High Voltage Electric Networks CJSC Financial statements and Independent Auditor’s Report For the year ended 31 December 2019 August 2020 The financial statements have been prepared in English and translated into Armenian. In case of discrepancies, the English version shall prevail. 2 High Voltage Electric Networks CJSC Annual Financial Staetements For the year ended 31 December 2019 Contents 4 Independent auditor’s report 7 Statement of profit or loss and other comprehensive income 8 Statement of financial position 9 Statement of cash flows 10 Statement of changes in equity 11 Index to notes forming part of the financial statements 12 Notes forming part of the financial statements Legal form: Closed Joint Stock Company Principal activities: Electric power transmission Board of Directors: Tigran Melqonyan Head of External Relations Department of Ministry of the Territorial Administration and Infrastructure of RA Vardan Burnazyan Deputy Director for Security and Control of the “Electric Networks of Armenia” CJSC Armen Meliq-Israelyan Head of Stock of Shares Management Department of the state property management committee of the Ministry of the Territorial Administration and Infrastructure of RA Torgom Madoyan Chairman of the Final Concluding Committee of the Institute of Energy and Electrical Engineering of NPUA, Director of “NT Service” LTD Hayk Harutyunyan General Director of “High Voltage Electric Networks” CJSC Armen Manukyan Head of Loan and Grant Projects Department of the Ministry of the Territiorial Administration and Infrastructure of RA 3 INDEPENDENT AUDITOR’S REPORT To the shareholder of High Voltage Electric Networks CJSC Qualified Opinion We have audited the financial statements of “High Voltage Electric Networks” CJSC (“the Company”), which comprise the statement of financial position as at 31 December 2019, and the statement of profit or loss and other comprehensive income, the statement of changes in equity and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies. In our opinion, except for the possible effects of the matters described in the “Basis for Qualified Opinion” paragraph, the accompanying financial statements present fairly, in all material respect, the financial position of the Company as at 31 December 2019, and its financial performance and its cash flows for the year ended in accordance with International Financial Reporting Standards (IFRSs). Basis for Qualified Opinion (1) As a result of the inspection of the Company’s activities for 2012-2014 carried out by the Inspectorate for Financial and Budgetary Supervision of the Staff of the Ministry of Finance of the Republic of Armenia (Act No 30-A dated 18.01.2016), additional liability on dividends payable in the amount of 757.7 million drams and related fines in the amount of 166.4 million drams were charged to the Company, mainly due to accounting in respect of the Iran-Armenia gas pipeline. At the same time, there are instructions of the Prime Minister of the Republic of Armenia (N02/23 15/2528-16 dated 25.06.2016 and N02/23 15/289-17 dated 12.01.2017) to suspend the inspection act and to address the raised issues after the completion of the gas pipeline sale deal. Due to the uncertainties on the terms and timing of the sale of the pipeline as well as uncertainties on effectiveness of the inspection results, we were unable to assess the impact of the matters on the Company’s liabilities, deferred tax assets and retained earnings reflected at the statement of financial position as at 31 December 2019. The independent auditor’s report on the financial statements for the year ended 31 December 2018 included the matter as basis for qualification. (2) In December 2019, the Company has unilaterally terminated the contract dated May 2016 with Chinese contractor Liaoning-Efacec Electrical Equipment Co. LTD (“the Contractor”) for reconstruction of Shinuhair and Agarak-2 substations. The termination was argued by continuing non- performance of the Contractor and breach of construction completion deadlines. As a result of the contract termination, the Company has received bank guarantee payment from a Chinese bank in the total amount of 1.4 million USD as a reimbursement for liquidating damages. As at 31 December 2019 the following balances are related to the contract:  Non-current prepayments of 340 million drams, included in the presented amount of 4,008 million drams (note 14),  Non-resident withholding taxes of 95 million drams paid by the Company on behalf of the non-resident contractor, included in the presented amount of 2,059 million drams (note 13),  Trade payable of 1,065 million drams, included in the presented amount of 14,012 million drams (note 21),  Construction in progress of 6,428 million drams, included in the presented amount of 94,390 million (note 12). The Company did not confirm the balances with the Contractor after the contract termination, as well as did not determine the recoverable value of the above assets as at 31 December 2019, despite the impairment indications which does not comply with the requirements of IAS 36, “Impairment of Assets”. Due to circumstances of the matter, we were unable to determine the impact of the matter on the carrying amount of non-current prepayments, prepaid non-resident withholding taxes, trade payables, construction-in-progress and deferred tax asset presented at the statement of financial positions as at 31 December 2019. The independent auditor’s report on the financial statements for the year ended 31 December 2018 included the matter as basis for qualification. 4 Independent Auditor’s Report (continued) We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code) and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified opinion. Emphasis of matter – subsequent event We draw your attention to Note 25 of the financial statements, which describes the uncertainty related to the outcome of the events subsequent to the reporting date of the financial statements. Our opinion was not modified in respect of this matter. Responsibilities of the management and those charged with governance for the Financial Statements Management of the Company is responsible for the preparation and fair presentation of the financial statements in accordance with IFRSs, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the Company’s ability to continue as going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operation, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company’s financial reporting process. Auditor’s Responsibility for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is high level of assurance, but is not a guaranty that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements arise from fraud and error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:  Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.  Obtain an understanding of internal control relevant to the audit 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 Foundation’s internal control. 5 High Voltage Electric Networks CJSC Statement of financial position As of 31 December 2019 Note 31.12.19 31.12.18 AMD'000 AMD'000 Non-current assets Property, plant and equipment 12 94,390,245 85,177,078 Intangible assets 101,164 128,025 Deferred tax assets 11 876,712 1,087,128 Trade and other receivables 13 273,200 494,803 Prepayments on PPE 14 4,008,557 5,841,190 99,649,878 92,728,224 Current Assets Inventories 15 2,161,670 2,019,772 Trade and other receivables 13 1,786,379 2,077,147 Term deposits 16 5,724,458 6,804,127 Cash and cash equivalents 17 10,356,637 6,413,756 20,029,144 17,314,802 Assets held for sale 76,520 76,602 Total assets 119,755,542 110,119,628 EQUITY AND LIABILITIES Equity Share capital 9,610,620 8,995,388 Share discount (49,284) (49,284) Other reserves 451,842 272,344 Retained earnings 15,848,834 14,204,548 18 25,862,012 23,422,996 Non-current liabilities Loans and borrowings 19 75,305,534 64,383,189 Grant liabilities 20 517,747 518,142 Provisions 22 586,878 - 76,410,159 64,901,331 Current liabilities Loans and borrowings 19 2,377,970 4,018,182 Profit tax payable 1,093,701 981,747 Trade and other payables 21 14,011,700 16,795,372 17,483,371 21,795,301 Total equity and liabilities 119,755,542 110,119,628 8 High Voltage Electric Networks CJSC Statement of cash flows For the year ended 31 December 2019 2019 2018 Note AMD'000 AMD'000 Cash flows from operating activities Profit for the year 2,439,016 2,440,446 Income tax expense 1,457,420 554,692 Profit before tax 3,896,436 2,995,138 Adjustments for: Depreciation and amortization 3,690,782 3,620,405 Loss/(gain) on disposal of PPE (41,280) 1,151 Inventory surplus (88,965) - Impairment of non-financial assets 88,286 - Loss/(gain) on disposal of inventory 5,895 10,465 Finance costs 1,389,406 1,606,591 Finance income (1,589,237) (1,315,233) Other loss/ (gain) (855,440) - Income from grants (3,011) (904) Exchange (gain)/loss (1,229,000) (1,554,578) Operating cash flows before changes in working capital 5,263,872 5,363,035 (Increase)/decrease in trade and other receivables 560,926 1,434,328 (Increase)/decrease in inventories (42,287) (250,518) Increase/(decrease) in provisions 704,505 - Increase/(decrease) in trade and other payables 1,330,968 1,661,907 Cash from operating activities 7,817,984 8,208,752 Income tax paid (1,135,050) (1,529,993) Net cash from operating activities 6,682,934 6,678,759 Cash flows from investing activities Payment for acquisition of PPE (13,154,672) (16,216,159) Proceeds from disposal of PPE 50,000 2,750 Repayment of borrowings 1,772 320 Redemption/ (placement) of term deposits 1,223,875 738,038 Interest received 1,321,094 1,315,233 Net cash used for investing activities (10,557,931) (14,159,818) Cash flows from financing activities Proceeds from loans and borrowings 19 12,018,212 15,362,954 Repayment of loans and borrowings 19 (1,642,664) (1,279,596) Interest paid 19 (2,549,811) (1,922,415) Net cash from financing activities 7,825,737 12,160,943 Net increase in cash and cash equivalents 3,950,740 4,679,884 Exchange (loss)/gain on cash and cash equivalents (7,859) 6,168 Cash and cash equivalents at the beginning of the year 6,413,756 1,727,704 Cash and cash equivalents at the end of the year 17 10,356,637 6,413,756 9 High Voltage Electric Networks CJSC Statement of changes in equity For the year ended 31 December 2019 Share Share Other Retained capital Discount reserves earnings Total AMD’000 AMD’000 AMD’000 AMD’000 AMD’000 Balance at 1 January 2019 8,995,388 (49,284) 272,344 14,204,548 23,422,996 Comprehensive income for the year Profit for the year - - - 2,439,016 2,439,016 - - - 2,439,016 2,439,016 Contributions by and distributions to shareholders Stock dividend (note 18) 615,232 - - (615,232) - Transfer to other reserves - - 179,498 (179,498) - 615,232 - 179,498 (794,730) - Balance as at 31 December 2019 9,610,620 (49,284) 451,842 15,848,834 25,862,012 Balance at 1 January 2018 8,995,388 (49,284) 272,344 11,764,102 20,982,550 Comprehensive income for the year Profit for the year - - - 2,440,446 2,440,446 - - - 2,440,446 2,440,446 Balance at 31 December 2018 8,995,388 (49,284) 272,344 14,204,548 23,422,996 10 High Voltage Electric Networks CJSC Index to notes forming part of the financial statements For the year ended 31 December 2019 1.  About the Company ..........................................................................................................................12  2.  Basis of preparation..........................................................................................................................13  3.  Critical accounting estimates and judgments .............................................................................14  4.  Financial instruments - Risk Management ...................................................................................15  5.  Revenue from contracts with customers .....................................................................................20  6.  Cost of sales .......................................................................................................................................20  7.  Other income .....................................................................................................................................20  8.  Administrative expenses .................................................................................................................21  9.  Other expenses..................................................................................................................................21  10.  Finance income and costs ...............................................................................................................22  11.  Income tax ..........................................................................................................................................22  12.  Property, plant and equipment......................................................................................................24  13.  Trade and other receivables...........................................................................................................25  14.  Prepayments ......................................................................................................................................26  15.  Inventories .........................................................................................................................................27  16.  Term deposits ....................................................................................................................................27  17.  Cash and cash equivalents ..............................................................................................................27  18.  Share capital and reserves ..............................................................................................................27  19.  Loans and borrowings.......................................................................................................................28  20.  Grant liabilities ..................................................................................................................................32  21.  Trade and other payables................................................................................................................32  22.  Provisions............................................................................................................................................33  23.  Related party transactions ..............................................................................................................33  24.  Contingencies and commitments ...................................................................................................34  25.  Events after reporting date ............................................................................................................35  26.  Accounting policies ...........................................................................................................................35  Annex A – IFRS 13 Fair Value measurement disclosures ........................................................................43  11 High Voltage Electric Networks CJSC Notes forming part of the financial statements for the year ended December 31, 2019 1. About the Company “High Voltage Electric Networks” closed joint stock company (“the Company”) has been established by transfer of assets and operations of “High Voltage Electric Networks” subsidiary of “ArmEnergo” state closed joint stock company (the Republic of Armenia Government Decree #450 dated 20 July 1998) and is a legal successor of that subsidiary. “Specialised Maintenance of Power Supply Units” SCJSC was reorganized and merged into the Company based on the Republic of Armenia Government Decree #709 dated 23 November 1999. On 10 February 2000 the Company was reregistered as closed joint stock company at the State Registry of the Republic of Armenia. The Company is operating under the license # 0006 “On transmission of electricity in the Republic of Armenia” issued by the Ministry of Energy of the Republic of Armenia on June 18, 1999. At 31 December 2019 the Armenian Government was the ultimate beneficiary of the Company, and acting through the Ministry of Energy Infrastructures and Natural Resources of the Republic of Armenia owned 100% of the voting ordinary shares (2018: 100%) (RA Government Decree #1694-N dated 6 November 2003). The Company operates 8 branches throughout the country.  Eastern Branch  Western Branch  Goris Branch  Project Branch  Administration of Construction of Energy Facilities Branch  Zangezur Branch  Northern Branch  Southern Branch The Company’s principal activity is transmission of electric power to Armenian and foreign consumers through electric networks located in Armenia. The Company also operates a wind power plant located in Lori region of Armenia with total production capacity of 2.64 megawatt. The Company’s operation, including tariff policy is regulated by the Public Services Regulatory Commission of the Republic of Armenia. The average number of the Company’s employees during 2019 was 695 (2018: 805). The Company is located 1 Zoravar Andranik, Yerevan, Republic of Armenia. Armenian business environment The Company’s operations are located in Armenia. Consequently, the Company is exposed to the effects of changes of economic and financial markets of Armenia. Armenia continues economic reforms and development of its legal, tax and regulatory frameworks as required by a market economy. The future stability of the Armenian economy is largely dependent upon these reforms and developments and the effectiveness of economic, financial and monetary measures undertaken by the government. 2019 can be considered a rather positive year for Armenian economy. GDP growth comprised 7.6% for the year. CPI has been quite stable over the last years (1.4%). It is important to note that AMD/USD exchange rate has also been mostly stable, with slight fluctuations in AMD/EUR rates for the year 2019. 12 High Voltage Electric Networks CJSC Notes forming part of the financial statements for the year ended December 31, 2019 (continued) Overall, management believes that it is taking appropriate measures to support the sustainability of the Company’s business under the current circumstances as well as ensuring relevant buffers to observe potential shocks in the near future. 2. Basis of preparation These financial statements have been prepared in accordance with International Financial Reporting Standards, International Accounting Standards and Interpretations (collectively IFRSs). The principal accounting policies adopted in the preparation of the financial statements are set out in note 26. The policies have been consistently applied to all the years presented, unless otherwise stated. The financial statements are presented in Armenian drams (AMD), which is also the Company's functional currency. Amounts are rounded to the nearest thousand (AMD’000), unless otherwise stated. The preparation of financial statements in compliance with adopted IFRS requires the use of certain critical accounting estimates and judgments. The areas where significant judgments and estimates have been made in preparing the financial statements and their effect are disclosed in note 3. Basis of measurement The financial statements have been prepared on a historical cost basis. Changes in accounting policies a) New standards, interpretations and amendments effective from 1 January 2019  IFRS 16 Leases (IFRS 16);  IFRIC 23 Uncertainty over income tax treatment (IFRIC 23). IFRIC 23 Uncertainty over income tax treatment (IFRIC 23) had no significant effect on the Company’s financial statements. Lessor accounting under IFRS 16 is substantially unchanged from present accounting under IAS 17. Lessors continue to classify all leases using the same classification principle as in IAS 17 and distinguish between two types of leases: operating leases and finance leases. Therefore, IFRS 16 does not have an impact for leases where the Company is the lessor. The Company does not have material lease contracts where it acts as a lessee. b) New standards, interpretations and amendments not yet effective There were no new standards, interpretations and amendments that are not yet effective that will have or may have an impact on the Company's future financial statements. 13 High Voltage Electric Networks CJSC Notes forming part of the financial statements for the year ended December 31, 2019 (continued) 3. Critical accounting estimates and judgments The Company makes certain estimates and assumptions regarding the future. Estimates and judgments are continually evaluated based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may differ from these estimates and assumptions. 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 financial year are discussed below. Estimates and assumptions Going concern Management prepared these financial statements on a going concern basis. In making this judgement, management considered the Company's financial position, current intentions, profitability of operations and access to financial resources. The management do not expect the situation to cause inappropriateness of going concern presumption due to expectations of continuing positive operating cash flows. Significant factor having effect on the Company going concern assumption is the current global health emergency situation because of a new strain of coronavirus originating in Wuhan, China (the “COVID- 19 outbreak”) and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally (see note 25). The management estimates that the negative effects of the spread of COVID19 and respective government policies would not materially affect Company’s activities in the nearest term. Two factors supporting this estimate are as follows;  The sole shareholder of the Company is the RA Government,  Company’s revenue is generated from the revenue from electricity transmission based on tariffs imposed by the Public Services Regulatory Commission of the Republic of Armenia. The base for calculation of the tariff includes predicted costs incurred, thus insuring in the sufficient cash generated from operations. After making assessments, the Company’s management has a reasonable expectation that the Company is able to continue its operational existence in the foreseeable future. The Company therefore continues to adopt the going concern basis in preparing its financial statements, therefore these financial statements do not include any adjustments that would result if the Company was unable to continue as a going concern. Useful life of property, plant and equipment The useful lives of property and equipment are based on management's estimates and may subsequently be changed (see note 26). At each reporting date, the Company's management reviews and, where appropriate, modifies the estimated useful lives of property, plant and equipment. Impairment of non current tangible assets At each reporting date, management of the Company determines whether there is any indication of impairment of non-current tangible assets. Indication of impairment includes changes in business plans, tariffs, and other factors leading to adverse effects for the Company. Impairment of receivables An allowance for expected credit losses on receivables is established based on management’s assessment of the probability of repayment of debts of specific debtors. For the purpose of assessing credit losses, the Company sequentially considers all reasonable and corroborated information about past events, current and forecasted events, which is available without large effort and is appropriate 14 High Voltage Electric Networks CJSC Notes forming part of the financial statements for the year ended December 31, 2019 (continued) for the assessment of receivables. Experience gained in the past is adjusted on the basis of current data in order to reflect current conditions that did not affect previous periods, and in order to exclude the influence of past conditions that no longer exist. Income taxes The Company is subject to income tax in Republic of Armenia. During the ordinary course of business, there are transactions and calculations for which the ultimate tax determination may be uncertain. As a result, the company recognizes tax liabilities based on estimates of whether additional taxes and interest will be due. These tax liabilities are recognized when, despite the company's belief that its tax return positions are supportable, the company believes that certain positions are likely to be challenged and may not be fully sustained upon review by tax authorities. The company believes that its accruals for tax liabilities are adequate for all open audit years based on its assessment of many factors including past experience and interpretations of tax law. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact income tax expense in the period in which such determination is made. Fair value measurement A number of assets and liabilities included in the Company's financial statements require measurement at, and/or disclosure of, fair value. The fair value measurement of the Company’s financial and non-financial assets and liabilities utilizes market observable inputs and data as far as possible. Inputs used in determining fair value measurements are categorized into different levels based on how observable the inputs used in the valuation technique utilized are (the 'fair value hierarchy'): - Level 1: Quoted prices in active markets for identical items (unadjusted) - Level 2: Observable direct or indirect inputs other than Level 1 inputs - Level 3: Unobservable inputs (i.e. not derived from market data). The classification of an item into the above levels is based on the lowest level of the inputs used that has a significant effect on the fair value measurement of the item. Transfers of items between levels are recognized in the period they occur. 4. Financial instruments - Risk Management The Company is exposed through its operations to the following financial risks: • Credit risk, • Fair value or cash flow interest rate risk, • Foreign exchange risk, • Other price risk • Liquidity risk In common with all other businesses, the Company is exposed to risks that arise from its use of financial instruments. This note describes the Company's objectives, policies and processes for managing those risks and the methods used to measure them. Further quantitative information in respect of these risks is presented throughout these financial statements. There have been no substantive changes in the Company's exposure to financial instrument risks, its objectives, policies and processes for managing those risks or the methods used to measure them from previous periods. 15 High Voltage Electric Networks CJSC Notes forming part of the financial statements for the year ended December 31, 2019 (continued) (a) Principal financial instruments The principal financial instruments used by the Company, from which financial instrument risks arise, are as follows: - Trade receivables - Cash and cash equivalents - Term deposits - Trade payables - Floating rate loans - Fixed rate loans (b) Financial instruments by category Financial assets Measured at amortized cost 2019 2018 AMD'000 AMD'000 Term deposits 5,724,458 6,804,127 Trade receivables 1,512,875 1,555,407 Cash and cash equivalents 10,356,637 6,413,756 17,593,970 14,773,290 Financial liabilities Measured at amortized cost 2019 2018 AMD'000 AMD'000 Trade payables 3,796,491 7,443,596 Loans and borrowings 77,683,504 68,401,371 Total financial liabilities 81,479,995 75,844,967 (c) Financial instruments not measured at fair value Financial instruments not measured at fair value include cash and cash equivalents, trade and other receivables, trade and other payables, as well as loans and borrowings. Due to their short-term nature, the carrying value of cash and cash equivalents, trade and other receivables, trade and other payables approximates their fair value. For details of the fair value hierarchy, valuation techniques, and significant unobservable inputs related to determining the fair value of loans and borrowings, which are classified in level 3 of the fair value hierarchy, refer to Annex A. General objectives, policies and processes The General Director has overall responsibility for the determination of the Company's risk management objectives and policies. The General Director receives monthly reports from the Company’s Financial Director through which it reviews the effectiveness of the processes put in place and the appropriateness of the objectives and policies it sets. The overall objective of the Company is to set policies that seek to reduce risk as far as possible without unduly affecting the Company's competitiveness and flexibility. Further details regarding these policies are set out below: 16 High Voltage Electric Networks CJSC Notes forming part of the financial statements for the year ended December 31, 2019 (continued) Credit risk Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The companies are generally exposed to the credit risk from their operating activities (primarily for trade receivables). Credit risk also arises from cash and cash equivalents and deposits with banks and financial institutions. Further disclosures regarding trade and other receivables, which are neither past due nor impaired, are provided in note 13. Cash in bank and short-term deposits A significant amount of cash is held with the following institutions: 31 December 2019 31 December 2018 Bank Bank Cash Deposits Cash Deposits AMD'000 AMD'000 AMD'000 AMD'000 RA Treasury 1,599 - 102,038 - Ardshinbank CJSC - rated Ba3 (Moody’s) 76,041 7,719,134 64,527 5,947,053 Ameriabank CJSC - rated Ba3 (Moody’s) 42,158 - 42,252 - Armbusinessbank CJSC - not rated 1,208,066 7,030,721 22,149 7,038,334 Other 2,812 - 570 - 1,330,676 14,749,855 231,536 12,985,387 The Company’s Finance Director monitors the credit ratings of counterparties regularly and at the reporting date does not expect any losses from non-performance by the counterparties. Market risk Market risk arises from the Company's use of interest bearing, tradable and foreign currency financial instruments. It is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in interest rates (interest rate risk), foreign exchange rates (currency risk) or other market factors (other price risk). Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company is exposed to the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. Interest margins may increase as a result of such changes but may also decrease or create losses in the event that unexpected movements occur. Interest rate risk is managed principally through applying fixed-rate contracts and monitoring the analysis of interest rate review terms. Changes in interest rates impact primarily loans and borrowings, since they may change their fair value (fixed rate debt) or their future cash flows (variable rate debt). Management does not have a formal policy of determining how much of the Company’s exposure should be to fixed or variable rates debt. However, at the time of raising new loans or borrowings management uses its judgment to decide whether it believes that a fixed or variable rate would be more favourable to the Company over the expected period until maturity. Fair value sensitivity analysis for fixed rate instruments The Company does not account for any fixed rate financial assets and liabilities at fair value through profit or loss for the period. The Company does not designate derivatives (interest rate swaps) as hedging instruments under a fair value hedge accounting model. Therefore, a change in interest rates 17 High Voltage Electric Networks CJSC Notes forming part of the financial statements for the year ended December 31, 2019 (continued) at the reporting date would not affect profit or loss. Cash flow sensitivity analysis for variable rate instruments The following table demonstrates the sensitivity to a reasonable possible change in interest rates, with all other variables held constant, of the Company’s statement of comprehensive income. Increase Sensitivity of Increase Sensitivity of (decrease) in net interest (decrease) in net interest Currency basis points income basis points income 2019 2019 2018 2018 AMD'000 AMD'000 AMD'000 AMD'000 USD 0.20% (112,442) 0.20% (85,942) USD (0.01%) 5,622 (0.01%) 4,297 Foreign exchange risk Foreign exchange risk arises when Company enter into transactions denominated in a currency other than their functional currency. The Company's policy is, where possible, to allow the Company to settle liabilities (denominated in their functional currency) with the cash generated from their own operations in that currency. In order to monitor the continuing effectiveness of this policy, the Board receives a monthly forecast, analyzed by the major currencies held by the Company, of liabilities due for settlement and expected cash reserves. The Company's foreign currency risk mainly arises from liabilities on loans denominated in US dollars, Euro and SDR, as well as from purchases made from major suppliers in US dollars and Euro. As at 31 December, the Company's net exposure to foreign exchange risk was as follows: 2019 2018 Net foreign currency assets/(liabilities) AMD'000 AMD'000 Euro (32,094,343) (29,479,910) US dollar (36,712,886) (34,621,685) Special Drawing Rights (5,218,897) (5,255,096) Net position, asset/(liability) (74,026,126) (69,356,691) The effect of a 10% strengthening of Euro against Armenian dram at the reporting date on the Euro denominated financial instruments, all other variables held constant, would have resulted in a decrease in post-tax profit for the year and decrease of net assets of AMD 2,568 million (2018: AMD 2,358 million). A 10% weakening in the exchange rate would, on the same basis, have increased post- tax profit and net assets by the same amounts. The effect of a 10% strengthening of US dollar against Armenian dram at the reporting date on the US dollar denominated financial instruments, all other variables held constant, would have resulted in a decrease in post-tax profit for the year and decrease of net assets of AMD 2,937 million (2018: AMD 2,770 million). A 10% weakening in the exchange rate would, on the same basis, have increased post-tax profit and net assets by the same amounts. The effect of a 10% strengthening of SDR against Armenian dram at the reporting date on the SDR denominated financial instruments, all other variables held constant, would have resulted in a decrease in post-tax profit for the year and decrease of net assets of AMD 418 million (2018: AMD 420 million). A 10% weakening in the exchange rate would, on the same basis, have increased post- tax profit and net assets by the same amounts. 18 High Voltage Electric Networks CJSC Notes forming part of the financial statements for the year ended December 31, 2019 (continued) Liquidity risk Liquidity risk arises from the Company’s management of working capital and the finance charges and principal repayments on its debt instruments. It is the risk that the Company will encounter difficulty in meeting its financial obligations as they fall due. The Company's policy is to ensure that it will always have sufficient cash available to meet its liabilities when they become due. To achieve this aim, it seeks to maintain cash balances (or agreed facilities) to meet expected requirements in reasonable timeframe. The Company also seeks to reduce liquidity risk by attracting borrowings with fixed interest rate. This is further discussed in the 'interest rate risk' section. The Board receives rolling 12-month cash flow projections on a monthly basis as well as information regarding cash balances. At the end of the financial year, these projections indicated that the Company expected to have sufficient liquid resources to meet its obligations under all reasonably expected circumstances. The liquidity risk of the Company is managed by the Company treasury function. Each operation has a facility with Company treasury, the amount of the facility being based on budgets. The budgets are set locally and agreed by the Board in advance, enabling the Company's cash requirements to be anticipated. Where facilities of Company entities need to be increased, approval must be sought from the Company’ Financial Director. Where the amount of the facility is above a certain level, agreement of the Board is needed. The following table sets out the contractual maturities (representing undiscounted contractual cash- flows) of financial liabilities: Between Total Up to 6 Carrying 31 December 2019 6 and 12 Between 1 undiscounted months value months and 5 years Over 5 years cash flows AMD'000 AMD'000 AMD'000 AMD'000 AMD'000 AMD'000 Trade payables 1,492,404 2,304,087 3,796,491 3,796,491 Loans and borrowings 1,666,166 2,224,872 27,505,964 71,128,930 102,525,932 77,683,504 Total 3,158,570 2,224,872 29,810,051 71,128,930 106,322,423 81,479,995 31 December 2018 Trade payables 4,303,010 3,140,586 - - 7,443,596 7,443,596 Loans and borrowings 1,666,166 2,224,872 27,505,964 71,128,930 102,525,932 68,401,371 Total 5,969,176 5,365,458 27,505,964 71,128,930 109,969,528 75,844,967 Capital Disclosures The Company’s capital includes the following components of equity: share capital, share premium, other reserves and retained earnings. The Company's objectives when maintaining capital are: - to safeguard the entity's ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders, and - to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk. The Company sets the amount of capital it requires in proportion to risk. The Company manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, or sell assets to reduce debt. 19 High Voltage Electric Networks CJSC Notes forming part of the financial statements for the year ended December 31, 2019 (continued) Consistent with others in the industry, the Company monitors capital on the basis of the debt to adjusted capital ratio. This ratio is calculated as net debt adjusted capital as defined above. Net debt is calculated as total debt (as shown in the consolidated statement of financial position) less cash and cash equivalents. The debt-to-adjusted-capital ratios at 31 December 2019 and at 31 December 2018 were as follows: 2019 2018 AMD'000 AMD'000 Loans and borrowings 77,683,504 68,401,371 Less: cash and term deposits (16,081,095) (13,217,883) Net debt 61,602,409 55,183,488 Equity 25,862,012 23,422,996 Debt to adjusted capital ratio (%) 238.20% 235.60% 5. Revenue from contracts with customers 2019 2018 AMD'000 AMD'000 Electricity transmission services Armenia 6,353,858 5,902,572 Iran 1,303,799 1,877,003 7,657,657 7,779,575 Supply of electricity produced 41,128 61,796 Other services - 15,850 7,698,785 7,857,221 6. Cost of sales 2019 2018 AMD'000 AMD'000 Depreciation and amortization 3,048,762 2,847,110 Employee benefits 1,434,250 1,100,508 Other 66,056 100,094 4,549,068 4,047,712 7. Other income 2019 2018 AMD'000 AMD'000 Recovery of impairment loss (1) 925,039 - Inventory surplus 88,965 - Operating lease income 54,638 56,372 Gain on sale of property, plant and equipment (net) 41,279 - Compensation for damages 9,260 37,600 Grant income 3,408 1,249 Income from penalties 1,745 275 Other 84,647 47,792 1,208,981 143,288 (1) In 2017, a decision was made to terminate the investment program of Armenia-Georgia high- voltage transmission lines (RA Government meeting 24.10 / 394769 -17 dated 21 February 2017) considering its implementation was not feasible under the particular circumstances. 20 High Voltage Electric Networks CJSC Notes forming part of the financial statements for the year ended December 31, 2019 (continued) As a result of numerous discussions about the necessity and value of the Program for Armenia and the discussions with the RA Prime Minister, on 30 October 2019 it was decided to continue the Program. Following this decision, in December 2019, "High Voltage Electric Networks" CJSC has negotiated new contracted terms with the consultant of the Program (Fichtner), in order to initiate new bidding process. Management estimated the implementation of the Program as highly feasible. Therefore, the Company has recovered the prior periods impaired construction in progress balances to the extent (541,946 thousand AMD), as well as the KfW 75 million Euro loan service fee of 383,093 thousand AMD (EUR 750,000). 8. Administrative expenses 2019 2018 AMD'000 AMD'000 Employee benefits 781,605 1,001,803 Depreciation and amortization 131,461 161,930 Non-recoverable taxes 35,174 50,093 Utilities 53,372 49,754 Travel and presentation 22,877 26,848 Fuel 20,558 35,383 Exploitation and maintenance costs 8,455 11,641 Audit and consulting 14,057 11,171 Other 63,459 64,756 1,131,018 1,413,379 Key management personnel compensation Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Company, including: General Director, Deputy General Director, chief engineer/technical director, branch managers, their deputies and chief engineers of the branches. Compensation of key management personnel in 2019 amounted to 199 million drams (2018: 234 million drams). 9. Other expenses 2019 2018 AMD'000 AMD'000 Depreciation and amortization 510,559 510,559 Impairment losses of non-financial assets 197,814 20,318 Loss on remeasurement of non-current receivable - 137,259 Loss on disposal of property, plant and equipment 24,210 32,252 Late fees and penalties 1,631 35,784 Write-off of non-resident withholding tax - 29,533 Other costs 25,861 41,795 760,075 807,500 21 High Voltage Electric Networks CJSC Notes forming part of the financial statements for the year ended December 31, 2019 (continued) 10. Finance income and costs 2019 2018 AMD'000 AMD'000 Interest income on term deposits 1,451,252 1,312,906 Interest income on demand deposits 8,566 1,979 Effect of discounting non-current provisions 129,419 - Other - 348 1,589,237 1,315,233 Interest expense on loans from RA Ministry of Finance (1,377,170) (1,606,024) Unwinding of discount of non-current provisions (11,792) - Interest expense on other loans (444) (567) (1,389,406) (1,606,591) 11. Income tax The Company accrues income tax for the current period in accordance with the requirements of the Armenia tax legislation, which may differ from IFRS. For the years ended 31 December 2019 and 2018, the corporate income tax rate was 20%. As some expenses are not deductible for tax purposes and also due to their non-taxable nature, the Company has certain permanent tax differences. Deferred tax reflects the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount determined for tax purposes. The temporary differences as at 31 December 2019 and 2018 mainly resulted from different accounting methods for tax financial reporting purposes. 2019 2018 Current tax expense AMD'000 AMD'000 Current income tax expense 1,247,004 1,085,601 Total current tax 1,247,004 1,085,601 Deferred income tax expense/income Origination and reversal of temporary differences 101,703 (530,909) Reduction in statutory tax rate 108,713 - 210,416 (530,909) Total income tax expense 1,457,420 554,692 The income tax rate for the current year was 20% in accordance with Tax Code of the Republic of Armenia (2018: 20%). The income tax rate was set to 18% from 1 January 2020. Current year profit tax was calculated using 20% rate, while the deferred tax as at reporting date: 18% rate. Reconciliation of the tax rate 2019 2018 AMD'000 AMD'000 IFRS profit before taxation 3,896,436 2,995,138 Profit tax calculated at statutory tax rate of 20% (2018: 20%) 779,287 599,028 Impact of statutory profit tax rate change (108,713) - Tax effect of permanent differences 786,846 (44,336) Total income tax expense 1,457,420 554,692 22 High Voltage Electric Networks CJSC Notes forming part of the financial statements for the year ended December 31, 2019 (continued) The following shows the tax effect on the main temporary differences that give rise to deferred income tax assets and liabilities as at 31 December 2019 and 2018: Recognized in 2019 2018 profit or loss AMD"000 AMD"000 AMD"000 Accelerated depreciation and amortization (7,410,602) (7,737,419) 326,817 Borrowing costs 864,314 1,375,900 (511,586) Impairment of non-current assets 2,677,674 3,111,398 (433,724) Impairment of inventories 62,302 - 62,302 Advances received 9,157,100 8,979,709 177,391 Vacation leaves provision 252,327 146,095 106,232 Non-current accounts receivable discounting 232,363 933,964 (701,601) Grant liabilities 145,140 146,865 (1,725) Assets held for sale 17,742 17,757 (15) Advances made - (25,510) 25,510 Non-current provision 586,878 - 586,878 Trade payable write off 168,520 - 168,520 Loans and borrowings (1,883,136) (1,513,119) (370,017) Deferred tax asset, net 4,870,622 5,435,640 (565,018) Deferred income tax, 18% (2018: 20%) 876,712 1,087,128 (210,416) 23 High Voltage Electric Networks CJSC Notes forming part of the financial statements for the year ended December 31, 2019 (continued) 12. Property, plant and equipment Buildings and Infrastructure Machinery and Construction in Land Vehicles Other Total Constructions Equipment Equipment Progress (a) Cost AMD’000 AMD’000 AMD’000 AMD’000 AMD’000 AMD’000 AMD’000 AMD’000 As at 1 January 2018 1,575,387 7,430,256 67,373,619 54,470,210 760,069 2,097,116 34,761,994 168,468,651 Additions 34,292 10,465 204,015 16,354 716,332 162,003 18,422,406 19,565,867 Disposals - - (290,158) (14,779) - (3,578) - (308,515) Transfers to complete - - 13,889,088 102,055 - - (13,991,143) - Other movements (3,901) - (85,000) - (87,450) (6,032) (468,805) (651,188) As at 31 December 2018 1,605,778 7,440,721 81,091,564 54,573,840 1,388,951 2,249,509 38,724,452 187,074,815 -0 0 -1 1 1 -0 1,047,648 1,047,649 As at 1 January 2019 1,605,778 7,440,721 81,091,564 54,573,840 1,388,951 2,249,509 38,724,452 187,074,815 Additions 13,056 382,741 44,191 55,951 10,519 12,162,123 12,668,581 Disposals - (132,460) (262,460) (475,579) (58,043) - - (928,542) Transfers to inventory - - - - - - (125,126) (125,126) Transfers to complete - 883,503 309,861 5,431,263 390 87,592 (6,712,609) - Other movements - - (52,947) (949) - - - (53,896) As at 31 December 2019 1,618,834 8,574,505 81,130,209 59,584,526 1,331,298 2,347,620 44,048,840 198,635,832 - 419 (1) 11,346 0 1 613,926 (b) Accumulated depreciation As at 1 January 2018 - 5,385,878 49,955,127 38,413,862 491,520 1,327,979 - 95,574,366 Depreciation charge - 211,950 1,480,967 1,578,164 91,961 141,880 - 3,504,922 Disposals - - (264,309) (8,377) (16,880) (3,578) - (293,144) As at 31 December 2018 - 5,597,828 51,171,785 39,983,649 566,601 1,466,281 - 98,786,144 As at 1 January 2019 - 5,597,828 51,171,785 39,983,649 566,601 1,466,281 - 98,786,144 Depreciation charge - 241,668 1,433,406 1,758,442 99,930 136,337 - 3,669,783 Disposals - (129,715) (240,995) (471,230) (57,842) - - (899,782) Other movements - - - - 189 (189) - - As at 31 December 2019 - 5,709,781 52,364,196 41,270,861 608,878 1,602,429 - 101,556,145 0 (0) 0 (1) (c) Accumulated impairment As at 1 January 2018 - 6,923 147,171 1,890,554 1,820 17,475 1,029,468 3,093,411 Impairment - - - - - - 18,182 18,182 As at 31 December 2018 - 6,923 147,171 1,890,554 1,820 17,475 1,047,650 3,111,593 As at 1 January 2019 - 6,923 147,171 1,890,554 1,820 17,475 1,047,650 3,111,593 Recovery of impairment - - - - - - (541,946) (541,946) Impairment - 419 - 11,154 - - 108,222 119,795 As at 31 December 2019 - 7,342 147,171 1,901,708 1,820 17,475 613,926 2,689,442 (d) Net Book Value As at 1 January 2018 1,575,387 2,037,455 17,271,321 14,165,794 266,729 751,662 33,732,526 69,800,874 As at 31 December 2018 1,605,778 1,835,970 29,772,608 12,699,637 820,530 765,753 37,676,802 85,177,078 As at 31 December 2019 1,618,834 2,857,382 28,618,842 16,411,957 720,600 727,716 43,434,914 94,390,245 24 High Voltage Electric Networks CJSC Notes forming part of the financial statements for the year ended December 31, 2019 (continued) Iran-Kajaran gas pipeline at the carrying amount of 9,913,362 thousand drams (included in infrastructure assets) was built back in 2007 for transportation of natural gas from Iran to Armenian national gas distribution network. Upon completion of construction the Company signed a preliminary agreement with Gazprom Armenia CJSC on sale of the pipeline, with the final sale arrangement to complete in the same year (2007). Gazprom Armenia CJSC has paid an advance of 9,137,100 thousand drams in 2007. However, the sale transaction did not take place and the preliminary agreement has been extended for several times consecutively with the last extension going to the end of 2020. Property, plant and equipment of the Company at the carrying amount of 26,150 million drams have been pledged as a security for loans and borrowings as of 31 December 2019 (2018: 21,381 million drams). Additions of property, plant and equipment comprise the following: 2019 2018 AMD'000 AMD'000 Acquisitions 11,185,677 18,146,425 Borrowing costs capitalized 1,201,923 1,205,240 Other capitalized expenses 234,698 214,202 Proficit from counting 46,283 - 12,668,581 19,565,867 All the Company's borrowings are specifical and directly attributable to construction of particular assets. Depreciation charge has been distributed among the following items: 2019 2018 AMD'000 AMD'000 Cost of sale 3,037,518 2,842,754 Administrative expenses 121,706 151,609 Other expenses 510,559 510,559 3,669,783 3,504,922 As at 31 December 2019, the cost of fully depreciated property, plant and equipment was 36,559 million drams (31 December 2018: 35,781 million drams). 13. Trade and other receivables 2019 2018 AMD"000 AMD"000 Trade receivables on electricity transmission service 1,492,337 1,533,155 Trade receivables on supply of electricity produced 6,677 11,715 Operating leases receivable 5,404 5,849 Other receivables 5,541 - Loans to related parties 2,916 4,688 Total financial assets, except for cash and cash equivalents 1,512,875 1,555,407 Advances to suppliers 116,891 244,091 Prepaid non-resident withholding taxes 323,966 331,891 Other prepaid taxes 103,459 437,926 Other 2,388 2,635 Total trade and other receivables 2,059,579 2,571,950 Less: Non current (273,200) (494,803) Current 1,786,379 2,077,147 The carrying value of trade and other receivables classified as financial assets at amortised cost approximates fair value. 25 High Voltage Electric Networks CJSC Notes forming part of the financial statements for the year ended December 31, 2019 (continued) Trade receivables on electricity transmission service include the amount of 662 million drams receivable from Yerevan Thermal Power Center CJSC (2018: AMD 843 million drams). According to the agreement signed with Yerevan Thermal Power Center CJSC in November 2017, the parties agreed the remaining balance of 495 million drams (2018: 744 million drams) will be paid until May 2022. At 31 December 2019, the above-mentioned receivable balance was discounted at 12% interest rate, which is a reasonable estimate for the counterparty’s incremental borrowing rate. The entire balance receivable from Yerevan Thermal Power Center CJSC in the amount of 273 million drams was classified as non-current as at 31 December 2019 (2018: 495 million drams). The average duration of trade receivable from sales of goods and services is 1 month (2018: 1 month). As at 31 December 2019 and 2018 there were no receivables passed due but not impaired. The Company applies the IFRS 9 simplified approach to measuring expected credit losses using a lifetime expected credit loss provision for trade receivables. To measure expected credit losses on a collective basis, trade receivables are grouped based on similar credit risk and aging. The expected loss rates are based on the Company’s historical credit losses experienced over the three-year period prior to the period end. The historical loss rates are then adjusted for current and forward-looking information on macroeconomic factors affecting the Company’s customers. Company’s management believes expected credit loss in respect of overdue trade receivables is not material. Prepaid balances to the state budget include: 2019 2018 AMD'000 AMD'000 Value added tax 99,757 418,791 Other taxes 3,702 19,135 103,459 437,926 14. Prepayments 2019 2018 AMD'000 AMD'000 Prepayments for acquisition of non-current assets 3,145,052 5,376,558 Loan service charges 847,525 464,432 Other 15,980 200 4,008,557 5,841,190 Prepaid loan charges include insurance and other charges paid to the lenders as follows: 2019 2018 AMD'000 AMD'000 Credit Institute for Reconstruction (KfW) 820,670 437,577 European Investment Bank (EIB) 26,855 26,855 847,525 464,432 In 2017, a decision was made to terminate the investment program of Armenia-Georgia high-voltage transmission lines (RA Government meeting 24.10 / 394769 -17 dated 21 February 2017) considering its implementation not feasible under the particular circumstances. As a result of numerous discussions about the necessity and value of the Program for Armenia and the discussions with the RA Prime Minister, it was decided 30 October 2019 to continue the Program. Following this decision, in December 2019, "High Voltage Electric Networks" CJSC has negotiated new 26 High Voltage Electric Networks CJSC Notes forming part of the financial statements for the year ended December 31, 2019 (continued) contracted terms with the consultant of the Program (Fichtner), in order to initiate new bidding process. Considering the above mentioned, the management has estimated at 31 December 2019 the implementation of the Program as highly feasible. Therefore, the Company has recovered the prior periods impaired construction in progress balances to the extent (541,946 thousand AMD), as well as the KfW 75 million Euro loan service fee of 383,093 thousand AMD (EUR 750,000). 15. Inventories 2019 2018 AMD'000 AMD'000 Construction materials 651,216 637,503 Other materials and consumables 776,362 652,183 Spare parts 350,357 333,949 Other 383,735 396,137 2,161,670 2,019,772 Inventories recognised as an expense during the year ended 31 December 2019 amounted to 70,772 thousand drams (2018: 88,527 thousand drams). These were included in cost of sales, 37,058 thousnad drams (2018: 47,564 thousand drams), administrative expenses, 27,686 thousand drams (2018: 40,963 thousand drams) and in other expenses, 6,028 thousand drams (2018: nil). Write-downs of inventories to net realisable value amounted to 62,302 thousand drams (2018: nill). These expenses were recognised in other expense in the statement of profit or loss (note 9). 16. Term deposits Contract Interest amount rate Maturity 2019 2018 AMD'000 AMD'000 AMD'000 ArmBusiness bank 3,600,000 12.0% 2020 3,618,937 3,624,362 ArmBusiness bank 3,400,000 11.5% 2020 3,411,784 3,413,973 Ardshinbank 3,410,000 6.0% 2019 - 3,440,843 Ardshinbank 4,412,000 7.0% 2020 4,453,961 - Ardshinbank 710,915 3.5% 2020 711,256 - Ardshinbank 2,500,000 12.3% 2020 2,553,917 2,506,209 14,749,855 12,985,387 Less: short-term deposits classified as cash equivalents (9,025,397) (6,181,260) Total classified as term deposits 5,724,458 6,804,127 17. Cash and cash equivalents 2019 2018 AMD'000 AMD'000 Bank accounts 1,330,676 231,536 Short-term deposits classified as cash equivalents 9,025,397 6,181,260 Cash on hand 564 960 10,356,637 6,413,756 Breakdown of cash held in bank accounts by servicing banks is presented in Note 4. 18. Share capital and reserves The share capital has increased by the amount of stock dividend declared in 2019 for operational 27 High Voltage Electric Networks CJSC Notes forming part of the financial statements for the year ended December 31, 2019 (continued) year 2018. The number of shares was 648,363 at 31 December 2018 and no new shares were issued in 2019. The increase was secured by a raise in the share nominal value, from 13,874.00 drams at 31 December 2018 to 14,822.90 drams at 31 December 2019. The Company established a reserve capital target at 15% of the share capital for covering future losses and makes 5% transfers from the annual net profit each year until the amount reaches the mentioned target. The Company has made cumulative 179,498 thousand drams as at the end of 2019. In 2019, a dividend of 615,232 thousand drams was declared (2018: no dividend was declared). 19. Loans and borrowings This note provides information about the contractual terms of the Company’s loans and borrowings, which are measured at amortised cost. Information about the Company’s exposure to interest rate and foreign currency risk is presented in Note 4. 2019 2018 AMD'000 AMD'000 Current Secured loans from the Ministry of Finance 2,145,210 3,333,156 Other secured loans 232,760 685,026 2,377,970 4,018,182 Non-current Secured loans from the Ministry of Finance 55,492,217 51,466,115 Other secured loans 19,813,317 12,917,074 75,305,534 64,383,189 Total loans and borrowings 77,683,504 68,401,371 The carrying amount of the loans and borrowings is considered to be a reasonable estimate of their fair value. Below are the Company's loans and borrowings presented by currencies: 2019 2018 AMD'000 AMD'000 Armenian dram 6,680,562 6,307,576 Euro 30,637,322 25,181,964 US dollar 35,146,723 31,656,736 Special Drawing Rights (SDR) 5,218,897 5,255,095 77,683,504 68,401,371 The Company signed sub-loan agreements with the Ministry of Finance of the Republic of Armenia to fund modernization projects. These sub-loan agreements were preceded by the loan agreements signed by and between the Ministry of Finance of Armenia and international financial institutions. As at 31 December 2019 the Company has 153,153 million drams of undrawn borrowing facilities (December 31, 2018: 160,195 million drams). 28 High Voltage Electric Networks CJSC Notes forming part of the financial statements for the year ended December 31, 2019 (continued) Terms and conditions of outstanding loans and borrowings were as follows: Contract amount Year of Contract 2019 2018 Lender (in currency) Currency Maturity int. rate EIR ՛000 AMD ՛000 AMD Project financed Loans provided by RA Ministry of Finance IBRD 39,000,000 USD 2036 RR +1%* 4.49% 16,201,175 15,192,113 Reliability of the power transmission network Ministry of Finance N/A** AMD 2036 RR +1%* 4.07% 3,650,700 3,353,187 Co-financing IBRD Reliability of the power transmission network IBRD 37,500,000 USD 2039 RR +1%* 4.41% 9,426,401 6,352,136 Reliability of the power transmission network Ministry of Finance N/A** AMD 2039 RR +1%* 4.45% 774,414 592,197 Co-financing IBRD Reliability of the power transmission network IBRD 28,194,486 USD 2039 RR* 4.50% 3,306,635 3,157,251 Electricity Transmission Network Improvement Ministry of Finance N/A** AMD 2039 RR* 3.82% 834,995 906,774 Co-financing IBRD Electricity Transmission Network Improvement ADB 15,192,292 SDR 2039 3.14% 3.12% 5,218,897 5,255,095 Power Transmission Rehabilitation Project Ministry of Finance N/A** AMD 2039 3.14% 3.13% 1,170,563 1,195,134 Co-financing ADB Power Transmission Rehabilitation Project KFW 10,200,000 EUR 2054 0.75% 4.17% 519,359 529,819 Caucasus Transmission Network Ministry of Finance N/A** AMD 2054 0.75% 0.75% 218,582 218,582 Co-financing KFW Caucasus Transmission Network KFW 83,000,000 EUR 2030 1.80% 1.80% - - Caucasus Transmission Network III KFW 7,300,000 EUR 2049 0.75% 0.75% 3,793,300 4,040,733 Rehabilitation of the substation Gyumri II KFW 7,300,000 EUR 2024 2.76% 6.69% 1,342,437 1,662,574 Rehabilitation of the substation Gyumri II KFW 14,060,000 EUR 2038 0.75% 0.72% 4,967,459 5,388,440 Power Transmission system Rehabilitation KFW 75,000,000 EUR 2029 1.85% 1.85% - - Caucasus Transmission Network I World Bank (WB) 19,600,000 USD 2033 0.50% 0.50% 5,328,244 5,758,220 Power transmission and distribution systems Ministry of Finance 8,988,290 USD 2022 0.50% 0.49% 884,265 1,197,016 Assistance to Energy system EIB 10,000,000 EUR TBD TBD - - - Caucasus Transmission Network I Total loans from MF 57,637,426 54,799,271 Other loans Export Development bank Iran-Armenia 400 kV third power transmission line 83,083,000 EUR 2026 4.00% 5.70% 15,489,398 10,794,956 of Iran (EDBI) and substation Iran-Armenia 400 KV third power transmission line SUNIR International FZE 24,817,000 EUR 2021 3.00% 4.33% 4,525,372 2,765,443 and substation Armenia renewable resources and energy 77,500,000 AMD 2024 0.00% 12.00% 31,308 41,701 Energy saving program efficiency Fund (R2e2) Total other loans 20,046,078 13,602,100 Total loans 77,683,504 68,401,371 (*) The variable interest rate (on IBRD loans and the loans with IBRD co-financing) equals the reference rate, RR (six-month LIBOR for loan currency) plus the variable spread. The variable spread includes a contractual spread, a maturity premium (where applicable), and a charge to cover the Bank’s average funding cost relative to LIBOR, wherein the benefits and risks of changes in IBRD's cost of borrowing are borne by the borrower. The variable spread is recalculated every January 1, April 1, July 1 and October 1 based on the cost of the underlying funding for these loans. (**) The co-financing provided by RA Ministry of Finance has not been defined in the loan contracts. 29 High Voltage Electric Networks CJSC Notes forming part of the financial statements for the year ended December 31, 2019 (continued) Changes in liabilities arising from financing activities Cash flows Non-cash flows Contract Proceeds from Repayment of At 31 amount At 1 January loans and loans and Interest Interest Effect of foreign December Lender (in currency) Currency 2019 borrowings borrowings repaid accrued curr. revaluation 2019 IBRD 39,000,000 USD 15,192,113 1,240,091 - (674,077) 567,735 (124,687) 16,201,175 Ministry of Finance AMD Co-financing IBRD 3,353,187 323,250 - (153,160) 127,423 - 3,650,700 EDBI 83,083,000 EUR 10,794,956 4,923,049 - (634,765) 760,804 (354,647) 15,489,397 World Bank 19,600,000 USD 5,758,220 - (371,737) (35,153) 25,738 (48,822) 5,328,246 KFW 14,060,000 EUR 5,388,440 - (251,815) (47,475) 38,018 (159,710) 4,967,458 KFW- Tranche 1 7,300,000 EUR 4,040,733 - (127,873) (29,176) 29,391 (119,774) 3,793,301 KFW- Tranche 2 7,300,000 EUR 1,662,574 - (326,845) (47,378) 103,861 (49,775) 1,342,437 Ministry of Finance 8,988,290 USD 1,197,016 - (286,458) (20,499) 5,681 (11,474) 884,266 ADB 15,192,292 SDR 5,255,095 160,394 (129,613) (160,394) 162,837 (69,422) 5,218,897 Ministry of Finance AMD Co-financing ADB 1,195,134 7,000 (31,586) (37,368) 37,383 - 1,170,563 IBRD 37,500,000 USD 6,352,136 3,122,597 - (268,781) 262,541 (42,092) 9,426,401 Ministry of Finance AMD Co-financing IBRD 592,197 182,548 (563) (24,118) 24,349 - 774,413 SUNIR International FZE 24,817,000 EUR 2,765,443 1,800,151 - (106,017) 165,905 (100,111) 4,525,371 IBRD 28,194,486 USD 3,157,251 219,378 - (153,967) 109,635 (25,661) 3,306,636 Ministry of Finance AMD Co-financing IBRD 906,774 39,754 (105,338) (33,389) 27,194 - 834,995 KfW 10,200,000 EUR 529,819 - - (16,246) 21,588 (15,803) 519,358 Ministry of Finance AMD Co-financing KFW 218,582 - - (1,639) 1,639 - 218,582 R2e2 - Zangezur and Goris 27,600,000 AMD branches 16,553 - (3,067) - 183 - 13,669 R2e2 – Eastern branch 26,900,000 AMD 12,844 - (4,483) - 130 - 8,491 R2e2 – Southern branch 23,000,000 AMD 12,304 - (3,286) - 130 - 9,148 KfW 83,000,000 EUR - - - (111,486) 112,097 (611) - KfW 75,000,000 EUR - - - (100,740) 101,292 (552) - 68,401,371 12,018,212 (1,642,664) (2,655,828) 2,685,554 (1,123,141) 77,683,504 Less: set off with Sunir FZE EUR - - - 106,017 (106,017) - - (non cash) Total 68,401,371 12,018,212 (1,642,664) (2,549,811) 2,579,537 (1,123,141) 77,683,504 30 High Voltage Electric Networks CJSC Notes forming part of the financial statements for the year ended December 31, 2019 (continued) Changes in liabilities arising from financing activities (in contract currency) As of Contract amount January Interest At 31 December Lender (in currency) Currency 1, 2019 Loans received Repaid Interest repaid accrued 2019 IBRD 39,000,000 USD 31,404,885 2,590,000 - (1,406,808) 1,185,478 33,773,555 EDBI 83,083,000 EUR 19,497,798 9,099,757 - (1,188,950) 1,421,752 28,830,357 World Bank 19,600,000 USD 11,903,296 - (776,190) (73,400) 53,747 11,107,453 KFW 14,060,000 EUR 9,732,575 - (468,684) (88,354) 70,375 9,245,912 KFW-Tranche 1 7,300,000 EUR 7,298,351 - (238,000) (54,299) 54,402 7,060,454 KFW-Tranche 2 7,300,000 EUR 3,002,933 - (608,333) (88,137) 192,210 2,498,673 Ministry of Finance 8,988,290 USD 2,474,451 - (600,000) (42,954) 11,877 1,843,374 ADB 15,192,292 SDR 7,834,188 242,769 (197,744) (242,769) 246,372 7,882,816 IBRD 37,500,000 USD 13,131,030 6,530,799 - (558,867) 547,655 19,650,617 SUNIR FZE 24,817,000 EUR 4,994,930 3,315,443 - (197,461) 310,144 8,423,056 IBRD 28,194,486 USD 6,526,618 459,000 - (321,409) 228,922 6,893,131 KFW 10,200,000 EUR 956,957 - - (30,238) 39,961 966,680 KFW 83,000,000 EUR - - - (207,500) 207,500 - KFW 75,000,000 EUR - - - (187,500) 187,500 - 118,758,012 22,237,768 (2,888,951) (4,688,646) 4,757,895 138,176,078 Less: set off with Sunir EUR - - - 197,461 (197,461) - FZE (non cash) Total 118,758,012 22,237,768 (2,888,951) (4,560,434) 4,757,895 138,176,078 31 High Voltage Electric Networks CJSC Notes forming part of the financial statements for the year ended December 31, 2019 (continued) 20. Grant liabilities 2019 2018 AMD'000 AMD'000 Balance at the beginning of year 518,142 519,046 Received during the year - - Recognized in profit or loss (395) (904) Balance at the end of year 517,747 518,142 Balance of grant liabilities breakdown by the donor organizations is as follows: 2019 2018 AMD'000 AMD'000 Neighborhood Investment Facility (NIF) 233,846 233,846 Credit Institute for Reconstruction (KfW) 131,143 131,144 International Bank for Reconstruction and Development (IBRD) 145,338 145,338 Other 7,420 7,814 517,747 518,142 The Company received grants from international banks and financial institutions for the implementation of the following projects:  Investment and technical assistance for connection of Armenian and Georgian power Grid  Construction and consulting work on Caucasus Transmission Network (Transmission Line and HDVC Station between Armenia and Georgia)  Preparation of the Electricity Transmission Network Improvement Project, consulting and trainings. 21. Trade and other payables 2019 2018 AMD'000 AMD'000 Payables on acquisition of property, plant and equipment 3,456,187 7,406,213 Trade payables 340,304 37,383 Total financial liabilities measured at amortized cost except for loans and borrowings 3,796,491 7,443,596 Prepayments received* 9,158,814 9,159,899 Accrued payroll 165,676 132,660 Taxes and duties payable 160,419 59,192 Provision for unbilled construction works** 730,300 - Other - 25 14,011,700 16,795,372 *Prepayment received represents amount received from Gazprom Armenia CJSC in 2007 for the acquisition of Iran Kajaran gas pipeline as described in Note 12. **Provision was recognized for the estimated construction works completed in the reporting year, which were however not billed by the contractors as at year-end. 32 High Voltage Electric Networks CJSC Notes forming part of the financial statements for the year ended December 31, 2019 (continued) Payables on acquisition of property and equipment include balances of the following counterparties: 2019 2018 AMD'000 AMD'000 SUNIR 1,148,705 4,258,225 Liaoning-Efacec Electrical EquipmentCo. LTD 1,065,626 1,178,772 Xian Electric Engineering Co LTD China 956,856 938,584 KASKAD-ENERGO LLC - 799,983 EFACECENGENHARIAESISTEMASS.A. 98,397 116,370 GAM ARAK INDUSTRIAL COMPANY 183,208 106,877 Other 3,395 7,402 3,456,187 7,406,213 The fair value of trade and other payables measured at amortised cost does not materially differ from their carrying value. Movements in provisions are as follows; Accrual for Unused construction 2019 vacations works Total Carrying amount at start of year 129,551 - 129,551 Charged during year 190,539 730,300 920,839 Used during year (155,137) - (155,137) Carrying amount at end of year 164,953 730,300 895,253 22. Provisions In December 2019, the Company has unilaterally terminated the contract dated May 2016 signed with its Chinese contractor Liaoning-Efacec Electrical Equipment Co.LTD (hereinafter referred to as the Contractor) for restoration of Shinuhair and Agarak substation 2. The basis for unilateral termination was continuing non-performance of the Contractor and breach of contract deadlines affecting timely completion of the construction works. Following the contract termination, the Company has received bank guarantee payment from Chinese bank in the total amount of 1.4 million USD as a reimbursement for liquidating damages. Considering the aforementioned contract has been terminated unilaterally, the Company is not sure the Contractor will not dispute the above amount. Therefore, a provision was recognized in line with IAS 37 “Provisions, Contingent Liabilities and Contingent Assets” Contingencies, until uncertainties resolve. Due to its non-current nature the probable future outflow of financial resources was discounted at the rate reflecting market conditions, which existed at the time of liability recognition. The movement in provision is as follows Provision for disputed 2019 cash balance AMD'000 Carrying amount at start of year - Charged during year 704,505 Effect of discounting non-current provision (129,419) Unwinding of discount 11,792 Carrying amount at end of year 586,878 23. Related party transactions (a) Control relationships As at 31 December 2019 the parent of the Company was the Government of the Republic of Armenia who owns 100% of the Company's shares, so all state-owned enterprises are considered to be affiliated with the Company. 33 High Voltage Electric Networks CJSC Notes forming part of the financial statements for the year ended December 31, 2019 (continued) (b) Transactions with the parent and other entities under the parent’s control Key related party balances as at 31 December 2019 and 2018 are presented below: 2019 2018 AMD'000 AMD'000 Loans and borrowings (Note 19) 57,637,426 54,799,271 Cash in hand and bank (Note 17) 1,599 Key management personnel compensation is disclosed in Note 8. 24. Contingencies and commitments (a) Purchase commitments As at 31 December 2019, the Company has purchase commitments in respect to the construction and rehabilitation of substations, overhead lines, etc., in the total amount of 38,633 million drams. (b) Penalties on construction contracts The Company has accrued penalties in the total amount of 1,494,859 thousand drams against the breach of construction contracts (scheduled works) by the three major contractors, as well as penalty(overdue interest) in the amount of 1,150,800 thousand drams on the outstanding overdue balance due from another major contractor (the balance was provided by the Company to the contractor as bridge financing in earlier period). The management estimates the collectability of these balances very low. Therefore, no income in respect of the mentioned penalties and overdue interest was recognized in the financial statements as of and for the year ended 31 December 2019. Penalties have been accrued for the total period of delay of the contract deadlines on the total amount of the contracts The breakdown of penalties accrued as at 31 December 2019 is as follows:  SUNIR-1,150,800 thousand drams.  Liaoning-Efacec Electrical Equipment Co. LTD-(“Reconstruction of Shinuhair and Agarak-2 substations”) - 718,129 thousand drams  GAM ARAK INDUSTRIAL COMPANY (“Design, supply and installation of replacement of 110 kV Noyemberyan and Lalvar overhead transmission lines”) - 104,945 thousand drams  Xian Electric Engineering Co LTD China (rehabilitation of Ashnak and Vanadzor-1 substations) - 671,785 thousand drams (c) Tax risks Armenian tax and customs legislation is subject to varying interpretations, and changes, which can occur frequently. Often, differing interpretations exist among numerous taxation authorities. Taxes are subject to review and investigation by a number of authorities, who are enabled by law to impose severe fines, penalties and interest charges. These facts may create tax risks in the Republic of Armenia substantially more significant than in other countries. As at 31 December 2019 management believes that its interpretation of the relevant legislation is appropriate and that the Company’s tax, currency and customs positions will be sustained. 34 High Voltage Electric Networks CJSC Notes forming part of the financial statements for the year ended December 31, 2019 (continued) 25. Events after reporting date (a) COVID-19 On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. Management is actively monitoring the global situation on its financial condition, liquidity, operations, customers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2020. Receivable balances may be impacted by COVID-19 so as counterparties may be experiencing financial difficulty, in which case the Company may work with those counterparties to attempt to collect amounts due by restructuring the fixed price arrangement to mitigate expected losses. Trade receivables are measured for collectability through recognition of an allowance for credit losses. Provided the Company has adopted IFRS 9 Financial Instruments, according to which expected losses are recognized based on historical experience, current conditions, and reasonable and supportable forecasts, the impacts of COVID-19 may necessitate adjustments to these estimates, particularly the forecasts of expected losses. However, one of the major counterparties is a government-owned company, and another one provides public interest services, which lowers the risk of financial difficulties. Although the Company cannot estimate the length or gravity of the impact of the COVID-19 outbreak at this time, if the pandemic continues, it may have a material effect on the Company’s results of future operations, financial position, and liquidity. (b) Change in share capital "According to Board decision issued 17 July 2020, as well as respective Governement Decision No 230- A issued 27 February 2020, the share capital will be increased by the amount of stock dividend of 1,240,547 thousand drams for operational year 2018. The number of shares was 648,363 at 31 December 2019 and no new shares were issued as at financial statements issue date. The increase will be secured by a raise in the share face value, from 14,822.90 drams at 31 December 2019 to 16,736.20 drams, resulting in the total amount of share capital 10,851,132.84 thousand drams 26. Accounting policies 26.1 Revenue recognition Revenue from contracts with customers is recognized when control of goods or services is transferred to the customers at the amount that reflects the consideration to which the Company expects to be entitled in exchange for those services. The Company concluded that it is the principal in its revenue arrangements, because it generally controls the goods or services before transferring them to the customer. Revenue is measured at the fair value of the consideration received or receivable taking into account the amount of any trade discounts and rebates allowed by the Company. Electricity transmission Revenue from electricity transmission is recognised in statement of profit or loss based on an act of services rendered containing the physical volume of electricity transmitted according to the concluded contracts. The act is prepared based on a monthly summary report of electricity consumption (prepared in physical volumes). The tariffs for electricity transmission and sales on 35 High Voltage Electric Networks CJSC Notes forming part of the financial statements for the year ended December 31, 2019 (continued) regulated market are approved by the government agencies of the constituents of the Republic of Armenia in the area of the state energy tariff regulation. The following tariffs for electricity transmission (without VAT) were effective throughout 2019 and 2018. Effective date AMD/kWh 01.02.2019 – 31.12.2019 1.2137 01.02.2018 – 31.01.2019 1.1169 01.01.2018 - 31.01.2018 1.8524 Electricity supply The revenue form supply of electricity is recognized at the moment when the control is transferred to the customer. The control transfer is mainly carried out when the electricity is delivered to the customer. There is limited judgement needed in identifying the point control passes: once physical delivery of the products to the agreed location has occurred, the Company no longer has physical possession, usually will have a present right to payment. The following tariffs for electricity supply (without VAT) were effective throughout 2019 and 2018. Effective date AMD/kWh 01.07.2019 – 31.12.2019 43.585 01.07.2018 – 30.06.2019 42.845 01.01.2018 - 30.06.2018 42.739 Services Revenue from installation, repair and maintenance services and other sales is recognized when the significant risks and rewards of ownership of the goods have passed to the buyer or when the services are provided. Performance obligations and timing of revenue recognition Revenue of the Company derives from sale of electricity produced and electricity transmission services. Control passes when electricity is transferred to customer. There is limited judgement needed in identifying the point control passes. Revenue is recognized over time on monthly basis based on the actual electricity transferred and actual electricity sold as evidenced by the invoices issued by the Company. Once physical transfer of the electricity to the agreed location has occurred, the Company no longer has physical possession, usually will have a present right to payment (as a single payment on delivery) and retains none of the significant risks and rewards of the goods in question. Determining the transaction price Company’s revenue is derived from fixed price contracts and therefore the amount of revenue to be earned from each contract is determined by reference to those fixed prices. The tariffs for electricity transmission are regulated by the Public Services Regulatory Commission of the Republic of Armenia. 36 High Voltage Electric Networks CJSC Notes forming part of the financial statements for the year ended December 31, 2019 (continued) Allocating amounts to performance obligations For most contracts, there is a fixed unit price for each product sold. Therefore, there is no judgement involved in allocating the contract price to each unit ordered in such contracts (it is the total contract price divided by the number of units ordered). Trade receivables Accounts receivable represents the Company’s right to for consideration that is unconditional (only the passage of time is required before payment of the consideration is due). Accounts receivable are recognized when the amount of consideration becomes payable by the customer. 26.2 Rental income The Company earns income from acting as a lessor in operating leases which do not transfer substantially all of the risks and rewards incidental to ownership of the property. Rental income arising from operating leases is accounted for on a straight-line basis over the lease term and is included in revenue in the statement of profit or loss. Initial direct costs incurred in negotiating and arranging an operating lease are recognised as an expense over the lease term on the same basis as the lease income. Lease incentives that are paid or payable to the lessee are deducted from lease payments. Accordingly, tenant lease incentives are recognised as a reduction of rental revenue on a straight- line basis over the term of the lease. The lease term is the non-cancellable period of the lease together with any further term for which the tenant has the option to continue the lease, where, at the inception of the lease, the Company is reasonably certain that the tenant will exercise that option. 26.3 Finance income and cost Finance income comprises interest income on cash balances and bank deposits. For all financial instruments measured at amortised cost interest income is recognised as it accrues, using the effective interest method. Finance costs comprise interest expense on borrowings, unwinding of discount on financial liabilities measured at amortised cost. Effective interest rate is the rate that exactly discounts the estimated future cash payments or receipts over the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or liability. Interest income and cost are included in finance income and finance cost in the statement of profit or loss and other comprehensive income. 26.4 Borrowing costs Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalized as part of the cost of that asset. Other borrowing costs are recognized as an expense in the period in which they are incurred. The Company begins capitalizing borrowing costs as part of the cost of a qualifying asset on the commencement date, which is the date when the Company first meets all of the following conditions: it incurs expenditures for the asset, it incurs borrowing costs, it undertakes activities that are necessary to prepare the asset for its intended use or sale. To the extent that the Company borrows funds specifically for the purpose of obtaining a qualifying asset, the Company determines the amount of borrowing costs eligible for capitalization as the actual borrowing costs incurred on that borrowing during the period less any investment income on the temporary investment of those borrowings. To the extent that the Company borrows funds generally and uses them for the purpose of obtaining 37 High Voltage Electric Networks CJSC Notes forming part of the financial statements for the year ended December 31, 2019 (continued) a qualifying asset. The Company determines the amount of borrowing costs eligible for capitalization by applying a capitalization rate to the expenditures on that asset. The capitalization rate is calculated as the weighted average of the borrowing costs applicable to the borrowings of the Company that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. Capitalization of borrowing costs is suspended during extended periods in which the Company suspends active development of a qualifying asset. Capitalization of borrowing costs is ceased when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete. 26.5 Foreign currency The functional currency of the Company is the currency of the primary economic environment in which the entity operates. The functional currency of the Company is national currency of the Republic of Armenia, Armenian dram (AMD). Monetary assets and liabilities are translated into functional currency at the exchange rate published by the Central Bank of Armenia (CBA) at respective dates of statement of financial position. Foreign exchange gains and losses resulting from the settlement of the transactions and from the translation of monetary assets and liabilities into functional currency at year-end official exchange rates of the CBA are recognized in profit and loss on net basis. Translation at year-end rates does not apply to non-monetary items that are measured at historical cost. At 31 December 2019, the principal rate of exchange used for translating foreign currency balances was AMD 479.70 against 1 US dollar (2018: AMD 483.75) and AMD 537.26 against 1 Euro (2018: AMD 553.65). 26.6 Property, plant and equipment (a) Recognition and measurement Property, plant and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses. Cost comprises purchase price including import duties and non-refundable purchase taxes and other directly attributable costs. When an item of property, plant and equipment comprises major components having different useful lives, they are accounted for as separate items of property and equipment. Properties in the course of construction for production, rental or administrative purposes, or for purposes not yet determined, are carried at cost, less any recognized impairment loss. Cost includes directly attributable expenditures, site preparation, installation and assembly costs, professional fees and for qualifying assets, borrowing costs capitalized in accordance with the Company’s accounting policy. The gain or loss arising on the disposal or retirement of an item of property and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in profit or loss. (b) Subsequent costs Expenditure to replace a component of an item of property and equipment that is accounted for separately is capitalized with the carrying amount of the component being written off. Other subsequent expenditure is capitalized if future economic benefits will arise from the expenditure. All other expenditure, including repair and maintenance, is recognized in profit or loss as incurred. (c) Depreciation Depreciation is charged to profit or loss or is added to the cost of other asset on a straight line basis over the estimated useful lives of the individual assets. Depreciation commences when assets are available for use. The estimated useful lives are as follows: Buildings and constructions - 30-50 years Transmission lines - 30-50 years 38 High Voltage Electric Networks CJSC Notes forming part of the financial statements for the year ended December 31, 2019 (continued) Machinery and equipment - 5-20 years Vehicles - 5-20 years Fixture, fittings and other - 5-10 years. 26.7 Intangible assets Intangible assets, which are acquired by the Company and which have finite useful lives, are stated at cost less accumulated amortization and impairment losses. Amortization is charged to profit or loss on a straight line basis over the estimated useful lives of the intangible assets, which are as follows: Licenses and patents - 5 years Software - 5-10 years 26.8 Impairment of non-financial assets Impairment of property, plant and equipment and intangible assets Assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. Recoverable amount is the higher of net selling price and value in use. If the recoverable amount of an asset or cash-generating unit is estimated to be less than its carrying amount, the carrying amount of the asset or cash-generating unit is reduced to its recoverable amount. Impairment losses are recognized as an expense immediately. Where an impairment loss subsequently reverses, the carrying amount of the asset or cash- generating unit is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss recognized for the asset or cash-generating unit in prior years. A reversal of an impairment loss is recognized as income immediately. 26.9 Inventories Inventories are assets held for sale in the ordinary course of business or in the form of materials or supplies to be consumed in the production process or in the rendering of services. Items such as spare parts, stand-by equipment and servicing equipment are also recognized as inventories unless they meet the definition of property and equipment. Inventories are stated at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. The first in, first out (FIFO) method is used to determine the cost of all ordinarily interchangeable inventories. 26.10 Financial instruments Initial measurement The classification of financial instruments at initial recognition depends on their contractual terms and the business model for managing the instruments. Financial instruments are initially measured at their fair value and, except in the case of financial assets and financial liabilities recorded at FVPL, transaction costs are added to, or subtracted from, this amount. 39 High Voltage Electric Networks CJSC Notes forming part of the financial statements for the year ended December 31, 2019 (continued) Measurement categories of financial assets and liabilities The Company classifies all of its financial assets based on the business model for managing the assets and the asset’s contractual terms, measured at either: (a) financial assets measured at fair value through profit or loss (FVTPL); (b) financial assets measured at fair value through other comprehensive income (FVOCI); c) financial assets measured at amortized cost. The Company's principal financial assets are classified as "measured at amortized cost". The accounting policy for this class is presented below. Financial assets measured at amortized cost These assets are held to collect contractual cash flows. Contractual cash flows are payments of principal and interest. These assets are initially recognized at fair value plus transaction costs that are directly attributable to the acquisition or issue, and are subsequently measured at amortized cost using the effective interest rate method, less provision for impairment. The Company's financial assets measured at amortized cost in the statement of financial position comprise trade and other receivables, loans to related parties as well as cash and cash equivalents. Cash and cash equivalents include on-demand deposits in banks. Financial liabilities The Company classifies its financial liabilities as “measured at amortized cost”. Loan and other borrowings are initially recognized at fair value less costs attributable to transaction. Such interest-bearing liabilities are subsequently measured at amortized cost using the effective interest rate method, which ensures that any interest expense over the period to repayment is at a constant rate on the balance of the liability carried in the statement of financial position. For the purposes of each financial liability, interest expense includes initial transaction costs and any premium payable on redemption, as well as any interest payable while the liability is outstanding. Loans and borrowings After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortized cost using the EIR (effective interest rate) method. Gains and losses are recognized in profit or loss when the liabilities are derecognized as well as through the EIR amortization process. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortization is included as finance costs in the statement of comprehensive income. Trade payables and other short-term monetary liabilities are initially recognized at fair value and subsequently carried at amortized cost using the effective interest method. Impairment of financial assets Impairment provisions for current and non-current trade receivables are recognised based on the simplified approach within IFRS 9 using the assessment of the expected solvency loss for the entire period. During this process, the probability of non-payment of trade receivables is assessed. This probability is then multiplied by the amount of the expected loss arising from default to determine the lifetime expected credit loss for the trade receivables. For trade receivables, which are reported net, such provisions are recorded in a separate provision account with the loss being recognised within cost of sales in the consolidated statement of comprehensive On confirmation that the trade receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision. Financial assets being a debt instrument and not classified as measured at FVTPL are subject to impairment testing using the expected debt loss model. According to this model, a debt loss provision shall be recognized in the amount of expected credit loss (ECL) for 12 months after the reporting date. However, if the instrument's credit risk has significantly increased since its initial recognition, the provision should be recognized in the amount of ECL for the whole life of the instrument. 40 High Voltage Electric Networks CJSC Notes forming part of the financial statements for the year ended December 31, 2019 (continued) 12-month ECL are the portion of ECL that result from default events on a financial instrument that are possible within the 12 months after the reporting date. Measurement of ECL ECL is a probability-weighted estimate of credit losses. It is measured as follows:  financial assets that are not credit-impaired at the reporting date: as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Company expects to receive);  financial assets that are credit-impaired at the reporting date: as the difference between the gross carrying amount and the present value of estimated future cash flows. Presentation of allowance for ECL in the financial statement Allowance for ECL for financial assets measured at amortised cost is deduced from the gross carrying amount of the assets and is presented on the net basis in the statement of financial position. 26.11 Share capital and reserves Equity instruments issued by the Company are recorded at the proceeds received. Share capital represents the nominal value of shares that have been issued. Share premium/ (discount) is recognized in equity, when a payment to shareholders against shares repurchased are below/ (above) face value of shares. Retained earnings include all current and prior period retained profits. All transactions with owners of the parent are recorded separately within equity. Dividends are recognized as a liability in the period in which they are declared. 26.12 Government grants Grants are not recognized until there is reasonable assurance that the Company will comply with the conditions attaching to them and the grants will be received. Grants with a primary condition to purchase, construct or otherwise acquire non-current assets are recognized as deferred income in the statement of financial position and transferred to profit or loss on a systematic and rational basis over the useful lives of the related assets. Grants related to lands are recognized in profit or loss over the periods of depreciation of the buildings located on those lands. Other grants are recognized as income over the periods necessary to match them with the cost for which they are intended to compensate, on a systematic basis. Grants that are receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the Company with no future related costs are recognized in profit or loss in the period in which they become receivable. 26.13 Provisions A provision is recognized in the statement of financial position when the Company has a legal or constructive obligation as a result of past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. 41 High Voltage Electric Networks CJSC Notes forming part of the financial statements for the year ended December 31, 2019 (continued) 26.14 Income tax Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are generally recognized for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilized. Such deferred tax assets and liabilities are not recognized if the temporary difference arises from the initial recognition of assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Company expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. 26.15 Employee benefits Short-term employee benefits are benefits expected to be settled wholly before twelve months after the end of the annual reporting period in which the employees render the related services and include: (a) wages, salaries and bonuses; (b) paid annual leaves and paid disability leaves; When employees render services to the Company during the accounting period, the Company recognizes the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service: a) as a liability (accrued expense), after deducting any amount already paid. If the amount already paid exceeds the undiscounted amount of the benefits, the Company shall recognizes that excess as an asset (prepaid expense) to the extent that the prepayment will lead to a reduction in future payments or a cash refund. b) as an expense, unless the amount is included in the cost of an asset. Paid absences The expected cost of short-term employee benefits in the form of paid absences is recognized as follows: a) in the case of accumulating paid absences, when the employees render service that increases their entitlement to future paid absences. b) in the case of non-accumulating paid absences, when the absences occur. Bonuses The expected cost of bonus payments is recognized when and only when the Company has a present legal or constructive obligation to make such payments as a result of past events and a reliable estimate of the obligation can be made. A present obligation exists when, and only when, the entity has no realistic alternative but to make the payments. 42 High Voltage Electric Networks CJSC Notes forming part of the financial statements for the year ended December 31, 2019 (continued) Annex A – IFRS 13 Fair Value measurement disclosures The following table sets out the assets and liabilities at 31 December 2019 for which fair values are disclosed in the notes. Item Fair value Valuation technique Fair value Significant AMD thousand hierarchy level unobservable inputs Current The carrying amount of short term (less than 12 months) trade Trade and other 1,512,875 receivables Level 3 N/A receivables approximates their fair values. Long term receivables were discounted at 12% Current The carrying amount of short term (less than 12 Trade and other 3,796,491 months) trade Level 3 N/A payables payables approximate its fair values. The carrying amount of the received loans approximates their fair value. The following effective discount rates Loans and have been used: 77,683,504 Level 3 N/A borrowings 0.5-4.5% for USD denominated loans; 0.72-6.69% for EUR denominated loans; and 3.12% for SDR denominated loans. 43