ru

Consolidated IFRS Financial statements

Consolidated Statement of Financial Position
Currency — RUB millions
Notes 31 December 2015 31 December 2014
Assets
Current assets
Cash and cash equivalents 7 114 198 53 167
Short-term financial assets 8 65 157 78 844
Trade and other receivables 9 95 241 103 014
Inventories 10 102 378 102 658
Current income tax prepayments 13 903 17 315
Other current assets 11 119 867 115 927
Total current assets 510 744 470 925
Non-current assets
Property, plant and equipment 12 1 587 653 1 293 800
Goodwill and other intangible assets 13 75 090 71 240
Investments in associates and joint ventures 14 169 611 150 727
Long-term trade and other receivables 8 867 265
Long-term financial assets 16 50 884 37 631
Deferred income tax assets 17 22 099 31 460
Other non-current assets 18 60 518 41 676
Total non-current assets 1 974 722 1 626 799
Total assets 2 485 466 2 097 724
Liabilities and shareholders’ equity
Current liabilities
Short-term debt and current portion of long-term debt 19 147 319 61 121
Trade and other payables 20 104 830 83 817
Other current liabilities 21 32 870 40 921
Current income tax payable 1 096 520
Other taxes payable 22 49 011 45 788
Provisions for liabilities and charges 23 13 938 18 564
Total current liabilities 349 064 250 731
Non-current liabilities
Long-term debt 24 670 779 502 306
Other non-current financial liabilities 25 115 375 105 944
Deferred income tax liabilities 17 68 752 81 032
Provisions for liabilities and charges 23 31 065 25 876
Other non-current liabilities 1 942 2 050
Total non-current liabilities 887 913 717 208
Equity
Share capital 26 98 98
Treasury shares 26 (1 170) (1 170)
Additional paid-in capital 44 326 50 074
Retained earnings 1 078 626 1 005 642
Other reserves 35 189 11 104
Equity attributable to Gazprom Neft shareholders 1 157 069 1 065 748
Non-controlling interest 37 91 420 64 037
Total equity 1 248 489 1 129 785
Total liabilities and equity 2 485 466 2 097 724
A. V. Dyukov sign

A. V. Dyukov

Chief Executive Officer

Gazprom neft PJSC

A. V. Yankevich sign

A. V. Yankevich

Chief Financial Officer

Gazprom neft PJSC

The accompanying notes are an integral part of these Consolidated Financial Statements
Consolidated Statement of Profit and Loss and Other Comprehensive Income
Currency — RUB millions (except per share data)
Notes Year ended
31 December
2015
Year ended
31 December
2014
Sales 1 655 775 1 690 557
Less export duties and sales related excise tax (187 832) (282 319)
Total revenue from sales 39 1 467 943 1 408 238
Costs and other deductions
Purchases of oil, gas and petroleum products (345 909) (382 505)
Production and manufacturing expenses (214 267) (171 711)
Selling, general and administrative expenses (100 176) (86 318)
Transportation expenses (133 320) (116 125)
Depreciation, depletion and amortisation (98 501) (85 951)
Taxes other than income tax 22 (353 145) (343 576)
Exploration expenses (922) (936)
Total operating expenses (1 246 240) (1 187 122)
Other loss, net 28 (14 088) (8 471)
Operating profit 207 615 212 645
Share of profit / (loss) of associates and joint ventures 14 24 956 (6 306)
Net foreign exchange loss 29 (67 910) (52 265)
Finance income 30 14 732 7 075
Finance expense 31 (33 943) (15 279)
Total other expenses (62 165) (66 775)
Profit before income tax 145 450 145 870
Current income tax expense (38 026) (17 518)
Deferred income tax benefit / (expense) 8 774 (1 696)
Total income tax expense 32 (29 252) (19 214)
Profit for the year 116 198 126 656
Other comprehensive income / (loss)
Currency translation differences 43 739 79 669
Cash flow hedge, net of tax 33 (9 333) (55 265)
Other comprehensive (loss) / income (199) 139
Other comprehensive income for the period 34 207 24 543
Total comprehensive income for the period 150 405 151 199
Profit attributable to:
— Gazprom Neft shareholders 109 661 122 093
— Non-controlling interest 6 537 4 563
Profit for the year 116 198 126 656
Total comprehensive income attributable to:
— Gazprom Neft shareholders 133 746 129 110
— Non-controlling interest 16 659 22 089
Total comprehensive income for the period 150 405 151 199
Earnings per share attributable to Gazprom Neft shareholders
Basic earnings (RUB per share) 23.24 25.88
Diluted earnings (RUB per share) 23.24 25.88
Weighted-average number of common shares outstanding Basic and Diluted (millions) 4 718 4 718
The accompanying notes are an integral part of these Consolidated Financial Statements
Consolidated Statement of Changes in Shareholders’ Equity
Currency — RUB millions
Attributable to Gazprom Neft shareholders
Share
capital
Treasury
shares
Additional
paid-in capital
Retained
earnings
Other
reserves
Total Non-controlling
interest
Total
equity
Balance as of 1 January 2015 98 (1 170) 50 074 1 005 642 11 104 1 065 748 64 037 1 129 785
Profit for the period - - - 109 661 - 109 661 6 537 116 198
Other comprehensive income / (loss)
Currency translation differences - - - - 33 617 33 617 10 122 43 739
Cash flow hedge, net of tax - - - - (9 333) (9 333) - (9 333)
Other comprehensive (loss) / income - - - - (199) (199) - (199)
Total comprehensive income for the period - - - 109 661 24 085 133 746 16 659 150 405
Transactions with owners, recorded in equity
Dividends to equity holders - - - (36 677) - (36 677) (1 842) (38 519)
Transaction under common control (Note 6) - - (5 748) - - (5 748) 12 566 6 818
Acquisition of non-controlling interest - - - - - - - -
Total transactions with owners - - (5 748) (36 677) - (42 425) 10 724 (31 701)
Balance as of 31 December 2015 98 (1 170) 44 326 1 078 626 35 189 1 157 069 91 420 1 248 489
Attributable to Gazprom Neft shareholders
Share
capital
Treasury
shares
Additional
paid-in capital
Retained
earnings
Other
reserves
Total Non-controlling
vinterest
Total
equity
Balance as of 1 January 2014 98 (1 170) 19 293 930 304 4 087 952 612 45 409 998 021
Profit for the period 122 093 122 093 4 563 126 656
Other comprehensive income / (loss)
Currency translation differences 62 143 62 143 17 526 79 669
Cash flow hedge, net of tax (55 265) (55 265) (55 265)
Other comprehensive income 139 139 139
Total comprehensive income for the period 122 093 7 017 129 110 22 089 151 199
Transactions with owners, recorded in equity
Dividends to equity holders (46 755) (46 755) (2 824) (49 579)
Transaction under common control 33 700 33 700 33 700
Acquisition of non-controlling interest (2 919) (2 919) (637) (3 556)
Total transactions with owners 30 781 (46 755) (15 974) (3 461) (19 435)
Balance as of 31 December 2014 98 (1 170) 50 074 1 005 642 11 104 1 065 748 64 037 1 129 785
The accompanying notes are an integral part of these Consolidated Financial Statements
Consolidated Statement of Cash Flows
Currency — RUB millions
Notes Year ended
31 December 2015
Year ended
31 December 2014
Cash flows from operating activities
Profit before income tax 145 450 145 870
Adjustments for:
Share of (profit) / loss of associates and joint ventures 14 (24 956) 6 306
Loss on foreign exchange differences 67 910 52 265
Finance income 30 (14 732) (7 075)
Finance expense 31 33 943 15 279
Depreciation, depletion and amortisation 12, 13 98 501 85 951
Impairment of trade and other receivables, net 9, 34 2 090 427
Write-off payables 28 (16 107) -
Impairment of Property, plant and equipment 12 15 582 -
Other non-cash items 4 488 5 398
Operating cash flow before changes in working capital 312 169 304 421
Changes in working capital:
Accounts receivable 16 019 49 382
Inventories 6 128 5 072
Other assets 7 998 4 152
Accounts payable (2 245) (10 958)
Taxes payable 2 905) (4 942)
Other liabilities (6 653) (18 799)
Total effect of working capital changes 18 342 23 907
Income taxes paid (19 522) (30 122)
Interest paid (28 229) (16 624)
Dividends received 2 415 2 383
Net cash provided by operating activities 285 175 283 965
Cash flows from investing activities
Acquisition of subsidiaries and joint operations, net of cash acquired 303 (12 493)
Increase in cash due to acquisition of a subsidiary under common control 6 2 229 -
Proceeds from disposal of subsidiaries, net of cash disposed (9) -
Acquisition of associates and joint ventures (106) (45 355)
Bank deposits placement (128 298) (129 917)
Repayment of bank deposits 174 043 114 040
Acquisition of other investments (4 476) (2 480)
Short-term loans issued (26 169) (2 100)
Repayment of short-term loans issued 27 883 1 867
Long-term loans issued (25 578) (23 142)
Repayment of long-term loans issued 5 737 1 374
Capital expenditures (349 036) (271 330)
Proceeds from sale of property, plant and equipment 982 1 743
Interest received 7 984 3 001
Net cash used in investing activities (314 511) (364 792)
Cash flows from financing activities
Proceeds from short-term borrowings 35 171 26 750
Repayment of short-term borrowings (13 691) (24 601)
Proceeds from long-term borrowings 153 748 109 078
Repayment of long-term borrowings (53 663) (44 067)
Transaction costs directly attributable to the borrowings received (350) (2 342)
Dividends paid to Gazprom Neft shareholders (36 346) (46 755)
Dividends paid to non-controlling interest (2 676) (3 372)
Acquisition of non-controlling interest in subsidiaries - (4 118)
Net cash provided by financing activities 82 193 10 573
Increase / (decrease) in cash and cash equivalents 52 857 (70 254)
Effect of foreign exchange on cash and cash equivalents 8 174 32 344
Cash and cash equivalents as of the beginning of the period 53 167 91 077
Cash and cash equivalents as of the end of the period 114 198 53 167

Notes to the Consolidated Financial Statements

1. General

Description of Business

Gazprom neft PJSC (the “Company”) and its subsidiaries (together referred to as the “Group”) is a vertically integrated oil company operating in the Russian Federation, CIS and internationally. The Group’s principal activities include exploration, production and development of crude oil and gas, production of refined petroleum products and distribution and marketing operations through its retail outlets.

The Company was incorporated in 1995 and is domiciled in the Russian Federation. The Company is a public joint stock company and was set up in accordance with Russian regulations. PJSC Gazprom (“Gazprom”, a state controlled entity), the Group’s ultimate parent company, owns 95.7% of the shares in the Company.

2. Summary of Significant Accounting Policies

Basis of Presentation

The Group maintains its books and records in accordance with accounting and taxation principles and practices mandated by legislation in the countries in which it operates (primarily the Russian Federation). The accompanying Consolidated Financial Statements were primarily derived from the Group’s statutory books and records with adjustments and reclassifications made to present them in accordance with International Financial Reporting Standards (“IFRS”).

Subsequent events occurring after 31 December 2015 were evaluated through 1 March 2016, the date these Consolidated Financial Statements were authorised for issue.

Basis of Measurement

TheConsolidated Financial Statements are prepared on the historical cost basis except that derivative financial instruments, financial investments classified as available-for-sale, and obligations under the Stock Appreciation Rights plan (SARs) are stated at fair value.

Foreign Currency Translation

The functional currency of each of the Group’s consolidated entities is the currency of the primary economic environment in which the entity operates. In accordance with IAS 21 the Group has analysed several factors that influence the choice of functional currency and, based on this analysis, has determined the functional currency for each entity of the Group. For the majority of the entities the functional currency is the local currency of the entity.

Monetary assets and liabilities have been translated into the functional currency at the exchange rate as of reporting date. Non-monetary assets and liabilities have been translated at historical rates. Revenues, expenses and cash flows are translated into functional currency at average rates for the period or exchange rates prevailing on the transaction dates where practicable. Gains and losses resulting from the re-measurement into functional currency are included in profit and loss, except when deferred in other comprehensive income as qualifying cash flow hedges.

The presentation currency for the Group is the Russian Rouble. Gains and losses resulting from the re-measurement into presentation currency are included in a separate line of equity in the Consolidated Statement of Financial Position.

The translation of local currency denominated assets and liabilities into functional currency for the purpose of these Consolidated Financial Statements does not indicate that the Group could realise or settle, in functional currency, the reported values of these assets and liabilities. Likewise, it does not indicate that the Group could return or distribute the reported functional currency value of capital to its shareholders.

Principles of Consolidation

The consolidated financial statements include the accounts of subsidiaries in which the Group has control. Control implies rights or exposure to variable returns from the involvement with the investee and the ability to affect those returns through the power over the investee. An investor has power over an investee when the investor has existing rights that give it the current ability to direct the relevant activities, i.e. the activities that significantly affect the investee’s returns. An investor is exposed, or has the rights to variable returns from its involvement with investee when the investor’s return from its involvement have the potential to vary as a result of the investee’s performance. The financial statements of subsidiaries are included in the Consolidated Financial Statements of the Group from the date when control commences until the date when control ceases.

In assessing control, the Group takes into consideration potential voting rights that are substantive. Investments in entities that the Group does not control, but where it has the ability to exercise significant influence over operating and financial policies, are accounted for under the equity method except for investments that meet criteria of joint operations, which are accounted for on the basis of the Group’s interest in the assets, liabilities, expenses and revenues of the joint operation. All other investments are classified either as held-to-maturity or as available for sale.

Business Combinations

The Group accounts for its business combinations according to IFRS 3 Business Combinations. The Group applies the acquisition method of accounting and recognises assets acquired and liabilities assumed in the acquiree at the acquisition date, measured at their fair values as of that date. Determining the fair value of assets acquired and liabilities assumed requires Management’s judgment and often involves the use of significant estimates and assumptions. Non-controlling interest is measured at fair value (if shares of acquired company have public market price) or at the non-controlling interest’s proportionate share of the acquiree’s net identifiable assets (if shares of acquired company do not have public market price).

Goodwill

Goodwill is measured by deducting the net assets of the acquiree from the aggregate of the consideration transferred for the acquiree, the amount of non-controlling interest in the acquiree and fair value of an interest in the acquiree held immediately before the acquisition date. Any negative amount (“bargain purchase”) is recognised in profit or loss, after Management identified all assets acquired and all liabilities and contingent liabilities assumed and reviewed the appropriateness of their measurement.

The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in profit or loss. Transaction costs, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination, are expensed as incurred.

Non-Controlling Interest

Ownership interests in the Group’s subsidiaries held by parties other than the Group entities are presented separately in equity in the Consolidated Statement of Financial Position. The amount of consolidated net income attributable to the parent and the non-controlling interest are both presented on the face of the Consolidated Statement of Profit and Loss and Other Comprehensive Income.

Changes in Ownership Interests in Subsidiaries without Change of Control

Transactions with non-controlling interests that do not result in loss of control are accounted for as equity transactions — that is, as transactions with the owners in their capacity as owners. The difference between fair value of any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity.

Disposal of Subsidiaries<

When the Group ceases to have control any retained interest in the entity is remeasured to its fair value at the date when control is lost, with the change in carrying amount of the investment to the entity recognised in profit or loss. The fair value is the initial carrying amount for the purposes of subsequent accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassified to profit or loss.

Acquisitions from Entities under Common Control

Business combinations involving entities under common control are accounted for by the Group using the predecessor accounting approach from the acquisition date. The Group uses predecessor carrying values for assets and liabilities, which are generally the carrying amounts of the assets and liabilities of the acquired entity from the consolidated financial statements of the highest entity that has common control for which consolidated financial statements are prepared. These amounts include any goodwill recorded at the consolidated level in respect of the acquired entity.

Investments in Associates

An associate is an entity over which the investor has significant influence. Investments in associates are accounted for using the equity method and are recognised initially at cost. The consolidated financial statements include the Group’s share of the profit or loss and other comprehensive income of equity accounted investees, after adjustments to align accounting policies with those of the Group, from the date that significant influence commences until the date that significant influence ceases.

Joint Operations and Joint Ventures

A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement.

A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement.

Where the Group acts as a joint operator, the Group recognises in relation to its interest in a joint operation:

  • Its assets, including its share of any assets held jointly;
  • Its liabilities, including its share of any liabilities incurred jointly;
  • Its revenue from the sale of its share of the output arising from the joint operation;
  • Its share of the revenue from the sale of the output by the joint operation; and
  • Its expenses, including its share of any expenses incurred jointly.

With regards to joint arrangements, where the Group acts as a joint venturer, the Group recognises its interest in a joint venture as an investment and accounts for that investment using the equity method.

Transactions Eliminated on Consolidation

Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with equity accounted investees are eliminated against the investment to the extent of the Group’s interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

Cash and Cash Equivalents

Cash represents cash on hand and in bank accounts, that can be effectively withdrawn at any time without prior notice. Cash equivalents include all highly liquid short-term investments that can be converted to a certain cash amount and mature within three months or less from the date of purchase. They are initially recognised based on the cost of acquisition which approximates fair value.

Non-Derivative Financial Assets

The Group has the following non-derivative financial assets: financial assets at fair value through profit or loss, held-to-maturity financial assets, loans and receivables and available-for-sale financial assets.

The Group initially recognises loans and receivables on the date that they are originated. All other financial assets (including assets designated as at fair value through profit or loss) are recognised initially on the trade date, which is the date that the Group becomes a party to the contractual provisions of the instrument.

The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in such transferred financial assets that is created or retained by the Group is recognised as a separate asset or liability.

Financial Assets at Fair Value through Profit or Loss

A financial asset is classified at fair value through profit or loss category if it is classified as held for trading or is designated as such upon initial recognition. Financial assets are designated at fair value through profit or loss if the Group manages such investments and makes purchase and sale decisions based on their fair value in accordance with the Group’s documented risk management or investment strategy. Financial assets at fair value through profit or loss are measured at fair value, and changes therein are recognised in profit and loss.

Held-to-Maturity Financial Assets

If the Group has the positive intent and ability to hold to maturity debt securities that are quoted in an active market, then such financial assets are classified to held-to-maturity category. Held-to-maturity financial assets are recognised initially at fair value. Subsequent to initial recognition held-to-maturity financial assets are measured at amortised cost using the effective interest method, less any impairment losses. Any sale or reclassification of a more than insignificant amount of held-to-maturity investments not close to their maturity would result in the reclassification of all held-to-maturity investments as available-for-sale, and prevent the Group from classifying investment securities as held-to-maturity for the current and the following two financial years.

Loans and Receivables

Loans and receivables is a category of financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognised initially at fair value. Subsequent to initial recognition loans and receivables are measured at amortised cost using the effective interest method, less any impairment losses. Allowances are provided for doubtful debts based on estimates of uncollectible amounts. These estimates are based on the aging of the receivable, the past history of settlements with the debtor and current economic conditions. Estimates of allowances require the exercise of judgment and the use of assumptions.

Available-for-Sale Financial Assets

Available-for-sale financial assets are non-derivative financial assets that are designated as available-for-sale or are not classified in any of the above categories of financial assets. Such assets are recognised initially at fair value. Subsequent to initial recognition, they are measured at fair value and changes therein, other than impairment losses and foreign currency differences on available-for-sale debt instruments, are recognised in other comprehensive income and presented within equity in the other reserves line. When an investment is derecognised or impaired, the cumulative gain or loss in equity is reclassified to profit and loss.

Non-Derivative Financial Liabilities

The Group initially recognises debt securities issued and liabilities on the date that they are originated. All other financial liabilities are recognised initially on the trade date on which the Group becomes a party to the contractual provisions of the instrument. The Group derecognises a financial liability when its contractual obligations are discharged, cancelled or expired. The Group classifies non-derivative financial liabilities into the other financial liabilities category. Financial liabilities are recognised initially at fair value. Subsequent to initial recognition, these financial liabilities are measured at amortised cost using the effective interest method. Other financial liabilities comprise loans and borrowings, bank overdrafts, and trade and other payables.

Derivative Financial Instruments

Derivative instruments are recorded at fair value on the Consolidated Statement of Financial Position in either financial assets or liabilities. Realised and unrealised gains and losses are presented in profit and loss on a net basis, except for those derivatives, where hedge accounting is applied.

The estimated fair values of derivative financial instruments are determined with reference to various market information and other valuation methodologies as considered appropriate, however significant judgment is required in interpreting market data to develop these estimates. Accordingly, the estimates are not necessarily indicative of the amounts that the Group could realise in a current market situation.

Hedge Accounting

The Group applies hedge accounting policy for those derivatives that are designated as a hedging instrument (currency exchange forwards and interest-rate swaps).

The Group has designated only cash flow hedges — hedges against the exposure to the variability of cash flow currency exchange rates on a highly probable forecast transaction.

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income. Changes in the fair value of certain derivative instruments that do not qualify for hedge accounting are recognised immediately in profit and loss.

When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity until the forecast transaction occurs. Any ineffective portion is directly recognised in profit and loss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss on any associated hedging instrument that was reported in equity is immediately transferred to profit and loss.

The fair value of the hedge instrument is determined at the end of each reporting period with reference to the market value, which is typically determined by the credit institutions.

Inventories

Inventories, consisting primarily of crude oil, refined oil products and materials and supplies are stated at the lower of cost and net realisable value. The cost of inventories is assigned on a weighted average basis, and includes expenditure incurred in acquiring the inventories, production or conversion costs, and other costs incurred in bringing them to their existing location and condition. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses.

Intangible Assets

Goodwill that arises on the acquisition of subsidiaries is included in intangible assets. Subsequently goodwill is measured at cost less accumulated impairment losses.

Other intangible assets that are acquired by the Group, which have finite useful lives, are measured at cost less accumulated amortisation and accumulated impairment loss.

Intangible assets that have limited useful lives are amortised on a straight-line basis over their useful lives. Useful lives with respect to intangible assets are determined as follows:

Intangible Asset Group Average useful life
Licenses and software 1–5 years
Land rights 25 years

Property, Plant and Equipment

Property, plant and equipment is stated at cost, net of accumulated depreciation and any impairment. The cost of maintenance, repairs and replacement of minor items of property, plant are expensed when incurred; renewals and improvements of assets are capitalised. Costs of turnarounds and preventive maintenance performed with respect to oil refining assets are expensed when incurred if turnaround does not involve replacement of assets or installation of new assets. Upon sale or retirement of property, plant and equipment, the cost and related accumulated depreciation and impairment losses are eliminated from the accounts. Any resulting gains or losses are recorded in profit and loss.

Oil and Gas Properties

Exploration and Evaluation Assets

Acquisition costs include amounts paid for the acquisition of exploration and development licenses.

Exploration and evaluation assets include:

  • Costs of topographical, geological, and geophysical studies and rights of access to properties to conduct those studies, that are directly attributable to exploration activity;
  • Costs of carrying and retaining undeveloped properties;
  • Bottom hole contribution;
  • Dry hole contribution;
  • Costs of drilling and equipping exploratory wells.

The costs incurred in finding, acquiring, and developing reserves are capitalised on a ‘field by field’ basis.

Costs of topographical, geological, and geophysical studies, rights of access to properties to conduct those studies are considered as part of oil and gas assets until it is determined that the reserves are proved and are commercially viable. On discovery of a commercially-viable mineral reserve, the capitalised costs are allocated to the discovery.

If no reserves are found, the exploration asset is tested for impairment. If extractable hydrocarbons are found then it should be subject to further appraisal activity, which may include drilling of further wells. If they are likely to be developed commercially (including dry holes), the costs continue to be carried as oil and gas asset as long as some sufficient/continued progress is being made in assessing the commerciality of the hydrocarbons. All such carried costs are subject to technical, commercial and Management review as well as review for impairment at least once a year to confirm the continued intent to develop or otherwise extract value from the discovery. When this is no longer the case, the costs are written off.

Other exploration costs are charged to expense when incurred.

An exploration and evaluation asset is reclassified to Property, Plant and Equipment and Intangible assets when the technical feasibility and commercial viability of extracting a mineral resource are demonstrable. Exploration and evaluation assets are assessed for impairment, and any impairment loss is recognised, before reclassification.

Development Costs

Development costs are incurred to obtain access to proved reserves and to provide facilities for extracting, treating, gathering and storing oil and gas. They include the costs of development wells to produce proved reserves as well as costs of production facilities such as lease flow lines, separators, treaters, heaters, storage tanks, improved recovery systems, and nearby gas processing facilities.

Expenditures for the construction, installation, or completion of infrastructure facilities such as platforms, pipelines and the drilling of development wells are capitalised within oil and gas assets.

Depreciation, Depletion and Amortisation

<

Depletion of acquisition and development costs of proved oil and gas properties is calculated using the unit-of-production method based on proved reserves and proved developed reserves. Acquisition costs of unproved properties are not amortised.

Depreciation and amortisation with respect to operations other than oil and gas producing activities is calculated using the straight-line method based on estimated economic lives. Depreciation rates are applied to similar types of buildings and equipment having similar economic characteristics, as shown below:

Asset Group Average useful life
Buildings and constructions 8–35 years
Machinery and equipment 8–20 years
Vehicles and other equipment 3–10 years

Catalysts and reagents mainly used in the refining operations are treated as other assets.

Capitalisation of Borrowing Costs

Borrowing costs directly attributable to the acquisition, construction or production of assets (including oil and gas properties) that necessarily take a substantial time to get ready for intended use or sale (qualifying assets) are capitalised as part of the costs of those assets. Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs are included in the borrowing costs eligible for capitalisation.

Impairment of Non-Current Assets

The carrying amounts of the Group’s non-current assets, other than assets arising from goodwill, inventories, long-term financial assets and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment.

Goodwill is tested for impairment annually or more frequently if impairment indicators arise. An impairment loss recognised for goodwill is not reversed in a subsequent period.

If any indication of impairment exists, the group makes an estimate of the asset’s recoverable amount. Individual assets are grouped for impairment assessment purposes at the lowest level at which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets (cash-generated units — CGUs). The carrying amount of the CGUs (including goodwill) is compared with their recoverable amount. The recoverable amount of CGUs to which goodwill is allocated is the higher of value in use and fair value less costs of disposal. Where the recoverable amount of the CGUs to which goodwill has been allocated is less than the carrying amount, an impairment loss is recognised.

An impairment loss is recognised in profit and loss.

Impairment of Non-Derivative Financial Assets

Financial assets are assessed at each reporting date to determine whether there is any objective evidence of impairment. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably.

The Group considers evidence of impairment for loans and receivables and held-to-maturity investments at both a specific asset and collective level. All individually significant loans and receivables and held-to-maturity investments are assessed for specific impairment. Loans and receivables and held-to-maturity investments that are not individually significant are collectively assessed for impairment by grouping together loans and receivables and held-to-maturity investments with similar risk characteristics.

An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate. Losses are recognised in profit or loss and reflected in an allowance account against loans and receivables or held-to-maturity investments.

Decommissioning Obligations

The Group has decommissioning obligations associated with its core activities. The nature of the assets and potential obligations is as follows:

  • Exploration and Production: the Group’s activities in exploration, development and production of oil and gas in the deposits are related to the use of such assets as wells, well equipment, oil gathering and processing equipment, oil storage tanks and infield pipelines. Generally, licenses and other permissions for mineral resources extraction require certain actions to be taken by the Group in respect of liquidation of these assets after oil field closure. Such actions include well plugging and abandonment, dismantling equipment, soil recultivation, and other remediation measures. When an oil field is fully depleted, the Group will incur costs related to well retirement and associated environmental protection measures.
  • Refining, Marketing and Distribution: the Group’s oil refining operations are carried out at large manufacturing facilities that have been operated for several decades. The nature of these operations is such that the ultimate date of decommissioning of any sites or facilities is unclear. Current regulatory and licensing rules do not provide for liabilities related to the liquidation of such manufacturing facilities or of retail fuel outlets. Management therefore believes that there are no legal or contractual obligations related to decommissioning or other disposal of these assets.

Management makes provision for the future costs of decommissioning oil and gas production facilities, wells, pipelines, and related support equipment and for site restoration based on the best estimates of future costs and economic lives of the oil and gas assets. Estimating future asset retirement obligations is complex and requires Management to make estimates and judgments with respect to removal obligations that will occur many years in the future.

Changes in the measurement of existing obligations can result from changes in estimated timing, future costs or discount rates used in valuation.

The amount recognised as a provision is the best estimate of the expenditures required to settle the present obligation at the reporting date based on current legislation in each jurisdiction where the Group’s operating assets are located, and is also subject to change because of revisions and changes in laws and regulations and their interpretation. As a result of the subjectivity of these provisions there is uncertainty regarding both the amount and estimated timing of such costs.

The estimated costs of dismantling and removing an item of property, plant and equipment are added to the cost of the item either when an item is acquired or as the item is used during a particular period for the purposes other than to produce inventories during that period. Changes in the measurement of an existing decommissioning obligation that result from changes in the estimated timing or amount of any cash outflows, or from changes in the discount rate are reflected in the cost of the related asset in the current period.

Income Taxes

Currently some Group companies including Gazprom neft PJSC exercise the option to pay taxes as a consolidated tax-payer and are subject to taxation on a consolidated basis. The majority of the Group companies do not exercise such an option and current income taxes are provided on the taxable profit of each subsidiary. Most subsidiaries are subject to the Russian Federation Tax Code, under which income taxes are payable at a rate of 20% after adjustments for certain items, that are either not deductible or not taxable for tax purposes. In some cases income tax rate could be set at lower level as a tax concession stipulated by regional legislation. Subsidiaries operating in countries other than the Russian Federation are subject to income tax at the applicable statutory rate in the country in which these entities operate.

Deferred income tax assets and liabilities are recognised in the accompanying Consolidated Financial Statements in the amounts determined by the Group using the balance sheet liability method in accordance with IAS 12 Income Taxes. This method takes into account future tax consequences attributable to temporary differences between the carrying amounts of existing assets and liabilities for the purpose of the Consolidated Financial Statements and their respective tax bases and in respect of operating loss and tax credit carry-forwards. Deferred income tax assets and liabilities are measured using the enacted tax rates that are expected to apply to taxable income in the years in which those temporary differences are expected to reverse and the assets recovered and liabilities settled. Deferred tax assets for deductible temporary differences and tax loss carry forwards are recorded only to the extent that it is probable that future taxable profit will be available against which the deductions can be utilised.

Mineral Extraction Tax and Excise Dutie

Mineral extraction tax and excise duties, which are charged by the government on the volumes of oil and gas extracted or refined by the Group, are included in operating expenses. Taxes charged on volumes of goods sold are recognised as a deduction from sales.

Common Stock

Common stock represents the authorised capital of the Company, as stated in its charter document. The common shareholders are allowed one vote per share. Dividends paid to shareholders are determined by the Board of Directors and approved at the annual shareholders’ meeting.

Treasury Stock

Common shares of the Company owned by the Group as of the reporting date are designated as treasury shares and are recorded at cost using the weighted-average method. Gains on resale of treasury shares are credited to additional paid-in capital whereas losses are charged to additional paid-in capital to the extent that previous net gains from resale are included therein or otherwise to retained earnings.

Earnings per Share

Basic and diluted earnings per common share are determined by dividing the available income to common shareholders by the weighted average number of shares outstanding during the period. There are no potentially dilutive securities.

Stock-Based Compensation

The Group accounts for its best estimate of the obligation under cash-settled stock-appreciation rights (“SAR”) granted to employees at fair value on the date of grant. The estimate of the final liability is re-measured to fair value at each reporting date and the compensation charge recognised in respect of SAR in profit and loss is adjusted accordingly. Expenses are recognised over the vesting period.

Retirement and Other Benefit Obligations

The Group and its subsidiaries do not have any substantial pension arrangements separate from the State pension scheme of the Russian Federation, which requires current contributions by the employer calculated as a percentage of current gross salary payments; such contributions are charged to expense as incurred. The Group has no significant post-retirement benefits or other significant compensated benefits requiring accrual.

Leases

Leases under the terms of which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset.

Other leases are operating leases and the leased assets are not recognised on the Group’s statement of financial position. The total lease payments are charged to profit or loss for the year on a straight-line basis over the lease term.

Recognition of Revenues

Revenues from the sales of crude oil, petroleum products, gas and all other products are recognised when deliveries are made to final customers, title passes to the customer, collection is reasonably assured, and the sales price to final customers is fixed or determinable. Specifically, domestic crude oil sales and petroleum product and materials sales are recognised when they are shipped to customers, which is generally when title passes. For export sales, title generally passes at the border of the Russian Federation and the Group is responsible for transportation, duties and taxes on those sales.

Revenue is recognised net of value added tax (VAT), excise taxes calculated on revenues based on the volumes of goods sold, customs duties and other similar compulsory payments.

Sales include revenue, export duties and sales related excise tax.

Buy / Sell Transactions

Purchases and sales under the same contract with a specific counterparty (buy-sell transaction) are eliminated under IFRS. The purpose of the buy-sell operation, i.e. purchase and sale of same type of products in different locations during the same reporting period from / to the same counterparty, is to optimise production capacities of the Group rather than generate profit. After elimination, any positive difference is treated as a decrease in crude oil transportation to the refinery costs and any negative difference is treated as an increase in crude oil transportation costs to the refinery.

Transportation Costs

Transportation expenses recognised in profit and loss represent expenses incurred to transport crude oil and oil products through the OJSC “AK “Transneft” pipeline network, costs incurred to transport crude oil and oil products by maritime vessel and railway and all other shipping and handling costs.

Other Comprehensive Income / Loss

All other comprehensive income / loss is presented by the items that are or may be reclassified subsequently to profit or loss, net of related deferred tax.

3. Critical Accounting Estimates, Assumptions and Judgments

Preparing these Consolidated Financial Statements in accordance with IFRS requires Management to make judgements on the basis of estimates and assumptions. These judgements affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the reporting date, and the reported amounts of revenues and expenses during the reporting period.

Management reviews the estimates and assumptions on a continuous basis, by reference to past experiences and other factors that can reasonably be used to assess the book values of assets and liabilities. Adjustments to accounting estimates are recognised in the period in which the estimate is revised if the change affects only that period or in the period of the revision and subsequent periods, if both periods are affected.

Actual results may differ from the judgements, estimates made by the management if different assumptions or circumstances apply.

Judgments and estimates that have the most significant effect on the amounts reported in these Consolidated Financial Statements and have a risk of causing a material adjustment to the carrying amount of assets and liabilities are described below.

Impairment of Non-Current Assets

The following are examples of impairment indicators, which are reviewed by the Management: changes in the Group’s business plans, changes in oil and commodity prices leading to sustained unprofitable performance, low plant utilisation, evidence of physical damage or, for oil and gas assets, significant downward revisions of estimated reserves or increases in estimated future development expenditure or decommissioning costs. In case any of such indicators exist the Group makes an assessment of recoverable amount.

The long-term business plans (models), which are approved by the Management, are the primary source of information for the determination of value in use. They contain forecasts for oil and gas production, refinery throughputs, sales volumes for various types of refined products, revenues, costs and capital expenditure.

As an initial step in the preparation of these plans, various market assumptions, such as oil prices, refining margins, refined product margins and inflation rates, are set by the Management. These market assumptions take into account long-term oil price forecasts by the research institutions, macroeconomic factors such as inflation rate and historical trends and variability.

In assessing value in use, the estimated future cash flows are adjusted for the risks specific to the asset group or CGU and are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money.

Estimation of Oil and Gas Reserves

Engineering estimates of oil and gas reserves are inherently uncertain and are subject to future revisions. The Group estimates its oil and gas reserves in accordance with rules promulgated by the US Securities and Exchange Commission (SEC) for proved reserves. Oil and gas reserves are determined with use of certain assumptions made by the Group, for future capital and operational expenditure, estimates of oil in place, recovery factors, number of wells and cost of drilling. Accounting measures such as depreciation, depletion and amortisation charges that are based on the estimates of proved reserves are subject to change based on future changes to estimates of oil and gas reserves.

Proved reserves are defined as the estimated quantities of oil and gas which geological and engineering data demonstrate recoverability in future years from known reservoirs under existing economic conditions with reasonable certainty. In some cases, substantial new investment in additional wells and related support facilities and equipment will be required to recover such proved reserves. Due to the inherent uncertainties and the limited nature of reservoir data, estimates of underground reserves are subject to change over time as additional information becomes available.

Oil and gas reserves have a direct impact on certain amounts reported in the Consolidated Financial Statements, most notably depreciation, depletion and amortisation as well as impairment expenses. Depreciation rates on oil and gas assets using the units-of-production method for each field are based on proved developed reserves for development costs, and total proved reserves for costs associated with the acquisition of proved properties. Moreover, estimated proved reserves are used to calculate future cash flows from oil and gas properties, which serve as an indicator in determining whether or not property impairment is present.

Useful Lives of Property, Plant and Equipment

Management assesses the useful life of an asset by considering the expected usage, estimated technical obsolescence, residual value, physical wear and tear and the operating environment in which the asset is located. Differences between such estimates and actual results may have a material impact on the amount of the carrying values of the property, plant and equipment and may result in adjustments to future depreciation rates and expenses for the period.

Contingencies

Certain conditions may exist as of the date of these Consolidated Financial Statements are issued that may result in a loss to the Group, but one that will only be realised when one or more future events occur or fail to occur. Management makes an assessment of such contingent liabilities that is based on assumptions and is a matter of judgement. In assessing loss contingencies relating to legal or tax proceedings that involve the Group or unasserted claims that may result in such proceedings, the Group, after consultation with legal and tax advisors, evaluates the perceived merits of any legal or tax proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.

If the assessment of a contingency indicates that it is probable that a loss will be incurred and the amount of the liability can be estimated, then the estimated liability is accrued in the Group’s Consolidated Financial Statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, is disclosed. If loss contingencies can not be reasonably estimated, Management recognises the loss when information becomes available that allows a reasonable estimation to be made. Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee is disclosed. However, in some instances in which disclosure is not otherwise required, the Group may disclose contingent liabilities of an unusual nature which, in the judgment of Management and its legal counsel, may be of interest to shareholders or others.

Joint Arrangements

Upon adopting of IFRS 11 the Group applied judgement when assessing whether its joint arrangements represent a joint operation or a joint venture. The Group determined the type of joint arrangement in which it is involved by considering its rights and obligations arising from the arrangement including the assessment of the structure and legal form of the arrangement, the terms agreed by the parties in the contractual arrangement and, when relevant, other facts and circumstances.

4. Application of New IFRS

The amendments to IAS 19 — Employee Benefitson contributions from employees or third parties to defined benefit plans became effective for the annual periods beginning on or after 1 July 2014. The amendment has no significant impact on Group’s Consolidated Financial Statements.

5. New Accounting Standards

Certain new standards and interpretations have been issued that are mandatory for the annual periods beginning on or after 1 January 2016 or later, and that the Group has not early adopted.

IFRS 9, Financial Instruments Part 1: Classification and Measurement (issued in November 2009, amended in October 2010, November 2013 and July 2014, effective for annual periods beginning on or after 1 January 2018). Key features of the new standard are:

  • Financial assets are required to be classified into two measurement categories: those to be measured subsequently at fair value (either through profit and loss or other comprehensive income), and at amortised cost. The decision is to be made at initial recognition.
  • An instrument is subsequently measured at amortised cost only if it is a debt instrument and both (i) the objective of the entity’s business model is to hold the asset to collect the contractual cash flows, and (ii) the asset’s contractual cash flows represent payments of principal and interest only. All other debt instruments are to be measured at fair value through profit or loss.
  • All equity instruments are to be measured subsequently at fair value. Equity instruments that are held for trading will be measured at fair value through profit or loss. For all other equity investments, an irrevocable election can be made at initial recognition, to recognise unrealised and realised fair value gains and losses through other comprehensive income rather than profit or loss. There is no recycling of fair value gains and losses to profit or loss.

The Group is currently assessing the impact of the new standard on its Consolidated Financial Statements.

The new standard introduces the core principle that revenue must be recognised when the goods and services are transferred to the customer, at the transaction price. Any bundled goods and services that are distinct must be separately recognised, and any discounts or rebates on the contract price must generally be allocated to the separate elements. When the consideration varies for any reason, minimum amounts must be recognised if they are not at significant risk of reversal. Costs incurred to secure contracts with customers have to be capitalised and amortised over the period when the benefits of the contract are consumed.

The Group is currently assessing the impact of the new standard on its Consolidated Financial Statements.

IFRS 16 Leases (issued in January 2016 and replaces the previous IAS 17 Leases, effective for annual periods beginning on or after January 1, 2019 with early adoption permitted in case of implementation of IFRS 15 Revenue from Contracts with Customers). Key features of the standard are:

  • IFRS 16 changes the lessees accounting requirements given in IAS 17 and eliminates the classification of leases as either operating leases or finance leases. Instead, introduces a single lessee accounting model where a lessee is required to recognise:

    (a) assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value; and

    (b) depreciation of lease assets separately from interest on lease liabilities in the income statement.

  • IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17.
  • IFRS 16 does not change the accounting for services.

The Group is currently assessing the impact of the new standard on its Consolidated Financial Statements.

The following other new standards are not expected to have any material impact on the Group when adopted:

  • Amendments to IAS 16 — Property, Plant and Equipment and IAS 38 Intangible Assets (issued in May 2014 and effective for annual periods beginning on or after January 1, 2016.
  • Amendments to IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint ventures (issued in September 2014 and December 2014 and effective for annual periods beginning on or after January 1, 2016).
  • Disclosure Initiative Amendments to IAS 1 (issued in December 2014 and effective for annual periods on or after 1 January 2016).
  • Amendments to the IFRS for Small and Medium-Sized Entities (issued in May 2015 and effective for annual periods beginning on or after January 1, 2017).

Unless otherwise described above, the new standards and interpretations are not expected to affect significantly the Group’s Consolidated Financial Statements.

6. Acquisition of Subsidiaries and Non-controlling Interest

Acquisition of Gazprom Resource Northgas

On 1 July 2014 the Group acquired an 18.2% share in Gazprom Resource Northgas LLC (a holding company which owns 50% share in Northgas) from Gazprombank for RUB 8.6 billion providing the Group with significant influence over Northgas due to presence in Board of Directors. In March 2015 the Group has obtained control over Gazprom Resource Northgas LLC based on signed management agreement and charter documents which provided the Group with a majority of voting rights which differ from the Group’s share in equity. The transaction was treated as a transaction under common control (the other owner of Gazprom Resource Northgas LLC is a subsidiary of Gazprom) and was accounted for using predecessor accounting method. As a result of this transaction, non-controlling interest in the amount of RUB 12.6 billion was recognised and the difference between the Group’s share in net assets and the initial cost of its investment reduced the additional-paid-in-capital for the period by RUB 5.8 billion. The following table represents information of Gazprom Resource Northgas LLC as of date of obtaining control:

As of 19 March 2015
Assets
Cash and cash equivalents 2 229
Other current assets 24
Loan issued 8 476
Investment in Northgas 4 730
Total assets acquired 15 459
Liabilities
Other payables (2)
Total liabilities assumed (2)
Net assets acquired 15 457
7. Cash and Cash Equivalents

Cash and cash equivalents as of 31 December 2015 and 2014 comprise the following:

31 December 2015 31 December 2014
Cash on hand 986 791
Cash in bank 39 937 41 106
Deposits with original maturity of less than three months 69 891 8 928
Other cash equivalents 3 384 2 342
Total cash and cash equivalents 114 198 53 167
8. Short-Term Financial Assets

Short-term financial assets as of 31 December 2015 and 2014 comprise the following:

31 December 2015 31 December 2014
Deposits with original maturity more than 3 months less than 1 year 49 206 76 658
Short-term loans issued 15 802 2 184
Financial assets held to maturity 149 2
Total short-term financial assets 65 157 78 844
9. Trade and Other Receivables

Trade and other receivables as of 31 December 2015 and 2014 comprise the following:

31 December 2015 31 December 2014
Trade receivables 112 572 108 447
Other financial receivables 7 254 7 543
Less impairment provision (24 585) (12 9761)
Total trade and other receivables 95 241 103 014

Trade receivables represent amounts due from customers in the ordinary course of business and are short-term by nature.

10. Inventories

Inventories as of 31 December 2015 and 2014 consist of the following:

31 December 2015 31 December 2014
Petroleum products and petrochemicals 41 692 41 787
Materials and supplies 38 782 34 422
Crude oil and gas 16 947 22 619
Other 8 497 7 243
Less provision (3 540) (3 413)
Total inventory 102 378 102 658

As part of the management of crude inventory the Group may enter transactions to buy and sell crude oil from the same counterparty. Such transactions are referred to as buy / sell transactions and are undertaken in order to reduce transportation costs or to obtain alternate quality grades of crude oil. The total values of buy / sell transactions undertaken for the years ended 31 December are as follows:

2015 2014
Buy / sell crude oil transactions for the year ended 31 December 92 949 41 450
11. Other Current Assets

Other current assets as of 31 December 2015 and 2014 consist of the following:

31 December 2015 31 December 2014
Value added tax receivable 47 616 42 281
Advances paid 40 080 39 782
Prepaid custom duties 6 728 18 178
Prepaid expenses 999 594
Other assets 33 437 32 043
Less impairment provision (8 993) (16 951)
Total other current assets 119 867 115 927

The impairment provision mainly relates to other assets attributable to Group’s Serbian subsidiary.

12. Property, Plant and Equipment

Movement in property, plant and equipment for the years ended 31 December 2015 and 2014 is presented below:

Cost O&G properties Refining assets Marketing and distribution Other assets Assets under construction Total
As of 1 January 2015 1 120 873 260 219 134 430 18 659 245 847 1 780 028
Additions 12 641 1 016 - - 311 871 325 528
Acquisitions through business combinations - - 24 283 47 354
Changes in decommissioning obligations (214) - - - - (214)
Capitalised borrowing costs - - - - 14 558 14 558
Transfers 183 139 38 093 16 543 1 921 (239 696) -
Internal movement (12 394) (75) (483) (394) 11 893 (1 453)
Disposals (12 249) (1 061) (2 747) (2 800) (2 871) (21 728)
Translation differences 63 486 9 845 5 028 264 27 625 106 248
As of 31 December 2015 1 355 282 308 037 152 795 17 933 369 274 2 203 321
Depreciation and impairment
As of 1 January 2015 (383 053) (68 395) (32 593) (2 187) - (486 228)
Depreciation charge (70 978) (11 032) (10 552) (1 256) - (93 818)
Impairment (15 582) - - - - (15 582)
Acquisitions through business combinations - - - (143) - (143)
Internal movement 222 (31) 1 114 148 - 1 453
Disposals 8 246 199 1 600 62 - 10 107
Translation differences (28 143) (2 202) (1 009) (103) - (31 457)
As of 31 December 2015 (489 288) (81 461) (41 440) (3 479) - (615 668)
Net book value
As of 1 January 2015 737 820 191 824 101 837 16 472 245 847 1 293 800
As of 31 December 2015 865 994 226 576 111 355 14 454 369 274 1 587 653
Cost O&G properties Refining assets Marketing and distribution Other assets Assets under construction Total
As of 1 January 2014 789 524 214 682 101 943 13 154 136 945 1 256 248
Additions 39 873 872 - 3 885 216 341 260 971
Acquisitions through business combinations and increase of share in joint operation 84 001 - 1 823 25 22 658 108 507
Changes in decommissioning obligations 757 - - - - 757
Capitalised borrowing costs - - - - 10 598 10 598
Transfers 167 417 29 270 14 665 1 886 (213 238) -
Internal movement (48 031) (1 692) (1 885) (26) 51 000 (634)
Disposals (7 232) (1 159) (1 724) (201) (3 683) (13 999)
Translation differences 94 564 18 246 19 608 (64) 25 226 157 580
As of 31 December 2014 1 120 873 260 219 134 430 18 659 245 847 1 780 028
Depreciation and impairment
As of 1 January 2014 (281 165) (56 211) (21 829) (1 500) - (360 705)
Depreciation charge (63 360) (9 208) (8 866) (735) - (82 169)
Impairment (4 116) - - - - (4 116)
Acquisitions through business combinations and increase of share in joint operation (1 990) - - - - (1 990)
Internal movement (88) (370) 1 066 26 - 634
Disposals 3 453 488 944 55 - 4 940
Translation differences (35 787) (3 094) (3 908) (33) - (42 822)
As of 31 December 2014 (383 053) (68 395) (32 593) (2 187) - (486 228)
Net book value
As of 1 January 2014 508 359 158 471 80 114 11 654 136 945 895 543
As of 31 December 2014 737 820 191 824 101 837 16 472 245 847 1 293 800

In 2015 the Group changed presentation of movement and balances in Property, Plant and Equipment: the new accounting policy is to present acquisition or construction of O&G properties as additions of assets under construction and put in use of O&G properties — as transfers from assets under construction to O&G properties. Previously these movements were classified as additions of O&G properties.

Capitalisation rate for the borrowing costs related to the acquisition of property, plant and equipment equals to 11% for the year ended 31 December 2015 (8.7% for the year ended 31 December 2014).

The information regarding Group’s exploration and evaluation assets (part of O&G properties) is presented below:

2015 2014
As of January 1 75 294 53 514
Additions 26 032 35 361
Acquisitions through business combinations - 24 495
Impairment (4 024) (4 116)
Unsuccessful exploration expenditures derecognised (132) (810)
Transfer to proved property (26 323) (66 573)
Disposals (279) (183)
Translation differences 12 437 33 606
As of December 31 83 005 75 294

Due to decrease in international oil prices in 2015 the Group performed impairment testing and recognised impairment loss in relation to upstream oil and gas assets in Iraq region and exploration asset located in Russia in the amounts of RUB 11.6 billion and RUB 4.0 billion, respectively.

The Group recognised impairment loss for the amount by which the book value of these assets exceeded its recoverable amount of RUB 85.4 billion. The impairment loss relating to exploration asset located in Russia was due to uncertain viability of commercial production.

The recoverable amount was determined as present value of estimated future cash flows using available forecasts of oil prices from globally recognized research institutions and production quantities based on reserve reports and long-term strategic plans. The pre-tax discount rates reflect current market assessments of the time value of money and the risks specific to the asset and vary in real terms from 10.3% to 14.4% depending on currencies the cash flows are denominated in.

13. Goodwill and Other Intangible Assets

The information regarding movements in Group’s intangible assets is presented below:

Cost Goodwill Software Land rights Other IA Total
As of 1 January 2015 33 635 19 327 17 513 14 881 85 356
Additions - 3 529 - 1 881 5 410
Acquisitions through business combinations - - - - -
Internal movement - 989 - (711) 278
Disposals - (767) - (830) (1 597)
Translation differences 2 902 1 165 69 230 4 366
As of 31 December 2015 36 537 24 243 17 582 15 451 93 813
Amortisation and impairment
As of 1 January 2015 (196) (7 778) (3 829) (2 313) (14 116)
Amortisation charge - (3 035) (627) (1 021) (4 683)
Impairment - - - - -
Internal movement - (309) - 31 (278)
Disposals - 666 - 400 1 066
Translation differences (32) (574) (1) (105) (712)
As of 31 December 2015 (228) (11 030) (4 457) (3 008) (18 723)
Net book value
As of 1 January 2015 33 439 11 549 13 684 12 568 71 240
As of 31 December 2015 36 309 13 213 13 125 12 443 75 090
As of 1 January 2014 27 972 14 617 17 108 5 700 65 397
Additions 44 3 736 346 1 695 5 821
Acquisitions through business combinations 311 13 - 7 267 7 591
Internal movement 72 (185) 25 90 2
Disposals - (579) - (397) (976)
Translation differences 5 236 1 725 34 526 7 521
As of 31 December 2014 33 635 19 327 17 513 14 881 85 356
Amortisation and impairment
As of 1 January 2014 - (5 382) (3 143) (1 486) (10 011)
Amortisation charge - (2 002) (685) (790) (3 477)
Impairment (188) - - - (188)
Internal movement - (41) - 39 (2)
Disposals - 282 - 165 447
Translation differences (8) (635) (1) (241) (885)
As of 31 December 2014 (196) (7 778) (3 829) (2 313) (14 116)
Net book value
As of 1 January 2014 27 972 9 235 13 965 4 214 55 386
As of 31 December 2014 33 439 11 549 13 684 12 568 71 240

Goodwill acquired through business combination has been allocated to Upstream (NIS and Tomskneft) and Downstream (Moscow Refinery) in the amounts of RUB 29.2 billion and RUB 7.1 billion as of 31 December 2015 (RUB 26.5 billion and RUB 6.9 billion as of 31 December 2014). Goodwill was tested for impairment and no impairment was identified.

14. Investments in Associates and Joint Ventures

The carrying values of the investments in associates and joint ventures as of 31 December 2015 and 2014 are summarised below:

Ownership percentage 31 December 2015 31 December 2014
Slavneft Joint venture 49.9% 83 301 74 177
SeverEnergy Joint venture 46.7% 72 128 60 215
Northgas Joint venture 50.0% 8 196 8 878
Others 5 986 7 457
Total investments 169 611 150 727

The principal place of business of the most significant joint ventures and associates disclosed above is the Russian Federation. The reconciliation of carrying amount of investments in associates and joint ventures as of the beginning of the reporting period and as of the end of the reporting period is shown below:

2015 2014
Carrying amount as of 1 January 150 727 120 358
Share of profit / (loss) of associates and joint ventures 24 956 (6 306)
Dividends declared (2 862) (7 453)
Share of other comprehensive income of associates and joint ventures 141 -
Increase in associates and joint ventures - 44 526
Other changes in cost of associates and joint ventures (3 351) (398)
Carrying amount as of 31 December 169 611 150 727

The total amount of dividends received from joint ventures in 2015 equals to RUB 2,415 million (RUB 7,453 million in 2014). The group didn’t receive any dividends from associates in the years 2015 and 2014.

Slavneft

The Group’s investment in OJSC Slavneft and various minority stakes in Slavneft subsidiaries (Slavneft) are held through a series of legal entities. Slavneft is engaged in exploration, production and development of crude oil and gas and production of refined petroleum products. The control over Slavneft is divided equally between the Group and OJSC NK Rosneft.

SeverEnergy

The Group’s investment in SeverEnergy LLC (SeverEnergy) is held through Yamal Razvitie LLC (Yamal Razvitie, an entity jointly controled by the Group and OJSC NOVATEK). SeverEnergy, through its subsidiary OJSC Arctic Gas Company (Arcticgas), is developing the Samburgskoye, Urengoiskoe and Yaro-Yakhinskoye oil and gas condensate fields and some other small oil and gas condensate fields located in the Yamalo-Nenetskiy autonomous region of the Russian Federation.

The Group and NOVATEK negotiated a series of linked transactions that aim to simplify the ownership structure and achieve parity shareholdings in SeverEnergy upon completion. The Group provided several long-term loans to Yamal Razvitie of which Yamal Razvitie financed RUB 34.9 billion on acquisition of additional 20% share in Artic Russia B.V. The loans will form the Group’s contribution in equity of Yamal Razvitie upon completion of the restructuring of the joint venture. In July 2015 the Group and NOVATEK decided to increase Yamal Razvitie share capital by converting partially long-term loans and transferring of 6.4% Arctic Russia B.V. shares. In August 2015 the Group made contributions to the capital of Yamal Razvitie by converting partially long-term loans. As a result the Group’s share increased from 45.1% to 46.7%.

The carrying amount of the Group’s investment exceeds the Group’s share in the underlying net assets of SeverEnergy by RUB 18.3 billion as of 31 December 2015 due to complex holding structure, current financing scheme and goodwill arising on acquisition (RUB 19.8 billion as of 31 December 2014).

Northgas

The Group’s investment in CJSC Northgas (Northgas) is held through Gazprom Resource Northgas LLC which owns a 50% share in Northgas. Northgas is engaged in exploration and development of natural gas and oil. After the Group obtained control over Gazprom Resourse Northgas (note 6) the Group’s effective share in Northgas increased to 50% (9.1% as of 31 December 2014).

The summarised financial information for the significant associates and joint ventures as of 31 December 2015 and 2014 and for the years ended 31 December 2015 and 2014 is presented in the table below.

Slavneft SeverEnergy Northgas
31 December 2015 31 December 2014 31 December 2015 31 December 2014 31 December 2015 31 December 2014
Cash and cash equivalents 8 078 13 709 13 875 698 2 160 4 000
Other current assets 15 830 17 568 13 941 9 413 3 131 11 811
Non-current assets 288 077 269 667 363 513 369 502 49 695 49 474
Current financial liabilities (49 748) (68 967) (31 762) (112 478) (6 110) (5 906)
Other current liabilities (18 294) (20 109) (9 309) (2 289) (2 001) (3 702)
Non-current financial liabilities (54 562) (46 592) (185 376) (126 172) (24 841) (34 550)
Other non-current liabilities (30 034) (24 973) (49 297) (49 065) (3 645) (2 122)
Net assets 159 347 140 303 115 585 89 609 18 389 19 005
Year ended 31 December 2015 Year ended 31 December 2014 Year ended 31 December 2015 Year ended 31 December 2014 Year ended 31 December 2015 Year ended 31 December 2014
Revenue 224 224 197 453 125 450 32 110 28 888 13 750
Depreciation, depletion and amortisation (32 169) (30 637) (20 786) (5 966) (2 328) (3 656)
Finance income 2 074 1 472 2 354 75 1 151 452
Finance expense (5 279) (1 530) (36 041) (14 263) (5 275) (929)
Total income tax (expense) / benefit (6 486) 1 999 (3 570) 1 152 (2 004) (854)
Profit / (loss) for the period 19 566 (10 282) 20 991 (4 341) 8 008 3 338
Total comprehensive income / (loss) 19 054 (9 876) 20 991 (4 341) 8 008 3 338

Current and non-current financial liabilities of SeverEnergy include RUB 146 billion payables to the Group and Russian banks as of 31 December 2015 (RUB 130 billion as of 31 December 2014). Other change of net assets of SeverEnergy relates to fair value adjustments on acquisition of additional share in 2015.

Summarised financial information on Northgas includes assets and liabilities of Gazprom Resource Northgas as of 31 December 2014.

Others

The aggregate carrying amount of all individually immaterial joint ventures and associates as well as the Group’s share of those joint ventures’ and associates’ profit or loss and other comprehensive income is not significant.

15. Joint Operations

Under IFRS 11 Joint Arrangements the Group assessed the nature of its 50% share in joint arrangements and determined investments in Tomskneft and Salym Petroleum Development as Joint operations. Tomskneft and Salym Petroleum Development are engaged in production of oil and gas in the Russian Federation and all of the production is required to be sold to the parties of the joint arrangement (that is, the Group and its partner).

16. Long-Term Financial Assets

Long-term financial assets as of 31 December 2015 and 2014 comprise the following:

31 December 2015 31 December 2014
Long-term loans issued 41 047 28 229
Available for sale financial assets 11 534 10 266
Financial assets held to maturity 3 112
Less impairment provision (1 700) (976)
Total long-term financial assets 50 884 37 631
17. Deferred Income Tax Assets and Liabilities

Recognised deferred tax assets and liabilities

Recognised deferred tax assets and liabilities are attributable to the following:

Assets Liabilities Net
As of 31 December 2015
Property, plant and equipment 11 775 (93 593) (81 818)
Intangible assets 6 (3 887) (3 881)
Investments 732 (630) 102
Inventories 747 (997) (250)
Trade and other receivables 611 (27) 584
Loans and borrowings (1 066) (1 066)
Provisions 5 498 (29) 5 469
Tax loss carry-forwards 32 896 - 32 896
Other 2 897 (1 586) 1 311
Net-off (33 063) 33 063 -
Tax assets / (liabilities) 22 099 (68 752) (46 653)
As of 31 December 2014
Property, plant and equipment 8 612 (72 655) (64 043)
Intangible assets 7 (4 144) (4 137)
Investments 2 220 (505) 1 715
Inventories 342 (858) (516)
Trade and other receivables 428 (98) 330
Loans and borrowings - (1 132) (1 132)
Provisions 3 029 (40) 2 989
Tax loss carry-forwards 13 958 - 13 958
Other 2 864 (1 600) 1 264
Tax assets / (liabilities) 31 460 (81 032) (49 572)

Movement in temporary differences during the period:

As of 1 January 2015 Recognised in profit or loss Recognised in other comprehensive income Acquired/ disposed of As of 31 December 2015
Property, plant and equipment (64,043) (14,552) (3,346) 123 (81,818)
Intangible assets (4,137) 256 - - (3,881)
Investments 1,715 1,132 (2,745) - 102
Inventories (516) 266 - - (250)
Trade and other receivables 330 183 71 - 584
Loans and borrowings (1,132) 66 - - (1,066)
Provisions 2,989 2,368 28 84 5,469
Tax loss carry-forwards 13,958 19,088 (150) - 32,896
Other 1,264 (33) 82 (2) 1,311
(49,572) 8,774 (6,060) 205 (46,653)
As of 1 January 2014 Recognised in profit or loss Recognised in other comprehensive income Acquired/ disposed of As of 31 December 2014
Property, plant and equipment (48 614) (9 774) (4 785) (870) (64 043)
Intangible assets (2 875) 191 - (1 453) (4 137)
Investments 1 358 195 162 - 1 715
Inventories (433) (83) - - (516)
Trade and other receivables 286 (86) 130 - 330
Loans and borrowings (545) (490) (97) - (1 132)
Provisions 2 911 38 40 - 2 989
Tax loss carry-forwards 6 062 7 821 71 4 13 958
Other 629 492 149 (6) 1 264
(41 221) (1 696) (4 330) (2 325) (49 572)
18. Other Non-Current Assets

Other non-current assets are primarily comprised of advances provided on capital expenditures (RUB 55.2 billion and RUB 38.4 billion as of 31 December 2015 and 2014, respectively).

19. Short-term Debt and Current Portion of Long-Term Debt

As of 31 December 2015 and 2014 the Group has short-term loans and current portion of long-term debt outstanding as follows:

31 December 2015 31 December 2014
Bank loans 24 193 4 875
Other borrowings 1 731 14 251
Current portion of long-term debt 121 395 41 995
Total short-term debt and current portion of long-term debt 147 319 61 121

Short-term bank loans and other borrowings include interest payable on short-term debt. Current portion of long-term debt includes interest payable on long-term borrowings.

In January 2015 the Group obtained revolving loan USD 300 million (RUB 16.9 billion) under the club term and revolving facilities agreement with a number of banks with six months maturity and interest rate of LIBOR+1% per annum. In July 2015 and December 2015 the Group refinanced the maturing facilities under the club term and revolving facilities agreement with a number of banks in a total amount of 300 million USD by new loans in the amount of USD 300 million at an interest LIBOR+1% per annum due for repayment on 30 June 2016.

On 22 March 2015 companies of Rosneft’s group concluded a settlement deed with companies of YUKOS’s group (hereinafter — the “Agreement”). In accordance with the Agreement the parties waived their mutual claims and terminated all existing court disputes, connected with the bankruptcy and liquidation of JSC “NK “YUKOS”. The Agreement does not prescribe any monetary payments on behalf of companies of Rosneft’s group. As a result companies of YUKOS’s group waived all of their claims to JSC “Tomskneft” VNK. Upon completion of the agreement (in April 2015) the Group wrote off its share in the respective liability of JSC Tomskneft that resulted in a gain in the amount of RUB 16.1 billion recognised within Other loss row in the Consolidated Statement of Profit and Loss and Other Comprehensive Income.

20. Trade and Other Payables

Accounts payable as of 31 December 2015 and 2014 comprise the following:

31 December 2015 31 December 2014
Trade accounts payable 76 372 65 624
Dividends payable 2 659 2 509
Other accounts payable 2 254 5 762
Forward contracts — cash flow hedge 23 545 9 922
Total trade and other payables 104 830 83 817
21. Other Current Liabilities

Other current liabilities as of 31 December 2015 and 2014 comprise the following:

31 December 2015 31 December 2014
Advances received 23 008 28 863
Payables to employees 2 864 2 180
Other non-financial payables 6 998 9 878
Total other current liabilities 32 870 40 921
22. Other Taxes Payable

Other taxes payable as of 31 December 2015 and 2014 comprise the following:

31 December 2015 31 December 2014
VAT 17 578 12 933
Mineral extraction tax 14 898 16 270
Excise tax 6 738 9 276
Property tax 2 329 2 389
Social security contributions 4 275 3 110
Other taxes 3 193 1 810
Total other taxes payable 49 011 45 788

Taxes other than income tax expense for the years ended 31 December 2015 and 2014 comprise the following:

Year ended 31 December 2015 Year ended 31 December 2014
Mineral extraction tax 256 477 236 027
Excise tax 68 358 84 184
Social security contributions 15 599 11 886
Property tax 9 529 9 477
Other taxes 3 182 2 002
Total taxes other than income tax 353 145 343 576
23. Provisions for Liabilities and Charges

Movement in Provisions for liabilities and charges for the years ended 31 December 2015 and 2014 is below:

Decommissioning provision Other Total
Carrying amount as of 1 January 2014 20 773 15 266 36 039
Short-term part 33 10 125 10 158
Long-term part 20 740 5 141 25 881
New obligation incurred 1 596 657 2 253
Provision assumed in a business combination - 420 420
Utilisation of provision (1 963) (778) (2 741)
Change in estimates (839) 3 260 2 421
Unwind of discount 1 422 - 1 422
Translation differences 2 467 2 159 4 626
Carrying amount as of 31 December 2014 23 456 20 984 44 440
Short-term part 168 18 396 18 564
Long-term part 23 288 2 588 25 876
New obligation incurred 2 085 8 634 10 719
Utilisation of provision (123) (11 557) (11 680)
Change in estimates (2 939) - (2 939)
Unwind of discount 2 172 - 2 172
Translation differences 1 446 845 2 291
Carrying amount as of 31 December 2015 26 097 18 906 45 003
Short-term part 121 13 817 13 938
Long-term part 25 976 5 089 31 065
24. Long-Term Debt

As of 31 December 2015 and 2014 the Group has long-term outstanding loans as follows:

31 December 2015 31 December 2014
Bank loans 451 887 258 087
Bonds 51 748 61 609
Loan Participation Notes 280 193 221 107
Other borrowings 8 346 3 498
less current portion of long-term debt (121 395) (41 995)
Total long-term debt 670 779 502 306

Bank loans

In May 2011 the Group signed a USD 870 million Club term loan facility with the syndicate of international banks (facility agent — SMBC) at an interest rate of Libor+1.5% per annum and final maturity date in September 2016. The outstanding balance as of 31 December 2015 is RUB 25.5 billion.

In July 2012 the Group signed EUR 258 million ECA-covered term loan facility with the group of international banks (facility agent — HSBC) at an interest rate of Euribor+1.45% per annum and final maturity date in December 2022. The outstanding balance as of 31 December 2015 is RUB 14.4 billion.

In April 2013 the Group signed USD 700 million club term loan facility with the group of international banks (facility agent — Commerzbank) at an interest rate of Libor+1.75% per annum and final maturity date in October 2018. The outstanding balance as of 31 December 2015 is RUB 43.7 billion.

In November 2013 the Group signed USD 2,150 million club term loan facility with the group of international banks (facility agent — Mizuho) at an interest rate of LIBOR+1.50% per annum and final maturity date in March 2019. The outstanding balance as of 31 December 2015 is RUB 156.8 billion.

In September 2014 the Group signed a RUB 30 billion term loan facility with PJSC Rosselkhozbank at an interest rate of 11.9% per annum and final maturity date in September 2019. The outstanding balance as of 31 December 2015 is RUB 30 billion.

In September 2014 the Group signed RUB 35.0 billion term loan facilities with PJSC Sberbank of Russia with final maturity date in September 2019. As of 31 December 2015, the interest rates vary from 13.48% to 13.58% per annum and the outstanding balance is RUB 35 billion.

In March 2015 the Group signed USD 350 million term loan facilities with one of the Russian privately owned banks due in September 2020. As of 31 December 2015 the interest rate is LIBOR+5% per annum and the outstanding balance is USD 350 million (RUB 25.5 billion).

In first half 2015 the Group signed several long-term facility agreements with final settlement in January 2018. As of 31 December 2015 the amount outstanding was RUB 72.9 billion.

In August 2015 the Group signed a long-term facility agreement in the amount of RUB 13.9 billion with PJSC Sberbank of Russia. The interest rate is determined as the interest rate offered to the Russian local bank by the Central Bank of Russia for refinancing of loan provided under this agreement in accordance with the Program of support of investment projects+2.5% per annum fixed for three years; the final maturity date is August 2025. In November and December 2015 the Group borrowed RUB 7.2 billion under the agreement.

The loan agreements contain one financial covenant that limits the Group’s ratio of “Consolidated financial indebtedness to Consolidated EBITDA”. The Group is in compliance with the covenant as of 31 December 2015.

Bonds

In February 2012 the Group placed ten-year Rouble Bonds (series 11) with the total par value of RUB 10 billion. In February 2015 the put option was exercised by the bondholders that resulted in the repurchase of the bonds by the Group in amount of RUB 9.6 billion.

As of 31 December 2015 the outstanding balance of Rouble Bonds (series 4, 8, 9, 10, 11, 12) is RUB 51.7 billion. The bonds bear interest of 8.2-12%per annum and are due for repayment in 2016-2018.

oan Participation Notes

In years 2012 and 2013 the group raised USD 3,000 million and EUR 750 million by issuing 10 years USD and 5 years EUR Loan Participation Notes. The outstanding balance as of 31 December 2015 is RUB 280.2 billion.

25. Other Non-Current Financial Liabilities

Other non-current financial liabilities as of 31 December 2015 are primarily comprised of RUB 60.6 billion of deferred consideration to PJSC Gazprom (RUB 53.7 as of 31 December 2014) and RUB 52.7 billion of cash flow hedge under forward contracts (RUB 48.4 billion as of 31 December 2014). The discounted liability is non-interest bearing and the timing of the redemption will occur from the future free cash flows of the Prirazlomnoye project (estimated repayment until the 2020 year).

26. Share Capital and Treasury Shares

Share capital as of 31 December 2015 and 2014 comprise the following:

Ordinary shares Treasury shares
31 December 2015 31 December 2014 31 December 2015 31 December 2014
Number of shares (million) 4 741 4 741 23 23
Authorised shares (million) 4 741 4 741 23 23
Par value (RUB per share) 0,0016 0,0016 0,0016 0,0016
On issue as of 31 December, fully paid (RUB million) 8 8 (1 170) (1 170)

The nominal value of share capital differs from its carrying value due to effect of the inflation.

On 30 September 2015 the general shareholders’ meeting of Gazprom neft PJSC approved an interim dividend on the ordinary shares for the six months ended 30 June 2015 in the amount of RUB 5.92 per share.

On 5 June 2015 the annual general shareholders’ meeting of Gazprom neft PJSC approved a dividend on the ordinary shares for 2014 in the amount of RUB 6.47 per share.

On 30 September 2014 the general shareholders’ meeting of Gazprom neft PJSC approved an interim dividend on the ordinary shares for the six months ended 30 June 2014 in the amount of RUB 4.62 per share.

On 6 June 2014 the annual general shareholders’ meeting of Gazprom neft PJSC approved a dividend on the ordinary shares for 2013 in the amount of RUB 9.38 per share.

27. Employee Costs

Employee costs for the years ended 31 December 2015 and 2014 comprise the following:

Year ended 31 December 2015 Year ended 31 December 2014
Wages and salaries 71 288 56 006
Stock appreciation rights (SAR) 657 594
Other costs 5 103 3 655
Total employee costs 77 048 60 255
Social security contributions 15 593 11 886
Total employee costs (with social taxes) 92 641 72 141
28. Other Loss, net

Other gain / (loss) for the years ended 31 December 2015 and 2014 comprise the following:

Year ended 31 December 2015 Year ended 31 December 2014
Write-off payables 16 107 -
Impairment of assets (15 582) (4 116)
Write-off of assets (7 772) -
Provisions (legal, environmental, etc.) 1 041 (1 460)
Penalties 4 (1 826)
Other losses (7 886) (1 069)
Total other loss, net (14 088) (8 471)
29. Net Foreign Exchange Loss

Net foreign exchange loss for the years ended 31 December 2015 and 2014 comprise the following:

Year ended 31 December 2015 Year ended 31 December 2014
Net foreign exchange loss on financing activities, including: (111 816) (122 299)
foreign exchange gain 53 989 74 755
foreign exchange loss (165 805) (197 054)
Net foreign exchange gain on operating activities 43 906 70 034
Net foreign exchange loss (67 910) (52 265)

Capitalised borrowing costs include interest on loans and exchange losses arising from foreign currency borrowings. The exchange losses capitalised within borrowing costs amounted RUB 5.9 billion for the year ended 31 December 2015 (RUB 4.8 billion for the year ended 31 December 2014).

30. Finance Income

Finance income for the years ended 31 December 2015 and 2014 comprise the following:

Year ended 31 December 2015 Year ended 31 December 2014
Interest income on loans issued 7 383 3 170
Interest on bank deposits 5 076 2 346
Other financial income 2 273 1 559
Total finance income 14 732 7 075
31. Finance Expense

Finance expense for the years ended 31 December 2015 and 2014 comprise the following:

Year ended 31 December 2015 Year ended 31 December 2014
Interest expense 40 411 19 220
Decommissioning provision: unwinding of discount 2 172 1 863
Less: capitalised interest (8 640) (5 804)
Finance expense 33 943 15 279
32. Income Tax Expense

The Group’s applicable income tax rate for the companies located in the Russian Federation is 20%.

Year ended 31 December 2015 Year ended 31 December 2014
RUB million % RUB million %
Total income tax expense 34 943 23.1 18 144 12.5
Profit before income tax excluding share of profit of associates and joint ventures 120 494 152 176
Profit before income tax of associates and joint ventures 30 645 (7 267)
Profit before income tax 151 139 144 909
Tax at applicable domestic tax rate (20%) 30 228 20.0 28 982 20.0
Effect of tax rates in foreign jurisdictions 3 892 2.6 (659) (0.5)
Difference in statutory tax rate in domestic entities (2 983) (2.0) (1 894) (1.3)
Non-deductible income and expenses 3 517 2.3 (3 034) (2.1)
Adjustment for prior years 2 803 1.9 (2 146) (1.5)
Change in tax rate - - (73) (0.1)
Foreign exchange gain of foreign non-operating units (2 514) (1.7) (3 032) (2.1)
Total income tax expense 34 943 23.1 18 144 12.5
Reconciliation of effective tax rate:
Year ended 31 December 2015 Year ended 31 December 2014
Current income tax expense
Current year 34 057 15 879
Adjustment for prior years 3 969 1 639
38 026 17 518
Deferred income tax benefit / (expense)
Origination and reversal of temporary differences (8 774) 1 769
Change in tax rate - (73)
(8 774) 1 696
Total income tax expense 29 252 19 214
Share of tax of associates and joint ventures 5 691 (1 070)
Total income tax expense including share of tax of associates and joint ventures 34 943 18 144
33. Cash Flow Hedges

The following table indicates the periods in which the cash flows associated with cash flow hedges are expected to occur and the fair value of the related hedging instrument:

Fair value Less than 6 month From 6 to 12 months From 1 to 3 years Over 3 years
As of 31 December 2015
Forward exchange contracts
Liabilities (76 258) (22 609) (935) (49 280) (3 434)
Total (76 258) (22 609) (935) (49 280) (3 434)
As of 31 December 2014
Forward exchange contracts
Liabilities (58 312) (8 576) (1 345) (28 433) (19 958)
Total (58 312) (8 576) (1 345) (28 433) (19 958)

As of 31 December 2015 and 2014 the Group has outstanding forward currency exchange contracts for a total notional value of US Dollars 1,237 million and US Dollars 1,642 million respectively. During the year ended 31 December 2015 the amount of RUB 13,044 million was reclassified from equity to a loss in the statement of profit and loss (RUB 827 million for the year ended 31 December 2014).

The impact of foreign exchange cash flow hedges recognized in other comprehensive income is set out below:

2015 2014
Before income tax Income tax Net of tax Before income tax Income tax Net of tax
Total recognized in other comprehensive (loss)/income as of the beginning of the period (58 312) 1 885 (56 427) (2 885) 1 723 (1 162)
Foreign exchange effects recognized during the period (30 990) 5 819 (25 171) (54 600) 142 (54 458)
Recycled to foreign exchange differences in profit or loss 13 044 (1 382) 11 662 (827) 20 (807)
Tax adjustment related to prior years - 4 176 4 176 - - -
Total recognized in other comprehensive (loss)/income for the period (17 946) 8 613 (9 333) (55 427) 162 (55 265)
Total recognized in other comprehensive (loss)/income as of the closing of the period (76 258) 10 498 (65 760) (58 312) 1 885 (56 427)

A schedule of the expected reclassification of the accumulated foreign exchange loss from other comprehensive income to profit or loss as of 31 December 2015 is presented below:

Year 2016 2017 2018 2022 Total
Total, net of tax (20 222) (14 693) (27 770) (3 076) (65 761)

The Group uses an estimation of the fair value of forward currency exchange contracts prepared by independent financial institutes. Valuation results are regularly reviewed by the Management. No significant ineffectiveness occurred during the reporting period.

34. Financial Risk Management

Risk Management Framework

Gazprom Neft Group has a risk management policy that defines the goals and principles of risk management in order to make the Group’s business more secure in both the short and the long term.

The Group’s goal in risk management is to increase effectiveness of Management decisions through detailed analysis of related risks.

The Group’s Integrated Risk Management System (IRMS) is a systematic continuous process that identifies, assesses and manages risks. Its key principle is that responsibility to manage different risks is assigned to different management levels depending on the expected financial impact of those risks. The Group is working continuously to improve its approach to basic IRMS processes, with special focus on efforts to assess risks and integrate the risk management process into such key corporate processes as business planning, project management and mergers and acquisitions.

Financial Risk Management

Management of the Group’s financial risks is the responsibility of employees acting within their respective professional spheres. The Group’s Financial Risk Management Panel defines a uniform approach to financial risk management at the Company and its subsidiaries. Activities performed by the Group’s employees and the Financial Risk Management Panel minimise potential financial losses and help to achieve corporate targets.

In the normal course of its operations the Group has exposure to the following financial risks:

  • market risk (including currency risk, interest rate risk and commodity price risk);
  • credit risk; and
  • liquidity risk.

Market Risk

Currency Risk

The Group is exposed to currency risk primarily on borrowings that are denominated in currencies other than the respective functional currencies of Group entities, which are primarily the local currencies of the Group companies, for instance the Russian Rouble for companies operating in Russia. The currency in which these transactions are denominated is mainly US Dollar.

The Group’s currency exchange risk is considerably mitigated by its foreign currency assets and liabilities: the current structure of revenues and liabilities acts as a hedging mechanism with opposite cash flows offsetting each other. The Group applies hedge accounting to manage volatility in profit or loss with its cash flows in foreign currency and hedges predominantly its borrowings.

The carrying amounts of the Group’s financial instruments by currencies they are denominated are as follows:

As of 31 December 2015 Russian Rouble USD EURO Serbian dinar Other currencies
Financial assets
Current
Cash and cash equivalents 22 142 81 112 2 514 6 271 2 159
Bank deposits 1 956 45 959 636 - 655
Loans issued 15 728 - 74 - -
Trade and other financial receivables 37 553 35 464 6 063 14 716 1 445
Non-current
Trade and other financial receivables 1 184 7 684
Loans issued 33 983 6 959 91
Held to maturity financial assets 3
Available for sale financial assets 9 748 99
Financial liabilities
Current
Short-term debt (23 774) (117 713) (5 813) - (19)
Trade and other financial payables (57 946) (9 046) (4 133) (8 076) (2 084)
Forward exchange contracts (23 545)
Non-current
Long-term debt (107 072) (479 958) (83 255) (1) (493)
Forward exchange contracts (52 713)
Other non-current financial liabilities (62 654) (7)
Net exposure (129 152) (513 485) (76 139) 13 009 1 663
As of 31 December 2014 Russian Rouble USD EURO Serbian dinar Other currencies
Financial assets
Current
Cash and cash equivalents 17 543 21 780 4 661 2 058 7 125
Bank deposits 630 66 558 1 146 - 8 324
Loans issued 2 162 22 - - -
Trade and other financial receivables 39 287 33 673 1 988 26 789 1 277
Non-current
Trade and other financial receivables 265
Loans issued 25 680 2 544 5
Held to maturity financial assets - 109 -
Available for sale financial assets 9 276 - - 14 -
Financial liabilities
Current
Short-term debt (25 918) (30 211) (4 980) - (12)
Trade and other financial payables (46 170) (17 195) (1 442) (7 198) (1 891)
Forward exchange contracts (9 921)
Non-current
Long-term debt (69 858) (365 559) (66 613) (1) (275)
Forward exchange contracts (48 391)
Other non-current financial liabilities (57 553)
Net exposure (104 656) (346 591) (65 235) 21 662 14 548

The following exchange rates applied during the period:

Reporting date spot rate
31 December 2015 31 December 2014
USD 1 72.88 56.26
EUR 1 79.70 68.34
RSD 1 0.66 0.57

Sensitivity analysis

The Group has chosen to provide information about market and potential exposure to hypothetical gain / (loss) from its use of financial instruments through sensitivity analysis disclosures.

The sensitivity analysis shown in the table below reflects the hypothetical effect on the Group’s financial instruments and the resulting hypothetical gains/losses that would occur assuming change in closing exchange rates and no changes in the portfolio of investments and other variables at the reporting dates.

Weakening of RUB
Equity Profit or loss
31 December 2015
USD/RUB (30% increase) (19 357) (135 791)
EUR/RUB (30% increase) (3) (22 923)
RSD/RUB (30% increase) (19 891) (2)
31 December 2014
USD/RUB (70% increase) (24 159) (225 022)
EUR/RUB (70% increase) 149 (46 606)
RSD/RUB (70% increase) 61 837

Decrease in the exchange rates will have the same effect in the amount, but the opposite effect on Equity and Profit and loss of the Group.

Interest Rate Risk

The significant part of the Group’s borrowings is at variable interest rates (linked to the LIBOR or EURIBOR rate). To mitigate the risk of unfavourable changes in the LIBOR or EURIBOR rates, the Group’s treasury function monitors interest rates in debt markets and based on it decides whether it is necessary to hedge interest rates or to obtain financing on a fixed-rate or variable-rate basis.

Changes in interest rates primarily affect debt by changing either its fair value (fixed rate debt) or its future cash flows (variable rate debt). However, at the time of any new debts Management uses its judgment and information about current/expected interest rates on the debt markets to decide whether it believes fixed or variable rate would be more favourable over the expected period until maturity.

The interest rate profiles of the Group are presented below:

Carrying amount
31 December 2015 31 December 2014
Fixed rate instruments
Financial assets 220 239 160 238
Financial liabilities (474 639) (319 395)
(254 400) (159 157)
Variable rate instruments
Financial liabilities (343 459) (244 032)
(343 459) (244 032)

Cash flow sensitivity analysis for variable rate instruments

The Group’s financial results and equity are sensitive to changes in interest rates. If the interest rates applicable to floating debt increase by 100 basis points (bp) at the reporting dates, assuming all other variables remain constant, it is estimated that the Group’s profit before taxation will change by the amounts shown below:

Profit or loss
31 December 2015
Increase by 100 bp (3 435)
31 December 2014
Increase by 100 bp (2 440)

A decrease by 100 bp in the interest rates will have the same effect in the amount, but the opposite effect on Profit and loss of the Group.

Commodity Price Risk

The Group’s financial performance relates directly to prices for crude oil and petroleum products. The Group is unable to fully control the prices of its products, which depend on the balance of supply and demand on global and domestic markets for crude oil and petroleum products, and on the actions of supervisory agencies.

The Group’s business planning system calculates different scenarios for key performance factors depending on global oil prices. This approach enables Management to adjust cost by reducing or rescheduling investment programs and other mechanisms.

Such activities help to decrease risks to an acceptable level.

Credit Risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s receivables from customers and in connection with investment securities.

The Group’s trade and other receivables relate to a large number of customers, spread across diverse industries and geographical areas. Gazprom Neft has taken a number of steps to manage credit risk, including: counterparty solvency evaluation; individual lending limits and payment conditions depending on each counterparty’s financial situation; controlling advance payments; controlling accounts receivable by lines of business, etc.

The carrying amount of financial assets represents the maximum credit exposure.

Trade and Other Receivables

The Group’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. Any excess of receivables over approved credit limit is secured by either letter of credit from a bank with an external credit rating not less than A, or advance payment. Management believes that not impaired trade receivables are fully recoverable.

The Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables and investments.

Impairment Losses

As of 31 December 2015 and 2014, the analysis of financial receivables is as follows:

Gross Impairment Gross Impairment
31 December 2015 31 December 2015 31 December 2014 31 December 2014
Not past due 95 916 (134) 87 434 (88)
Past due 0 — 180 days 11 190 (4 796) 9 291 (93)
Past due 180 — 365 days 3 199 (3 012) 799 (623)
Past due 1 — 3 year 7 976 (6 371) 11 075 (5 101)
Past due more than three years 10 412 (10 272) 7 656 (7 071)
128 693 (24 585) 116 255 (12 976)

The movement in the allowance for impairment in respect of trade and other receivables during the period was as follows:

2015 2014
Balance at the beginning of the year 12 976 8 991
Increase during the year 6 284 662
Amounts written off against receivables 110 104
Decrease due to reversal (4 426) (284)
Reclassification from other lines 7 946 -
Other movements (610) (239)
Translation differences 2 305 3 742
Balance at the end of the year 24 585 12 976

In 2015 the Group recognised an impairment provision in relation to trade receivables from OJSC “TRANSAERO Airlines” in the amount of RUB 5.7 billion.

Release in provision in the amount of RUB 4.4 billion mainly relates to positive outcome of negotiations with the Serbian Government for collection of receivables from Serbian state owned companies. The negotiations ended in adoption of the Law on taking over the receivables by the Government. As a result the receivables were restructured and in December 2015 the Group received the first instalment.

The movement in the allowance for impairment in respect of other current assets during the period was as follows:

2015 2014
Balance at the beginning of the year 16 951 10 461
Increase during the year 1 410 1 949
Amounts written off against receivables (4 047) (312)
Reclassification to other lines (7 946) -
Other movements 903 (284)
Translation differences 1 722 5 137
Balance at the end of the year 8 993 16 951

Investments

The Group limits its exposure to credit risk mainly by investing in liquid securities. Management actively monitors credit ratings and does not expect any counterparty to fail to meet its obligations.

The Group does not have any held-to-maturity investments that were past due but not impaired as of 31 December 2015 and 2014.

>Credit quality of financial assets

The credit quality of financial assets that are neither past due nor impaired can be assessed by reference to external credit ratings (if available) or to historical information about counterparty default rates:

A BBB Less than BBB Without rating Total
As of 31 December 2015
Cash and cash equivalents - 84 361 19 825 5 642 109 828
Deposits with original maturity more than 3 months less than 1 year - 42 652 6 554 - 49 206
Long-terms loans issued - - - 41 047 41 047
As of 31 December 2014
Cash and cash equivalents 8 993 26 499 6 051 8 491 50 034
Deposits with original maturity more than 3 months less than 1 year 65 758 5 739 1 719 3 442 76 658
Long-terms loans issued - - - 28 229 28 229

The credit quality of trade and other receivables is assessed regularly by the Management of the Group. For this purpose the customers are individually analysed based on a number of characteristics, such as:

  • legal form of the entity;
  • duration of relationships with the Group, including ageing profile, maturity and existence of any financial difficulties; and
  • whether the customer is a final customer or not, or a related party or not.

One of the major factors that are considered is ageing profile. The most significant current customers do not have any breakage of payment history.

Liquidity Risk

Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset.

The Group’s approach to managing liquidity is to ensure that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. In managing its liquidity risk, the Group maintains adequate cash reserves and actively uses alternative sources of loan financing in addition to bank loans. The Group’s stable financial situation helps it to mobilise funds in Russian and foreign banks with comparative ease.

The following are the contractual maturities of financial liabilities, including estimated interest payments:

Carrying amount Contractual cash flows Less than 6 months 6 — 12 months 1 — 2 years 2 — 5 years Over 5 years
As of 31 December 2015
Bank loans 476 080 540 886 67 680 68 683 108 054 282 073 14 396
Bonds 51 748 63 783 25 678 2 159 14 272 21 674 -
Loan Participation Notes 280 193 363 090 10 104 5 672 12 509 94 967 239 838
Other borrowings 10 077 11 928 5 024 690 2 807 1 413 1 994
Other non-current financial liabilities 62 662 62 662 - - 60 601 2 061 -
Trade and other payables 81 285 81 285 78 774 2 511 - - -
962 045 1 123 634 187 260 79 715 198 243 402 188 256 228
As of 31 December 2014
Bank loans 262 962 293 629 15 797 23 460 78 335 169 132 6 905
Bonds 61 609 70 129 12 452 2 031 23 212 32 434 -
Loan Participation Notes 221 107 295 615 5 880 2 532 6 566 80 530 200 107
Other borrowings 17 749 18 118 14 362 311 220 1 219 2 006
Other non-current financial liabilities 57 553 85 171 - - 1 031 67 951 16 189
Trade and other payables 73 896 73 896 71 188 2 708
694 876 836 558 119 679 31 042 109 364 351 266 225 207

Capital Management

The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern, to provide sufficient return for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure the Group may revise its investment program, attract new or repay existing loans or sell certain non-core assets.

On the Group level capital is monitored on the basis of the net debt to EBITDA ratio and return on the capital on the basis of return on average capital employed ratio (ROACE). Net debt to EBITDA ratio is calculated as net debt divided by EBITDA. Net debt is calculated as total debt, which includes long and short term loans, less cash and cash equivalents and short term deposits. EBITDA is defined as earnings before interest, income tax expense, depreciation, depletion and amortisation, foreign exchange gain (loss), other non-operating expenses and includes the Group’s share of profit of equity accounted investments. ROACE is calculated in general as Operating profit adjusted for income tax expense divided by the average for the period figure of Capital Employed. Capital employed is defined as total equity plus net debt.

The Group’s net debt to EBITDA ratios at the end of the reporting periods were as follows:

Year ended 31 December 2015 Year ended 31 December 2014
Long-term debt 670 779 502 306
Short-term debt and current portion of long-term debt 147 319 61 121
Less: cash, cash equivalents and deposits (163 404) (129 825)
Net debt 654 694 433 602
Total EBITDA 345 160 300 761
Net debt to EBITDA ratio at the end of the reporting period 1.90 1.44
Operating profit 207 615 212 645
Operating profit adjusted for income tax expenses 157 213 185 796
Add / (less) share of profit / (loss) of associates and joint ventures 24 956 (6 306)
Average capital employed 1 733 285 1 373 665
ROACE 10.51% 13.07%

There were no changes in the Group’s approach to capital management during the period.

Fair Value Measurement

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an ordinary transaction between market participants at the measurement date.

The different levels of fair value hierarchy have been defined as follows:

  • Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities
  • Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices)
  • Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

The following assets and liabilities are measured at fair value in the Group’s Consolidated Financial Statements:

  • Derivative financial instruments (forward exchange contracts and interest-rate swaps used as hedging instruments),
  • Stock Appreciation Rights plan (SAR),
  • Financial investments classified as available for sale except for unquoted equity instruments whose fair value cannot be measured reliably that are carried at cost less any impairment losses.

Derivative financial instruments and SAR refer to Level 2 of the fair value measurement hierarchy, i.e. their fair value is determined on the basis of inputs that are observable for the asset or liability either directly (as prices) or indirectly (derived from prices). There were no transfers between the levels of the fair value hierarchy during the year ended 31 December 2015 and 2014. There are no significant assets or liabilities measured at fair value categorised within Level 1 or Level 3 of the fair value hierarchy. The fair value of the foreign exchange contracts is determined by using forward exchange rates at the reporting date with the resulting value discounted back to present value.

As of 31 December 2015 the fair value of bonds and loan participation notes is RUB 258,408 million (RUB 232,210 million as of 31 December 2014). The fair value is derived from quotations in active market and related to Level 1 of the fair value hierarchy. The carrying value of other financial assets and liabilities approximate their fair value.

The table below analyses financial instruments carried at fair value, which refer to Level 2 of the fair value hierarchy.

Level 2
As of 31 December 2015
Forward exchange contracts (76 258)
Other financial liabilities (657)
Total liabilities (76 915)
As of 31 December 2014
Forward exchange contracts (58 312
Other financial liabilities (2 228)
Total liabilities (60 540)

The Company implements a cash-settled stock appreciation rights (SAR) compensation plan. The plan forms part of the long term growth strategy of the Group and is designed to reward Management for increasing shareholder value over a specified period. Shareholder value is measured by reference to the Group’s market capitalisation. The plan is open to selected Management provided certain service conditions are met. The awards are fair valued at each reporting date and are settled in cash at the conclusion of the three years vesting period. The awards are subject to certain market and service conditions that determine the amount that may ultimately be paid to eligible employees. The expense recognised is based on the vesting period. In 2015 the new three years period of SAR plan commenced.

The fair value of the liability under the plan is estimated using the Black-Scholes-Merton option-pricing model by reference primarily to the Group’s share price, historic volatility in the share price, dividend yield and interest rates for periods comparable to the remaining life of the award. Any changes in the estimated fair value of the liability award will be recognised in the period the change occurs subject to the vesting period.

The following assumptions are used in the Black-Scholes-Merton model as of 31 December 2015:

Volatility 4.1%
Risk-free interest rate 10.4%
Dividend yield 6.1%

In the Consolidated Statement of Profit and Loss and Other Comprehensive Income for the year ended 31 December 2015 and 2014 the Group recognised compensation expense of RUB 657 million and RUB 594 million, respectively. This expense is included within selling, general and administrative expenses. A provision of RUB 657 million has been recorded in respect of the Group’s estimated obligations for one year under the plan as of 31 December 2015. As of 31 December 2014 the amount of the three years provision was equal to RUB 2,228 million.

35. Operating Leases

Non-cancellable operating lease rentals are payable as follows:

31 December 2015 31 December 2014
Less than one year 8 179 15 425
Between one and five years 17 169 24 211
More than five years 65 404 69 062
90 752 108 698
36. Commitments and Contingencies

Taxes

Russian tax and customs legislation is subject to frequent changes and varying interpretations. Management’s treatment of such legislation as applied to the transactions and activity of the Group, including calculation of taxes payable to federal, regional and municipal budgets, may be challenged by the relevant authorities. The Russian tax authorities may take a more assertive position in their treatment of legislation and assessments, and there is a risk that transactions and activities that have not been challenged in the past may be challenged later. As a result, additional taxes, penalties and interest may be accrued. Generally, taxpayers are subject to tax audits for a period of three calendar years immediately preceding the year in which the decision to carry out a tax audit has been taken. Under certain circumstances tax audits may cover longer periods. The years 2012, 2013 and 2014 are currently open for tax audit. Management believes it has adequately provided for any probable additional tax accruals that might arise from these tax audits.

Russian transfer pricing legislation was amended starting from 1 January 2012 to introduce significant reporting and documentation requirements regarding market environment at the date of transaction. Compared to the old rules the new transfer pricing rules appear to be more technically elaborate and better aligned with the international transfer pricing principles developed by the Organisation for Economic Cooperation and Development (OECD). The new legislation allows the tax authorities to make transfer pricing adjustments and impose additional tax liabilities in respect of controllable transactions (transactions with related party and some types of transactions with an unrelated parties), if the transaction pricing was not established in line with arm’s length principles.

The Group’s controllable transactions with related parties are subject to constant internal review for compliance with the new transfer pricing rules. The Group believes that the transfer pricing documentation that the Group has prepared to comply with the new legislation provides sufficient evidence to support the Group’s tax positions and related tax returns. In addition in order to mitigate potential risks, the Group negotiates pricing approaches for major controllable transactions with tax authorities in advance. Nine pricing agreements between the Group and tax authorities regarding some significant intercompany transactions have been concluded in 2012-2014.Given that the practice of implementation of the new transfer pricing rules has not yet been developed and some clauses of the new law have contradictions and cannot be called unambiguous, the impact of any challenge to the Group’s transfer prices cannot be reliably estimated.

Economic Environment in the Russian Federation

The Russian Federation displays certain characteristics of an emerging market. Tax, currency and customs legislation is subject to varying interpretations and contributes to the challenges faced by companies operating in the Russian Federation. The political and economic instability, uncertainty and volatility of the financial markets and other risks may have negative effects on the Russian financial and corporate sectors. The future economic development of the Russian Federation is dependent upon external factors and internal measures undertaken by the government to sustain growth, and to change the tax, legal and regulatory environment. Management believes it is taking all necessary measures to support the sustainability and development of the Group’s business in the current business and economic environment.

In 2014 the U.S., the EU and certain other countries imposed sanctions on the Russian energy sector that partially apply to the Group. The information on the main restrictions related to sanctions was disclosed in the Consolidated Financial Statements as of and for the year 31 December 2014. There were no significant changes in sanctions during the year 2015.

Environmental Matters

The enforcement of environmental regulation in the Russian Federation is evolving and the enforcement posture of government authorities is continually being reconsidered. The Group periodically evaluates its potential obligations under environmental regulation. Management is of the opinion that the Group has met the government’s requirements concerning environmental matters, and the Group does not therefore have any material environmental liabilities.

Capital Commitments

As of 31 December 2015 the Group has entered into contracts to purchase property, plant and equipment for RUB 281,503 million (RUB 203,749 million as of 31 December 2014).

37. Group Entities

The most significant subsidiaries of the Group and the ownership interest are presented below:

Ownership interest
Subsidiary Country of incorporation 31 December 2015 31 December 2014
Exploration and Production
OJSC Gazprom Neft-Noyabrskneftegaz Russian Federation 100% 100%
Gazprom Neft Orenburg LLC Russian Federation 100% 100%
Zapolyarneft LLC Russian Federation 100% 100%
Gazprom Neft Shelf LLC Russian Federation 100% 100%
Gazprom Neft-Khantos LLC Russian Federation 100% 100%
Gazprom Neft-Vostok LLC Russian Federation 100% 100%
Gazprom neft Yamal LLC Russian Federation 90% 90%
JSC Uzhuralneftegaz Russian Federation 87.5% 87.5%
Refining
JSC Gazprom Neft-Omsk Refinery Russian Federation 100% 100%
JSC Gazprom Neft-Moscow Refinery Russian Federation 100% 100%
Marketing
PJSC Gazpromneft-Tumen Russian Federation 99.5% 99.5%
OJSC Gazpromneft-Omsk Russian Federation 100% 100%
JSC Gazpromneft-Ural Russian Federation 100% 100%
JSC Gazprom Neft-Novosibirsk Russian Federation 100% 100%
OJSC Gazpromneft-Yaroslavl Russian Federation 92.5% 92.5%
OJSC Gazpromneft-Centre Russian Federation 100% 100%
OJSC Gazpromneft Regional Sales Russian Federation 100% 100%
JSC Gazprom Neft-Severo-Zapad Russian Federation 100% 100%
JSC Gazpromneft-Kuzbass Russian Federation 100% 100%
CJSC Gazprom Neft-Aero Russian Federation 100% 100%
Gazprom Neft Marin Bunker LLC Russian Federation 100% 100%
Other Operations
Gazpromneft-Lubricants LLC Russian Federation 100% 100%
Gazpromneft-Bitumen Materials LLC Russian Federation 100% 100%
Gazpromneft-NTC LLC Russian Federation 100% 100%
OJSC CNT Russian Federation 100% 100%
Gazpromneftfinance LLC Russian Federation 100% 100%
Gazpromneft-Invest LLC Russian Federation 100% 100%
ibusiness companies
Naftna industrija Srbije A.D. Serbia 56.2% 56.2%

The following tables summarise the consolidated financial information relating to the significant Group’s subsidiary Naftna industrija Srbije A.D. and its subsidiaries and Gazprom Resource Northgas LLC (note 6). The carrying amount of non-controlling interests of all other subsidiaries are not significant individually.

As of and for the year ended 31 December 2015:

Carrying amount of non-controlling interest Profit attributable to non-controlling interest Current assets Non-current assets Current liabilities Non-current liabilities
Naftna industrija Srbije A.D. and its subsidiaries 71 528 26 616 56 620 243 131 (43 006) (76 400)
Gazprom Resource Northgas LLC 15 460 3 319 2 009 8 197 (7) -
Revenue Profit
Naftna industrija Srbije A.D. and its subsidiaries 183 022 7 071
Gazprom Resource Northgas LLC - 4 058

As of and for the year ended 31 December 2014:

Carrying amount of non-controlling interest Profit attributable to non-controlling interest Current assets Non-current assets Current liabilities Non-current liabilities
Naftna industrija Srbije A.D. and its subsidiaries 58 536 25 225 62 066 192 646 (42 726) (62 027)
Revenue Profit
Naftna industrija Srbije A.D. and its subsidiaries 153 706 11 053

Dividends paid in 2015 by Naftna industrija Srbije A.D. to the non-controlling share comprised RUB 2.6 billion (RUB 2.3 billion in 2014). Gazprom Resource Northgas LLC didn’t pay dividends in 2015.

38. Related Party Transactions

For the purpose of these Consolidated Financial Statements parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial and operational decisions as defined by IAS 24 Related Party Disclosures. Related parties may enter into transactions which unrelated parties might not, and transactions between related parties may not be effected on the same terms, conditions and amounts as transactions between unrelated parties.

The Group has applied the exemption as allowed by IAS 24 not to disclose all government related transactions, as the parent of the Company is effectively being controlled by the Russian Government. In the course of its ordinary business, the Group enters into transactions with natural monopolies, transportation companies and other companies controlled by the Russian Government. Such purchases and sales are individually insignificant and are generally entered into on market or regulated prices. Transactions with the state also include taxes which are detailed in Notes 11, 22 and 32. The tables below summarises transactions in the ordinary course of business with either the parent company or associates and joint ventures.

The Group enters into transactions with related parties based on market or regulated prices. Short-term and long-term loans provided as well as debt are based on market conditions available for not related entities.

As of 31 December 2015 and 2014 the outstanding balances with related parties were as follows:

31 December 2015 Parent company Parent’s subsidiaries and associates Associates and joint ventures
Cash and cash equivalents 15 402
Short-term financial assets 3 135 14 901
Trade and other receivables 1 232 2 895 17 941
Other assets 4 527 1 253
Long-term financial assets 10 503 30 791
Total assets 1 242 26 462 64 886
Short-term debt and other current financial liabilities 1 672
Trade and other payables 3 203 2 737 1 567
Other current liabilities 2 107 1 107 241
Long-term debt and other non-current financial liabilities 62 650 72 883 -
Total liabilities 67 960 76 727 3 480
31 December 2014 Parent company Parent’s subsidiaries and associates Associates and joint ventures
Cash and cash equivalents 13 780
Short-term financial assets - 1 719 1 295
Trade and other receivables 1 257 3 038 13 190
Other assets 38 3 762 1 889
Long-term financial assets - - 23 541
Total assets 1 295 22 299 39 915
Short-term debt and other current financial liabilities - - 981
Trade and other payables 1 096 2 217 1 956
Other current liabilities 2 108 507 328
Long-term debt and other non-current financial liabilities 57 552 - -
Total liabilities 60 756 2 724 3 265

For the years ended 31 December 2015 and 2014 the following transactions occurred with related parties:

Year ended 31 December 2015 Parent company Parent’s subsidiaries and associates Associates and joint ventures
Crude oil, gas and oil products sales 18 678 34 597 56 641
Other revenue 8 1 088 31 739
Purchases of crude oil, gas and oil products - 41 799 98 785
Production related services 31 14 332 17 730
Transportation costs 6 000 1 811 8 130
Interest income 370 1 588 3 580
Interest expense 5 993 94 160
Year ended 31 December 2014 Parent company Parent’s subsidiaries and associates Associates and joint ventures
Crude oil, gas and oil products sales 14 259 22 523 42 790
Other revenue 16 414 10 830
Purchases of crude oil, gas and oil products - 38 825 84 599
Production related services - 14 737 19 092
Transportation costs 8 176 1 519 2 717
Interest income - 821 1 772
Interest expense 942 - -

For the year ended 31 December 2015 the Group had a transaction with a subsidiary of Gazprom (Note 6).

Transactions with Key Management Personnel

For the years ended 31 December 2015 and 2014 the Group recognized RUB 1,564 million and RUB 1,664 million, respectively, as compensation for key management personnel (members of the Board of Directors and Management Committee). Starting from the Consolidated Financial Statements for the period ended December 31, 2014 the Group also includes quarterly accruals of SAR in key management remuneration in addition to salaries, bonuses and other contributions.

39. Segment Information

Presented below is information about the Group’s operating segments for the years ended 31 December 2015 and 2014. Operating segments are components that engage in business activities that may earn revenues or incur expenses, whose operating results are regularly reviewed by the chief operating decision maker (CODM), and for which discrete financial information is available.

The Group manages its operations in 2 operating segments: Upstream and Downstream.

Upstream segment (exploration and production) includes the following Group operations: exploration, development and production of crude oil and natural gas (including joint ventures results), oil field services. Downstream segment (refining and marketing) processes crude into refined products and purchases, sells and transports crude and refined petroleum products. Corporate centre expenses are presented within the Downstream segment.

Eliminations and other adjustments section encompasses elimination of inter-segment sales and related unrealised profits, mainly from the sale of crude oil and products, and other adjustments.

Intersegment revenues are based upon prices effective for local markets and linked to market prices.

Adjusted EBITDA represents the Group’s EBITDA and its share in associates and joint ventures’ EBITDA. Management believes that adjusted EBITDA represents useful means of assessing the performance of the Group’s ongoing operating activities, as it reflects the Group’s earnings trends without showing the impact of certain charges. EBITDA is defined as earnings before interest, income tax expense, depreciation, depletion and amortisation, foreign exchange gain (loss), other non-operating expenses and includes the Group’s share of profit of associates and joint ventures. EBITDA is a supplemental non-IFRS financial measure used by Management to evaluate operations.

Year ended 31 December 2015 Upstream Downstream Eliminations Total
Revenue from sales:
External customers 74 802 1 393 141 - 1 467 943
Inter-segment 534 625 18 373 (552 998) -
Total revenue from sales 609 427 1 411 514 (552 998) 1 467 943
Adjusted EBITDA 266 879 137 932 - 404 811
Depreciation, depletion and amortisation 71 153 27 348 - 98 501
Impairment of assets (15 582) (15 582)
Capital expenditure 244 958 104 078 - 349 036
Year ended 31 December 2014 Upstream Downstream Eliminations Total
Revenue from sales:
External customers 24 226 1 384 012 - 1 408 238
Inter-segment 454 755 10 114 (464 869) -
Total revenue from sales 478 981 1 394 126 (464 869) 1 408 238
Adjusted EBITDA 160 320 182 294 - 342 614
Depreciation, depletion and amortisation 64 223 21 728 - 85 951
Capital expenditure 208 796 62 534 - 271 330

The geographical segmentation of the Group’s revenue and capital expenditures for the years ended 31 December 2015 and 2014 is presented below:

Year ended 31 December 2015 Russian Federation CIS Export and international operations Total
Sales of crude oil 81 187 28 416 189 386 298 989
Sales of petroleum products 740 520 78 134 432 480 1 251 134
Sales of gas 28 243 - 3 411 31 654
Other sales 66 235 2 085 5 678 73 998
Less custom duties and sales related excises - (899) (186 933) (187 832)
Total revenue from sales 916 185 107 736 444 022 1 467 943
Year ended 31 December 2014
Sales of crude oil 42 624 15 889 233 101 291 614
Sales of petroleum products 715 854 64 582 546 498 1 326 934
Sales of gas 24 406 - 1 604 26 010
Other sales 40 695 1 430 3 874 45 999
Less custom duties and sales related excises - (593) (281 726) (282 319)
Total revenue from sales 823 579 81 308 503 351 1 408 238
Russian Federation CIS Export and international operations Total
Non-current assets as of 31 December 2015 1 548 035 13 861 390 726 1 952 623
Capital expenditures for year ended 31 December 2015 301 070 1 277 46 689 349 036
Impairment of assets (4 023) - (11 559) (15 582)
Non-current assets as of 31 December 2014 1 288 625 15 332 253 751 1 557 708
Capital expenditures for year ended 31 December 2014 235 337 1 737 34 256 271 330

Adjusted EBITDA for the years ended 31 December 2015 and 2014 is reconciled below:

Year ended 31 December 2015 Year ended 31 December 2014
Profit for the period 116 198 126 656
Total income tax expense 29 252 19 214
Finance expense 33 943 15 279
Finance income (14 732) (7 075)
Depreciation, depletion and amortisation 98 501 85 951
Net foreign exchange loss 67 910 52 265
Other loss, net 14 088 8 471
EBITDA 345 160 300 761
(less) / add share of (profit) / loss of associates and joint ventures (24 956) 6 306
add share of EBITDA of associates and joint ventures 84 607 35 547
Total adjusted EBITDA 404 811 342 614
40. Subsequent events

In February 2016 the Group repurchased Rouble Bonds (series 8, 9 and 11) with the total par value of RUB 20.4 billion.

Supplementary Information on Oil and Gas Activities (Unaudited)

The accompanying consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). In the absence of specific IFRS guidance, the Group has reverted to other relevant disclosure standards, mainly US GAAP, that are consistent with practices established for the oil and gas industry. While not required under IFRS, this section provides unaudited supplemental information on oil and gas exploration and production activities.

The Group makes certain supplemental disclosures about its oil and gas exploration and production that are consistent with practices. While this information was developed with reasonable care and disclosed in good faith, it is emphasised that some of the data is necessarily imprecise and represents only approximate amounts because of the subjective judgments involved in developing such information. Accordingly, this information may not necessarily represent the current financial condition of the Group or its expected future results.

The Group voluntarily uses the SEC definition of proved reserves to report proved oil and gas reserves and disclose certain unaudited supplementary information associated with the Group’s consolidated subsidiaries, share in joint operations, associates and joint ventures.

The proved oil and gas reserve quantities and related information regarding standardised measure of discounted future net cash flows do not include reserve quantities or standardised measure information related to the Group’s Serbian subsidiary, NIS, as disclosure of such information is prohibited by the Government of the Republic of Serbia. The disclosures regarding capitalised costs relating to and results of operations from oil and gas activities do not include the relevant information related to NIS.

Presented below are capitalised costs relating to oil and gas producing activities:

31 December 2015 31 December 2014
Consolidated subsidiaries and share in joint operations
Unproved oil and gas properties 78 442 70 295
Proved oil and gas properties 1 199 223 1 163 584
Less: Accumulated depreciation, depletion and amortisation (474 857) (373 218)
Net capitalised costs of oil and gas properties 802 808 860 661
Group’s share of associates and joint ventures
Proved oil and gas properties 472 931 366 771
Less: Accumulated depreciation, depletion and amortisation (101 596) (80 870)
Net capitalised costs of oil and gas properties 371 335 285 901
Total capitalised costs consolidated and equity interests 1 174 143 1 146 562

Presented below are costs incurred in acquisition, exploration and development of oil and gas reserves for the years ended 31 December:

Year ended 31 December 2015 Year ended 31 December 2014
Consolidated subsidiaries and share in joint operations
Exploration costs 922 936
Development costs 242 400 179 461
Costs incurred 243 322 180 397
Group’s share of associates and joint ventures
Exploration costs 311 583
Development costs 55 792 51 676
Total costs incurred consolidated and equity interests 299 425 232 656

Results of operations from oil and gas producing activities for the years ended:

Year ended 31 December 2015 Year ended 31 December 2014
Consolidated subsidiaries and share in joint operations
Revenues:
Sales 120 476 100 567
Transfers 426 604 396 928
Total revenues 547 080 497 495
Production costs (99 138) (84 089)
Exploration expenses (922) (936)
Depreciation, depletion and amortisation (70 978) (63 405)
Taxes other than income tax (268 750) (245 484)
Pretax income from producing activities 107 292 103 581
Income tax expenses (19 211) (12 058)
Results of oil and gas producing activities 88 081 91 523
Group’s share of associates and joint ventures
Total revenues 165 500 98 849
Production costs (19 521) (20 311)
Exploration expenses (311) (583)
Depreciation, depletion and amortisation (24 046) (16 293)
Taxes other than income tax (64 248) (50 604)
Pretax income from producing activities 57 374 11 058
Income tax expenses (5 274) 1 979
Results of oil and gas producing activities 52 100 13 037
Total consolidated and equity interests in results of oil and gas producing activities 140 181 104 560

Proved Oil and Gas Reserve Quantities

Proved reserves are defined as the estimated quantities of oil and gas, which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. In some cases, substantial new investment in additional wells and related support facilities and equipment will be required to recover such proved reserves. Due to the inherent uncertainties and the limited nature of reservoir data, estimates of underground reserves are subject to change over time as additional information becomes available.

Proved developed reserves are those reserves, which are expected to be recovered through existing wells with existing equipment and operating methods. Proved undeveloped reserves are those reserves which are expected to be recovered as a result of future investments to drill new wells, to recomplete existing wells and/or install facilities to collect and deliver the production from existing and future wells.

As determined by the Group’s independent reservoir engineers, DeGolyer and MacNaughton, the following information presents the balances of proved oil and gas reserve quantities (in millions of barrels and billions of cubic feet respectively):

Proved Oil Reserves Quantities — in MMBbl 31 December 2015 31 December 2014
Consolidated subsidiaries and share in joint operations
Beginning of year 5 051 4 981
Production (315) (307)
Purchases of minerals in place - 105
Revision of previous estimates 106 272
End of year 4 842 5 051
Minority’s share included in the above proved reserves (27) (16)
Proved reserves, adjusted for minority interest 4 815 5 035
Proved developed reserves 2 573 2 747
Proved undeveloped reserves 2 270 2 304
Group’s share of associates and joint ventures
Beginning of year 1 362 1 189
Production (92) (77)
Purchases of minerals in place 73 58
Revision of previous estimates 71 192
End of year* 1 414 1 362
Proved developed reserves 681 614
Proved undeveloped reserves 734 748
Total consolidated and equity interests in reserves — end of year 6 256 6 413
Proved Gas Reserves Quantities — in Bcf 31 December 2015 31 December 2014
Consolidated subsidiaries and share in joint operations
Beginning of year 6 321 6 323
Production (479) (455)
Purchases of minerals in place - 23
Revision of previous estimates 295 430
End of year 6 137 6 321
Minority’s share included in the above proved reserves (51) (29)
Proved reserves, adjusted for minority interest 6 086 6 292
Proved developed reserves 3 598 3 821
Proved undeveloped reserves 2 539 2 500
Group’s share of associates and joint ventures
Beginning of year 10 188 7 069
Production (557) (150)
Purchases of minerals in place 3 202 1 677
Revision of previous estimates 524 1 592
End of year* 13 357 10 188
Proved developed reserves 6 846 4 357
Proved undeveloped reserves 6 511 5 831
Total consolidated and equity interests in reserves — end of year 19 494 16 509

*Including 82% NCI share in Gazprom Resource Northgas

Standardised Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves

Estimated future cash inflows from production are computed by applying average first-day-of-the-month price for oil and gas for each month within the 12 month period before the balance sheet date to year-end quantities of estimated proved reserves. Adjustment in this calculation for future price changes is limited to those required by contractual arrangements in existence at the end of each reporting period. Future development and production costs are those estimated future expenditures necessary to develop and produce year-end proved reserves based on year-end cost indices, assuming continuation of year end economic conditions. Estimated future income taxes are calculated by applying appropriate year-end statutory tax rates. These rates reflect allowable deductions and tax credits and are applied to estimated future pre-tax cash flows, less the tax bases of related assets. Discounted future net cash flows have been calculated using a 10% discount factor. Discounting requires a year-by-year estimate of when future expenditures will be incurred and when reserves will be produced.

The information provided in tables set out below does not represent Management’s estimate of the Group’s expected future cash flows or of the value Group’s proved oil and gas reserves. Estimates of proved reserves quantities are imprecise and change over time, as new information becomes available. Moreover, probable and possible reserves, which may become proved in the future, are excluded from the calculations. The calculations should not be relied upon as an indication of the Group’s future cash flows or of the value of its oil and gas reserves.

31 December 2015 31 December 2014
Consolidated subsidiaries and share in joint operations
Future cash inflows 10 101 648 12 756 212
Future production costs (6 506 491) (7 734 833)
Future development costs (804 747) (938 935)
Future income tax expenses (428 252) (665 167)
Future net cash flow 2 362 158 3 417 277
10% annual discount for estimated timing of cash flow (1 237 504) (1 936 851)
Standardised measure of discounted future net cash flow 1 124 654 1 480 426
Group’s share of associates and joint ventures
Future cash inflows 3 560 911 3 593 104
Future production costs (1 840 372) (2 003 356)
Future development costs (231 270) (254 790)
Future income tax expenses (243 400) (228 982)
Future net cash flow 1 245 869 1 105 976
10% annual discount for estimated timing of cash flow (752 451) (668 192)
Standardised measure of discounted future net cash flow 493 418 437 784
Total consolidated and equity interests in the standardised measure of discounted future net cash flow 1 618 072 1 918 210