“High Voltage Electrical Networks” CJSC Annual financial statements and Independent Auditor’s Report For the year ended 31 December 2018 “High Voltage Electrical Networks” CJSC Annual financial statements For the year ended 31 December 2018 Contents 4 Independent auditor’s report 7 Statement of 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 transmission Board of Directors: Artashes Kirakosyan Acting Chief Secretary of MEINR of the RA Tigran Melqonyan Head of External Relations Department of MEINR of the RA Vardan Burnazyan Deputy Director for Security and Control of the “Electric Networks of Armenia” CJSC Armen Meliq-lsrayelyan Head of the Stock of Shares Management Department of the State Property Management Committee of the Ministry of Economic Developments and Investments of the RA Torgom Madoyan Chairman of the Final Concluding Committee of the Institute of Energy and Electrical Engineering of NPUA, Director of “NT Service” LTD Artak Albertyan Head of Division of Financial Planning of Current Budget Expenditures in Energy and Economy’s other spheres of the department of Financial Planning of Budget Expenditures of the staff of the Ministry of Finance of the RA Hayk Harutyunyan General Director of “High Voltage Electric Networks” CJSC, Board Member 2 IBDO Tel: +374 60 528899 E-mail: bdo@bdoarmenia.am www.bdoarmenia.am 23/6, Davit Anhaght Str., 5th Floor, office 7 Yerevan, Armenia Independent Auditor’s Report To the shareholder of HVEN CJSC 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, 2018, 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 2018, 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) 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 2018 and 2017 and on the income, expenses, assets, liabilities and cumulative profits reflected in the financial statements for the years then ended. (2) The Company has disagreements with its Chinese contractor Liaoning-Efacec Electrical Equipment Co.LTD (hereinafter referred to as the Contractor) related to the value of works and equipment of AMD 1,178 million supplied by the latter within the framework of contract for restoration of Shinuhair and Agarak substation 2 and reflected in the Company’s accounts. We were unable to determine the impact of the above-mentioned circumstances as at 31 December 2018 and 2017 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. BDO Armenia cjsc, is a memoei of BOO International Limited, a UK company limited by guarantee, and forms pan of the international BDO network of independent member firms. “High Voltage Electrical Networks” CJSC Statement of profit or loss and other comprehensive income For the year ended 31 December 2018 2017 Note AM D ’000 AM D’000 Revenue 5 7,857,221 12,035,551 Cost of sales 6 (4,047,712) (3,683,494) Gross profit 3,809,509 8,352,057 Other income 7 143,288 494,978 Administrative expenses 8 (1,413,379) (1,603,835) Other expenses 9 (807,500) (1,811,456) 1,731,918 5,431,744 Results from operating activities Finance income 10 1,315,233 670,740 Finance expense 11 (1,606,591) (497,492) Foreign exchange gain/(loss) 12 1,554,578 (2,604,526) Profit before tax 2,995,138 3,000,466 Profit tax expense 13 (554,692) (1,850,957) Net profit for the year 2,440,446 1,149,509 Other comprehensive income - - 2,440,446 1,149,509 Total comprehensive income for the year The financial statements from pages 6 to 47 were approved by the Management of the Company on 21 June 2&T9^ind signed by: Gevorg Muradyan Chief Accountant 6 “High Voltage Electrical Networks” CJSC Statement of financial position As of 31 December Note 31.12.18 31.12.17 AMD'000 AMD'000 Non-current assets Property and equipment 14 85,177,078 69,800,874 Intangible assets 128,025 29,087 Deferred tax assets 15 1,087,128 556,219 Long-term receivables 16 494,803 893,110 Advances for acquisition of property and 5,841,190 8,801,081 17 equipment 92,728,224 80,080,371 Current Assets Inventory 18 2,019,772 1,779,719 Trade and other receivables 16 2,072,459 3,108,487 Borrowings provided 4,688 5,008 Term deposits 19 12,985,387 8,042,165 Cash and cash equivalents 20 232,496 1,227,704 17,314,802 14,163,083 Assets held for sale 76,602 - Total assets 110,119,628 94,243,454 EQUITY AND LIABILITIES Equity Share capital 21 8,995,388 8,995,388 Paid-in-capital 21 (49,284) (49,284) Capital reserve 21 272,344 272,344 Retained earnings 21 14,204,548 11,764,102 23,422,996 20,982,550 Non-current liabilities Loans and borrowings 22 64,383,189 54,518,667 Grants related to assets 23 518,142 519,046 64,901,331 55,037,713 Current liabilities Loans and borrowings 22 4,018,182 1,607,632 Trade and other payables 24 17,777,119 16,615,559 21,795,301 18,223,191 Total equity and liabilities 110,119,628 94,243,454 7 “High Voltage Electrical Networks” CJSC Statement of cash flows For the year ended 31 December 2018 2017 AMD'000 AMD'000 Cash flows from operating activities Profit for the year 2,440,446 1,149,509 Adjustments for: Depreciation and amortization 3,620,405 2,962,797 Loss in disposal of PPE 1,151 6,290 Loss/(gain) on disposal of inventory 10,465 11,103 Interest expense 1,606,591 497,492 Income tax expense 554,692 1,850,957 Finance income (1,315,233) (670,740) Income from grants (904) (50,267) Write-off of receivables (609,971) 756 Exchange (gain)/loss (1,554,578) 2,604,526 Operating cash flows before changes in working capital 4,753,064 8,362,423 (lncrease)/decrease in trade and other receivables 2,044,299 (636,649) (lncrease)/decrease in inventories (250,518) 25,756 Increase/(decrease) in trade and other payables 1,661,907 4,094,875 Cash from operating activities 8,208,752 11,846,405 Income tax paid (1,529,993) (1,442,676) Net cash from operating activities 6,678,759 10,403,729 Cash flows from investing activities Payment for acquisition of PPE (16,216,159) (14,914,708) Inflows from disposal of PPE 2,750 22,714 Repayment of borrowings 320 1,186 Placement of term deposits (4,943,222) (5,820,855) Interest income received 1,315,233 670,740 Net cash used for investing activities (19,841,078) (20,040,923) Cash flows from financing activities Inflows from loans and borrowings 15,362,954 12,676,538 Repayment of loans and borrowings (1,279,596) (1,280,598) Interest paid (1,922,415) (1,429,035) Grants received - 47,682 Dividends paid - (163,370) Net cash from financing activities 12,160,943 9,851,217 Net increase in cash and cash equivalents (1,001,376) 214,023 Exchange (loss)/gain on cash and cash equivalents 6,168 9,882 Cash and cash equivalents at the beginning of the year 1,227,704 1,003,799 Cash and cash equivalents at the end of the year 232,496 1,227,704 8 “High Voltage Electrical Networks” CJSC Statement of changes in equity For the year ended 31 December 2018 Additional paid- Capital Retained Share Capital in-capital Reserve Earnings Total AMD’000 AMD’000 AMD’000 AMD’000 AMD’000 Balance as at 31 December 2017 8,995,388 (49,284) 272,344 11,764,102 20,982,550 Net profit of the year - - - 2,440,446 2,440,446 Balance as at 31 December 2018 8,995,388 (49,284) 272,344 14,204,548 23,422,996 Additional paid- Capital Retained Share Capital in-capital Reserve Earnings Total AMD’000 AMD’000 AMD’000 AMD’000 AMD’000 Balance as at 31 December 2016 8,755,027 (45,551) 240,739 10,987,280 20,003,196 Increase of share capital on the account of 177,712 - - (177,712) - accumulated dividends Reduction of charter capital (3,052) (3,733) - - (6,785) Net profit of the year - - - 1,149,509 1,149,509 Dividend distribution - - - (163,370) (163,370) Transfer to reserve capital - - 77,995 (31,605) - Balance as at 31 December 2017 8,995,388 (49,284) 272,344 11,764,102 20,982,550 9 “High Voltage Electrical Networks” CJSC Index to notes forming part of the financial statements For the year ended 31 December 2018 Independent Auditor’s Report.......................................................................................3 1. About the Com pany.......................................................................................... 11 2. Basis of preparation.......................................................................................... 11 3. Critical accounting estimatesand judgments...........................................................14 4. Financial instruments - Risk Management.............................................................. 14 5. Revenue..........................................................................................................20 6. Cost of sales.................................................................................................... 20 7. Other income...................................................................................................21 8. Administrative expenses.................................................................................... 21 9. Other expenses................................................................................................ 22 10. Finance incom e................................................................................................ 22 11. Finance expense...............................................................................................22 12. Foreign currency gain/(loss)................................................................................22 13. Income tax.......................................................................................................23 14. Property, plant and equipment........................................................................... 24 15. Deferred Tax....................................................................................................27 16. Trade and other receivables............................................................................... 28 17. Prepayments for acquisition of property and equipment.......................................... 29 18. Inventories...................................................................................................... 29 19. Term deposits.................................................................................................. 29 20. Cash............................................................................................................... 30 21. Equity............................................................................................................. 30 21.1 Share capital....................................................................................................30 21.2 Share premium.................................................................................................30 21.3 Dividends........................................................................................................ 30 21.4 Reserve capital.................................................................................................31 22. Loans and borrowings........................................................................................ 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 measurement disclosures..................................................... 47 10 “High Voltage Electrical Networks” CJSC Notes forming part of the financial statements For the year ended 31 December 2018 (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 2018 was 805 (2017: 839). 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 27. 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). 11 “High Voltage Electrical Networks” CJSC Notes forming part of the financial statements For the year ended 31 December 2018 (continued) b) New standards, interpretations and amendments not yet effective Date by which Date Company plans Impact of initial Nature of the impending change in accounting policy application of to apply the # Pronouncement application on on adoption of the pronouncement the IFRS is pronouncement financial statements required initially Under IFRS 16 a lessee recognizes a right-of-use assets and a lease liability. The right-of-use assets is treated similarly to other non-financial assets and depreciated 1 January 2019 Impact is still to be 1 IFRS 16, Leases accordingly and the liability accrues interest. The lease Early adoption 1 January 2019 considered liability is initially measured at the present value of permitted lease payments payable over the lease term. The interpretation addresses how to determine the taxable profit(loss), tax bases, unused tax losses, 1 January 2019 IFRIC 23 Uncertainty 2 unused tax credits and tax rates, when there is Early adoption 1 January 2019 No impact envisaged Over Income Tax uncertainty over treatment under IAS 12, Income Tax. permitted 13 “High Voltage Electrical Networks” CJSC Notes forming part of the financial statements For the year ended 31 December 2018 (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 2018 (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 Financial assets measured at amortized value 2018 2017 AMD’000 AMD'000 Term deposits 12,985,387 8,042,165 Borrowings provided 4,688 5,008 Trade and other receivables 1,550,719 2,826,137 Cash in hand and banks 232,496 1,227,704 Total financial assets 14,773,290 12,101,014 Financial liabilities Financial liabilities measured at amortized value 2018 2017 AMD'000 AMD'000 Trade and other payables 7,576,256 5,949,950 Loans and borrowings 68,401,371 56,126,299 Total financial liabilities 75,977,627 62,076,249 (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 15 “High Voltage Electrical Networks” CJSC Notes forming part of the financial statements For the year ended 31 December 2018 (continued) 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 USD, EUR and SDR, as well as from purchases made from major suppliers in USD and EUR. As of 31 December the Company’s net exposure to foreign exchange risk was as follows: 31.12.18 31.12.17 Net foreign currency AMD’OOO AMD'000 assets/(liabilities) EUR (29,479,910) (24,720,866) USD (34,621,685) (28,087,555) SDR (5,255,096) (3,728,776) Net position (69,356,691) (56,537,197) The effect of a 10% strengthening of EUR against AMD at the reporting date on the EUR-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 2,948 million (2017: AMD 2,472 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 USD against AMD at the reporting date on the USD-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 3,462 million (2017: AMD 2,809 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 AMD 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 526 million (2017: AMD 373 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. 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 17 “High Voltage Electrical Networks” CJSC Notes forming part of the financial statements For the year ended 31 December 2018 (continued) 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 6 Between 1 Up to 6 31 December 2018 and 12 and 5 months months years Over 5 years AMD'000 AMD'000 AMD'000 AMD'000 Payables on sale and other payables 4,435,670 3,140,586 Loans and borrowings 1,666,166 2,224,872 27,505,964 71,128,930 Total 6,101,836 5,365,458 27,505,964 71,128,930 Between 6 Between 1 Up to 6 31 December 2017 and 12 and 5 months months years Over 5 years AMD'000 AMD'000 AMD'000 AMD'000 Payables on sale and other 2,769,135 2,602,486 578,330 - payables Loans and borrowings 1,327,194 1,674,971 25,371,572 41,778,340 Total 4,096,329 4,277,457 25,949,902 41,778,340 Capital Disclosures The Company’s capital includes the following components of equity: share capital, share premium, reserve capital 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. Consistent with others in the industry, the Group 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. 18 “High Voltage Electrical Networks” CJSC Notes forming part of the financial statements For the year ended 31 December 2018 (continued) The debt-to-adjusted-capital ratios at 31 December 2018 and at 31 December 2017 were as follows: 31.12.18 31.12.17 AMD'000 AM D'000 Loans and borrowings 68,401,371 56,126,299 Less: cash and term deposits (13,217,883) (9,269,869) Net debt 55,183,488 46,856,430 Equity 23,422,996 20,982,550 Debt to adjusted capital ratio (%) 235.60% 223.31% 19 “High Voltage Electrical Networks” CJSC Notes forming part of the financial statements For the year ended 31 December 2018 (continued) 2018 2017 AMD'000 AMD'000 Electricity transmission services Inside of the RA 5,902,572 9,708,177 From Armenia to Iran 1,877,003 2,207,504 7,779,575 11,915,681 Sale of electricity produced 61,796 83,580 Other services 15,850 36,290 7,857,221 12,035,551 Price for electricity transmission services to electricity network (without VAT) Effective date AMD/kWh 01.02.2018 1.1169 01.02.2017 1.8524 01.08.2016 1.2802 Price for electricity produced on “Lory-1” wind turbine station (without VAT) Effective date Effective date 01.07.2018 42.845 01.07.2017 42.739 01.07.2016 42.645 6. Cost of sales 2018 2017 AMD'000 AMD'000 Depreciation 2,847,110 2,321,327 Salaries and wages 1,100,508 1,243,482 Materials 47,564 55,432 Cost of energy sold 16,402 41,388 Electricity cost 1,091 849 Transformer oil short analysis cost 5,165 10,018 Repair costs of PPE 28,840 9,809 Other 1,032 1,189 4,047,712 3,683,494 20 “High Voltage Electrical Networks” CJSC Notes forming part of the financial statements For the year ended 31 December 2018 (continued) 7. Other income 2018 2017 AMD’000 AMD'000 Operating lease 56,372 55,227 Compensation for damages 37,600 - Income from grants related to assets 1,249 382,248 Fines accrual 275 50,267 Other 47,792 7,236 143,288 494,978 8. Administrative expenses 2018 2017 AMD’OOO AMD'000 Salaries and wages 1,001,803 1,147,327 Depreciation of property and equipment 161,930 130,911 Non-reimbursable taxes 50,093 47,410 Utilities 49,754 63,795 Business trip costs 26,848 46,037 Fuel 35,383 41,607 Exploitation and maintenance costs 11,641 27,936 Audit and consulting 11,171 31,881 Other 64,756 66,931 1,413,379 1,603,835 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 2018 amounted to AMD 234 million (2017: AMD 245 million). “High Voltage Electrical Networks” CJSC Notes forming part of the financial statements For the year ended 31 December 2018 (continued) 9. Other expenses 2018 2017 AMD'000 AMD'000 Depreciation 510,559 510,559 Loss from discount of long-term receivable 137,259 145,397 Fines and penalties 35,545 58,801 Loss on disposal of property, plant and equipment 32,252 - Write-off of non resident income tax 29,533 - Office costs 8,377 11,590 Non-Refundable Tax 8,212 - Donations 3,778 10,330 Write-off of inventories 2,135 609 Net loss from sale of property and equipment 1,151 6,290 Write-off of debtors 239 . Net loss from sale of property and equipment 18,183 1,046,861 Net loss from sale of inventories - 10,494 Other expenses 20,277 10,525 807,500 1,811,456 10. Finance income 2018 2017 AMD'000 AMD'000 Interest income from short-term bank deposits 1,312,906 666,707 Interest income from bank accounts 1,979 3,734 Interest income from provided borrowings 348 299 1,315,233 670,740 11. Finance expense 2018 2017 AMD'000 AMD'000 Interest expense on loans from RA Ministry of Fi 1,606,024 496,802 Interest expense on other loans 567 690 1,606,591 497,492 12. Foreign currency gain/(loss) 2018 2017 AMD'000 AMD'000 Loans and borrowings 1,490,760 (2,287,837) Trade and other payables 55,955 (325,936) Cash in hand and bank 6,167 9,882 Trade and other payables 1,723 (139) Other (27) (496) 1,554,578 (2,604,526) 22 “High Voltage Electrical Networks” CJSC Notes forming part of the financial statements For the year ended 31 December 2018 (continued) 13. Income tax 2018 2017 Current tax expense AMD’000 AMD'000 Income tax for the period 1,085,601 1,541,275 Adjustment related to the understatement of previous period provision - - Total current tax 1,085,601 1,541,275 Deferred tax expense (compensation) Origination and reversal of temporary differences (530,909) 309,682 Tax losses - - Total deferred tax expense (compensation) (530,909) 309,682 554,692 1,850,957 The reasons for the difference between the actual tax charge for the year and the standard rate of corporation tax in the RA applied to profits for the year are as follows: 2018 2017 Effective tax Effective tax AMD'000 rate (%) AMD'000 rate (%) Profit (loss) for the year 2,440,446 1,149,509 Profit tax compensation (expense) 554,692 1,850,957 Profit/(loss) before taxation 2,995,138 3,000,466 Profit tax calculated at a tax rate 20% (2016: 20%) 599,028 20.00% 600,093 20.00% Expenses and income not deductible/taxable for tax purposes, net (44,336) -1.48% 1,250,864 41.69% Total tax expense (compensation) 554,692 18.52% 1,850,957 61.69% Estimates and assumptions The Company is subject to income tax in RA. 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. 23 “High Voltage Electrical Networks” CJSC Notes forming part of the financial statements For the year ended 31 December 2018 (continued) 14. Property, plant and equipment B u ild in g s and T ra n sm ittin g M a ch in e ry , P ro d u c tio n C o n s tr u c tio n in Lan d V e h ic le s T o ta l c o n str u c tio n s fix t u r e s e q u ip m en t p r o p e r t y and e c t p ro ce ss (a) Cost or revalued A M D 000 A M D 000 A M D 000 A M D 000 A M D 000 A M D '000 A M D 000 A M D ’000 A s at 01.01. 2017 1.084.322 7,404,825 67.113,983 55,766.045 761.790 2,015.015 19.366.163 153,512,143 Additions 491,988 51.019 301.024 41.276 35,320 87,376 15,395,831 16,403,834 Disposals (923) (25,588) (41.383) (1337,111) (37.041) (5,275) (1,447,326) A s at 31.12.2017 1.575,387 7,430.256 67.373,619 54,470,210 760.069 2.097.116 34.761,994 163.468,651 As at 01.01.2018 1 ,5 7 5 ,3 8 7 7 ,4 3 0 ,2 5 6 6 7 ,3 7 3 ,6 1 9 5 4 ,4 7 0 ,2 1 0 7 6 0 ,0 6 9 2 ,0 9 7 ,1 1 6 3 4 ,7 6 1 ,9 9 4 1 6 8 ,4 6 8 ,6 5 1 Additions 3 4 ,2 9 2 1 0 ,4 6 5 2 0 4 ,0 1 5 1 6 ,3 5 4 7 1 6 ,3 3 2 1 6 2 ,0 0 3 1 8 ,4 2 2 ,4 0 6 1 9 ,5 6 5 ,8 6 7 Disposals - - ( 2 9 0 ,1 5 8 ) (1 4 ,7 7 9 ) - (3 ,5 7 8 ) - (3 0 8 5 1 5 ) Reclassification - - 1 3 ,8 8 9 ,0 8 8 1 0 2 ,0 5 5 - ֊ (1 3 ,9 9 1 ,1 4 3 ) - Adjustement ( 3 ,9 0 1 ) ֊ (8 5 ,0 0 0 ) - (8 7 ,4 5 0 ) (6 ,0 3 2 ) (4 6 8 ,8 0 5 ) ( 6 5 1 ,1 8 8 ) A s at 31.12.2018 1 ,6 0 5 ,7 7 8 7 ,4 4 0 ,7 2 1 8 1 ,0 9 1 ,5 6 4 5 4 ,5 7 3 ,8 4 0 1 ,3 8 8 ,9 5 1 2 ,2 4 9 ,5 0 9 3 8 ,7 2 4 ,4 5 2 1 8 7 ,0 7 4 ,8 1 5 (b) Accum ulated depreciation As at 01.01. 2017 - 5,197,414 48.973.301 37575,531 488.762 1,207.791 - 93,442,799 Depreciation charge - 209.930 1,007,906 1,573,031 37,543 125,362 - 2,953,772 Disposals ֊ (21,252) (26,030) (734,989) (34,721) (5,163) (822,205) Adjustements ֊ (214) (0) 289 (64) (11) - - A s at 31.12.2017 - 5,385,878 49.955.127 38,413,862 491520 1,327,979 - 95,574.366 A s at 01.01.2018 . 5 ,3 8 5 ,8 7 8 4 9 ,9 5 5 ,1 2 7 3 8 ,4 1 3 ,8 6 2 491520 1,327,979 9 5 ,5 7 4 ,3 6 6 Depreciation charge - 2 1 1 ,9 5 0 1 ,4 8 0 ,9 6 7 1 ,5 7 8 ,1 6 4 91,961 1 4 1 ,8 8 0 ֊ 3 5 0 4 ,9 2 2 Disposals - - ( 2 6 4 ,3 0 9 ) (8,377) ( 1 6 ,8 8 0 ) (3 5 7 8 ) - (293,144) As at 31.12.2018 ֊ 5 ,5 9 7 ,8 2 8 5 1 ,1 7 1 ,7 8 5 3 9 ,9 8 3 ,6 4 9 5 6 6 ,6 0 1 1,466,281 - 9 8 ,7 8 6 ,1 4 4 © Accum ulated impairment A s at 01.01. 2017 - 6.923 162.184 2.471.274 1.S20 17,475 - 2,659.676 Disposals - - (15.013) (580.720) - - - (595,733) Impairment - - - - - - 1.029,468 1,029,468 A s at 31.12.2017 - 6,923 147,171 1,390554 1.820 17.475 1.029,468 3,093.411 A s at 01.01.2018 6,923 1 4 7 ,1 7 1 1 ,8 9 0 ,5 5 4 1,820 17,475 1 ,0 2 9 ,4 6 8 3 ,0 9 3 ,4 1 1 Impairment ֊ - ֊ - - - 1 8 ,1 8 2 18,182 A s at 31.12.2018 ֊ 6,923 1 4 7 ,1 7 1 1 ,8 9 0 .5 5 4 1,820 17,475 1 ,0 4 7 ,6 5 0 3 ,1 1 1 ,5 9 3 (d) Net book value At January 2017 1.084.322 2,200.488 17.978.49S 15,719,240 271.203 789.749 19.366,163 57.409,66S A t 31 December 2017 1.575.3S7 2.037.455 17,271.321 14.165,794 266,729 751,662 33,732.526 69,300.874 A t 31 December 20118 1,605,778 1 ,8 3 5 ,9 7 0 29,772,608 12,699,637 820,530 765,753 37,676,802 85,177,078 24 “High Voltage Electrical Networks” CJSC Notes forming part of the financial statements For the year ended 31 December 2018 (continued) Included in the conveyance schemes is the Iran-Kajaran gas pipeline at the carrying amount of 10,423,922 thousand drams. The pipeline is transporting natural gas from Iran to Armenia’s national gas distribution network. In 2007 the Company signed a preliminary agreement with Gazprom- Armenia CJSC on sale of the pipeline, with the final agreement to sign in 2007. In 2007 Gazprom- Armenia CJSC paid an advance of 9,137,100 thousand drams, however the sale transaction did not take place eventually and the agreement has been extended for several times consecutively. According to the latest signed agreement the sale is to take place till 1 April, 2020. Property and equipment of the Company at the carrying amount of 21,381 thousand drams have been pledged as a security for loans and borrowings as of December 31, 2018. Additions of property and equipment include: 2018 2017 AMD'000 AMD'000 Acquisitions 18,146,425 15,054,998 Borrowing costs capitalized 1,229,548 1,205,240 Other capitalized expenses 214,202 119,288 19,565,867 16,403,834 The Company has only specific loans and borrowings. The borrowing costs eligible for capitalization are the actual borrowing costs on that borrowing during the capitalization period. Deductions of PPE at carrying value 2018 2017 AMD'000 AMD'000 Disposal 15,371 29,004 Liquidation - 385 Impairment 18,182 1,029,468 33,553 1,058,856 “High Voltage Electrical Networks” CJSC Notes forming part of the financial statements For the year ended 31 December 2018 (continued) Construction in progress represents cost of construction works implemented in the framework of the following projects, financed by International Financial Institutions and the Government of the Republic of Armenia: 01.01.17 31.12.17 31.12.18 AMD'000 AMD'000 AMD'000 Overhead transmission lines constructed in the scope of Reliability of the power transmission network project 13,141,539 14,484,324 6,242,009 Construction of Iran-Armenia 3rd overhead transmission line and Noravan substation 4,672,659 12,752,401 19,748,638 Rehabilitation of Agarak and Shinuhayr substations in the scope of Rehabilitation of electricity transmission networks project 116,242 3,677,196 6,464,949 in the scope of Reliability of the power transmission network project 126,510 1,416,725 635,247 Rehabilitation of Ashnak substation in the scope of Improvement of electricity transmission network project 136,216 1,132,498 4,470,735 Rehabilitation of Ararat-2 and Eghegnadzor substations 6,575 * Construction of Ayrum and Ddmashem substations and Armenia-Georgia overhead transmission lines 1,172,804 Other 193 129,605 ֊ 19,366,163 33,626,774 37,561,577 Depreciation expense has been distributed among the following items: 2018 2017 AMD'000 AMD'000 Cost of sale 2,842,754 2,321,327 Administrative expenses 151,609 121,886 Other expenses 510,559 510,559 3,504,922 2,953,772 As at 31.12.2018, the cost of fully depreciated PPE was 35,781 thousand drams (December 31, 2017: 33,781 thousand drams). 26 “High Voltage Electrical Networks” CJSC Notes forming part of the financial statements For the year ended 31 December 2018 (continued) 15. Deferred Tax Deferred tax is calculated on temporary differences under the liability method using a tax rate of 20% (2017: 20%). The movement on the deferred tax account is as shown below: 2018 2017 AMD'000 AMD'000 Balance at the beginning of year 556,219 865,901 (Charged)/credited to profit and loss 530,909 (309,682) Balance at the end of year 1,087,128 556,219 Deferred tax assets have been recognized in respect of all tax losses and other temporary differences giving rise to deferred tax assets where the directors believe it is probable that these assets will be recovered. Below is the movement of deferred tax assets and liabilities during the reporting period (prior to deducting allowable amounts as per IAS 12). Details of the deferred tax liability, amounts recognized in profit or loss and amounts recognized in other comprehensive income are as follows: (Charged) Charged) Asset Liability Net /credited to /credited to profit or loss equity 2018 2018 2018 2018 2018 AMD"000 AMD"000 AMD"000 AMD"000 AMD"000 Accelerated depreciation of PPE - (650,024) (650,024) 608,594 - Advance payment for the gas pipeline 1,795,942 - 1,795,942 (31,478) - Vacation provisioning 29,219 - 29,219 - - Discount of receivables 186,793 ֊ 186,793 157,713 - Grants related to assets ' Assets held for sale 29,373 . 29,373 100,255 Provided Advances 3,551 - 3,551 3,551 - Loans and borrowings (5,102) - (5,102) (5,102) - Tax asset/(liabilities) ֊ (302,624) (302,624) (302,624) - Set off of tax 2,039,781 (959,648) 1,087,128 530,909 - Tax asset derecognition (959,648) 959,648 - - - Net tax assets/(liabilities) 1,087,128 - 1,087,128 530,909 - 2017 2017 2017 2017 2017 AMD"000 AMD"000 AMD"000 AMD"000 AMD"000 Accelerated depreciation of PPE " (1,258,618) (1,258,618) (421,614) " Advance payment for the gas pipeline 1,827,420 - 1,827,420 - - Vacation provisioning 29,219 - 29,219 4,887 - Discount of receivables 29,080 - 29,080 29,080 - Grants related to assets - (70,882) (70,882) (70,882) - Provided Advances - - - 88,232 - Loans and borrowings - - - (60,615) - Tax asset/(liabilities) 1,885,719 (1,329,500) 556,219 (309,682) - Set off of tax (1,329,500) 1,329,500 - - - Tax asset derecognition - - - - - Net tax assets/(liabilities) 556,219 - 556,219 (309,682) - 27 “High Voltage Electrical Networks” CJSC Notes forming part of the financial statements For the year ended 31 December 2018 (continued) 16. Trade and other receivables 31.12.18 31.12.17 AMD"000 AMD"000 Short-term receivables from electricity transmission service 1,038,352 1,903,152 Long-term receivables from electricity transmission service 494,803 893,110 From sale of electricity produced 11,715 20,831 From operating lease 5,849 7,457 From sale of property and equipment and other inventories - 603 Fines and penalties 608,241 - Other receivables - 984 Provision on doubtful receivables (608,241) - Total financial assets classified as borrowings and 1,550,719 2,826,137 receivables except for cash and cash equivalents Prepayments on goods and services 244,091 309,731 Receivables in the form of tax and other payments 769,817 853,517 Other 2,635 12,212 2,567,262 4,001,597 The carrying value of trade and other receivables classified as loans and receivables approximates fair value. Receivables from the electricity transmission service include the amount of 843 million drams receivable from Yerevan Thermal Power Plant CJSC (December 31, 2017: AMD 1,580 million drams). According to the agreement signed with Yerevan Thermal Power Plant CJSC in November 2017, the parties agreed to pay the remaining balance of 744 million drams( 31 December,2017:1,182 million drams) starting from 2015 until May of 2022. On 31 December 2018, the above-mentioned debt was discounted at 12%, which is a reasonable estimate of the Company. The debt of Yerevan Thermal Power Plant CJSC in the amount of 495 min drams was classified as long-term as of 31 December 2018 (2017: 893 min drams). The average duration of trade receivable from sales of goods and services is 1 month (2017: 1 month). As at 31 December 2018 there were no receivables passed due due but not impaired (same 2017). 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 no provision is needed for impairement in respect of overdue trade receivables. Accounts receivable from the state budget include: 2018 2017 AMD’OOO AMD'000 VAT 418,791 400,307 Non-resident withholding tax 331,890 412,921 Other 19,136 40,289 _________ 769,817 853,517 28 “High Voltage Electrical Networks” CJSC Notes forming part of the financial statements For the year ended 31 December 2018 (continued) 17. Prepayments for acquisition of property and equipment 31.12.18 31.12.17 AMD'000 AMD'000 Prepayments for acquisition of non-current assets 5,376,558 5,495,436 Prepayments on loans 464,432 3,305,370 Other 200 275 5,841,190 8,801,081 Advances on loans include insurance and other payments to the lenders: 31.12.18 31.12.17 AMD'000 AMD'000 KFW 437,577 820,669 EIB 26,855 26,855 Export Development bank of Iran - 1,833,664 SUNIR International FZE - 562,309 IBRD - 61,873 464,432 3,305,370 18. Inventories 31.12.18 31.12.17 AMD'000 AMD'000 Building materials 637,503 645,302 Spare parts 652,183 382,259 Other 396,137 56,637 Materials 333,949 695,521 2,019,772 1,779,719 The amount of inventories recognized as expense during the year is 88,527 thousand drams ( 2017: 123,574 thousand drams), which includes the write-off of inventories in the amount of 9,687 thousand drams (2016: 17,024 thousand drams). 19. Term deposits As of December 31, 2018 Interest Interest Principal accrued as of Interest accrued Maturity amount 31 December rate during 2018 2018 AMD'000 AMD'000 AMD'000 ArmBusiness bank CJSC 3,600,000 24,362 335,934 13.0% April 15, 2019 ArmBusiness bank CJSC 3,400,000 13,973 13,973 12.5% December 20, 2019 Ardshinbank CJSC 3,410,000 30,843 100,174 6.0% February 4, 2019 Ameriabank CJSC 2,500,000 6,209 261,990 12.9% January 29, 2019 12,910,000 75,387 29 “High Voltage Electrical Networks” CJSC Notes forming part of the financial statements For the year ended 31 December 2018 (continued) As of December 31, 2017 Interest Interest Principal accrued as of Interest accrued Maturity amount 31 December rate during 2017 2017 AMD'000 AMD'000 AMD'000 Ardshinbank CJSC 3,600,000 25,299 211,636 13.5% 13 April 2018 ArmBusiness bank CJSC 2,900,000 13,944 13,944 13.5% 18 Dec 2018 ArmBusiness bank CJSC 29 Jan 2019 America bank CJCS 1,000,000 2,117 2,470 12.9% 500,000 805 11,162 8.4% 26 Sept 2018 20. Cash 31.12.18 31.12.17 AMD'000 AMD'000 Cash in hand 960 1,240 Bank accounts 231,536 1,226,464 232,496 1,227,704 Breakdown of cash held on bank accounts by banks is presented in Note 4. 21. Equity 21.1 Share capital Issued and fully paid 2018 2018 2017 2017 Number AMD'000 Number AMD'000 Ordinary shares at the beginning of year (1) 648,363 8,995,388 648,583 8,820,728 Issued and fully paid during the year - - - - Increase of Charter Capital by increase of nominal value of one share at the account of - - - 177,712 accumulated dividend Reduction of Charter capital as a result of - - (220) (3,052) property transfer to the shareholder Ordinary shares at the end of year (2) 648,363 8,995,388 648,363 8,995,388 21.2 Share premium Share premium arises when equity instruments of the Company are issued at a price greater than the nominal value of the shares. Share redemption deficit is the negative difference between the nominal value of the shares repurchased and the value of the consideration transferred. 21.3 Dividends No dividents paid during 2018 (2017: 163.4 min paid). 30 “High Voltage Electrical Networks” CJSC Notes forming part of the financial statements For the year ended 31 December 2018 (continued) 21.4 Reserve capital In accordance with the law “On joint stock companies” and the Company’s charter, the Company has the obligation to create a reserve at the maximum of 15% of the issued share capital through transfers from accumulated profits. The purpose of the reserve capital is to cover future losses. 22. Loans and borrowings 31.12.18 31.12.17 AMD'000 AMD'000 Current Secured by collateral, including: Loans from the Ministry of Finance 3,333,156 1,456,514 Other loans 685,026 151,118 4,018,182 1,607,632 Non-current Secured by collateral, including: Loans from the Ministry of Finance 51,466,115 45,094,776 Other loans 12,917,074 9,423,891 64,383,189 54,518,667 Total loans and borrowings 68,401,371 56,126,299 The carrying amount of loans is considered to be a reasonable estimate of fair value. Below are the Company's loans and borrowings by currencies: 2018 2017 AMD'000 AMD'000 AMD 6,307,576 5,127,839 EUR 25,181,964 21,829,714 USD 31,656,736 25,439,970 Special Drawing Rights (SDR) 5,255,095 3,728,776 68,401,371 56,126,299 Agreements with the Ministry of Finance of the Republic of Armenia were signed between the Republic of Armenia represented by the Ministry of Finance and the Company to fund projects described in note 14. The sub-loan agreements were preceded by the loan agreements with the Ministry of Finance and international banks and organizations. In accordance with loan agreements the Republic of Armenia has to provide the sub-loans for the total amount of funds received. Ministry of Finance of Armenia is also obliged to provide co-financing to the Company for the taxes and other costs connected with the implementation of the projects. Main terms and conditions of loans are described below. 31 “High Voltage Electrical Networks” CJSC Notes forming part of the financial statements For the year ended 31 December 2018 (continued) Loans from the Ministry of Finance of the Republic of Armenia include: As of As of Contract Decemb Decemb amount in Currenc Date of Contract Effective er er Financing institution currency y maturity Interest rate int. rate int. rate 31. 2018 31, 2017 Proiect financed Reliability of the power IBRD 39,000,000 USD 15 May 2036 Variable 4.55% 4.49% 15,192,113 12,956,923 transmission network Ministry of Finance Reliability of the power Co-financing IBRD AMD 15 May 2036 Variable 4.55% 4.52% 3,353,187 3,233,607 transmission network 15 February Reliability of the power IBRD 37,500,000 USD 2039 Variable 4.44% 4.41% 6,352,136 3,398,352 transmission network Ministry of Finance 15 February Reliability of the power Co-financing IBRD AMD 2039 Variable 4.44% 4.45% 592,197 300,371 transmission network 15 November Electricity Transmission IBRD 28,194,486 USD 2039 Variable 3.85% 4.50% 3,157,251 1,434,244 Network Improvement 15 Ministry of Finance November Electricity Transmission Co-financing IBRD AMD 2039 Variable 3.85% 3.82% 906,774 476,300 Network Improvement Power Transmission AD В 15,192,292 Rcth 15 May 2039 Constant 3.14% 3.12% 5,255,095 3,728,775 Rehabilitation Project Ministry of Finance Power Transmission Co-financing ADB AMD 15 May 2039 Constant 3.14% 3.13% 1,195,134 844,953 Rehabilitation Project 30 December Caucasus Transmission KFW 10,200,000 EUR 2054 Constant 0.75% 4.17% 529,819 549,719 Network 30 Ministry of Finance December Caucasus Transmission Co-financing KFW AMD 2054 Constant 0.75% 0.75% 218,582 218,581 Network 30 December Caucasus Transmission KFW 83,000,000 EUR 2030 1.80% 1.80% Network III 30 June Rehabilitation of the KFW 7,300,000 EUR 2024 Constant 2.76% 6.69% 4,040,733 3,803,564 substation Gyumri II 30 June Rehabilitation of the KFW 7,300,000 EUR 2049 Constant 0.75% 0.75% 1,662,574 2,024,999 substation Gyumri II 32 “High Voltage Electrical Networks” CJSC Notes forming part of the financial statements For the year ended 31 December 2018 (continued) As of As of Contract Decemb Decemb amount in Currenc Date of Contract Effective er er Financing institution currency y maturity Interest rate int. rate int. rate 31. 2017 31. 2016 Proiect financed Ministry of Finance Rehabilitation of the Co-financing KFW AMD Constant 0.75% 0.75% 2,059 substation Gyumri II 31 December Power Transmission KFW 14,060,000 EUR 2038 Constant 0.75% 0.72% 5,388,440 5,928,391 Rehabilitation Project 30 December Caucasus Transmission KFW 75,000,000 EUR 2029 Constant 1.85% 1.85% Network I 05 Electricity transmission December and distribution World Bank (WB) 19,600,000 USD 2033 Constant 0.50% 0.49% 5,758,220 6,147,094 systems 17 December Ministry of Finance 8,988,290 USD 2022 Constant 0.50% 0.49% 1,197,016 1,503,356 Within 4-20 Constant or years from floating/ the moment set upon the of loan use of loan by Caucasus Transmission European Investment Bank (EIB) 10,000,000 EUR usage bLP Network I 33 “High Voltage Electrical Networks” CJSC Notes forming part of the financial statements For the year ended 31 December 2018 (continued) Other loans include: Contract As of As of amount in Date of Contract Effective int. December December Financing institution currency______Currency maturity Interest rate .r ■ i 2017 int. rate_______ rate__________ 31, 2018_________ 31, •' Project financed Iran-Armenia 400 KV 15 third power transmission Export Development September line and related bank of Iran (EDBI) 83,083,000 EUR 2026 Variable 4.00% 5.70% 10,794,956 7,215,567 substation Iran-Armenia 400 KV third power transmission SUNIR International 15 March line and related FZE 24,817,000 EUR 2021 Variable 3.00% 4.33% 2,765,443 2,307,474 substation Armenia renewable 21 resources and energy November efficiency Fund 2021- 01 (R2e2) 77,500,000 AMD July, 2024 0.00% 12.00% 41,701 51,970 Energy saving program As of December 31,2018 the Company has AMD 160,195 min of undrawn borrowing facilities (December 31,2017: AMD 165,360 min). 34 “High Voltage Electrical Networks” CJSC Notes forming part of the financial statements For the year ended 31 December 2018 (continued) The movement of loans in thousand drams is presented below: Contract As of As of amount January Loans Interest Interest December Lender in currency Currency \ 2018 received Repaid accrued repaid 31, 2018 Lender IBRD 39,000,000 USD 12,956,923 2,137,714 - 602,103 (495,627) (9,000) 15,192,113 Ministry of Finance Co-financing IBRD AMD 3,233,607 93,436 _ 149,427 (123,283) 3,353,187 EDBI 83,083,000 EUR 7,215,566 5,981,838 (1,833,662) 539,862 (476,627) (632,021) 10,794,956 World Bank 19,600,000 USD 6,147,094 - (375,715) 29,430 (38,381) (4,208) 5,758,220 KFW 14,060,000 EUR 5,928,391 - (260,881) 41,036 (51,168) (268,938) 5,388,440 KFW- Tranche 1 7,300,000 EUR 3,803,564 408,730 - 27,639 (28,479) (170,721) 4,040,733 KFW- Tranche 1 co-financing AMD 2,059 - (2,059) - - - KFW- Tranche 2 7,300,000 EUR 2,024,999 - (338,614) 125,840 (58,450) (91,201) 1,662,574 Ministry of Finance 8,988,290 USD ',503,356 - (290,820) 7,220 (22,234) (506) 1,197,016 ADB 15,192,292 SDR 3,728,776 1,621,348 - 134,930 (117,609) (112,350) 5,255,095 Ministry of Finance Co-financing ADB AMD 844,953 347,524 (581) 31,817 (28,579) 1,195,134 IBRD 37,500,000 USD 3,398,353 2,870,263 (47,623) 259,011 (130,706) 2,838 6,352,136 Ministry of Finance Co-financing IBRD AMD 300,371 282,600 (1,105) 21,136 (10,805) 592,197 SUNIR International FZE 24,817,000 EUR 2,307,474 1,121,906 (562,309) 80,634 - (182,262) 2,765,443 IBRD 28,194,486 USD ',434,244 1,736,022 (22,552) 92,477 (84,544) 1,604 3,157,251 Ministry of Finance Co-financing IBRD AMD 476,300 425,000 (1,045) 24,106 (17,587) 906,774 KfW 10,200,000 EUR 549,719 - - 22,067 (16,831) (25,136) 529,819 Ministry of Finance Co-financing KFW AMD 218,581 _ _ 1,640 (1,639) 218,582 R2e2-Zangezur and Goris branches 27,600,000 AMD 19,403 _ (3,067) 217 _ 16,553 R2e2 - Eastern branch 26,900,000 AMD 17,145 - (4,483) 182 - 12,844 R2e2 - Southern branch 23,000,000 AMD 15,422 - (3,286) 168 - 12,304 KfW 83,000,000 EUR - - - 115,713 (115,500) (213) - KfW 75,000,000 EUR - 104,574 (104,367) (207) - Total 56,126,300 17,026,381 (3,747,802) 2,411,229 (1,922,416) (1,492,321) 68,401,371 35 “High Voltage Electrical Networks” CJSC Notes forming part of the financial statements For the year ended 31 December 2018 (continued) The movement of loans in respective foreign currency is presented below: Contract amount As of January Loans Interest Interest As of December Lender in currency Currency 1,2018 received Repaid accrued repaid 31. 2018 IBRD 39,000,000 USD 26,764,973 4,419,491 - 1,239,350 (1,018,929) 31,404,885 EDBI 83,083,000 EUR 12,438,488 10,526,921 (3,595,366) 949,185 (821,430) 19,497,798 World Bank 19,600,000 USD 12,697,985 - (776,190) 60,793 (79,292) 11,903,296 KFW 14,060,000 EUR 10,219,602 - (468,684) 73,575 (91,918) 9,732,575 KFW-Tranche 1 7,300,000 EUR 6,556,738 743,276 - 49,560 (51,223) 7,298,351 KFW-Tranche 2 7,300,000 EUR 3,490,777 - (608,333) 225,399 (104,910) 3,002,933 Ministry of Finance 8,988,290 USD 3,105,464 - (600,000) 14,941 (45,954) 2,474,451 ADB 15,192,292 SDR 5,408,568 2,399,964 - 198,278 (172,622) 7,834,188 IBRD 37,500,000 USD 7,019,938 5,945,953 (100,000) 535,793 (270,654) 13,131,030 SUNIR FZE 24,817,000 EUR 3,977,717 1,949,600 (1,073,941) 141,554 - 4,994,930 IBRD 28,194,486 USD 2,962,703 3,594,470 (47,114) 190,318 (173,759) 6,526,618 KFW 10,200,000 EUR 947,627 - - 39,568 (30,238) 956,957 KFW 83,000,000 EUR - - - 207,500 (207,500) - KFW 75,000,000 EUR - - - 187,500 (187,500) - Total 95,590,580 29,579,675 (7,269,628) 4,113,314 (3,255,929) 118,758,012 36 “High Voltage Electrical Networks” CJSC Notes forming part of the financial statements For the year ended 31 December 2018 (continued) 23. Grants related to assets 2018 2017 AMD'000 AMD'000 Balance at the beginning of year 519,046 521,631 Received during the year - 379,663 Reclassified from grants related to income - (382,248) Recognized in profit or loss (904) - Balance at the end of year 518,142 519,046 Balance of grants related to assets includes amounts provided by the following counterparties: 31.12.18 31.12.17 AMD'000 AMD'000 Neighborhood Investment Facility (NIF) 233,846 233,846 KFW 131,144 131,144 IBRD 145,338 145,338 Other 7,814 8,718 518,142 519,046 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'000 AMD'000 Payables on acquisition of property and equipment 7,406,213 5,783,324 Payables to employees 132,660 146,181 Other payables 37,383 20,445 Total financial liabilities measured at amortized cost except for loans and borrowings 7,576,256 5,949,950 Prepayments received 9,159,899 9,139,271 Taxes and duties payable 1,040,939 1,526,288 Other 25 50 17,777,119 16,615,559 37 “High Voltage Electrical Networks” CJSC Notes forming part of the financial statements For the year ended 31 December 2018 (continued) Payables on acquisition of property and equipment include balances of the following counterparties: 31.12.18 31.12.17 AMD'000 AMD'000 SUNIR 4,258,225 2,821,835 Liaoning-Efacec Electrical EquipmentCo. LTD 1,178,772 524,802 Xian Electric Engineering Co LTD China 938,584 212,627 KASKAD-ENERGO LLC 799,983 104,372 EFACECENGENHARIAESISTEMASS.A. 116,370 - GAM ARAK INDUSTRIAL COMPANY 106,877 - KALPATARU POWER TRANSMISSION LTD - 2,052,897 Other 7,402 66,791 7,406,213 5,783,324 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 2018. 38 “High Voltage Electrical Networks” CJSC Notes forming part of the financial statements For the year ended 31 December 2018 (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 483.75 drams for 1 US dollar and 553.65 drams for 1 euro as of December 31,2018 (December 31, 2017: 484.10 drams for 1 US dollar, 580.10 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 2018 (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 2018 (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 41 “High Voltage Electrical Networks” CJSC Notes forming part of the financial statements For the year ended 31 December 2018 (continued) financing transactions are received, the associated costs are allocated to and reclassified against such 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. 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 2018 (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 43 “High Voltage Electrical Networks” CJSC Notes forming part of the financial statements For the year ended 31 December 2018 (continued) 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. 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 2018 (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. Performance obligations and timing of revenue recognition 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. 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 ot 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 are set by Government decision. Allocating amounts to performance obligations For most contracts, there is a fixed unit price for each product sold, with reductions given for bulk orders placed at a specific time. 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). 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. Control passes when electricity is transferred to customer. There is limited judgement needed in identifying the point control passes. 45 “High Voltage Electrical Networks” CJSC Notes forming part of the financial statements For the year ended 31 December 2018 (continued) Rental income Rental income is recognized on a straight-line basis over the term of the relevant lease. 4 46 “High Voltage Electrical Networks” CJSC Notes forming part of the financial statements For the year ended 31 December 2018 (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 months) trade Trade and other 1,550 receivables Level 3 N/A receivables approximates their fair values. Long term receivables were discounted at 5.26% Current The carrying amount of short term (less than 12 Trade and other 7,576 months) trade Level 3 N/A payables 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 68,401 Level 3 N/A 0.5-4.5% for USD denominated loans; 0.72-6.69% for EUR denominated loans; and 3.12% for SDR denominated loans. 47