STATE OIL COMPANY OF THE AZERBAIJAN REPUBLIC International Financial Reporting Standards Consolidated Financial Statements 31 December 2012 Contents Independent Auditors' Report Consolidated Financial Statements Consolidated Statement of Financial Position ............................................................................................................... 2 Consolidated Statement of Comprehensive Income ...................................................................................................... 4 Consolidated Statement of Changes in Equity .............................................................................................................. 5 Consolidated Statement of Cash Flows ......................................................................................................................... 6 Notes to the Consolidated Financial Statements 1 The Group and its operations ................................................................................................................................ 7 2 Basis of preparation and significant accounting policies ....................................................................................... 7 3 Critical accounting estimates and judgments ...................................................................................................... 20 4 Adoption of new or revised standards and interpretations and new accounting pronouncements ...................... 24 5 Segment information ........................................................................................................................................... 26 6 Financial risk management ................................................................................................................................. 31 7 Balances and transactions with related parties ................................................................................................... 36 8 Cash and cash equivalents ................................................................................................................................. 38 9 Restricted cash and deposits .............................................................................................................................. 39 10 Trade and other receivables ............................................................................................................................... 39 11 Inventories .......................................................................................................................................................... 40 12 Other long-term assets ........................................................................................................................................ 40 13 Other financial assets .......................................................................................................................................... 40 14 Property, plant and equipment ............................................................................................................................ 42 15 Intangible assets other than goodwill .................................................................................................................. 43 16 Investments in jointly controlled entities .............................................................................................................. 44 17 Investments in associates ................................................................................................................................... 45 18 Loan receivable from jointly controlled entity ...................................................................................................... 47 19 Trade and other payables ................................................................................................................................... 47 20 Borrowings .......................................................................................................................................................... 48 21 Taxes payable ..................................................................................................................................................... 50 22 Asset retirement obligations ................................................................................................................................ 50 23 Other provisions for liabilities and charges .......................................................................................................... 51 24 Deferred income.................................................................................................................................................. 52 25 Other non-current liabilities ................................................................................................................................. 52 26 Deferred acquisition consideration payable ........................................................................................................ 53 27 Charter capital, additional paid-in-capital and retained earnings ......................................................................... 53 28 Analysis of revenue by categories ...................................................................................................................... 54 29 Analysis of expenses by nature .......................................................................................................................... 54 30 Other operating income ....................................................................................................................................... 54 31 Finance income ................................................................................................................................................... 55 32 Finance costs ...................................................................................................................................................... 55 33 Income taxes ....................................................................................................................................................... 55 34 Significant non-cash investing and financing activities ........................................................................................ 58 35 Contingences, commitments and operating risks ................................................................................................ 58 36 Business combination, acquisition of non-controlling interests, acquisition of subsidiary which is not a business and goodwill ...................................................................................................................................... 63 37 Events after reporting date .................................................................................................................................. 69 Ernst & Young Holdings (CIS) B.V. Ernst & Yanq Holdinqs (SiAyEs) Bi.Vi. Port Baku Towers Business Centre Port Baku Tauers Biznes Mərkəzi South Tower (block A), 9th floor Cənub Qülləsi (A bloku), 9-cu mərtəbə 153 Neftchilar avenue Neftçilər prospekti 153 Baku AZ1010, Azerbaijan Bakı AZ1010, Azərbaycan Tel: +994 (12) 490 7020 Tel: +994 (12) 490 7020 Fax: +994 (12) 490 7017 Faks: +994 (12) 490 7017 www.ey.com/azerbaijan Independent Auditors’ Report to Management of the State Oil Company of the Azerbaijan Republic: We have audited the accompanying consolidated financial statements of the State Oil Company of the Azerbaijan Republic (the "Company") and its subsidiaries (the “Group”), which comprise the consolidated statement of financial position as at 31 December 2012, and the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used