2010 (Amounts expressed in thousands of USD unless othe1wise indicated.) NOTE 2- BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT RELEVANT ACCOUNTING POLICIES (Continued) Deferred income tax is recognised, using the liability method, on temporary differences ans1ng between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax 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 tax is determined using tax rates (and laws) 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. DefeJTed 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 tempora1y 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 CUITent 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. The Group categorises subscribers as follows: • Prepaid subscribers, that use prepaid cards to access wireless network and • Post-paid and paid-in-advance subscribers that are billed each month for their access of wireless network. Revenues are categorised as follows: • revenue from subscribers, including monthly fixed fees, call out revenue, prepaid card services; • roaming fees charged to other wireless operators for non-company subscribers using the Group's network; • interconnect fees; • connection fees; • other - rentals of transmission lines and other services. Pricewall.'1'11ouseCoope1'S 1\n"Ountants N.V. For identifica1ion purpoS<."S only 22 ..Jill pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011AND2010 (Amounts expressed in thousands of USD unless otherwise indicated.) NOTE 2 - BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT RELEVANT ACCOUNTING POLICIES (Continued) Revenue .fi-0111 prepaid card services The Group sells prepaid phone cards to subscriber separately from the handset. These cards allow subscribers a predetermined allotment of wireless phone calls and/or take advantage of other services offered by the Group, such as short messages. At the time that prepaid phone card is purchased by a subscriber, the Group records the receipts of cash as deferred revenue (Note 13). The Company recognises revenues from the sale of the prepaid card in the period when the subscriber uses airtime under the prepaid card. Unused ai1time on sold prepaid card is not recognised as revenue until the related service has been provided to the subscriber. Call out revenue Call out revenue is recognised based on the actual airtime used by the subscribers. Prepayments received for the call out revenue are not recognised as revenue until the related service has been provided to the subscriber. Interconnect revenues and costs The Company charges interconnect per minute fees and fixed monthly payments to other wireless and fixed line operators within the country which the subsidiaries of Fintur operates, for calls originated outside and terminated within Group's network. The Group recognises such revenues when the services are provided. The Group is charged interconnect per minute fees and fixed monthly payments by other wireless and fixed line operators within the country which the subsidiaries of Fintur operates, for calls originated within the Group's network and terminated outside of the network. The Group recognises such costs when the services are provided. Roaming revenues The Group charges roaming per minute fees to other wireless operators for non-Group subscribers utilizing the Group's network. The Group recognises such revenues when the services are provided. Connection fees Connection fees consist of non-refundable charges received from subscribers at the time of initiation without fixed period of the contract between the Group and the subscriber. Connection fees are recognised as revenue immediately. Monthly.fixed.fee The Group recognises revenues related to the monthly network fees in the month that wireless service is provided to the subscriber. Pliccwuterl1ouseCoopcrs 1\Cl'Ounlants N. V. For idcnlifirotion purpores only 23 pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011AND2010 (Amounts expressed in thousands of USO unless otherwise indicated.) NOTE2- BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT RELEVANT ACCOUNTING POLICIES (Continued) Multiple deliverables The Group may 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 fo1111 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. Other revenues The revenue recognition policy for other revenues (including SMS, MMS, GPRS and WAP) is to recognise revenue as services are provided. Interest income is recognised on a time-proportion basis using the effective interest method. 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 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 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 and 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, all pension payments are administered by the pension funds directly. Prict..'\\'nft:'rhoUS<.'Coopcn; 1\c.."t"OUn l:mts N. V, For identification purpo~·$ only 24 Jill pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011 AND 2010 (Amounts expressed in thousands ofUSD unless othe1wise indicated.) NOTE2- BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT RELEVANT ACCOUNTING POLICIES (Continued) Segment reporting Operating segments are reported in a manner consistent with the internal repo1ting 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.iltel 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, fair value interest rate risk and cash flow 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 pe1formance. 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 exchange 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 2011, 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 2011 would have been USO 551 (2010: USO 1,83 7) lower/higher, mainly as a result of foreign exchange gains/losses on translation of USO denominated bank balances, trade receivables and trade payables. At 31December2011, ifthe USO had strengthened/weakened by 10 percent against the Azeri Mana! with all other variables held constant, post-tax profit for the year ended 31 December 2011 would have been USO 592 (20 I 0: USO 667) lower/higher, mainly as a result of foreign exchange gains/losses on translation of USO denominated bank balances, trade receivables and payables. At 31 December 2011, if the USO had strengthened/weakened by I 0 percent against the Georgian Lari with all other variables held constant, post-tax profit for the year ended 31 December 2011 would have been USO 127 (20 I 0: USO 176) lower/higher, mainly as a result of foreign exchange gains/losses on translation of USO denominated bank balances, trade receivables and payables. Prire\rnlerhouscCoopers Acmuntanls N,\'. For identifirntion purposes onlr 25 .ff;£i pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STA TEMENTS AT 31DECEMBER2011AND2010 (Amounts expressed in thousands of USO unless 01he1wise indicated.) NOTE 2 - BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT RE LEVANT ACCOUNTING POLICIES (Continued) (ii) Cash flow and fi1ir value interest rate risk The Group is exposed to changes in market interest rates based on the existence of interest bearing assets and liabilities. As disclosed in Note 4, time deposits at fixed rates amount to USO 62,523 at 31 December 2011 (20 I 0: USO 83,023). (iii) Credit risk Ownership of financial assets involves the risk that counterpa11ies 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 ca1Tying 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 po11folio 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 2011 and 20 I 0: 2011 2010 ING Bank 118,969 51,114 T. Garanti Bankasi A.S. 62,759 61,583 Bank Standard 22,292 40,174 Citibank 6,014 5,272 Texnikabank 5,423 3,127 International Bank of Azerbaijan 4,407 27,871 Kazkomme1tsbank 4,193 27,623 VTB Bank 3,361 2,205 Bank of Georgia 3, 155 I, 183 Kapitaibank 2,055 1,553 JSCB Victoriabank 673 12,831 RabitaBank 446 3,690 Respublika Bank 100 1,269 Avrasiya Bank 69 1,445 Uni Bank 55 1,689 Other 6,533 8,786 Total 240,504 251,415 Pricc''"terhouseCoopcrs Accountants N'.\'. For idc-nlirirotion purposes ouly 26 Jill pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011AND2010 (Amounts expressed in thousands ofUSD unless otl1erwise indicated.) NOTE2- BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT RELEVANT ACCOUNTING POLICIES (Continued) (iv) 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 management 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. (vi) 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 detem1ined 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. Financial 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. Financial instruments carried at/air 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, whose shares are subject to the put option (Note 14). Prk'e\''nlerhou!>t'Coopers Act'Ounlnnts N.V. For idenlificntion vur~s only 27 Jill pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011AND2010 (Amounts expressed in thousands of'USD unless otherwise indicated.) NOTE 2- BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT RELEVANT ACCOUNTING POLICIES (Continued) Fimmcia/ liabilities 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 on 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) I11come 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. Frnther, 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, ta'\ authorities may challenge transactions and the Group may be assessed additional taxes, penalties and fines. Ta'.: 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 detem1ination 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 defeiTed income tax liability by USO 1,497, if unfavourable; or decrease deferred income ta'\ liability by USD 1,497, if favourable. (b) Put options The Group recognises a financial liability originating 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. Price\\" NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011AND2010 (Amounts expressed in thousands ofUSD unless othe1wise indicated.) NOTE 2- BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT RELEVANT ACCOUNTING POLICIES (Continued) (c) Allowance for doub({ul 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. (ti) Useful lives ofproperty and equipment and intangible 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 22,370 if unfavourable; or decrease by USO 27 ,341 if favourable. If the management's useful life estimates for computer software and other intangible assets differed 10% from the actual trend of economic benefits inflow to the Group generated by related assets, the amortization charge for the next twelve months would: increase by USO 3,558 if unfavourable; or decrease by USO 4,349 if favourable. (e) 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 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. Pricewn1erhouseCoopers Accoun 1ants N. \'. For iden1if1Cltion purposes only 29 Jill pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011 AND 2010 (Amounls expressed in thousands of USO unless 0U1erwise indicated.) NOTE 2 - BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT RELEVANT ACCOUNTING POLICIES (Continued) (/) Legal proceedings and claims The Group is subject to various legal proceedings and claims, the outcomes of which are subject to significant unce1tainty. The Group evaluates, among other factors, the degree of probability of an unfavorable 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 20). (g) A1111ual impairment review 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 determined based on value-in-use calculations. These calculations require the use of estimates (Note I 0). 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% instead of50%), 1% higher (16.0% instead of 15.0%) and I% lower (5% instead of 6%), respectively than management's estimates at 31 December 2011, the Group would have recognised an impairment ofUSD 65,921 against goodwill. If the budgeted gross margin, the estimated cost of capital and the grO\vth rate used in the value-in-use calculation for the Georgia CGU had been I% lower (40% instead of 41 %), I% higher ( 18.1 % instead of 17. I%) and I% lower (3% instead of 4%), respectively than management's estimates at 31 December 2011, the Group would have not recognised any impainnent 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 I% lower (36% instead of 37%), I% higher ( 17.5% instead of 16.5%) and 1% lower (3% instead of 4%), respectively than management's estimates at 31 December 2011, the Group would have not recognised any impai1111ent against goodwill. (II) I11terco11nect revenues As of I January 2011, the interconnect agreement between Azercell and its competitor, Azerfon LLC, that regulated the pricing of interconnect traffic expired. Due to an existing disagreement over the application of an asymmetric arrangement in pricing for the traffic between Azercell and Azerfon LLC, no formal agreement on how to regulate the pricing of interconnect calls has yet been signed. In the absence of a valid agreement, starting from January 2011, Azercell has been applying an asymmetric rate of USO 0.06 per minute for inbound and outbound traffic with Azerfon LLC. Over the same period, Azerfon LLC has been applying an asymmetric interconnect rate of USO 0.03 per minute to its outgoing traffic to Azercell. Azercell and Azerfon LLC failed to reach any agreement during 2011 over the application of tariffs and the dispute is likely to end up in a cou1t. The amount of interconnect revenue recognised by Azercell during 2011 from Azerfon LLC is USO 21, 169 and the resulting net receivable balance due from Azerfon LLC as of 31 December 2011 recognised by Azercell is USO 11,813. Azercell management believes that Azercell has a proper legal basis and business rationale behind its assumptions regarding the application of asymmetric rates with Azerfon LLC. However, the existence of an unsettled dispute for a prolonged period of time under current circumstances indicates that there is an unce1tainty regarding the outcome of this dispute and the potential impact that the outcome of any cou11 decision and/or subsequent agreement might have on the amount of interconnect revenue recognised in 2011 as well as the resulting balance due from Azerfon LLC as of31 December 2011. Pricewn1erhouscCoopcrsA<'l'Ou11t:111t:; N.V. For identification purpose$ only Rh 30 .fttil pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011AND2010 (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 Januaiy 2011 that would be expected to have a material impact on the Group. (ii) New standards, amendments and inte1pretations effective.for annual periods beginning on or after 1 Janu01y 2011 that are not relevant for the Group's operations IAS 32 (amendment), "Financial instruments: Presentation", is effective for annual periods beginning on or after I February 20 I 0. The amendment recognises that the previous requirement to classify foreign-curTency-denominated rights issued to all existing shareholders on a pro rata basis as derivative liabilities is not consistent with the substance of the transaction, which represents a transaction with owners acting in their capacity as such. The amendment therefore creates an exception to the 'fixed for fixed' rule in IAS 32 and requires rights issues within the scope of the amendment to be classified as equity. The amendment should be applied retrospectively. Early adoption is permitted. IFRJC 19, "Extinguishing financial liabilities with equity instruments", is effective for annual periods beginning on or after I July 20 I 0. IFRIC 19 clarifies the accounting when an entity renegotiates the tem1s of its debt with the result that the liability is extinguished by the debtor issuing its own equity instruments to the creditor (referred to as a 'debt for equity swap'). Early adoption is permitted. The interpretation should be applied retrospectively from the beginning of the earliest comparative period presented, as adoption in earlier periods would result only in a reclassification of amounts within equity. IFRS I (amendment), "First-time adoption of IFRS", is effective for annual periods beginning on or after I July 20 I 0. The amendment Provides the same relief to first-time adopters as was given to curTent users of IFRSs upon adoption of the amendments to IFRS 7. Also clarifies the transition provisions of the amendments to IFRS 7. Earlier adoption is permitted. Early adoption is required for a first-time adopter that has a first reporting period that begins earlier than I July 20 I 0 in order to benefit from the disclosure relief. IAS 24 (revised), "Related party disclosures", is effective for annual periods beginning on or after I January 2011. The revised standard removes the requirement for government-related entities to disclose details of all transactions with the government and other govemment-related entities. It also clarifies and simplifies the definition of a related party. Earlier adoption is permitted either for the entire standard or for the reduced disclosures for government-related entities. IFRIC 14 (amendment), "!AS 19 - The limit on a defined benefit asset, minimum funding requirements and their interaction", is effective for annual periods beginning on or after I Januaiy 2011. The amendment removes unintended consequences arising from the treatment of pre payments where there is a minimum funding requirement. The amendment also results in pre payments of contributions in ce1tain circumstances being recognised as an asset rather than an expense. It will apply from the beginning of the earliest comparative period presented. Earlier adoption is pennitted. Annual Improvements to IFRSs 20 I 0. Amendments affect six standards and one IFRIC: IFRS 1,_IFRS 7 .. IFRS 3, IFRS 7, IAS 27, !AS 34 and IFRIC 13. Prico"·atcrhouscCoopc""'~"OUnt:mtsN.I'. For identification purpo.c:es only 31 Jill pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011AND2010 (Amounts expressed in thousands ofUSD unless othe1wise indicated.) NOTE 2 - BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT RELEVANT ACCOUNTING POLICIES (Continued) (iii) New standards and amendments that are not yet effective but relevant.for the Group's operations IAS I (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 pe1111itted. IFRS 9, "Financial instruments", 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. IFRS 9 was issued in November 2009 and October 20 I 0. It replaces the parts of IAS 39 that relate to the classification and measurement of financial instruments. IFRS 9 requires financial assets to be classified into two measurement categories: those measured as at fair value and those measured at amo1tised cost. The determination is made at initial recognition. The classification depends on the entity's business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the !AS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity's own credit risk is recorded in other comprehensive income rather than the income statement, unless this creates an accounting mismatch. IFRS 10, "Consolidated financial statements", is effective for annual periods beginning on or after I Janua1y 20 I 3. The standard builds on existing principles by identifying the concept of control as the detennining 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 the determination of control where this is difficult to assess. IFRS 13, "Fair value measurement'', is effective for annual periods beginning on or after I Janua1y 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 pennitted by other standards within IFRSs or US GAAP. 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 interpretations that are not yet effective and not relevant.for the Group's operations IFRS 7 (amendment), "Financial instruments: Disclosures" IFRS I (amendment), "First-time adoption of IFRS" IAS 12 (amendment), "Income ta\'.es" IAS 19 (amendment), "Employee benefits" IFRS 11, "Joint arrangements" IFRS 12, "Disclosures of interests in other entities" IAS 27 (revised), "Separate financial statements" IAS 28 (revised), "Associates and joint ventures" IFRIC 20, "Stripping costs in the production phase of a surface mine" Prict-wntcrhotLq-Coopers Accountants ~, \'. For idenlification purposes only 32 Jill pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011AND2010 (Amounts expressed in thousands of USO unless othem~se indicated.) NOTE 2 - BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT RELEVANT ACCOUNTING POLICIES (Continued) 2.8 Comparative information The Group has made a reclassification regarding distributors' comm1ss1ons in the consolidated statement of income for the year ended 3 I December 20 I 0 in order to conform to presentation of consolidated statement of income for the year ended 31 December 20 I I. The effect of this reclassification on the consolidated statement of income for the year ended 3 I December 20 I 0 is presented below: Previously reported Restated Revenues, net (Note 3) 1,736,576 1,791 ,725 Selling and marketing expenses (Note 18) (201 ,269) (256,418) 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, GUrtel 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, deferred income tax assets/liabilities. The segment assets at 31 December 2011 and 20 I 0 are as follows: 2011 2010 Kazakhstan 967,729 905,201 Azerbaijan 654,921 536,488 Georgia 221 ,493 212,125 Moldova I 16,223 104,963 Other(*) 837,105 849,645 Segment assets 2,797,471 2,608,422 Unallocated assets 254,677 262,973 Less: inter-segment eliminations ( 140, 159) (156,128) Total assets 2,911,989 2,715,267 (*) Segment assets of Other segment include goodwill related to Azercell among other relatively smaller items (Note I 0). Priccwa1erho1L~pcrsAt'COun1rm1s N.V. For identifimtion purposes only 33 Jill pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011 AND 2010 (Amounts expressed in thousands of USO unless otherwise indicated.) NOTE 3 - SEGMENT INFORMATION (Continued) Capital expenditure comprises additions to prope11y and equipment and intangible assets and is allocated based on where the assets are located. The capital expenditures for the years ended 31 December 2011 and 20 I 0 are as follows: 2011 2010 Kazakhstan 188,773 195,260 Azerbaijan 179,438 112,491 Georgia 38,867 33,815 Moldova 27,265 26,231 Other 513 Total 434,856 367,797 (b) Segment liabilities Segment liabilities comprise operating liabilities and are allocated based on where the assets are located. Unallocated liabilities comprise items such as taxation and borrowings. The segment liabilities at 31 December 2011 and 2010 are as follows: 2011 2010 Kazakhstan 133,377 140,541 Azerbaijan 74,651 107,084 Georgia 10,948 10,988 Moldova 65,631 73,660 Other(*) 792,399 794,735 Segment liabilities 1,077,006 1,127,008 Unallocated liabilities 59,183 59,765 Less: inter-segment eliminations (77,984) (85,239) Total liabilities 1,058,205 1,101,534 (*) Segment liabilities of Other segment include put option liability among other relatively smaller items (Note 14). PricewnterhouseCoopcrs 1\crount:ints N.V. For idenlification purposes only 34 .A1, pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011AND2010 (Amounts expressed in thousands ofUSD unless otherwise indicated.) NOTE 3 - SEGMENT INFORMATION (Continued) (c) Depreciation and amortisation expense Depreciation and amortisation expenses for the years ended 31 December 2011 and 2010 are as follows: 1 January - 31 December 2011 Kazakhstan Azerbaijan 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 1 January - 31 December 2010 Kazakhstan Azerbaijan Georgia Moldova Other Total Depreciation 113,528 67,715 26,001 9,646 36 216,926 Amortisation 19,349 4,100 10,752 3,184 22 37,407 Total 132,877 71,815 36,753 12,830 58 254,333 (d) Provision for impairment of receivables Impairment charge on receivables for the years ended 31 December 2011 and 2010 are as follows: 2011 2010 Kazakhstan 1,811 2,180 Azerbaijan 800 1,418 Moldova 237 22 Georgia IOI 102 Total 2,949 3,722 Priccwnlt>rhouscCoopcrs Accountn111s N.\'. For idcnlifimtion purposes only 35 Jill pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011AND2010 (Amounts expressed in thousands of USD unless otherwise indicated.) NOTE 3- SEGMENT INFORMATION (Continued) (e) Segment results The segment results for the years ended 31 December 2011 and 20 I 0 are as follows: Inter-segment I January- 31 December 2011 Kazakhstan Azerbaijan Georgia Moldova Other eliminations Total External revenue 1,210,607 526, 174 141,646 79,240 237 - 1,957,904 Inter-segment revenue 122 128 310 8 0 (568) Total segment revenue 1,210,729 526,302 141,956 79,248 237 (568) 1,957,904 Operating expenses (646,093) (344,366) ( 125,419) (67,388) (14,127) 478 (I, 196,915) Other operating expenses, net (332) - (82) (275) (10,757) (1390) ( 12,836) Segment result 564,304 181,936 16,455 11,585 (24,647) (1,480) 748,153 Unallocated expenses (27) Operating 1>rofit 748,126 Inter-segment l January-31 December2010 Kazakhstan Azerbaijan Georgia Moldova Other eliminations Total External revenue 1,034,228 531,028 156,746 67,949 1,774 - 1,791,725 Inter-segment revenue 152 181 301 20 1,520 (2, 174) Total segment revenue 1,034,380 531,209 157,047 67,969 3,294 (2, 174) 1,791,725 Operating expenses (572,563) (325,046) ( 120,442) (59,336) (13,524) 1,986 ( 1,088,925) Other operating income/( expenses), net 981 - 150 1,993 (65,632) 188 (62,320) Segment result 462,798 206,163 36,755 10,626 (75,862) - 640,480 Unallocated expenses ( 1,311) Operating profit 36 G.D. pwc-~ FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011AND2010 (Amounts expressed in thousru1ds ofUSD unless other.vise indicated.) NOTE 3 - SEGMENT INFORMATION (Continued) (/) /11for111atio11 about products mu/ services at 31 December 2011and2010 l January- 31 December 2011 Kazakhstan Azerbaijan Georgia Moldova Other Total Revenues from prepaid card services 749,528 352,546 71,775 20,412 1,194,261 Call out revenues 195,349 54.133 22.066 15,095 286,643 Interconnect revenues 153,022 74,451 19,371 24,586 271,430 Revenues from SMS 27.675 28.998 11,984 3,421 72,078 Roaming revenues 36,020 9,276 5,074 4,921 55,291 Revenue from sales of handsets 24,034 24,034 Revenues from MMS, GPRS, and WAP 10,295 4,469 4,621 3,426 22,811 Monthly fixed tees 14,018 1,241 31 4,565 19,855 Registration and connection fees 613 - 167 888 1,668 Transmission line in lease - 282 282 Other service revenues 53 778 6,557 1,926 237 9,551 External revenues 1,210,607 526,174 141,646 79,240 237 1,957,904 l January- 31 December 2010 Kazakhstan Azerbaijan Georgia Moldova Other Total Revenues from prepaid card services 640,457 363,230 79,112 14,997 1,097,796 Call out revenues 204,924 67,093 21,951 13,870 307,838 Interconnect revenues 113,462 60,097 26,070 24,622 224,251 Revenues from SMS 25,902 26,205 13,863 2,603 68,573 Roaming revenues 27,249 8,613 4,435 4,605 44,902 Revenues from MMS, GPRS, and WAP 9,203 3.238 1,290 1,630 15,361 Monthly fixed fees 10,230 1,895 238 3,132 15,495 Registration and connection fees 825 - 153 713 1,691 Transmission line in lease - 278 278 Other service revenues 1.976 379 9,634 1,777 1,774 15,540 156,746 67,949 External revenues 1,034,228 531,028 I, 77 4 YiTT'St''~.¥.2!.?22'"'""'• N.v. o-u1 1u.:n1u1u.111un purposes only 37 A pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011AND2010 (Amounts expressed in thousands ofUSD unless otl1e1;vise indicated.) NOTE 4 - CASH AND CASH EQUIVALENTS The analysis of cash, cash equivalents and restricted cash at 31 December 2011 and 20 I 0 is as follows: 2011 2010 Cash on hand 460 421 Banks - demand deposits 177,981 168,392 - time deposits 62,523 83,023 Restricted cash 130 158 Total 241,094 251,994 Time deposits are all sho11-te1111 with original maturities of less than three months. The interest rate of USD denominated time deposits of USD 62,523 (20 I 0: USD 83,023) is 4.3% per annum at 31 December 2011 (2010: 3.5% p.a.). Restricted cash of USD 130 (2010: USD 158) represents the amount deposited in a special bank account in order to receive pennission for expatriate personnel to work for Kcell in Kazakhstan. Cash and cash equivalents included in the consolidated statements of cash flows are as follows: 2011 2010 2009 Cash and cash equivalents 241,094 25 I ,994 170,321 Less: restricted cash (I 30) (158) (I 80) Total 240,964 251,836 170,141 NOTE 5 - TRADE RECEIVABLES The analysis of trade receivables at 31 December 2011 and 2010 is as follows: 2011 2010 Receivable from retailers 71,443 63,985 Interconnect receivable from local wireless and fixed line operators 41,812 27,584 Receivable from subscribers 30,996 32,666 Receivable from roaming operators 9,670 5,671 Other 1,341 514 155,262 130,420 Less: provision for impairment of trade receivables (17,327) (17,318) Trade receivables, net 137,935 113,102 Prict>wnterhouscCoopcrs Accoun lnnt!I N. \'. For identification purposes only 38 ~ pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011AND2010 (Amounts expressed in thousands ofUSD unless otherwise indicated.) NOTE 5 - TRADE RECEIVABLES (Continued) Movements on the provision for impairment of trade receivables for the years ended 31 December 2011 and 20 I 0 are as follows: 2011 2010 At I Janua1y 17,318 14,530 Provision for impairment of receivables 2,949 3,722 Collections during the year (81) (155) Receivables written-off during the year as uncollectible (3,214) (808) Exchange differences, net 355 29 At 31 December 17,327 17,318 Azercell has a significant dependency on operations with AzTelekom PU ("AzTelekom"), which is the national telecommunications operator. All local and international incoming, outgoing and transit traffic goes through AzTelekom, and additionally, the majority of transmission channels leased by the Group are rented from AzTelekom. Interconnect receivables at 31 December 2011 include receivables from AzTelekom amounting to USO 10,223 (2010: USD 9,904). The dispute concerning international and intercity tariffs on traffics between AzTelekom and Azercell has sta1ied in August 2009 and is still ongoing. Azercell believes that there is a sufficient and proper legal basis underlying the amounts of receivables from AzTelekom. Management has not provided any impainnent provision for past due receivables at 31 December 2011. Interconnect receivables at 31 December 2011 also include receivables from Azerfon LLC, a mobile operator, amounting to USD 11,813 (20 I 0: USD 1,211 ). This debt has been outstanding due to disagreement in rates for incoming traffic starting from Januaiy 2011. No impairment provision has been recorded in these consolidated financial statements as of 3 I December 2011, since Azercell management believes that there is a sufficient and proper legal basis underlying the amount of receivables from Azerfon LLC. There is no concentration of credit risk with respect to trade receivables. Additionally, canying amounts of trade receivables approximate their fair values. The other classes within trade receivables do not contain impaired assets. As of 3 I December 2011, trade receivables amounting to USD 29,329 (2010: USD I I ,562) were past due but not impaired. Majority of these receivables relate to the interconnect receivable from local wireless and fixed line operators and corporate subscribers where the inherent risk of default is considered low. Past due but not impaired balance also contained Azercell's overdue receivables from AzTelekom and Azerfon LLC. The Group does not have any collateral over trade receivables. The ageing analysis of these trade receivables is as follows: 2011 2010 Between 30 and 60 days 2,614 1,316 Between 60 and 90 days 1,799 9"".).) Between 90 and I 80 days 4,262 1,617 More than 180 days 20,654 7,696 Total 29,329 11,562 tnnts ~.\'. For identifo.-ation purposes only 39 Jill pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011AND2010 (AmounlS expressed in thousands ofUSD unless otherwise indicated.) NOTE 5 - TRADE RECEIVABLES (Continued) As of 31 December 2011, trade receivables of USO 20,641 (2010: USO 20, 722) were impaired. The amount of the provision was USO 17,327 as of 31 December 2011 (2010: USO 17,318). The provision provided is mainly in respect of individual subscribers with overdue balances for a long period of time. It was assessed that a po1tion of the receivables is expected to be recovered. The ageing of these receivables is as follows: 2011 2010 Less than 30 days 959 938 Between 30 and 60 days 587 656 Between 60 and 90 days 997 1,102 Between 90 and 180 days 5,563 7,251 More than 180 days 12,535 10,775 Total 20,641 20,722 NOTE 6 - TRANSACTIONS AND BALANCES WITH SHAREHOLDERS AND OTHER RELATED PARTIES Amounts due from and due to related pa1ties at 31 December 2011 and 20 I 0 are as follows: 2011 2010 Due from related parties: OAO Kazakhtelecom ("Kazakhtelecom") 14,531 8,825 TeliaSonera UTA Holding B.V. 515 4,813 Turkcell 485 153 Other 513 429 Total 16,044 14,220 2011 2010 Due to related parties: Cenay in~aat Ltd. Sti. ("Cenay in~aat") 19,214 Other 1,513 l,010 Total 1,513 20,224 Sales and purchases made by the Group to and from related parties during the years ended 31 December 2011 and 20 I 0 are as follows: 2011 2010 Revenues from related parties: Kazakhtelecom 30,342 23,344 Turkcell 2,356 3,363 Megafon 848 638 Other 3,758 3,763 Total 37,304 40 ~ pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31 DECEMBER2011AND2010 (Amounts expressed in thousands of USO unless othe1wise indicated.) NOTE 6 - TRANSACTIONS AND BALANCES WITH SHAREHOLDERS AND OTHER RELATED PARTIES (Continued) 2011 2010 Cost and expenses incurred with related parties: Kazakhtelecom 42,659 42,174 Turkcell 4,450 4,019 Megafon 654 1,534 Other 2,240 2,911 Total 50,003 50,638 The carrying amount and fair value of amounts due from and due to related parties approximate each other. At 31 December 2011, due from Kazakhtelecom amounting to USO 14,53 1 (2010: USO 8,825) 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. At 31 December 2011, due from TeliaSonera UTA Holding B.V. amounting to USO 515 (2010: USO 4,813) represents amounts receivable for manage111ent services provided. At 31 December 20 I 0, due to Cenay in~aat amounting to USD 19,214 represents dividends payable. Revenues from Turkcell resulted fro111 roaming services provided. Cost and expenses incurred with Tw-kcell resulted from the purchase of technical and management support, GSM network equipment, purchase of property and equipment and roaming services rendered. 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-ter111 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, perfom1ance 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 Dece111ber 2011 amounted to USO 5,622 (2010: USO 6,423). PriC('\\nlerhouscCoopersAC"COunlm1L'i X.V. For idE'nlifirolion purposes only 41 Jill pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011AND2010 (Amounts expressed in thousands ofUSD unless otherwise indicated.) NOTE 7- INVENTORIES The analysis of inventories at 31 December 2011 and 20 I 0 are as follows: 2011 2010 Sta11 packages 4,204 4,259 Scratch cards 3,611 3,386 Edge cards 3,370 1,204 Handsets 2,630 SIM cards and packages 1,691 1,720 Spare parts 444 323 Other 3,487 2,316 Total 19,437 13,208 There is no inventory carried at fair value less cost to sell at 31 December 2011 and 20 I 0. NOTE 8 - OTHER CURRENT ASSETS The analysis of other current assets at 3 I December 2011 and 20 I 0 are as fol lows: 2011 2010 Advances given to suppliers 27,621 14,930 Value added tax ("VAT") receivable, and other prepaid taxes and funds 22,924 22,372 Prepaid income taxes 10,051 Prepaid expenses 9,307 14,282 Prepayment for customs duties 1,840 2,489 Other 4,939 5,001 Total 76,682 59,074 PricC\,aterhouseCoopers Accountants N.\', For idenlificrltion purposes only 42 _Jill pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011AND2010 (Amounts expressed in thousands of USO unless otherwise indicated.) NOTE 9 - PROPERTY AND EQUIPMENT The movements in propetty 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 January 2011 buildings equipment(*) and fixtures vehicles improvements 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 di ffercnces (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,t 11 801,673 51,338 1,145 2,704 344,766 1,379,737 No borrowing cost was capitalized in the costs of the property and equipment during the year. Depreciation and amot1isation expense of USD 258,737 (2010: USO 228,519) has been charged in cost of services (Note 16), USD 27,721 (2010: USD 24,601) in general and administrative expenses (Note 17) and USO 1,893 (2010: USD 1,213) in selling and marketing expenses (Note 18). ( *) Machinery and equipment mainly comprises of switches and transmission devices, network and computer equipment. Prirewalf'rhouscCoopE"r.> An:ount:mls N.V. For idcnlifirnlion purpo.$E"S only 43 ~ pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011AND2010 (Amounts expressed in thousands ofUSD unless otherwise indicated.) NOTE 9 - PROPERTY AND EQUIPMENT (Continued) The movements in prope1ty and equipment and related accumulated depreciation for the year ended 31 December 20 I 0 are as follows: Construction Land and Machinery and Furniture Motor Leasehold in progress and At t Januarr 2010 buildings eguipment {*) and lixtures vehicles improvements advances given Total Cost 110,322 1.706, 119 106,642 4,399 1,353 228.769 2,157.604 Accumulated depreciation (20,128) (857,456) (70,669) (3,343) (903) - (952,499) Net book amount 90,194 848,663 35,973 t,056 450 228,769 t,205,105 2010 Opening net book amount 90,194 848.663 35,973 1,056 450 228,769 1,205,105 Exchange di ffercnccs 863 2,020 1,712 48 35 (2,296) 2.382 Additions 20,223 11,156 16,895 630 - 246,722 295,626 Transfers 5,316 146.336 6.549 (I 0) 1,459 ( 159,650) Disposals ( 122) ( 1,752) (591) (56) - (71) (2,592) Depreciation (7,005) (192,254) (17.197) (458) ( 12) - (216,926) Closing net book amount 109,469 814,169 43,341 1,210 1,932 313,474 1,283,595 At 31December2010 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) - ( 1,158.209) Net book amount 109,469 814,169 43,341 1,210 1,932 313,474 1,283,595 PrirewntE'rhouSE'Coopc"rsAC'C'Ountnnls N.V. For idenlifimtion purJ>OSl":I nnly 44 Jill pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011AND2010 (Amounts expressed in thousands ofUSD unless otherwise indicated.) NOTE 10 - INTANG IBLE ASSETS The movements in intangible assets and related accumulated amortisation for the year ended 31 December 2011 are as follows: Licences and Computer Advances At 1 January 2011 Goodwill other rights software Other given Total Cost 713,566 219,349 171,276 23,647 3,299 1,131,137 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 2011 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 (109,293) (92,904) (8,085) (210,282) Net book amount 713,566 182,965 106,512 16,186 6,661 1,025,890 Goodwill is allocated to cash-generating units for the purpose of impainnent testing. Each of those cash generating units represents the Group's investment in each country of operation by each primary reporting segment. Priccnnterl1ouseCoopcrs Accountnnts N. \'. For identificntion purposes onl) 45 _!ill pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31 DECEMBER 2011 AND 2010 (AmounlS expressed in thousands of USO unless otherwise indicated.) NOTE 10 - INTANGIBLE ASSETS (Continued) The movements in intangible assets and related accumulated amortisation for the year ended 3 I December 20 I 0 are as fol lows: Licences and Computer Advances At 1January2010 Goodwill other rights software Other given Total Cost 713,566 258,316 136,231 23,470 12,736 1,144,319 Accumulated amortisation (135,392) (55,325) (3,448) (194, 165) Net book amount 713,566 122,924 80,906 20,022 12,736 950,154 2010 Opening net book amount 713,566 122,924 80,906 20,022 12,736 950, 154 Exchange differences (10,529) (1,801) 117 (5,813) (18,026) Additions 33,960 36,205 2,006 72,171 Transfers 2,504 40 (2,544) Disposals (50) (3,086) (3, 136) Amortisation (16,000) (18,997) (2,410) (37,407) Closing net book amount 713,566 130,355 98,767 17,769 3,299 963,756 At 31 December 2010 Cost 713,566 219,349 171,276 23,647 3,299 1,131, 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 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 ce1tain 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 repo1ting segment-level summary of goodwill as of 31 December 2011 and 20 I 0 is presented below: 2011 2010 Azerbaijan 684,736 684,736 Georgia 24,859 24,859 Moldova 3,971 3,971 Total 713,566 46 ~ pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011AND2010 (Amounts expressed in thousands of USO unless otherwise indicated.) NOTE 10 - INTANGIBLE ASSETS (Continued) The recoverable amount of a cash-generating unit is determined 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 growth rate does not exceed the long-tem1 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: 2011 Azerbaijan Georgia Moldova EBITDA margin(*) 50% 41% 37% Growth rate(**) 6% 4% 4% Discount rate(***) 15.0% 17.1% 16.5% 2010 Azerbaijan Georgia Moldova EBITDA margin (*) 55% 44% 33% Growth rate(**) 4% 2% 2% Discount rate(***) 17.4% 16.2% 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 detem1ined 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. NOTEll-TRADEPAYABLES The analysis of trade payables at 3 I December 20 I I and 20 I 0 are as fol lows: 2011 2010 Trade accounts payable I 03,448 92,990 Payable due to property and equipment purchases 21,306 23,870 Total 124,754 116,860 Pricl"\\':llcrhouseCoopcn;Accountants N,\', For idt:>ntificnlion purposes only 47 Jill pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011AND2010 (Amounts expressed in thousands of USO unless otherwise indicated.) NOTE 11 - TRADE PAYABLES (Continued) The maturity analysis of trade payables and due to related parties at 31 December 2011 and 20 I 0 is as follows; Between 3 Less than months and 1 Between 1 Over 5 At 31 December 2011 3 months year and 2 years years Trade payables 92,106 32,648 Due to related parties 1,006 507 Total future payments 93,112 33,155 Between 3 Less than months and 1 Between 1 Over 5 At 31 December 2010 3 months year and 2 years years Trade payables 98,437 5,715 12,708 Due to related parties 19,892 332 Total future payments 118,329 6,047 12,708 NOTE 12 - TAXATION ON INCOME The analysis of ta\'.ation on income for the years ended 31 December 2011 and 20 I 0 are as follows: 2011 2010 Current income ta\'. charge (160,921) (166,951) DeferTed income ta"X (charge )/credit ( 13,500) 15,210 Taxation on income (174,421) (151,741) Dutch tax legislation does not permit a Dutch parent company and its foreign subsidiaries to file a consolidated Dutch ta"X return. Dutch resident companies are taxed on their worldwide income for corporate income ta\'. purposes at a statutory rate of 25.5% (2010: 25.5%). No futther ta\'.es are payable on this profit unless the profit is distributed. If ce1tain conditions are met, income derived from foreign subsidiaries is ta\'. 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 ta\'. 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 ta"Xation 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 ta\'.. However, under the Netherlands' extensive tax treaty network, this rate can, in many cases, be significantly reduced if certain conditions are met. Price\\;tlerhouseCoopcrs Accountm1ts N'.\'. For identific:ttion purpo!>eS only 48 ~ pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011AND2010 (Amounts expressed in thousands ofUSD unless otherwise indicated.) NOTE 12 - TAXATION ON INCOME (Continued) Deferred income taxes Fintur recognises deferred income tax assets and liabilities based upon temporary differences arising between their financial statements as reported 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 I and 20 I 0, using the enacted tax rates, were as follows: 2011 2010 Deferred income tax assets: Difference between the tax base and the carrying value of property and equipment and intangible assets 12,220 9,651 Deferred revenue 7,021 10,926 Trade payables and expense accruals 5,923 5,674 Impairment of receivables 6,044 8,237 Other 2,342 2,720 Deferred income tax assets 33,550 37,208 Deferred income tax liabilities: Difference between the tax base and the carrying value of property and equipment and intangible assets (57,798) (57,719) Unremitted earnings of foreign subsidiaries (14,974) (6,093) Deferred income tax liabilities (72,772) (63,812) Deferred income tax liability, net (39,222) (26,604) DefetTed income tax liabilities of USO 14,974 (2010: USO 6,093) have been recognised for the withholding tax and other taxes that would be payable on the unremitted earnings of the subsidiaries. DefetTed 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 1 December 201 1 and 2010 are as follows: 2011 2010 Deferred income tax assets: Deferred income tax assets to be recovered after more than 12 months 11,566 9,083 Deferred income tax assets to be recovered within 12 months 2,017 1,896 13,583 10,979 2011 2010 Deferred income tax liabilities: DefetTed income tax liabilities to be settled after more than 12 months 44,597 31,277 Deferred income tax liabilities to be settled within 12 months 8,208 6,306 52,805 37,583 Price\\';,terhouseCoopcrs Accountants N.\'. For idenlifirntion purposes only 49 Jill pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011AND2010 (Amounts expressed in thousands ofUSD unless otherwise indicated.) NOTE 12-TAXATION ON INCOME (Continued) The movements on the net deferred income ta'< liability for the years ended 31 December 2011 and 20 I 0 are as follows: 2011 2010 At I January 26,604 46,722 Exchange differences (882) (4,908) Charge/( credit) to the consolidated statement of income 13,500 (15,210) At 31 December 39,222 26,604 The statutory tax rates applicable to the parent company and subsidiaries in the respective countries at 31 December 2011 and 20 I 0 are as follows: 2011 2010 Fintur Holdings B.V. (the Netherlands)(*) 25.0% 25.5% Kcell (Kazakhstan) 20.0% 20.0% Azercell (Azerbaijan) 20.0% 20.0% Geocell (Georgia) 15.0% 15.0% Moldcell (Moldova)(**) Azeitel and GUrtel (Turkey)(*) 20.0% 20.0% The weighted average applicable tax rate for the year ended 31 December 2011 was 21%(20I0: 21 %). (*) The main revenues of Fintur Holdings B. V., Azertcl and GU11el are dividend income which is exempt from income tax in the Netherlands and Turkey, respectively. (**) Beginning from I January 2008, Moldcell has a full tax payment exemption as long as it complies with certain condition. The tax on the Group's profit before ta'< differs from the theoretical amount that would arise using the weighted average tax rate applicable to profits of the consolidated entities for the years ended 3 I December 2011 and 2010 are as follows: 2011 2010 Profit before ta' Withholding taxes on dividends and ta' Taxation on income (174,421) (151,741) (***) In 2011, the differences between the accrual of income taxes for the year ended 31 December 2010 and actual income taxes which were reflected in income tax declarations of Azercell and Geocell presented as adjustment 0 f prior year inCOllle taX. Pcimmlerhous.Coopers AccouutmHs N.\". For identification purposes only 50 .Jill pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011AND2010 (Amounts expressed in thousands of USO unless otherwise indicated.) NOTE 13 - OTHER CURRENT LIABILITIES The analysis ofother current Iiabil ities at 3 I December 2011 and 20 I 0 are as follows: 2011 2010 Deferred revenue (*) 39,772 73,029 Deposits received from subscribers 28,171 25,607 Payables to personnel 22,154 18,804 Taxes other than income taxes payable 9,067 8,627 Other 1,156 4,452 Total 100,320 130,519 (*) 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 14 - OTHER NON-CURRENT LIABILITIES The analysis of other non-current liabilities at 31 December 2011 and 20 I 0 are as follows: 2011 2010 Financial liability(**) 768,795 759,659 Other 3,640 14,507 Total 772,435 774,166 (**) 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 USD 2.2 billion for Azcrcell. 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% po11ion of Azcrcell shares subject to the put option is calculated as USO 925 million. As of 31 December 20 I I and 20 I 0. the Group re-measured the fair value of Azercell as USD 1.80 billion. The present value of the estimated option redemption amount corresponding to 42.2% of the fair value of Azercell as of 31 December 2011 is determined as USD 769 million (20 I 0: USO 760 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 income under other operating expense. Priccwntcrhou~oopers Art.'Ounlnnts N.\'. For id<'nlifk-ation purposes only 51 Jill pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011AND2010 (Amounts expressed in thousands of USO unless otherwise indicated.) NOTE 14 - OTHER NON-CURRENT LIABILITIES (Continued) Movements of financial liability for the years ended 31 December 2011 and 2010 are as follows: 2010 At I January 740,758 Dividend distribution to the non-controlling shareholder holding the put option (48,295) Charge to the consolidated statement of income 67,196 At 31 December 759,659 2011 At I 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 Other non-current liabilities amounting to USO 14,507 at 31 December 20 I 0 represent obligations related to commissions, bonuses and other rewards ("pool system") payable to dealers and distributors in six years time if necessary conditions of the pool system have been met by dealers and distributors. Effective interest rate used for non-current portion of trade and other payables within the pool system amounted to 8 percent per annum. As of 31 December 2011, these obligations were classified as cwTent liabilities. NOTE 15 - SHARE CAPITAL The composition of the share capital at 31 December 2011 and 2010 are as follows: 2011 2010 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 1,930,000,000 Total number of shares issued and outstanding 540,000,000 Priccwnlerhoust<'oopcrs t\ccountrtnts N.\'. For idcnlifirotion pur~s 011ly 52 ~ pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011AND2010 (Amounts expressed in thousands of USO unless otherwise indicated.) NOTE 16 - COST OF SERVICES The analysis of cost of services for the years ended 3 1 December 20 I 1 and 2010 are as follows: 2011 2010 Depreciation and amo1tisation charges 258,737 228,519 Interconnect fees and expenses 209,424 175,248 Radio and transmission network management and maintenance 72,245 42,633 Transmission links expenses 56,911 53,657 Roaming expenses 43,904 35,107 System service maintenance 39,117 29,958 Staff costs 36,250 36,142 Costs of SIM card and scratch card sales 12,326 22,984 Other 74,039 68,509 Total 802,953 692,757 NOTE 17- GENERAL AND ADMINISTRATIVE EXPENSES The analysis of general and administrative expenses for the years ended 31 December 2011 and 2010 are as follows: 2011 2010 Staff costs 41,923 40,605 Ta-...:es and duties 30,582 25,925 Depreciation and amo1tisation charges 27,721 24,601 Rent expenses 6,776 6,312 Utilities expenses 4,040 4,179 Representation expenses 3,142 1,888 Consulting expenses and professional fees 2,813 7,992 Charity expenses 1,015 1,447 Repair and maintenance expenses 967 2,400 Other 27,944 25,712 Total 146,923 141,061 PricewnlerhouscCoopers Acoounlnnls r-.', \', For identifirotion purpa.st>s only 53 ~ pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011AND2010 (Amounts expressed in thousands ofUSD unless otherwise indicated.) NOTE 18 - SELLING AND MARKETING EXPENSES The analysis of selling and marketing expenses for the years ended 31 December 2011 and 2010 are as follows: 2011 2010 Retailers' and dealers' commissions 81,549 118,937 Advertising and marketing expenses 78,282 66,056 Staff costs 40,717 38,986 Sales promotion 15,577 1,938 Kcell express costs 8,825 Rent expenses 3,283 3,382 Depreciation and amortisation charges 1,893 1,213 Public relation expenses 995 1,494 Other 24,770 15,587 Total 247,066 256,418 NOTE 19 - FINANCIAL INCOME AND EXPENSES The analysis of financial income and expenses for the years ended 31 December 2011 and 20 I 0 are as follows: 2011 2010 Foreign currency transaction gains, net 23,137 1,526 Interest income on term deposits 9,280 6,940 Bank commissions (826) (741) Interest expense (325) (399) Other, net (1,784) 1,743 Total financial income, net 29,482 9,069 NOTE 20 - COMMITMENTS AND CONTINGENCIES Political and economic conditions 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, regulatory and political developments, which are beyond the Group's control. Pricewnlerhm.tseCooJ>('rs Accountm1t~ N.V, For idenlifirotion purposes only 54 ..w pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011AND2010 (Amounts expressed in thousands of USO unless otherwise indicated.) NOTE 20 - 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. Taxation 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 ta"X.es, penalties and interest. Ta"X. periods remain open to retroactive review by the ta"\. authorities for three to five years. Government investigations at Kcell During 2010, Kee II was subject to a number of investigations by various government authorities aimed at reduction of Kcell's roaming tariffs, elimination of roaming threshold, elimination of call connection charge, decrease of tariffs for outgoing on-net calls. Roaming threshold investigation In 20 I 0, Keel! 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 couti 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 USD 107,007 calculated as 10% of Kcell's total revenues generated from I January 20 I 0 to 3 I March 20 I 0. After several claims and counterclaims filed during 2010, Kcell was able to defend its position and conclusion of the Agency was cancelled by the judgment of court of cassation entered into legal force immediately. The Agency filed a claim to higher couti instances and in August 2011, the Supreme Court returned the case to the first instance for additional investigation. Keel l's management filed claim to the Prosecutor's office in this regard that Supreme Cowi's decision was against procedural rules. In case the cou1i decision is further appealed by the Agency, Keel! 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 Keel I. Kcell's management believes that current 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 3 I December 20 I 1. Price\\nlcrhoosc>Coopers Account:rnls N. \', For identifiC'Oltio11 purpo$('S 0111~· 55 _jID, pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011AND2010 (Amounts expressed in thousands of USD unless otherwise indicated.) NOTE 20 - COMMITMENTS AND CONTINGENCIES (Continued) Roaming tar!ffs investigation The Agency has also performed 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 cou1t 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 2011, the ASIEC (the cou1t of first instance) ruled in favour of the Group with respect to the investigation of roaming tariffs. The Cou1t's decision was appealed by the Agency for Competition Protection. On 11 May 2011, the ASIEC informed Kcell that the cou1t decision of 17 Februa1y 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 Supreme Court returned the case to the first instance court for additional investigation. Kcell 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 provisions have been recorded in these consolidated special purpose financial info1111ation as of 31 December 2011. Legal proceedings and disputes Legal proceedings ofAzercell As of 31 December 2011, Azercell has been engaged in litigation proceedings with Bakcell LTD, a mobile operator. Bakcell LTD filed a claim against Azercell demanding reimbursement of USO 19,288 with respect to the cumulative difference resulting from the application of allegedly incorrect rates for interconnect traffic by Azercell since April 2009. Additionally, Bakcell 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. On 26 July 2011, the Baku City Administrative-Economic Cou1t ruled against Azercell in favour of Bakcell LTD, but Azercell appealed the court decision immediately. On 18 November 2011, the Baku City Court of Appeal issued the resolution in favour of Azercell and the claim of Bakcell LTD concerning the reimbursement of USO 19,288 with respect to the cumulative difference was rejected as per the cornt's decree. At the same time, the Court of Appeal upheld the earlier decision of the Administrative- Economic Cornt with respect to the change in interconnect rates from USO 0.06 to USO 0.03 per minute. On 6 December 2011, Azercell appealed against this decision to the Supreme Court of the Republic of Azerbaijan. As of 31 December 20 I I, net receivables balance due from Bakcell LTD amounted to USO 211. As of the date of these consolidated financial statements, Azercell and Bakcell LTD have not yet reached an agreement on the balances resulting from the interconnect traffic between them. P1ict>\\;"1l<.>rhouscC'oopers Accountonts N,\', For identifirntion purpo..~s only 56 _@J., pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011 AND 2010 (Amounts expressed in thousands ofUSD unless otherwise indicated.) NOTE 20 - COMMITMENTS AND CONTINGENCIES (Continued) As of 31 December 2011, Azercell has been engaged in litigation proceedings with AzTelekom PU, a national telecommunications operator, in relation to a claim initiated against Azercell mainly regarding reimbursement of 50 percent of an alleged excess margin with a total amount of USO 26,367 absorbed by Azercell for international calls between 2006 and 2010. On 11 October 2011, the Baku City Administrative-Economic Court issued the resolution in favour of Azercell and the claim of AzTelekom PU was rejected as per the court's decree. In addition, the court resolution demanded that AzTelekom PU repay USO 7,817 to Azercell for interconnect traffic. AzTelecom PU appealed against the cowt decree, but on 16 January 2012 the appeal was dismissed by the Baku City Court of Appeal. As of 31 December 2011, the net receivables balance due from AzTelekom PU amounted to USO 10,223. No provision has been made in these consolidated financial statements as Azercell's management believes that it is not likely that any significant losses will arise due to this claim. As of 31 December 2011, Azercell has been engaged in litigation proceedings with Azerfon LLC, a mobile operator, in relation to a claim initiated by the latter against Azercell seeking compensation for reputational damage allegedly caused by Azercell's advertisement campaign in the amount of USO 7,667. Additionally, Azerfon LLC claims USO 9,800 as damages caused by an alleged interruption in the operation of interconnect communication channels between these two operators by Azercell during September 2008. On 30 November 2011, the Baku City Administrative-Economic Cowt ruled in favour of Azercell and the claim of Azerfon LLC was rejected as per the court's decree. As of 31 December 2011, the net receivables balance due from Azerfon LLC amounted to USO 11,813. As of the date of these consolidated financial statements, Azercell and Azerfon LLC have not yet reached an agreement regarding the rates to be applied for interconnect traffic. 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 of operation 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 2011 and 2010 are as follows: 2011 2010 Less than I year 27,582 28,125 Over I year not later than 3 years 27,221 54,857 Aggregate minimum future lease payments 54,803 82,982 On 22 December 20 I 0, Kcell signed a Telecommunication Services Agreement (the "Agreement") with Kazakhtelecom. Based on this agreement the Kcell 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 implies the increase in capacity from 2.5 Gbps in 2011 to 92 Gbps in 2020 and respective increase in annual costs from 4 billion to 4.92 billion Tenge excluding VAT. The Agreement is noncancellable until 31 December 2013. In case one of the parties initiates the tennination of the Agreement, it is obliged to pay another party penalty at the rate of I 00% of the cost of the services calculated according to the terms of the Agreement for the period beginning from the date oftennination hereof till 31 December 2013. Pricewn1erhouseCoope.sAC<'Ountm1l•N.I'. For idcnlificntion purpo..'"'!S only 57 Jill pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011AND2010 (Amounts expressed in thousands of USO unless otherwise indicated.) NOTE 20 - COMMITMENTS AND CONTINGENCIES (Continued) Capital expenditure commitments Kcell has contractual capital expenditure commitments in relation to the property and equipment amounting to USD 17,575 (20 I 0: USD 51,657). The commitment relates to telecommunication equipment and construction of buildings. Moldcell has capital commitments in relation to the property and equipment amounting to USD 6,386 (2010: USD 3,024). The commitment relates to value added service platforms and equipment. Azercell has an outstanding capital expenditure commitment as of 31 December 2011 amounting to USD 14,788 (2010: nil). Commitments for future services Moldcell had commitments of USD 2,648 (20 I 0: USO 2,334), which includes commitments for service and maintenance of USD 616 (20 I 0: USD 1,825) and adveriising of USD 2,032(2010: USD 509). NOTE 21 - EMPLOYEE BENEFIT EXPENSES The payroll costs for the years ended 31 December 2011 and 2010 were as follows: 2011 2010 Payroll costs 118,890 115,733 NOTE 22- DEPRECIATION AND AMORTISATION EXPENSES The depreciation and amortisation expenses for the years ended 31 December 2011 and 2010 were as follows: 2011 2010 Depreciation 246,800 216,926 Amortisation 41,551 37,407 Total 288,351 254,333 NOTE 23 - EVENT AFTER BALANCE SHEET DA TE TeliaSonera, through its 100% subsidiary Sonera Holding B. V. ("TeliaSonera") has signed an agreement with Kazakhtelecom to acquire 49% of the shares in Kcell. The purchase price is USD 1.5 billion. The transaction finalized during the first quarter of 2012. TeliaSonera has further agreed, subject to certain conditions, to sell 25% of the shares minus 1% share in Kcell in an Initial Public Offering ("!PO"). Depending on the share price development after the !PO, TeliaSonera may have to make an additional payment to Kazakhtelecom. PiiccwnterhouscCoopcl'S Accounlrmts N.\'. For idcn1ificalion purposes only 58 ~ pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL ST ATEMENTS AT 31DECEMBER2011AND2010 (Amounts expressed in thousands ofUSD unless otherwise indicated.) COMPANY-ONLY FINANCIAL STATEMENTS Pricewn1ed1ou~eCoopcrs Acrountn11l.!l N.V. For identinro1ion pur~s on!) 59 _,~ pwc FINTUR HOLDINGS B.V. COMPANY-ONLY FINANCIAL STATEMENTS AT 31DECEMBER2011 AND 2010 (Amounts expressed in thousands of USO unless otherwise indicated.) Balance sheets as at 31 December 2011 and 2010 (after proposed appropriation of profit) Note 2011 2010 Non-current assets: Intangible assets 24 681,299 681,299 Financial assets 25 1,309,678 1,154,051 Total non-current assets 1,990,977 1,835,350 Current assets: Receivables 26 59,657 65,139 Cash at banks and in hand 115,277 41,245 Total current assets 174,934 106,384 Non-current liabilities: Financial liability 28 768,795 759,659 Total non-current liabilities 768,795 759,659 Current liabilities: Payables 29 16,081 7,837 Total current liabilities 16,081 7,837 Net current assets/(liabilities) (609,942) (661,112) Total assets less non-current and current liabilities 1,381,035 1,174,238 Equity: 27 Share capital 265,487 271,972 Additionally paid-in capital 41,415 41,415 Currency translation reserve (87,626) (83,808) Other reserves 1,320,759 1,204,659 Dividend (159,000) (260,000) Total equity 1,381,035 1,174,238 Pricewa.lel'houscCoopers Accounlnnts N.\', For identificntion purposes only 60 Jill pwc FINTUR HOLDINGS B.V. COMPANY-ONLY FINANCIAL STATEMENTS AT 31DECEMBER2011AND2010 (Amounts expressed in thousands ofUSD unless otherwise indicated.) Profit and loss account for the years ended 31 December 2011 and 2010 Note 2011 2010 Result from participations after taxation 25 414,365 369,965 Other income and expenses after taxation (44,750) (67,645) Result after taxation 369,615 302,320 Price\\nterl1ouseCoopers A(."COUntnnts N.V, 61 For idenlifil":tlion purp:>S(?s only Jill pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011AND2010 (Amounts expressed in thousands ofUSD unless otherwise indicated.) NOTE24-GENERAL Basis o.f presentation The company-only financial statements of Fintur Holdings B. V. (the 'Company' or 'Fintur') have been prepared in accordance with Pa11 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 detennination 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 financial statements. 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 25 - INTANGIBLE ASSETS Goodwill 2011 2010 Acquisition or production costs as at 1 January 682,433 682,433 Accumulated impairments and amortisation (I, 134) (I, I 34) Book value as at 31 December 681,299 681,299 PriC<'\\":llc.'rhouscCoopl'rs ,.\ccount~nls N.V. 62 For identifirotion purpo~s only Jill pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011AND2010 (Amounts expressed in thousands ofUSD unless otherwise indicated.) NOTE 26 - FINANCIAL ASSETS An overview of the movements of the financial fixed assets is taken up below: Investments in group companies 2011 2010 Book value as at 1 January 1,154,051 1,032,325 Movements: Dividends received (248,309) (202,547) Exchange differences (3,818) (8,949) Result participations 414,365 369,965 Capital increase in subsidiary 13,326 11,552 Contribution of share capital by the non-controlling shareholder holding the put option 10,950 Written put option (30,887) (48,295) Total movements during the year 155,627 121,726 Book value as at 31 December 1,309,678 1,154,051 Accumulated decreases in value and write-downs List ofparticipations Statutory seat Share in equity Consolidated using the full consolidation method Azertel TelekomUnikasyon Yatmm Dt$ Ticaret A.S., Istanbul, Turkey 51 Azercell Telekom B.M. Baku, Azerbaijan 51 Azeronline Ltd Baku, Azerbaijan 26 Gi.iliel TelekomUnikasyon Yatmm ve DI$ Ticaret A.$. Istanbul, Turkey 100 Geocell LLC Tblisi, Georgia 100 GSM Kazakhstan LLP OAO Kazakhtelecom ('Keel!') Almaty, Kazakhstan 51 J.M. Moldcell S.A. ('Moldcell') Chisinau, Moldova 100 Molfintur S.R.L. Chisinau, Moldova 99 NOTE 27 - RECEIVABLES 2011 2010 Amounts due from group companies 59,649 65,131 Others 8 8 Total 59,657 65,139 ------"""""""'""'""""~,.,..,-.l;mtsN.\', 63 For identifi~lion purposes only Jill pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011AND2010 (Amounts expressed in thousands ofUSD unless othem~se indicated.) NOTE 28- 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 2011 can be shown as follows: lssuell Allllitionally Currency At the disposal share pa ill-in translation Other of the ACME capital capital reserve reserves (llivillenll) Total Balances as at I January 2011 271,972 41,415 (83,808) 1,204,659 (260,000) 1,174,238 Transfers (260,000) 260,000 Dividend ( 159,000) ( 159,000) Translation of EUR share capital in USD(*) (6,485) 6,485 Translation of foreign participations (3,818) (3,818) Profit for the year 369,615 369.615 Balances as at 31 December 2011 265,487 41,415 (87,626) 1,320,759 (159,000) 1,381,035 (*) Translation of EUR share capital in USO using an exchange rate of I EUR - USO 1.29. NOTE 29 - NON-CURRENT LIABILITIES 2011 2010 Financial liability put option (note 15) 768,795 759,659 NOTE 30 - CURRENT LIABILITIES 2011 2010 Deferred tax liability with respect to unremitted earnings 14,974 6,093 Short-term payable to related parties 61 157 Other liabilities 1,046 1,587 Total 16,081 7,837 NOTE31-EMPLOYEES Similar to the prior year, there are no employees working for the Company. Pricewntt•rhou.c;cC'oopers Accountants N.\'. 64 For idenlilication purpo.c.es only Jill pwc FINTUR HOLDINGS B.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AT 31DECEMBER2011AND2010 (Amounts expressed in thousands ofUSD unless otherwise indicated.) NOTE 32 - REMUNERATION OF THE BOARD Sho1t-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 Company and other compensation in fo1111 of reimbursement of apa1tment rent expenses. Shott-term employee benefits paid to key management personnel included in general and administrative expenses for the year ended 31 December 2011 amount to USO 5,622 (2010: USO 6,423). NOTE 33 - RELATED PARTIES The Company has recognised interest income on its amounts due from subsidiaries of USO 4, 102 and USO 5,342 over the years 2011 and 2010, respectively. Additionally the Company incurred net operating expenses of USO 17,029 and USO 10, 736 for costs charged by its subsidiaries over the years 2011 and 2010, respectively. Rotterdam, 30 August 2012 Board of Directors, T.E. Kivisaari L. Develioglu (appointed 30 November 2011) E.J. Rytkonen M.S.Ciliv Sonera Holding B.V. Pdce\\nlcrhoust.<'oopers AcrountanLc;; N.V. 65 For idt'nliOrotion purposes only Jill pwc FINTUR HOLDINGS B.V. OTHER INFORMATION OTHER INFORMATION PriCC\,ntC'rhouseCooiK'n-. Acrountm1I.<> N.V. 66 For idenlifknlion purpo~s only ~ pwc FINTUR HOLDINGS B.V. OTHER INFORMATION PROFIT APPROPRIATION ACCORDING TO THE ARTICLES OF ASSOCIATION According to a1ticle 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 369,615,000 to the other reserves. USD'OOO Addition to other reserves 369,615 Total 369,615 DIVIDENDS On 19 January 2012 the fa.traordinary General Meeting of Shareholders of the Company resolved to declare a dividend in a total amount of MUSD I 00, payable as at the same date. On 29 May 2012 the Extraordinary General Meeting of Shareholders of the Company resolved to declare a dividend in a total amount of MUSD 40, payable as at the same date. On 27 July 2012 the Extraordinary General Meeting of Shareholders of the Company resolved to declare a dividend in a total amount of MUSD 65, payable as at the same date. EVENT AFTER BALANCE SHEET DATE TeliaSonera, through its I 00% subsidiary Sonera Holding B. V. ("TeliaSonera") has signed an agreement with Kazakhtelecom to acquire 49% of the shares in Kcell. The purchase price is USO 1.5 billion. The transaction finalized during the first quarter of 2012. TeliaSonera has further agreed, subject to ce1tain conditions, to sell 25% of the shares minus I% share in Kcell in an Initial Public Offering ("!PO"). Depending on the share price development after the !PO, TeliaSonera may have to make an additional payment to Kazakhtelecom. PricewnlerhouseCoopcrs Acrount;Jnls N.\'. 67 For identifirotion purpose:i only Jill pwc [~' ~ pwc Independent auditor's report To: the General Meeting of Shareholders of Fintur Holdings B.V. Report on the financial statements We have audited the accompanying financial statements 2011 of Fintur Holdings B.V., Rotterdam. The financial statements include the consolidated financial statements and the company-only financial statements. The consolidated financial statements comprise the consolidated balance sheets as at 31 December 2011, the consolidated statements of income, 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 explanatory information. The company-only financial statements comprise the company-only balance sheet as at 31 December 2011, the company-only statement of income for the year then ended and the notes, comprising a summa1y 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 rep01t 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 with 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 judgement, 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. PricewaterlwuseCoopers Accountants N. V., Prinses Margrietplantsoen 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 the brand under which PricewaterhouseCoopers Accountants N.V. (Chamber of Commerce 34180285), PricewaterhouseCoopers Belastingadviseurs N.V. (Chamber of Commerce 34180284), PricewalerhouseCoopers Advisory N.V. (Chamber of Commerce 34180287), PricewaterhouseCoopers Compliance Services 8.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. Purchases by these companies are governed by General Terms and Conditions of Purchase ('algemene inkoopvoorwaarden'). At www.pwc.nl more detailed information on these companies is available, including these General Terms and Concltions and the General Terms and Conditions of Purchase, which have also been filed at the Amsterdam Chamber of Commerce. pwc We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 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 2011, 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-only financial statements In our opinion, the company-only financial statements give a true and fair view of the financial position of Fintur Holdings B.V. as at 31 December 2011, and of its result for the year then ended in accordance with Pait 9 of Book 2 of the Dutch Civil Code. Report on other legal and regulatory requirements 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 report 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, 4 September 20H Pricewate~mf · soopers_J..c~'unt~~ts N.V. I' -·- --.__.. .. I De handtekening \ is door de KvK onleesbaar gemaakt. I I Page 2of2