"High Voltage Electrical Networks" CJSC Annual financial statements and Independent Auditor's Report For the year ended 31 December 2017 "High Voltage Electrical Networks" CJSC Annual financial statements For the year ended 31 December 2017 Contents 3 Independent auditor's report 6 Statement of comprehensive income 7 Statement of financial position 8 Statement of cash flows 9 Statement of changes in equity 10 Index to notes forming part of the financial statements 11 Notes forming part of the financial statements Legal form: Closed Joint Stock Company Principal activities: Electric transmission Board of Directors: Anahit Tigranyan Head of Production and Technical Department of "Hrazdan Energy Organization" OJSC, Chairman of the Board Rubik Davtyan Advisor to Head of Department of Financial Programming of Current Budget Expenditures of staff of RA Ministry of Finance, Board Member Artak Albertyan Head of Division of Financial Planning of Current Budget Expenditures on Fuel-energy Complex and Economic Productivity in other spheres of the department of Financial Planning of Budget Expenditures of staff of RA Ministry of Finance, Board Member Armen Meliq-Israelyan Head of department of supervision of state shares of governance of state property under the Government of RA, Board Member Suren Tatikyan Lecturer at NPUA Institute of Energy and Electrotechnics, Board Member Independent Auditor's Report To the shareholder of HVEN CJSC Report on the audit of the financial statements Qualified Opinion We have audited the accompanying financial statements of "HVEN" CJSC (hereinafter "the Company"), which comprise the statement of financial position as at December 31, 2017, and the statement of comprehensive income, 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 effects of the matter 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 2017, and its financial performance and its cash flows for the year ended in accordance with International Financial Reporting Standards (IFRSs). Basis for Qualified Opinion According to Act 30-A dated January 18, 2016, composed based on the results of inspections relating to the Company's activity 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, the additional liabilities were imposed on the Company in regard to dividends of AMD 757.7 million and penalties in the amount of AMD 166.4 million, mainly related to the different approaches to the recognition and measurement of transactions on the Iran-Armenia gas-pipeline. At the same time, there are instructions (N02/23 15/2528-16 dated 25 June 2016 and N02/23 15/289-17 dated 12 January 2017) of the Prime Minister of Armenia to suspend the aforementioned acts and to address the raised issues after the completion of the gas-pipeline sale deal. Due to the restrictions on the terms and conditions of the sale of the Iran-Armenia gas-pipeline and the uncertainties associated with the effect of the act, we were unable to determine the impact of the above-mentioned circumstances as at 31 December 2017 and 2016 and on the income, expenses, assets, liabilities and cumulative profits reflected in the financial statements for the years then ended. 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. Other Matter The financial statements of the Company for the year ended 31 December 2016 were audited by another auditor, who expressed an unqualified opinion on those statements on 10 May 2017. 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. * Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. * Conclude on the appropriateness of management's use of going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Foundation's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Foundation to cease to continue as a going concern. * Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation: We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. Conclusion on complying with other legal requirements According to the Loan Agreement N 8055-AM concluded by and between the Republic of Armenia (RA) and the International Bank for Reconstruction and Development (IBRD) on 01 June 2011, and the provisions of clause 1. (a) of Section 5 of the Loan Agreement 8388-AM signed on 06 August 2014, as well as the provisions of sub-Loan agreements signed by and between the RA Ministry of Finance and the Company, the Latter cannot accumulate new debts unless the justified forecast of HVEN CJSC's income and expense shows that the net revenues expected by HVEN CJSC for each year at Least 1.2 times exceed the necessary funds to cover the servicing of all debts (including new debts) during that year. In our opinion, the Company has fulfilled this condition during the year ended December 31, 2017. "BDO Armenia" CJSC Director Vahagn Sahakyan Auditor Hrachya Hovhannisyan 29 June 2018 Yerevan "High Voltage Electrical Networks" CJSC Statement of comprehensive income For the year ended 31 December 2017 2016 Note AMD'000 AMD'000 Revenue 5 12,035,551 6,594,375 Cost of sales 6 (3,683,494) (3,688,749) Gross profit 8,352,057 2,905,626 Other income 7 494,978 213,585 Administrative expenses 8 (1,603,835) (1,406,711) Other expenses 9 (1,811,456) (847,119) Results from operating activities 5,431,744 865,381 Finance income 10 670,740 28,545 Finance expense 11 (497,492) (324,438) Foreign exchange gain/(loss) 12 (2,604,526) 466,199 Profit before tax 3,000,466 1,035,687 Profit tax expense 13 (1,850,957) (403,594) Net profit for the year 1,149,509 632,093 Other comprehensive income - - Total comprehensive result for the year 1,149,509 632,093 The financial statements from pages 6 to 46 were approved by the Management of the Company on 25 June 2018 and signed y. Artak Hovakimyah Gevor4 Muradyan Acting General Director Chief Accountant 6 "High Voltage Electrical Networks" CJSC Statement of financial position As of 31 December Note 31.12.17 31.12.16 AMD'OO0 AMD'OOO Non-current assets Property and equipment 14 69,800,874 57,409,668 Intangible assets 29,087 33,773 Deferred tax assets 15 556,219 865,901 Long-term receivables 16 893,110 - Advances for acquisition of property and 17 8,801,081 9,271,479 equipment 80,080,371 67,580,821 Current Assets Inventory 18 1,779,719 1,816,578 Trade and other receivables 16 3,108,487 3,365,843 Prepayment on income tax - 98,599 Borrowings provided 5,008 6,194 Term deposits 19 8,042,165 2,221,310 Cash and cash equivalents 20 1,227,704 1,003,799 14,163,083 8,512,323 Total assets 94,243,454 76,093,144 EQUITY AND LIABILITIES Equity Share capital 21 8,995,388 8,820,729 Paid-in-capital 21 (49,284) (45,551) Capital reserve 21 272,344 240,739 Retained earnings 21 11,764,102 10,987,279 20,982,550 20,003,196 Non-current liabilities Loans and borrowings 22 54,518,667 41,917,091 Grants related to assets 23 519,046 521,631 55,037,713 42,438,722 Current liabilities Loans and borrowings 22 1,607,632 1,456,478 Trade and other payables 24 16,615,559 12,194,748 18,223,191 13,651,226 Total equity and liabilities 94,243,454 76,093,144 The financial statements from pages 6 to 46 were approved by the Management of the Company on 25 June 2018 and signed by: Artak Hovakiniyan Ge rg Muradyan Acting General Director Chef Accountant 7 "High Voltage Electrical Networks" CJSC Statement of cash flows For the year ended 31 December 2017 2016 AMD'0O0 AMD'OOO Cash flows from operating activities Profit for the year 1,149,509 632,093 Adjustments for: Depreciation and amortization 2,962,797 2,867,920 Loss in disposal of PPE 6,290 17,586 Loss/(gain) on disposal of inventory 11,103 (6,523) Interest expense 497,492 324,438 Income tax expense 1,850,957 403,594 Finance income (670,740) (25,737) Income from grants (50,267) (3,066) Write-off of receivables 756 869 Exchange (gain)/loss 2,604,526 (466,199) Operating cash flows before changes in working capital 8,362,423 3,744,975 (Increase)/decrease in trade and other receivables (636,649) 1,583,665 (Increase)/decrease in inventories 25,756 248,307 Increase/(decrease) in trade and other payables 4,094,875 (78,250) Cash from operating activities 11,846,405 5,498,697 Income tax paid (1,442,676) (814) Net cash from operating activities 10,403,729 5,497,883 Cash flows from investing activities Payment for acquisition of PPE (14,914,708) (11,635,384) Inflows from disposal of PPE 22,714 37,893 Repayment of borrowings 1,186 139,252 Placement of term deposits (5,820,855) (2,200,000) Interest income received 670,740 - Net cash used for investing activities (20,040,923) (13,658,239) Cash flows from financing activities Advances on loans paid - (357,559) Inflows from loans and borrowings 12,676,538 11,657,665 Repayment of loans and borrowings (1,280,598) (1,420,787) Interest paid (1,429,035) (868,030) Grants received 47,682 364,990 Dividends paid (163,370) (915,061) Net cash from financing activities 9,851,217 8,461,218 Net increase in cash and cash equivalents 214,023 300,862 Exchange (loss)/gain on cash and cash equivalents 9,882 (2,216) Cash and cash equivalents at the beginning of the year 1,003,799 705,153 Cash and cash equivalents at the end of the year 1,227,704 1,003,799 8 .о � о� ^ � о оо � -_- � о°� аиооо^ "' N^и$� � .- и и о n м � �оg� °�� � оон°�� о� g dN ��- �о ~�г°.а с°" оо м ' оойо � ' ' `рΡ�.'�й°о� N`' и1�0 � ги О�а`гV � и о 1� м�О � и оо N о�` n � ��� � ��м^ с ��м .MO�v� �гр 'С � .. � `-' .. .� а� `��{ р ... .- � � а�+ �С.. о� � �WQ`'� `'� �W� р� � � � � и .� � � � и О� оо� йм �о� �� � го° �N � Zg� �� et м 1� й��.,N N й��„� г.� й ^ .-, � ... i i � ,-. � � � � й N о й м а�о ;д � oNO й и 1� N й .��' � а g й м о� с°� $ оо .о" �л" � �.д й о� ... .д. о � о м er 3 у Е со.. `. � �о с � � ' � � ' � _ •и о 'г0 а �гС ro �о а а и гом t'i й ш � о � о N N�� � оо ��о ���� W N в'� ОО N М N ш +, � ;g n n "� м о о� о � оп � b аоо ^� �j ао�лм� о ±,° Е ш ,�°oN � � а` го°о�°�v о`�о j го= �р� `- � �рсо оо � L �� = И �о й й � w о � С � О V и .о i0 � и �о � а � � � N � N соЧ N `ш ё � �а а`, а`, � ш л - а � � .д го .д Е�_ и й � Е Е а Е й°-с � b � и й й � f0 й G и�� л� о С С ш�°� С м г`о'��^ �r ° йм м Lsл �м �+ й� w. w а�+ � а+ �+ и�'�' '�С� N д.+ г0 � о о о^ О гС i0 � о О и 1- Ф гид о Ф С а' � а' гиС � гб и+� ��� V и� о` С vo- U U и U О С Ш й гrСС � й � G � � �0 �0 � а n' .о С � � +�+ ' т С гиС�ZоН т Ф и�Z01-т "High Voltage Electrical Networks" CJSC Index to notes forming part of the financial statements For the year ended 31 December 2017 1. About the Com pany ............................................................................................................................. 11 2. Basis of preparation ............................................................................................................................ 11 3. Critical accounting estim ates and judgm ents ................................................................................. 14 4. Financial instrum ents - Risk Managem ent ....................................................................................... 14 5. Revenue ................................................................................................................................................ 20 6. Cost of sales .......................................................................................................................................... 20 7. Other incom e ........................................................................................................................................ 21 8. Adm inistrative expenses .................................................................................................................... 21 9. Other expenses .................................................................................................................................... 22 10. Finance incom e .................................................................................................................................... 22 11. Finance expense .................................................................................................................................. 22 12. Foreign currency gain/(loss) .............................................................................................................. 22 13. Incom e tax ............................................................................................................................................ 23 14. Property, plant and equipm ent ......................................................................................................... 24 15. Deferred Tax ........................................................................................................................................ 27 16. Trade and other receivables .............................................................................................................. 28 17. Prepaym ents for acquisition of property and equipm ent ............................................................. 29 18. Inventories ............................................................................................................................................ 29 19. Term deposits ....................................................................................................................................... 29 20. Cash ........................................................................................................................................................ 30 21. Equity .................................................................................................................................................... 30 21.1 Share capital ......................................................................................................................................... 30 21.2 Share prem ium ..................................................................................................................................... 30 21.3 Dividends ..... **"****"'*"*'*'**'*'*******"*** ....... ............... 30 21.4 Reserve capital ..................................................................................................................................... 31 22. Loans and borrow ings ......................................................................................................................... 31 23. Grants related to assets ...................................................................................................................... 37 24. Trade and other payables ................................................................................................................... 37 25. Related party transactions ................................................................................................................. 38 26. Effects of changes in accounting policies ........................................................................................ 38 27. Accounting policies .............................................................................................................................. 39 Annex A - IFRS 13 Fair Value m easurem ent disclosures ............................................................................ 46 io "High Voltage Electrical Networks" CJSC Notes forming part of the financial statements For the year ended 31 December 2017 (continued) 1. About the Company "High Voltage Electrical Networks" closed joint stock company (hereinafter - the Company) has been established through reorganization of "High Voltage Electrical Networks" subsidiary of "ArmEnergo" SCJSC in accordance with the Republic of Armenia Government Decree #450, dated 27 July 1998 and is a legal successor of it. The Company was reorganized as a closed joint stock company on 21 August 1998. The Company's Charter is approved by the RA Ministry of Energy Decree #254-GM, dated 14 August 1998. "High Voltage Electrical Networks" state closed joint stock company was reregistered as a closed joint stock company in State registry of Organizations on 10 February 2000. The Company is the legal successor of High Voltage Electrical Networks Subsidiary, "High Voltage Electrical Networks" SCJSC and "Specialised Maintenance of Power Supply Units" SCJSC. 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. The Company is a profit-making trading company whose charter capital is divided into a certain number of shares that assure the Company's shareholder's right of ownership. The control over the Company's shares is reserved to the Minister of Energy of the Republic of Armenia in accordance with the RA Government Decree #1694-N dated 6 November 2003. The Company has 8 branches * 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 activities are: 1. transmission and transposition of electric power (capacity) according to the commercial and network rules of the electric power market, 2. construction, reconstruction, maintenance and operation of transmission network, 3. provision of scheduled and extraordinary repair, calibration of meters under its ownership or possession, 4. Implementation of scientific-research and design works of energy facilities. The Company's activities, including tariff policy are regulated by the Public Services Regulatory Commission of the Republic of Armenia. The average number of the Company's employees during 2017 was 839 (2016: 863). Legal address of the Company is: 1 Zoravar Andranik, Yerevan, Republic of Armenia. 2. Basis of preparation The principal accounting policies adopted in the preparation of the financial statements are set out in note 29. 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. These financial statements have been prepared in accordance with international Financial Reporting Standards, International Accounting Standards and Interpretations (collectively IFRSs). ii "High Voltage Electrical Networks" CJSC Notes forming part of the financial statements For the year ended 31 December 2017 (continued) 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 2017 * Annual Improvements to IFRSs (2014 - 2016 Cycle): IFRS 12 Disclosure of interests in other entities, * IAS 12 Income Taxes (Amendment - Recognition of Deferred Tax Assets for Unrealized Losses), * IAS 7 Statement of Cash Flows (Disclosure Initiative Amendments). 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СП LL .�С �� о Ш О G1 � О� Ш� С L >+ � гС +:, � с� � Й � � � � гсо �•С ш� � с_ гио о��° ^,л � � ,,,о, и� га и й•а +-+ �� ш 0. �`у ш с го w� Й ш й й а г � гс Ё "� ŭv� ш�f-t-v�° оН� �v °_' а�� � � �' L С о • � И � о о � о о N о с � гр � l�J и с й i6 � С � � �" �� го �` а� о й ш и � с и U С � 3 -с с_ � � и J �°- j, гсо � = о ш � +� и Z � �`Е и� � NC�-ор Nc -� а и,� �� й и� а � и� �!- � �°и �- �` й о й � О � � г� м � и "High Voltage Electrical Networks" CJSC Notes forming part of the financial statements For the year ended 31 December 2017 (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 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 27). At each reporting date, the Company's management reviews and, where appropriate, modifies the estimated useful lives of property, plant and equipment. Collectibility of trade receivables and provided borrowings The accounting estimates of trade receivable collectability are linked to credit risk. Note 4 refers to the assessment of credit risk of financial assets, including receivables and borrowings. 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 14 "High Voltage Electrical Networks" CJSC Notes forming part of the financial statements For the year ended 31 December 2017 (continued) objectives, policies and processes for managing those risks or the methods used to measure them from previous periods. (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 and other payables - Floating rate loans - Fixed-rate loans (b) Financial instruments by category Financial assets Loans and receivables Investments held-to-maturity 2017 2016 2017 2016 AMD'000 AMD'OOO AMD'OOO AMD'000 Term deposits - - 8,042,165 2,221,310 Borrowings provided 5,008 6,194 - - Trade and other receivables 2,826,137 2,535,075 Cash in hand and banks 1,227,704 1,003,800 - - Total financial assets 4,058,849 3,545,069 8,042,165 2,221,310 Financial liabilities Financial liabilities measured at amortized value 2017 2016 AMD000 AMD'OOO Trade and other payables 5,949,950 2,960,853 Loans and borrowings 56,126,299 43,373,569 Total financial liabilities 62,076,249 46,334,422 (c) Financial instruments not measured at fair value Financial instruments not measured at fair value include cash and cash equivalents, trade and other receivables, loans and borrowings provided to customers, 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 LS "High Voltage Electrical Networks" CJSC Notes forming part of the financial statements For the year ended 31 December 2017 (continued) 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: 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 Company is mainly exposed to credit risk from credit sales. Credit risk also arises from cash and cash equivalents and deposits with banks and financial institutions; only major highly reputable local banks are accepted Further disclosures regarding trade and other receivables, which are neither past due nor impaired, are provided in note 16. Cash in bank and short-term deposits A significant amount of cash is held with the following institutions: 31 December 2017 31 December 2016 Short-term Short-term Cash in bank doits Cash in bank dots deposits deposits AMD'OOO AMD'000 AMD'OOO AMD'OOO с> ^а иа` и и и о Е о Е �.�'с+�с+�с+�сго° г�� 'Ес'Ёсс с с с�,с� � ш о о о о о о о о� а� а� о� о гLс ro г`а_ о� о� � � 'у � 'й � •у^� � •й � � � Е � гб г6 гб f••_ � I- = гб С г0 С � У . � а� и_ _ и_ и__ и �� �� �� �У �У +-+ О� О � Е� Ел Ед Ё'� о•с `о � � ^ ` ` `"�'''��' � :дгоо оогоолгс:дга гр и гр и гв и� и+.+ з�' 3 Ш го v гв и 3 и 3 и 3 пs й го й � гсе �� гсо •� гсс �^ гсо a�i v 3.с 3.с ��.+ � а.+ ��.с � s,а � ii�+ ��.�.+��wZ wZ a�a�UZUZ VZ� й� й ���О М 1� � N М �• О �о и О � оо � м N и ор .р ct р. м 1� N er N О �v Ё oN iл о и � о о о м м .о � гЧ с•� у м � о� ^ о� О � in й ао м сЧ о � � м О �О о�о oN й � � N и � О � о N М N � N N f � 1 О Ш � N О � `- О и м о� .- � •�7' о� Q Е О о� �о м м � оМ � � 1 й й Т .о м оо О er �о ао" � о� оо" м V� Ш М � N М Мо '�t `^0' � о0 и�'� N оо0 О � N М М в- М М N � .�. 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С_ •И С (б о w �' о � с с 'D � г�t с ш о v ..- Е J -У -� -� �` � � с с о � Ё -p�v � � г � > и � т � j У У У� а т Й т� У � � "High Voltage Electrical Networks" CJSC Notes forming part of the financial statements For the year ended 31 December 2017 (continued) 23. Grants related to assets 2017 2016 AMD'OOO AMD'OOO Balance at the beginning of year 521,631 159,707 Received during the year 379,663 364,990 Reclassified from grants related to income (382,248) - Recognized in profit or toss - (3,066) Balance at the end of year 519,046 521,631 Balance of grants related to assets includes amounts provided by the following counterparties: 31.12.17 31.12.16 AMD'OOO AMD'OOO Neighborhood Investment Facility (NIF) 233,846 233,846 KFW 131,144 131,144 IBRD 145,338 145,338 Grants related to land - 9,960 Other 8,718 1,343 519,046 521,631 The Company received grants from international banks and institutions for implementation of different projects, as described below: " Investment and technical assistance for connection of Armenian and Georgian power Grid " Construction and consulting works on Caucasus Transmission Network (Transmission Line and HDVC Station between Armenia and Georgia) " Preparation of the Electricity Transmission Network Improvement Project, consulting and trainings. 24. Trade and other payables 31.12.17 31.12.16 AMD'OOO AMD'OOO Payables on acquisition of property and equipment 5,783,324 2,826,881 Payables to employees 146,181 122,370 Other payabies 20,445 11,602 Total financial liabilities measured at amortized cost except for loans and borrowings 5,949,950 2,960,853 Prepayments received 9,139,271 9,137,216 Taxes and duties payable 1,526,288 96,506 Other 50 173 16,615,559 12,194,748 37 "High Voltage Electrical Networks" CJSC Notes forming part of the financial statements For the year ended 31 December 2017 (continued) Payables on acquisition of property and equipment include balances of the following counterparties: 31.12.17 31.12.16 AMD'OOO AMD'OOO SUNIR 2,821,835 731,162 KALPATARU POWER TRANSMISSION LTD 2,052,897 1,966,963 Liaoning-Efacec Electrical EquipmentCo. LTD 524,802 - Xian Electric Engineering Co LTD China 212,627 KASKAD-ENERGO LLC 104,372 Others 66,791 128,756 5,783,324 2,826,881 The fair value of trade and other payables measured at amortised cost does not materially differ from their carrying value. Prepayment received represents amount received from Gazprom-Armenia CJSC in 2007 for the acquisition of Iran-Kajaran gas pipeline as described in note4. 25. Related party transactions The Government of the Republic of Armenia owns 100% of the Company's shares, so all state-owned enterprises are considered to be affiliated with the Company. Related parties include the key management personnel. The information on their compensation is provided in Note 8. 26. Effects of changes in accounting policies There have been no changes in accounting policies during 2017. 38 "High Voltage Electrical Networks" CJSC Notes forming part of the financial statements For the year ended 31 December 2017 (continued) 27. Accounting policies Foreign currencies In preparing the financial statements, transactions in currencies other than the functional currency are recorded at the rates of exchange defined by the Central Bank of Armenia prevailing on the dates of the transactions. At each reporting date, monetary items denominated in foreign currencies are retranslated at the rates defined by the Central Bank of Armenia prevailing on the reporting date. which is 484.10 drams for 1 US dollar and 580.10 drams for 1 euro as of December 31, 2017 (December 31, 2016: 483.94 drams for 1 US dollar, 512.20 drams for 1 euro). Non-monetary items are not retranslated and are measured at historic cost (translated using the exchange rates at the transaction date). Exchange differences arising on the settlement and retranslation of monetary items, are included in profit or loss for the period. Property and equipment Property 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 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. 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. 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 years Transmission lines - 30 years Machinery and equipment - 5-20 years Vehicles - 5-15 years Fixture, fittings and other - 5-10 years. 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 Leased assets Leases are classified as finance leases whenever the terms of the lease transfer substantially all the 39 "High Voltage Electrical Networks" CJSC Notes forming part of the financial statements For the year ended 31 December 2017 (continued) risks and rewards of ownership to the lessee. ALl other Leases are treated as operating Leases. The Company as a lessor Rental income from operating lease agreements is recognized on a straight-line basis over the time of the relevant lease. The Company as a lessee Operating lease payments are recognized as an expense on a straight-line basis over the lease term. Associated costs, such as maintenance and insurance, are expensed as incurred. 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 cost of inventories is based on the weighted average principle and includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. Financial instruments Recognition, initial measurement and derecognition Financial assets and financial liabilities are recognized when the Company becomes a part to the contractual provisions of the financial instrument. Financial assets are derecognized when the contractual rights to the cash flows from the financial asset expire, or when the financial asset and aLL substantial risks and rewards are transferred. Financial liabilities are derecognized when they are extinguished, discharged, cancelled or expire. Financial assets and financial liabilities are measured initially at fair value plus transaction costs, except for financial assets and financial liabilities carried at fair value through profit or loss, which are measured initially at fair value. Classification and subsequent measurement of financial assets For the purpose of subsequent measurement financial assets other than hedging instruments are divided into the following categories upon initial recognition: loans and receivables financial assets at fair value through profit or loss available-for-sale financial assets held-to-maturity investments. Financial assets are assigned to different categories on initial recognition, depending on the characteristics of the instrument and its purpose. A financial instrument's category is relevant for the way it is measured and whether any resulting income and expenses are recognized in profit or loss or in other comprehensive income. Refer to note 26.2 for a summary of the Company's financial assets by category. Generally, the Company recognizes all financial assets using settlement date accounting. An assessment of whether a financial asset is impaired is made at least at each reporting date. All income 40 "High Voltage Electrical Networks" CJSC Notes forming part of the financial statements For the year ended 31 December 2017 (continued) and expenses relating to financial assets that are recognized in profit or loss are presented within finance costs, finance income or other financial items, except for impairment of trade receivables which is presented within other expenses. i. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and include trade and other receivables, as well as cash and bank balances. Trade and other receivables Current accounts receivable are initially recognized at fair value. Subsequently they are measured at amortized cost less allowance for impairment. An allowance for impairment of trade receivables is established when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor and default and delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset's carrying amount and the present value of the estimated future cash flows, discounted at the original effective interest rate. The balance of the allowance is adjusted by recording a charge or income to profit or loss of the reporting period. Any amount written-off with respect to customer account balances is charged against the existing allowance for doubtful accounts. All accounts receivable for which collection is not considered probable are written-off. Cash and bank balances The Company's cash and bank balances comprise cash in hand, bank accounts and cash in transit. ii. Held-to-maturity investments Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity and include deposits at commercial banks. Investments are classified as held-to-maturity if it is the intention of the Company's management to hold them until maturity. Deposits are subsequently measured at amortized cost using the effective interest method. In addition, if there is objective evidence that the deposit has been impaired, the financial asset is measured at the present value of estimated cash flows. Any changes to the carrying amount of the deposit are recognized in profit or loss. Classification and subsequent measurement of financial liabilities The Company's financial liabilities include loans and borrowings and trade and other payables. A summary of the Company's financial liabilities by category is given in note 26.2. i. Loans and borrowings Loans and borrowings are recognized initially at fair value, net of issuance costs associated with the borrowing. Subsequent to initial recognition, loans and borrowings are stated at amortized cost with any difference between cost and redemption value recognized in profit or loss over the period of the borrowings on an effective interest basis. Interest costs incurred in connection with borrowings are expensed as incurred as part of finance expenses, except for the borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset, which are capitalized as part of that asset. Financing costs Costs incurred for loans and borrowings before proceeds from financing are received are recorded as advance fees. Such costs include legal and insurance fees, fees from independent engineers, consultants, registration fees, agency fees, arrangement and management fees. As proceeds from financing transactions are received, the associated costs are allocated to and reclassified against such 41 "High Voltage Electrical Networks" CJSC Notes forming part of the financial statements For the year ended 31 December 2017 (continued) financing arrangements. In cases when financing is received in multiple tranches advance fees are charged against related financial liabilities in proportions of the fees to the total financing receivable. Financing costs associated with debt are expensed over time as interest expense or capitalized to the cost of a qualifying asset using the effective interest rate method. In the event that a financing effort is abandoned or unsuccessful, allocable financing costs are charged to expense. ii. Trade and other payables Trade and other payables are stated at fair value and subsequently stated at amortized cost. 3.7 Impairment Impairment of property 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. Impairment of financial assets Financial assets, other than those at fair value through profit or loss, are assessed for indicators of impairment at each reporting date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been impacted. For financial assets carried at amortized cost, the amount of the impairment is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables where the carrying amount is reduced through the use of an allowance account. With the exception of available-for-sale equity instruments, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized. Equity 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 includes any premium received on issue of share capital. Any transaction costs associated with issuing of shares are deducted from share premium. Share redemption deficit represents the difference between the nominal value of the shares redeemed and their redemption price. Premiums and deficit from issue and redemption of shares are 42 "High Voltage Electrical Networks" CJSC Notes forming part of the financial statements For the year ended 31 December 2017 (continued) presented net in equity. 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. 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 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. 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. 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. 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 43 "High Voltage Electrical Networks" CJSC Notes forming part of the financial statements For the year ended 31 December 2017 (continued) 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. 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. Revenue recognition 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. Revenue is reduced for estimated customer returns, rebates and other similar allowances. 44 "High Voltage Electrical Networks" CJSC Notes forming part of the financial statements For the year ended 31 December 2017 (continued) Sale of goods Revenue from the sale of goods is recognized when all the following conditions are satisfied: * the Company has transferred to the buyer the significant risks and rewards of ownership of the goods; * the Company retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; * the amount of revenue can be measured reliably; * it is probable that the economic benefits associated with the transaction will flow to the Company and, * the costs incurred or to be incurred in respect of the transaction can be measured reliably. Rendering of services Revenue from a contract to provide services is recognized when: * the amount of revenue may be reliably measured; * it is probable that the economic benefits associated with the transaction will flow to the Company; * the stage of completion of the transaction at the reporting date may be reliably measured; and, * the costs incurred for the transaction and the costs to complete the transaction may be reliably measured. Revenue of the Company derives from sale of electricity produced and electricity transmission services. Revenue is recognized on monthly basis based on the actual electricity transferred and actual electricity sold as evidenced by the invoices issued by the Company. Interest income Interest revenue is accrued on a timely basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset's net carrying amount. Rental income Rental income is recognized on a straight-line basis over the term of the relevant lease. 45 "High Voltage Electrical Networks" CJSC Notes forming part of the financial statements For the year ended 31 December 2017 (continued) Annex A - IFRS 13 Fair Value measurement disclosures The following table sets out the assets and liabilities at 31 December 2017 for which fair values are disclosed in the notes. Item Fair value Valuation technique Fair value Significant AMD million hierarchy level unobservable inputs Current The carrying amount of short term (less than 12 Trade and other months) trade 2,826 receivables Level 3 N/A approximates their fair values. Long term receivables were discounted at 5.26% Current The carrying amount of Trade and other short term (less than 12 5,950 months) trade Level 3 N/A payables approximates its fair values. The carrying amount of the received loans approximates their fair value. The following effective discount rates have been used: Received loans 56,126 0532 fo usd LeveL 3 N/A 0.51-3.32% for USD denominated loans; 0.75-7.01% for EUR denominated loans; and 3.21% for SDR denominated loans. '46