Establishing a solid base for future growth Annual Report and Accounts 2020 Kcell is the foremost leader in Kazakhstan’s fast-expanding telecoms market. Its 4G/LTE network enables innovative, value-added digital services and high-quality business solutions that are underpinned by a focus on customer value management. Strategic report 01 2020 highlights At a glance 10 Milestones and key events of 2020 12 14 Chairman’s statement 16 Q&A with our CEO 18 Our business model 20 Our market 22 Our strategy 24 Key performance indicators 26 Operating review 30 Financial review 32 Sustainability 36 Risk management Governance Board of Directors Management Board Corporate Governance Financial statements Independent Auditor’s Report Consolidated statement of financial position Consolidated statement of comprehensive income Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the consolidated financial statements 38 40 41 47 50 51 52 53 54 02 Focusing on supporting our society To assist our customers during this difficult period, we made sure that all channels of communications were able to continue uninterrupted. 2 04 Delivering technology and service excellence Our approach is underpinned by a customer-centric focus and attractive tariffs that add value through access to high-quality digital content. Kcell Annual Report and Accounts 2020 2020 HIGHLIGHTS Total revenue (KZT million) Service revenue (KZT million) 174,684 140,049 11.5% YoY 2019: 156,657 1.8% YoY 2019: 137,564 B2B revenue (KZT million) excluding off-net bulk sms EBITDA (KZT million) excluding non-recurring items 18,730 72,147 28.5% YoY 2019: 14,581 12.1% YoY 2019: 64,364 Handset sales (KZT million) Subscribers (000’s) 34,634 8,055 81.4% YoY 2019: 19,091 2.7% 2019: 8,275 06 08 Providing the best business solutions We developed innovative packages that facilitated working from home and network connectivity to meet changing business needs this year. Expanding our high quality network The strength of the reach and quality of Kcell’s 4G/ LTE coverage will aid its support of the roll-out of the ‘250+ programme’. 01 Strategic reportGovernanceFinancial statementsKcell Annual Report and Accounts 2020 Focusing on supporting our society Since the start of the quarantine period, we have focused on supporting our society and providing the tools to assist our customers as we all grapple with the personal and professional challenges that the pandemic has created. Kcell has introduced free calls and internet traffic for medical professionals. We have also provided all our customers with free access to more than 400 e-learning web sites, to online book, movie and TV entertainment services and to online banking services mobile applications. In addition, we have granted bonus minutes and free roaming data for those subscribers who have not been able to return to Kazakhstan as a result of the current state of emergency. We also provided uninterrupted mobile service when subscribers’ balance reaches zero. From early days of quarantine in Kazakhstan we urged our customers to remain home by displaying the slogan UYDEBOL (meaning “stay home” in Kazakh). Our initiatives were clearly communicated across all digital touchpoints, emphasizing our overarching message “Stay home, Kcell is at your service”. 02 Kcell Annual Report and Accounts 2020 Free and bonus services During the pandemic, Kell provided its subscribers with free access to the entire Kaznet, including university websites, reference databases, online diaries, e-education portals and resources recommended by the Ministry of Education and Science. It also covered free access to banks and mobile banking. Jańa tariff subscribers were additionally able to activate a daily free bonus package of 30 minutes’ voice communication. With quarantine restrictions in place, the Company introduced remote replacement and free delivery of SIM cards. Free calls and internet traffic for 3,500 medical professionals 400 Provide free access to more than 400 e-learning websites 27 online banking services and mobile applications 5,000 roaming subscribers provided 30 bonus minutes and 3 GB free traffic 4G communication for a modular infectious hospital Uninterrupted mobile service when subscribers’ balance reaches zero UYDEBOL slogan displayed on subscribers’ handset screen (meaning “Stay Home” in Kazakh) 03 GovernanceFinancial statementsStrategic reportKcell Annual Report and Accounts 2020 Delivering technology and service excellence Our customer-centric approach helps us retain our position in a highly competitive market. Revenue growth partially driven by a rise in subscribers for high quality attractive tariff plans which include variety of additional services (ivi TV, Yandex+, Mobi Doctor, etc.). Continued focus on the development and launch of innovative and attractive bundled offers, as well as proactive promotion across all channels. 4G device penetration growth supported by contract phones sales. 04 Kcell Annual Report and Accounts 2020 C A S E S T U D Y Launch of Simkomats self-service terminals In April 2020, Kcell introduced Simkomats self-service terminals mindful of the communication needs of its customers during the COVID-19 pandemic. Simkomats provide remote services such as new SIM, SIM change, top-up and E-SIM using biometrical ID scan and will also improve the overall customer experience in the long-term. Read more on page 27 C A S E S T U D Y Kcell and Samsung collaboration In September 2020, we opened the second of our co-branded Kcell and Samsung stores in Shymkent, following our first successful collaboration with the mobile phone company in 2019 in Almaty. Consultants are on hand to tell visitors to the stores all about the advantages of different Samsung smartphone models and contract offers. Customers are then able to test out the smartphones before buying and get a full range of standard services, including number activation, tariff selection and balance top-up. It is now over five years since we launched our Kcell/Activ exclusive retail chain, which has proved extremely popular with 35 stores throughout Kazakhstan. 05 GovernanceFinancial statementsStrategic reportKcell Annual Report and Accounts 2020 Providing the best business solutions We offer attractive business solutions and devices with progressive tariff plans to enable connectivity Corporate mobile Devices with connectivity Virtual PBX Fixed internet M2M Big data IoT IT security Outsourced call-centre IT infrastructure Private LTE Mobile work place 06 Kcell Annual Report and Accounts 2020 B2B revenue +28.5% (excluding off-net bulk sms) Business solutions 62.7% of total B2B revenue C A S E S T U D Y Working from home and connectivity As part of our commitment to supporting our customers during the pandemic, we worked with the Ministry of Education to provide connected devices and tools to assist with online education, including free access to 400 e-learning sites. We have also developed a range of packages specifically designed to meet the connectivity needs of those working remotely from home across Kazakhstan. 07 GovernanceFinancial statementsStrategic reportKcell Annual Report and Accounts 2020 Expanding our high quality network Kcell’s 4G/LTE coverage reaches 65% of the population and, at the same time, has significantly improved the quality of our services % 6508 Kcell Annual Report and Accounts 2020 LTE traffic of total data traffic LTE population coverage 3G population coverage 75.1% 65.1% 83.8% C A S E S T U D Y 250+ project delivers high-speed access Kcell has signed up to a network sharing initiative together with Kazakhstan’s two other mobile providers (Beeline and Tele2). As part of the country’s 250+ project, the initiative aims to deliver high-speed internet access to rural communities with populations of 250 or more. The digital project will provide 3G and 4G connectivity from all three operators to 1,600 rural settlements with a combined population of 1 million, and also give them access to new services including distance learning, telemedicine, mobile financial services as well as government digital resources. Each mobile operator will have equal access to the shared network. Read more on page 29 09 GovernanceFinancial statementsStrategic reportKcell Annual Report and Accounts 2020 AT A GLANCE Network B2C B2B 75.1% Share of LTE in data traffic 71.4% 62.7% 4G device penetration among Kcell customers Share of revenues from business solutions Coverage Employees 65.1% Share of population with 4G/LTE access 2,249 employees in the Company Transforming ourselves to maintain future leadership Network Fedorovka Zatobolsk Lisakovsk Petropavlovsk Kokshetau Pavlodar Stepnogorsk Atbasar Ekibastuz Nur-Sultan Arkalyk Temirtau Abay Uralsk Aksay Aktobe Alga Kandyagash Inderborskiy Dossor Atyrau Kulsary Ganyushkino Shalkar Zhezkazgan Tengiz Aralsk Beyneu Ayteke bi Fort Shevchenko Aktau Zhanaozen 2G coverage 3G coverage 4G/LTE coverage 10 Semey Ridder Oskemen Bukhtarma Ayagoz Zaysan Urdzhar Balkhash Taldykorgan Dostyk Kyzylorda Zhanakorgan Zhanatas Arys Aksu Shu Merke Taraz Korday Zharkent Kapchagay Almaty Saryagash Zhetysay Kcell Annual Report and Accounts 2020 Our Company Kcell provides the full range of mobile telecommunication services, including voice, messaging, value-added (multimedia and mobile content) and data transmission (internet access). Its two key brands are among the best established in Kazakhstan: Kcell for B2B (corporate subscribers and public organisations) and Activ for B2C (individual consumers). At the end of 2020, the Company had 8.1 million subscribers, while 65.1% of the population had access to its 4G network and 83.8% to its 3G service. Our vision Kcell has a clear vision for the future: delivering first-class services to its customers and, in turn, creating value for all its stakeholders, including the Republic of Kazakhstan. It will achieve this through further investment in its network and the introduction of additional value- added services while retaining its focus on competitive pricing. The Company’s commitment to best practice in corporate governance underpins the quality of it financial and operational performance. Products and services Kcell provides the full spectrum of mobile telecommunication products and services to both individuals and organisations. Alongside voice, SMS, MMS and data transmission, it offers internet access and value-added services, including mobile content. These include various OTT services under the Mobi brand (TV, Music, Kino, Press, Bookmate) and unique mobile financial services (Mobimoney). An increased focus on the sale of handsets has enabled the Company to expand its offering and meet more of its customers needs. G o v e r n a n c e i F n a n c a i l Petropavlovsk Fedorovka Zatobolsk Lisakovsk Kokshetau Atbasar Stepnogorsk Pavlodar Ekibastuz Nur-Sultan Arkalyk Temirtau Abay Uralsk Aksay Aktobe Alga Kandyagash Inderborskiy Ganyushkino Dossor Atyrau Kulsary Tengiz Beyneu Fort Shevchenko Aktau Zhanaozen Shalkar Zhezkazgan Aralsk Ayteke bi Semey Ridder Oskemen Bukhtarma Ayagoz Zaysan Urdzhar Balkhash Taldykorgan Dostyk Kyzylorda Zhanakorgan Saryagash Zhetysay Zhanatas Shu Merke Taraz Korday Arys Aksu Zharkent Kapchagay Almaty Over the past two decades, Kcell has built one of the most modern, technologically advanced and extensive mobile telecommunication networks in Kazakhstan. Looking to the future, integration with country’s infrastructure should allow the Company to significantly increase both its offering and its overall customer base, providing an improved service quality at reduced cost to the business. Kcell has licences to operate on 2G, 3G and 4G/LTE frequencies indefinitely. Its network is collocated and operates on four frequency bands – 700/800 MHz, 900 MHz, 1700/1800 MHz and 2100 MHz – providing both data and voice communications. Data transfer speeds range from 300 kbps for 2G to 37 mbps for 3G and up to 74 mbps for 4G and 221 mbps for 4G+. Projects with Kazakhtelecom Exploiting the synergies between our major shareholder Kazakhtelecom and Kcell is a key focus to enabling us both to gain competitive advantages. Integrating Kcell and Tele2 networks marked our first joint product initiative and, alongside this, plans to combine radio access networks with that of Kazakhtelecom companies is progress well. s t a t e m e n t s 11 Strategic reportKcell Annual Report and Accounts 2020 MILESTONES AND KEY EVENTS OF 2020 We’ve come a long way In 1998, Kcell became the first company to receive a licence to provide cellular services on the GSM-900 standard in Kazakhstan. In December 2018, Kazakhtelecom acquired a 75% stake in Kcell, enabling the Company to move forward with its ambitious agenda. The transaction allowed the two partners to begin to exploit the clear synergies between them, in particular, by giving Kcell access to Kazakhtelecom’s infrastructure. 01/20 Board of Directors An Extraordinary General Meeting of Shareholders (EGM), held on 15 January 2020, adopted the decision to elect Jere Calmes as an Independent Director on the Kcell Board of Directors. His terms of office will be effective from the election date until its expiration as agreed at the EGM on 25 January 2019. Milestones On 1 June 1998, Kcell was established as GSM Kazakhstan OAO Kazakhtelecom to operate a cellular telecommunications network in Kazakhstan. Cross-listing on AIX On 6 February 2020, Kcell’s ordinary shares and GDRs were admitted to the Astana International Exchange (AIX) Official List. Trading commenced on 7 February 2020. 02/20 03/20 Agreement with KaR-Tel On 4 March 2020 Kcell and KaR-Tel signed a Frequency Sharing Agreement, which allows KaR-Tel the right to share 5 MHz radio frequency within the 1725-1730 MHz band and 1820-1825 MHz band. In September 2003, Kcell became the first telecommunications operator in Kazakhstan to launch General Packet Radio Service (GPRS) and Multimedia Messaging Service (MMS) functionality. In December 2010, Kcell officially began operating dedicated 3G networks in Astana and Almaty, significantly improving the quality of data transfer services. 1998 1999 2003 2005 2010 2012 After receiving the first GSM licence in Kazakhstan, the Company officially launched its mobile communications network in February 1999, operating under the Kcell trademark, adding the Activ brand in the following September. In September 2005, the Company was the first cellular operator to introduce GPRS roaming in Kazakhstan. In February 2012, Kazakhtelecom sold its 49% stake to Sonera Holding B.V. (Sonera), a subsidiary of TeliaSonera. In December 2012, the Company successfully completed its offering of global depositary receipts (GDRs) on the London Stock Exchange and ordinary shares on the Kazakh Stock Exchange. 12 Kcell Annual Report and Accounts 2020 05/20 Network sharing agreement The Board approved a trilateral network sharing agreement between Kcell JSC, KaR-Tel LLP and Mobile Telecom-Service LLP to commence joint construction and operation of a mobile broadband network for settlements of 250 -1,000 people with rail and road access. 12/20 Departure of Kaspars Kukelis On 21 December 2020, the Company announced that Kaspars Kukelis, Chairman of the Management Board, Chief Executive Officer, would be transferring to another position in the Kazakhtelecom JSC group of companies from 3 January 2021. 06/20 Rating upgrade On 24 June 2020, Fitch Ratings upgraded Kcell Long-Term Issuer Default Rating (IDR) from ‘BB’ to ‘BB+’, the outlook ‘stable’. New acting Chief Executive Executive Officer and Chairman Yuri Kharlamov, a member of the Management Board and Chief Financial Officer, was appointed as Chairman of the Management Board, Chief Executive Officer, effective from 6 February 2021. Yuri Kharlamov had been acting Chairman of the Management Board and Chief Executive Officer from 3 January 2021. In May 2014, Kcell became an official distributor of iPhone in Kazakhstan; while in September, it launched a major rebranding campaign for the Activ brand. In January 2016, Kcell acquired additional spectrum rights on 700/800 MHz and 1800 Mhz bands, boosting its nationwide connectivity and preparing for the launch of advanced 4G and LTE services later in the year. In December 2018, Telia and Fintur sold their 75% stake in Kcell to Kazakhtelecom. 2014 2015 2016 2017 2018 2019 In March 2015, the Company opened its first branded Kcell store in Almaty, a new concept aimed at improving customer experience. The international ratings agency Fitch assigned the Company a long-term issuer default rating of ‘BB’, the outlook ‘stable’. In the first full year following the Kazakhtelecom acquisition, the Company appointed a new Board led by independent members, which outlined a new strategic vision and established a new executive team to implement it. The year marked a clear turnaround for Kcell with increased revenues of 4.6%, the first improvement in its key financial indicators for five years. 13 Strategic reportGovernanceFinancial statementsKcell Annual Report and Accounts 2020 CHAIRMAN’S STATEMENT Supporting our employees and customers Dear Shareholders, As we reported last year, emergency measures were introduced in Kazakhstan in mid-March in response to the spread of the COVID-19 virus. At the time, while this was already impacting business activity, both the duration of the quarantine and its implications generally were unpredictable. Despite the national lockdowns, Kcell still delivered a strong set results in service revenue and the sale of devices, which were both supported by sales through online channels. Our first priority during this period was the safety of our employees and the second, as a good corporate citizen, was to support our customers. Remote working was introduced where possible with full technical support and access to online conferencing and training. The personal safety for those required to work on the front line was ensured through workplace transport, personal protective equipment (PPE) supplied and sanitised offices. We created a Department of Medical Aid with trained staff and equipment. In total, we committed KZT323 million to countering the spread of COVID-19 among our employees and the wider population. The Company played an active role in helping our customers during what were very uncertain times. Most importantly, we backed our medical professionals by providing them with free calls and internet access. We also gave all our customers free access to a wide range of educational and entertainments platforms as well as facilitating online banking services. Uninterrupted services became ever more vital and, for those subscribers unable able to return to Kazahstan due to closed borders or finding themselves with zero balances, we ensured continuity and peace of mind. Performance in 2020 Against this difficult economic backdrop, I am particularly pleased that Kcell is able to report a robust performance, both financially and operationally. Overall, this can be attributed to a number of factors: strong online sales during the quarantine period; a surge in consumer confidence as retail outlets re-opened; the opening of the second Kcell/Samsung store in September; and a further boost from sales of the latest Samsung smartphone and the iPhone 12. Our endeavours to refocus our B2B portfolio during 2020, removing unprofitable products and introducing more innovative propositions for our corporate customers, also proved successful. Full details are included in the CEO’s review on pages 16 to 17. Against this difficult economic backdrop, I am particularly pleased that Kcell is able to report a robust performance, both financially and operationally.” Alexey Buyanov Chairman of the Board of Directors 14 Kcell Annual Report and Accounts 2020 Operational synergies with Kazakhtelecom Despite the ongoing pandemic, we made it a strategic imperative to exploit the synergies between our major shareholder Kazakhtelecom and Kcell during 2020. It was already clear that achieving efficiencies would enable us both to gain competitive advantage and, indeed, we launched our first joint product initiative to deliver fixed and mobile convergent services. The integration of the companies radio networks projects with our majority shareholder Kazakhtelecom which started in Q3 of 2020 aimed to leverage operational synergies. The implementation of this collaborative project is progressing well and already providing a significant improvement in data transmission speed and absolute network coverage in comparison with competitors. 263 sites in 17 cities across Kazakhstan were merged in 2020. We are already seeing significant improvement in data transfer speed and in network coverage compared to our competitors. Project 250+ participation As part of Digital Kazakhstan, the country’s ambitious drive to provide digital access to all its citizens, Project 250+ is an initiative that aims to deliver high- speed internet access to rural communities with populations of 250 or more. Kcell was proud to be invited, along with Kazakhstan’s two other mobile providers, to supply 3G and 4G connectivity to 1,600 rural settlements with a combined population of 1 million. Through a network sharing programme, this will enable access to educational, telemedicine and mobile financial services as well as government digital resources. Kcell’s termination of GDRs programme The Board has given serious consideration to a request by the Company’s majority shareholder, Kazakhtelecom, to delist its GDRs from both the London Stock Exchange (LSE) and the Astana International Exchange (AIX). It has concluded that the low liquidity and poor trading performance of the GDRs do not warrant the costs and management effort required to maintain the Company’s status as an internationally listed company. The ordinary shares of the Company will continue to be listed on the Kazakhstan Stock Exchange (“KASE”) and on AIX following the termination of the Deposit Agreement and the GDR programme. The management believes that concentrating trading on KASE will improve liquidity. It also feels that the costs and efforts of maintaining an international listing are no longer justifiable, since there are no plans to access international capital markets. The EGM hold on 9 April 2021, approved the termination of the GDR programme, delisting of securities and termination of the Deposit Agreement. The Deposit Agreement and the GDR programme would terminate on 12 June 2021. In December 2020, Chairman of the Management Board, CEO, Kaspar Kukelis left the post to take up another position in the Kazakhtelecom JSC group of companies. During his tenure, Kcell was able to achieve significant improvement in key financial and operational indicators. Along with the Board of Directors, I would like to thank him for his contribution and to wish him every success for the future. We have now appointed Yuri Kharlamov as Chairman of the Management Board, CEO. Yuri joined Kcell nearly a year ago as Chief Financial Officer and we have every confidence in his ability to lead the Company on a further upward trajectory through effective operational performance and continuity of the Company’s strategy. G o v e r n a n c e i F n a n c a i l s t a t e m e n t s 15 Strategic reportKcell Annual Report and Accounts 2020 Q&A WITH OUR CEO Delivering strong performance A Total revenue in 2020 increased by 11.5%, to KZT174,684 million (2019: KZT156,657 million). Service revenue rose to KZT140,049 million (2019: KZT137,564 Q How would you summarise the overall performance of the Kcell business in 2020 and the factors that have driven this, in particular the strong uplift in figures during the last quarter? million), up 1.8% year-on-year and 3.8% increase excluding off-net bulk SMS revenue. We saw an underlying increase in service revenue, driven mainly by a rise in subscribers for our innovative, high quality tariff plans and robust handset sales, supported by strong sales through online sales channels. During the year, EBITDA, excluding non-recurring items, grew by 12.1% to KZT72,147 million (2019: KZT64,364 million), due to strong revenue growth allied with our ongoing focus on cost optimisation. Free cash flow for 2020 increased by 31.1% to KZT28,705 million (2019: KZT21,900 million). We have also improved the terms of our debt portfolio during the year. Generated cash flow will be used for financing our capital intensive projects. Q What actions were taken by the Company that you think would account for the strong rise in service revenue, particularly during the last quarter? A Service revenues also benefited from our strong focus on customers’ needs, as demonstrated by the introduction of innovative tariffs, such as Reactiv, new streaming film and television services (OTT) and mobile financial services products along with the rollout of apps that allow customers to manage their accounts according to their own particular requirements. As a result, average revenue per user (ARPU) increased by 9.3% year-on-year. Q Handset sales have become part of your broader offering to meet your customers’ needs in recent years. How successful was this in 2020? A Handset sales increased significantly in 2020. We have successfully opened two co-branded stores with Samsung; its new models are very popular with our customers. In addition, in Q4, sales were further driven by the launch of the iPhone 12 leading to an increase in Kcell’s entire market share for handsets and devices. We also experienced an increased demand for devices during the pandemic lockdown. This was both to enable B2B customers to work efficiently from home and also, as part of our involvement with the Ministry of Education, supplying devices for online learning. Overall, in 2020 handset and device sales increased to KZT34,634 million (2019: KZT19,091 million), up 81.4% year-on-year. Kcell has delivered a strong financial and operational performance in 2020, in the face of the significant challenges resulting from the COVID-19 global pandemic and its impact on the level and scale of business activity in Kazakhstan.” Yuri Kharlamov Chairman of the Management Board, CEO 16 Kcell Annual Report and Accounts 2020 A In B2B, we focused in 2020 on rebalancing the portfolio to remove unprofitable products such as off-net bulk Q What has been your approach for B2B customers during the last year? SMS, while developing new propositions including virtual office services. This resulted in 28.5% growth, excluding off-net bulk SMS revenue in 2020. A We have made great progress in advancing connectivity across the country through our participation in the ‘250+’ project, which targets the Q Are there any particular projects that you would like to highlight in 2020? achievement of a high level of digitalisation throughout Kazakhstan, by bringing access to high-speed Internet to villages with 250+ population. The ‘250+ project, a joint initiative by Kazakhstan’s three mobile operators, is part of the Digital Kazakhstan programme and aims to bring connectivity to 1,600 rural settlements across the entire country. This initiative will benefit more than 1 million people and ensure that all citizens have access to modern online services, including business, education, health and entertainment, by the end of 2021, which significantly marks the 30th anniversary of Kazakhstan’s independence. This partnership between Kazakhstan’s three mobile operators to deliver this ambitious project will additionally ensure that overall costs are contained while greatly improving connectivity; thus providing widespread economic and social benefits. Also we are making good progress with instigating collaborative projects with our majority shareholder Kazakhtelecom to leverage operational synergies. Q How do you propose sustaining your position in today’s very competitive market? A Towards the end of the year, we started a project to improve the efficiency of the commercial function aimed at enhancing the customer experience and accelerating the process of launching new products and services. We plan to extend this to value-added services, OTT and mobile financial services, improving the mobile application and developing online sales and customer service channels Q The COVID-19 pandemic has impacted business across Kazakhstan during 2020. How has Kcell managed the situation? A Throughout the year, we have played an active role in providing crucial support to both our customers and the wider society in Kazakhstan, enabling the continuation of business, education and crucial channels of communication during an extremely difficult period for our economy and society. We did this by providing the tools that our customers needed as both we all grappled with the personal and professional challenges created by the pandemic quarantine. Kcell introduced free calls and internet traffic for medical professionals. We also gave all our customers free access to more than 400 e-learning web sites, to online books, movies and TV entertainment as well as mobile applications for online banking services. In addition, we have granted bonus minutes and free roaming data to those subscribers who were unable to return to Kazakhstan as a result of this state of emergency. We also provided uninterrupted mobile service if subscribers’ balance reached zero. During quarantine in Kazakhstan, we urged our customers to remain home by displaying the slogan UYDEBOL (“stay home” in Kazakh) on handsets. Our initiatives were clearly communicated across all digital touchpoints, emphasising our overarching message “Stay home, Kcell is at your service”. Q What are your thoughts about any ongoing implications for 2021? A With signs that the situation in Kazakhstan is gradually stabilising, and on the basis that nothing untoward occurs to undermine this stability, the Company outlook for 2021 is for high single-digit growth in both revenue and EBITDA. The CAPEX projection will be provided upon completion of the second planning stage for the radio access networks integration project with the Kazakhtelecom group of companies. Every member of the Kcell team has demonstrated outstanding resilience and commitment in the face of the challenges presented by COVID-19. As a result, we continue to deliver technology and service excellence to support our customers, as well as the wider economy and society. And, we are well positioned to provide value to all our stakeholders in the year ahead. 17 G o v e r n a n c e i F n a n c a i l s t a t e m e n t s Strategic reportKcell Annual Report and Accounts 2020 OUR BUSINESS MODEL Kcell’s business model is built upon sound foundations and at the core of its success. By exploiting its strong asset base and differentiators through 21st-century solutions, Kcell seeks to generate superior value for all its stakeholders. Our inputs People Kcell recognises the value of recruiting, developing and retaining talented people, and aims to be an employer of choice in Kazakhstan by creating a positive and motivating work environment, as well as improving the quality of life for employees and their families. Network The Company operates one of the most modern, technologically advanced and extensive mobile telecommunication networks in the country, and has licences to operate on 2G, 3G and 4G/ LTE frequencies indefinitely. Financial position Service revenues benefitted from strong focus on customers’ needs, as demonstrated by the introduction of innovative tariffs, new OTT and mobile financial services products. Kcell’s higher share of revenues from B2B and handset sales, together with a consistent focus on optimising costs, is helping to strengthen the Company’s financial position. What makes us different 18 Operating model The digital transformation of our operations is progressing well. Our commitment to innovation and value is central to this and enables us to deliver 21st century solutions to our customers. We achieve this through the quality of our fast-expanding network, competitive brands in the market place and data-centric products and services, as well as the support of our dedicated employees. Customer- oriented solutions Value for money Technology Kcell has become Kazakhstan’s largest digital ecosystem and enjoys a competitive edge through such value-added content as mobile financial services, mobile television, movies, books, music and magazines, as well as the development of unique business solutions for corporate clients. Brands The Kcell and Activ brands are well established in the highly competitive B2B and B2C telecommunications markets and recognised for their quality of customer experience and value. Natural resources We care about the environment in which we operate, contributing to local and global sustainability by developing, promoting and utilising resource-efficient and environmentally friendly services, and by seeking to reduce our environmental footprint. Network quality With our high-quality 4G/LTE network, we continue to lead the advancement of mobile telecommunications in Kazakhstan and look forward to introducing the next generation, 5G. Innovation We invest in innovative products and services, and developing digital content; in 2017, we opened an innovation lab to work on ‘internet of things’ (IoT) services. Kcell Annual Report and Accounts 2020 Strategy The Company’s strategy is to retain a market-leading position and to unlock synergies with Kazakhtelecom. See page 22 Sustainability Investments in sustainability play a crucial role in ensuring that the business model will endure and in benefiting society as a whole. See page 32 Risk management We have implemented a robust risk management system to identify and mitigate risks to our operations and ensure that our business functions without disruption. Governance By adhering to the highest standards of ethical conduct with all our stakeholders, we seek to contribute to and promote an enduring culture of responsible business. See page 36 See page 38 P E O P L E N E T W O R K B R A N D S P R O D U C T S A N D S E R V I C E S Values created for Customers Kcell provides the full spectrum of mobile telecommunications services to both individuals and organisations, underpinned by data-centric products and services that add high value for digital customers. Subscribers 8.1m Shareholders The Company remains steadfastly committed to maximising value for shareholders in a way that is sustainable for the long term, including through its clearly defined dividend policy. Dividend paid to shareholders KZT 9bn1 1 For 2019. Employees Kcell has 2,249 employees with remuneration packages, which reflect internal equity and external local market conditions, and offers comprehensive benefits. Employees +15.3% Community We are actively involved in many initiatives that aim to improve the lives of people, focusing on three key areas: education, sport and healthy lifestyles, and society. Community investments KZT 323m commitment to Kcell employees during the pandemic, supporting employees and their families Expertise From the engineers that build our networks to the operators in our call centres, we employ a dedicated workforce who have the skills to deliver a first-class service to our customers. Customer relationships Our focus is on customer value management through the application of smart pricing methods and the use of targeted promotional activities. Brand reputation As one of Kazakhstan’s leading companies, Kcell takes very seriously its responsibility to the communities in which it operates, supporting them through its people and its business. 19 Strategic reportGovernanceFinancial statementsKcell Annual Report and Accounts 2020 OUR MARKET The changing face of the industry While 2020 was the year when the coronavirus pandemic dominated world news, it will have a much longer lasting impact on the global economy, and the telecommunications sector is not immune to this. Service providers are more likely to experience difficulties in securing finance to progress infrastructure and service development as the uncertainties of the economic slowdown persist. The global telecom market This also means that plans to accelerate the availability of premium products and services such as 5G and fibre optics could be severely hampered. However, it is not all gloom and doom as it is predicted that the trend for growth seen within the global telecom market over recent years will continue. The face of the industry is changing yet again as new technologies push the boundaries: mobile connectivity is outperforming fixed-line and fixed-voice connections in particular. In fact, the ever-increasing penetration of internet services through both wireless or copper-laid networks is fast replacing fixed-voice traffic altogether. Although it is a later adopter than many developed markets, the CIS region is experiencing a rapid uplift in mobile broadband and 4G became the leading technology in the region during 2020. Greater use of data-intensive services and the demand for higher speeds will see this increase further with the prediction that 4G will account for nearly two-thirds of the region’s total connections by 2025. The latest figures for the industry show that, in 2019, mobile technologies and services generated 6.1% of GDP in the CIS region, which equates to a value-added contribution of US$137 billion. With 5G technologies becoming more widespread – 50 million 5G connections estimated by 2025 – the boost to the CIS economy will be significant, as key sectors such as manufacturing, utilities and professional and financial services reap the benefits of better and faster connectivity. Focusing on Kazakhstan A general overview of the Kazakhstan telecom market shows a consistent growth in recent years, which is expected to continue. This is mainly attributed to the rise in urban populations across the country and the subsequent increase in the adoption of mobile phones, which support 3G, 4G and planned 5G services. Global Monitor predicts further strong growth in the telecom market until 2025, influenced in particular by the Internet of Things (IoT) as it connects devices across wired and wireless broadband. 2G platforms are gradually being withdrawn and will largely have disappeared by 2025, with 3G networks also being reduced as consumer demand for improved connectivity becomes the key driver to providing better access. Mobile subscriptions are forecast to increase by 72% from 2019-2025 with smartphones up by 86% and mobile internet users by 54%. It is estimated that, by then, 3G will only account for 28% of the market with 4G taking the lion’s share at 60% and 5G already cornering 12% overall. From its much-anticipated launch during 2021, it is likely that the vast majority of mobile connections will already be on 5G by 2029. Much of this will be fuelled by an ambitious programme, Digital Kazakhstan, drawn up by the Government of Kazakhstan in order to improve the country’s ranking in the global information and communication technology (ICT) Development Index. The most recent listing in 2017 ranked the country in 52nd place: the target is to be one of the top 30 countries. Taking just one indicator of the progress being made, the share of internet users in 2020 in Kazakhstan had increased to 88% from 84.2% in 2019. 20 Kcell Annual Report and Accounts 2020 2020 was also the start of a major initiative, the 250+ programme, which aims to bring high-speed internet access to rural settlements with more than 250 inhabitants. All three of Kasakhstan’s mobile operators have signed up to delivering connectivity to 1,600 villages across the country, reaching over 1 million people. The partnership agreement will contain costs while, at the same time, increasing access to business, education, health and entertainment services by the end of 2021, which is also the 30th anniversary of Kazakhstan’s independence. Structure of telecommunications services revenues in Kazakhstan in 2020 4.50% 5.98% 2.32% 4.04% The Government has also signed up to an initiative, led jointly by UNICEF and the UN’s International Telecommunication Union. Built on the four pillars of Map, Connect, Finance, and Empower, Giga aims to connect every school in the world to the internet and every student to information, opportunity and choice by 2030. 2020 activity and COVID-19 The telecom market remains highly competitive with only three major mobile operators: Kcell, Beeline and Tele2/Altel. The focus for all three continues to be the introduction of new and affordable products and services, along with the expansion of networks and bandwidth. Innovation is key to driving revenue from both mass-market entertainment and high-end business connectivity. With the safety of employees paramount during the COVID-19 pandemic, the telecom industry in Kazakhstan experienced its impact in a number of ways. The state of emergency lockdowns, with remote working and home schooling, inevitably brought with it increased revenues through the streaming of educational and entertainment services. Capital expenditure on infrastructure, on the other hand, decreased as companies were forced to slow network deployments to ensure the health and safety of their engineers. Compared to many sectors of the Kazakh economy, the overall communications industry performed well with an 8.6% increase in revenue year-on-year at KZT884.5 billion. Much of this is attributable to a 14.4% rise in revenue from internet service at KZT33.1 billion; voice service accounted for KZT231.3 billion, up slightly by 1.5%; while local telephone services were down 2.6% to KZT35.8 billion. In terms of volume, the Internet, mobile communications and other telecommunication services accounted for 83% of the market. The COVID-19 response by the country’s mobile operators to introduce measures to support their customers throughout a difficult year was exemplary. Measures included free access to educational services and to government websites and banking services, free or discounted tariffs for healthcare workers, online conferencing solutions to support business continuity and economic recovery. They also engaged with both public and private sectors on initiatives to alleviate the impact on vulnerable groups in society. 26.23% 19.41% 37.51% Mobile communications Internet services Other communication services Local telephone services Long-distance telephone services Data transfer Communication programs Source ©Profit KS More information about Kcell’s performance and its own response to the COVID-19 pandemic can be found throughout this Annual Report. Sources: Global Monitor: www.globalmonitor.us/product/ kazakhstan-telecommunication-market-report GSMA: www.gmsa.com The Mobile Economy Russia & CIS 2020 www.profit.kz 21 Strategic reportGovernanceFinancial statementsKcell Annual Report and Accounts 2020 OUR STRATEGY Kcell is at your service Our support for subscribers and clients during the state of emergency also reinforced our strategies for growth and innovation across the business. In smartphones Focus on smartphone users Having a clear multi-brand architecture will enable Kcell to improve the performance of its B2C business through optimal pricing for bundles, customer value management and network quality. Priorities – Higher share and ARPU of bundled offer users – Contract sales growth – Additional revenues from digital services Performance in 2020 – Revenue growth driven by a rise in subscribers for high quality attractive tariff plans which include variety of additional services (ivi TV, Yandex+, Mobi Doctor, educational platforms, cash back) – Systematic growth in the penetration of package offers is due to: +81.4% increase in handset sales • Active promotion of new offers across all channels +9.3% ARPU growth • Launch of innovative and attractive service packages • Introduction of a new ‘Reactiv’ tariff line with unlimited Internet access • Launch of an internet shop for online sales • Opening of 2 co-branded shops in partnership with Samsung • Significant increase in 4G penetration due to record handset sales and new Apple and Samsung smartphones Key performance indicators See page 25 22 Kcell Annual Report and Accounts 2020 In B2B Web conferencing service launched Sustainable growth through diversification In 2020, we focused on rebalancing the B2B portfolio by removing unprofitable products, such as off-net bulk sms, whilst developing new propositions including virtual office services and private LTE networks. The development of these innovative, new products will attract additional revenue streams and secure annual growth. Priorities – Active participation in the Digital Kazakhstan projects – Leadership and intensive growth in large business through business solutions – Extensive SME growth through digital solutions and automation – Development of new business areas (Big Data, IoT, etc) Performance in 2020 – Growth of 28.5% year-on-year, excluding off net bulk sms – Launch of an electronic ticketing system to supply fare validation and payment terminals for public transport – Completion of the construction and launch of the first commercial Private LTE in Kazakhstan and one of the first in the CIS – Introduction of a voice and video communication system (mission critical push-to-talk) – IoT solutions are under development and piloting Key performance indicators See page 24 Group synergies Product convergence and network integration Additional synergies can be achieved through numerous products and cost optimisation. There is potential from existing offerings such as fixed-mobile convergence (FMC) in the B2C segment and fiscal data, as well as in new areas, such as FMC in the B2B segment, B2G and Digital Kazakhstan. Priorities – New revenues from FMC in the mass segment – Converged digital services for business – Other commercial synergies Performance in 2020 – The first phase of integration of Kcell and Kazakhtelecom’s radio networks – Launch of the first joint product initiative with Kazakhtelecom to deliver fixed and mobile convergent services Key performance indicators See page 24 263 sites merged in 17 cities 23 Strategic reportGovernanceFinancial statementsKcell Annual Report and Accounts 2020 KEY PERFORMANCE INDICATORS Showing strength and leadership Despite a difficult trading year, Kcell delivered both strong financial and operational results in 2020, in line with its provided outlook. Financial indicators Total revenue (KZT million) EBITDA* (KZT million) Net income (KZT million) 174,684 72,147 * excluding non-recurring items 17,578 2020 2019 2018 174,684 2020 72,147 2020 17,578 156,657 2019 64,364 2019 10,015 149,701 2018 50,941 2018 8,531 Total revenue increased by 11.5%, driven by attractive new tariff plans, an increase in customers with bundled offers and higher sales of devices in B2C and B2B segments. EBITDA growth was 12.1%, mainly driven by higher device sales, termination of provision of low margin services and substantial cost optimisation, with a 41.3% margin. Net income, reflecting the same key drivers as EBITDA and supported by thorough analysis and tight control of expenses, increased by 75.5%. B2B revenues (KZT million) Data revenues (KZT million) Service revenues (KZT million) 20,139 58,446 140,049 2020 2019 2018 20,139 2020 58,446 2020 140,049 18,616 16,021 2019 2018 51,430 45,800 2019 2018 137,564 131,269 A strong B2B performance delivered 28.5%, excluding off-net bulk sms revenue, due to the focus on rebalancing the portfolio and developing new propositions. Data revenue increased by 13.6%; data traffic was up by 40.6% to 453.4 PB. Our bundled base grew by 8.1pp during the year, while 4G device penetration increased by 7.5pp during the year due to record handset sales and new smartphones from Apple and Samsung. Service revenue increased by 1.8%; excluding off-net bulk sms, service revenue grew by 3.8%. This growth was driven by a rise in subscribers for high-quality, attractive tariff plans, which include a variety of additional services such as: ivi TV, Yandex+, Mobi Doctor, educational platforms, cash back. 24 Kcell Annual Report and Accounts 2020 Operational indicators Total subscribers (’000) 8,055 Minutes of usage (MOU; units) 230 Churn (%) 34.1 2020 2019 2018 8,055 8,275 2020 2019 230 2020 34.1 228 2019 44.5 8,969 2018 218 2018 55.5 While the total number of subscribers fell by 2.7%, the take-up of high-quality tariff plans rose in line with the move to value-driven acquisition. MOU remained largely unchanged during 2020, in keeping with the trend seen in recent years. Churn again fell considerably to 34.1% as Kcell continued to implement its strategy of moving from volume-driven to value-driven subscriber acquisition. Prepaid subscribers (’000) Average revenues per user (ARPU; KZT) Handset sales (KZT million) 7,061 1,457 34,634 2020 2019 2018 7,061 7,312 2020 2019 1,457 2020 34,634 1,334 2019 19,091 8,062 2018 1,154 2018 18,432 The drop in prepaid subscribers of 3.4% is also in line with Company’s strategy to move from a subscriber base that is volume-driven to one that is value-driven. ARPU grew by 9.3%, boosted by the improved quality of our subscriber base with a growing number migrating to new offers with expanded content. This also included a higher number of subscribers with fixed contracts, due to the increasing volume of devices sold through our online shops. Handset revenue increased significantly by 81.4%, fuelled by online sales, the opening of a second co-branded Samsung store and the launch of the iPhone 12. 25 Strategic reportGovernanceFinancial statementsKcell Annual Report and Accounts 2020 OPERATING REVIEW – B2C Ensuring crucial support for our customers throughout the year 2020 was a changeable year for our B2C business. The full realisation about the impact of the COVID-19 pandemic become clearer as we moved into Q2. The national lockdown resulted in lower consumer spending and an increase in personal saving. Job losses and uncertainty about the future were also factors in the decline in the number of active subscribers in the Kcell network and reduced top-up payments. A slowing in the spread of the pandemic and a lifting of restrictions towards the end of the year also brought with it an increase in consumer confidence as evidenced by the growth in service revenue (excluding off-net bulk sms), which was up 3.8% year-on-year. This was driven in part by our focus on customer needs and the introduction of innovative tariffs, such as Reactiv, new OTT and mobile financial services products, but robust handset sales (particularly online) sales also contributed to this. Average revenue per user (ARPU) during the year grew by 9.3%. SuperApp launch We launched a beta version of updated mobile applications and websites to provide our customers with a more consistent and user-friendly access to Kcell’s services. This SuperApp ‘ecosystem’ brings together a number of integrated products: core/VAS/OTT; MFS; online shop; subscriber self-service (robot consultant, WhatsApp and Telegram bots, free SMS to 9090). Non-cash payments and QR Payments made by the Kcell/Activ subscribers using their prepaid balance doubled in 2020 compared with 2019. As elsewhere in the world, the growth of non-cash payments in mobile commerce has largely been driven by two factors: the pandemic and an improvement in user interfaces. During the lockdown period, online shopping and payments made via the internet increased significantly. In Kazakhstan, according to the players in the mobile commerce market, from January to April 2020, the volume of non-cash transactions increased by more than 2.5 times to KZT 7.4 trillion (2019: KZT 2.8 trillion). But, it is also important to see this in the context of how quickly consumers have embraced the move towards a cashless society: as recently as five years ago, annual non-cash transactions only accounted for KZT 234.3 billion of overall payments. Inevitably, upselling to new – more attractive but more expensive – tariff plans also slowed, while global travel bans brought a substantial reduction in roaming revenue. However, we believed that it was crucial to support our customers through this difficult period, making sure that all channels of communications were able to continue uninterrupted. During quarantine in Kazakhstan and in line with the national guidelines, we promoted the slogan, UYDEBOL (“stay home” in Kazakh), on handsets. We introduced free calls and internet traffic for medical professionals, while giving all our customers free access to more than 400 e-learning web sites, to online books, movies and TV entertainment and online banking services. In addition, we have granted bonus minutes and free roaming data to subscribers who were unable to return to Kazakhstan as a result of the state of emergency. We also provided uninterrupted mobile service if subscribers’ balance reached zero. All these initiatives were communicated across all digital touchpoints, clearly emphasising our overarching message “Stay home, Kcell is at your service”. 26 Kcell Annual Report and Accounts 2020 Share of bundled subscribers MFS active users (000) 4G device penetration in Kcell’s network +8.1pp +32% +7.5pp 2020 2019 2018 62.3 2020 226 2020 71.4 54.2 2019 171 47.0 2018 110 2019 2018 63.9 50.9 It is predicted that, during 2021, QR payments will grow dynamically. Although available since 2017, consumers had been slow to adopt this payment option, despite its obvious advantages of lower commission and safer transactions. But 2020 changed all that with the banks in Kazakhstan actively promoting QR payments and generally raising public awareness. TapOnPhone+QR technology using international unified standards has a major part to play in the near-future of mobile commerce and will require an ecosystem for payments using mobile phone balances. Kcell has already invested in this and is ahead of the curve with the launch of its ‘Cash back with Visa QR’ campaign. It is the only mobile operator in Kazakhstan providing contactless payments services using QR code in the Visa QR network around the world. Retail and online handset sales The lifting of quarantine and the loosening of the tight restrictions governing the opening of offices and stores unleashed a pent-up demand from consumers for handsets and devices. This helped to generate a significant increase in sales, up 81.4% year-on-year at KZT 34,634 million. The increase was also partially driven by higher sales through online channels. Alongside this, revenue was further enhanced by improved inventory management processes, which enabled the Company to handle and meet demand effectively, combined with careful price monitoring. MobiDoctor Revenue growth was partially driven by a rise in subscribers for high-quality and attractive tariff plans, which included variety of additional services (ivi cinema, Yandex+ music streaming and other benefits, educational platforms). Telemedicine has become an increasingly important element within digital offers and, with the spread of COVID-19 and quarantine measures, the demand for such services grew significantly during 2020. In response to this and collaborating with IMEDICUS, Kcell launched the MobiDoctor online consultation service. Included in the Jańa 3990 tariff plans, MobiDoctor allows Activ subscribers to received an unlimited number of online medical consultations from a doctor on duty or a paediatrician at any time of the day or night, seven days a week, anywhere in the world. As predicted, the take-up for this service has grown exponentially since the launch as subscribers were keen to take advantage of this innovative new service. Simkomat self-service kiosks During April, we introduced the first of our Activ Simkomats in Almaty. These self-service kiosks allow customers to easily purchase, replace a lost SIM- card, install an eSIM or top up their balance. Given the state of emergency, these were a real boon for those wishing to access cellular services in a safe and efficient way. They have already proved popular and have now been installed across Kazakhstan with plans to increase their numbers in the coming year. The Simkomat was developed by a team designers, product specialists and developers with the aim of increasing digitalisation and improving the user experience. This will also reduce costs and contribute to the future expansion of the network. ivi cinema ivi cinema is another premium service that Kcell is now offering as part of the Jańa 3990 tariff for Activ subscribers. With no additional fees and unlimited access without adverse image quality and all online advertising blocked, subscribers are able to watch more than 80,000 films and TV series on ivi cinema. This proved most popular with subscribers during lockdown and quarantine, when broadening the scope of home entertainment was particularly welcome. 27 Strategic reportGovernanceFinancial statementsKcell Annual Report and Accounts 2020 OPERATING REVIEW – B2B A change in focus contributed to increased B2B sales In B2B, our focus during 2020 was on rebalancing the portfolio to remove unprofitable products, such as off-net bulk sms, whilst developing new propositions including virtual office services. This resulted in 28.5% growth year-on-year, excluding off-net bulk sms revenue. While our change in focus and attractive new services contributed to the significant increase in B2B sales, this was also boosted by the demand for devices and connection accessories as the pandemic restrictions forced citizens across Kazakhstan to work remotely from home. We have created and delivered a range of packages specifically designed at facilitating work from home and network connectivity to meet the changing needs of Kazakh people. We were also pleased to be able to offer our support and work with the Ministry of Education to provide devices and tools to enable schooling to continue online. Mobile workplace Kcell’s aim is always to help clients solve their business problems and 2020 was no different despite the ever-changing nature of the challenges that it threw at the Company. Adapting quickly to new realities and utilising the latest innovations were key to enabling the Kazakh people to work and study remotely without any problems with connectivity. Where teleworking had previously been something of a novelty for the vast majority of businesses, 28 it now became a necessity along with the application of the most modern technologies. In July 2020, this prompted us to launch a web conferencing service, based on the Cisco Meeting Server platform and offering a secure solution via Kcell’s server facilities to minimise the risk of data hacking. And, although this was initiated because of the COVID-19 situation, we see this as very much part of our future product offering in the ‘new normal’ marketplace. Internet of things (IoT) The Internet of Things (IoT), once the domain of science fiction fantasy, is now part of everyday life from the ability to monitor your household appliances at a distance on your phone to inbuilt sensors that tell you when your car needs a service or the oil changing. IoT is expanding into almost every aspect of modern living. During 2020, due to the coronavirus pandemic, there was a slight slowdown in growth in this area. However, analysts predict that the Kazakh IoT market is set to grow exponentially by at least 15% per annum with the market to be more evenly distributed than at present. The ‘smart’ city and home has been the major focus to date but the use of IoT in agriculture, transport and logistics is becoming more commonplace. And, in recent years, Kcell has significantly increased the solutions that it offers based on IoT technology. Vehicle tracking A GPS tracker installed on a vehicle collects data on the location and speed of the vehicle, and sending it to a client’s platform via Kcell’s cellular network. This service enables companies to optimise logistics processes, track vehicle routes in real time, monitor fuel consumption, track cargo and minimise the risk of damage and theft, alert warehouse personnel on deliveries and can also provide accurate information in the event of an accident. Smart city A manhole monitoring system proposed by Kcell monitors the maintenance of wells, preventing any unauthorised opening, which could threaten the safety of citizens, as well reducing vandalism. Kcell Annual Report and Accounts 2020 Retail and FMCG With food products very sensitive to storage conditions, temperature and humidity, writing off products due to any disruption in storage conditions is both problematic and unprofitable for retail chains. Kcell offers its customers solutions include that include sensors, IoT devices, server software and user interfaces that records and transfers data on storage conditions in order to minimise such events. Agriculture Kcell is part of the implementation of the Kazakh Government’s 250+ programme that will provide broadband mobile Internet to rural settlements with populations of over 250 people. By the end of 2021, 1,600 Kazakh villages will not only have online access to online business, education, health and entertainment services but will also have the connectivity to use IoT technologies to monitor the status of livestock and control the operation of agricultural machinery and vehicles. Halyk Bank and Kcell pandemic partnership As part of its support for its citizens during the pandemic, the Kazakh Government announced the payment of KZT 42,500 social allowance for many employees and self-employed workers. Halyk Bank is one of the main operators for state payments and its call centre experienced a five-fold increase to 4.5 million calls per month as people contacted them to apply for the allowance or check on their eligibility. During the state of emergency, Halyk Bank operated its call centre 24/7 and more than doubled staffing levels. Kcell also stepped up and offered several solutions to help with the situation. The two organisations joined forces, recalling employees who were on leave due to COVID-19, with some 110 Kcell employees trained to help with the social allowance calls as part of a joint team of over 500. On the technical side, Kcell arranged the infrastructure needed to handle the volume of calls and the Business Solutions department developed (in 16 hours) a Telegram bot for Halyk Bank that would transfer customer calls to automatic online service channels. With these alternative portals, customers were able to find all the necessary information on social payments, apply for bank loan deferral, get the service online and much more. The partnership between the two companies demonstrated that Kazakh businesses can easily navigate the new reality. By working flexibly and co-operating with one another, Kcell and Halyk Bank were able to provide vital support for their clients. Private LTE In 2020, Kcell completed the construction and launch of one the first commercial Private LTE in the CIS. This encompasses autonomous networks for digitalising the mining industry and enabling the automation of mining and processing procedures. In turn, this will both help drive efficiency and help prevent production accidents. Working in partnership with mining companies, the Company has gained invaluable experience from this initial project and can see major potential in approaching other B2B customers with this proposition. 29 Strategic reportGovernanceFinancial statementsKcell Annual Report and Accounts 2020 FINANCIAL REVIEW Delivering another year of strong performance Kcell delivered a strong financial performance in 2020, despite the significant challenges resulting from the COVID-19 global pandemic and its impact on business activity in Kazakhstan. Total revenue in 2020 was up by 11.5% and EBITDA, excluding non- recurring items, grew by 12.1%. Financial highlights – Net sales up 11.5% to KZT174,684 million (2019: KZT156,657 million). Service revenue increased by 1.8% to KZT140,049 million (2019: KZT137,564 million); service revenue excluding off-net bulk SMS grew by 3.8%. – EBITDA, excluding non-recurring items, increased by 12.1% to KZT72,147 million (2019: KZT64,364 million). EBITDA margin was 41.3% (2019: 41.1%). – Operating income, excluding non-recurring items, up 22.6% to KZT41,283 million (2019: KZT33,661 million). – Net finance cost decreased by 9.8% to KZT9,453 million (2019: KZT10,479 million). KZT in millions, except key ratios, per share data and changes 2020 2019* Change % Net sales of which service revenues EBITDA, excluding non-recurring items Margin (%) Operating income, excluding non-recurring items Net income Earnings per share (KZT) CAPEX-to-sales (%) Free cash flow 174,684 140,049 156,657 137,564 72,147 41.3 41,283 17,578 87.9 15.4 28,705 64,364 41.1 33,661 10,015 50.1 12.9 21,900 11.5 1.8 12.1 22.6 75.5 75.5 31.1 * The Company has adopted IFRS Interpretations Committee’s agenda decision on cancellable or renewable leases, and related non-removable leasehold improvements and restated comparative financial statement. Revenues – Net income increased by 75.5% to KZT17,578 million (2019: KZT10,015 million). Net sales Net sales were 11.5% higher year-on-year and amounted to KZT174,684 million (2019: KZT156,657 million). – CAPEX-to-sales ratio of 15.4% (2019: 12.9%). – Free cash flow increased by 31.1% KZT28,705 million (2019: KZT21,900 million). – The number of subscribers totalled 8,055 thousand (2019: 8,275 thousand). Service revenue increased by 1.8% to KZT140,049 million (2019: KZT137,564 million); service revenue excluding off-net bulk SMS increased by 3.8%. Enterprise revenue, excluding off-net bulk SMS, was up 28.5% to KZT18,730 million (2019: KZT14,581 million). Voice and other services Revenue from voice and other services decreased by 6.1% to KZT73,851 million (2019: KZT78,689 million). 30 Kcell Annual Report and Accounts 2020 Data service revenue Data revenue increased by 13.6% to KZT58,446 million (2019: KZT51,430 million). Data traffic grew by 40.6% to 453.4 PB (2019: 322.5 PB). Value-added service revenue Revenue from value-added services increased by 4.1% to KZT7,752 million (2019: KZT7,447 million). Breakdown of revenues KZT in millions, except percentages Voice and other services Data services Value-added services Handset sales Total revenues 2020 73,851 58,446 7,752 34,634 174,684 % of total 42.3 33.5 4.4 19.8 100.0 2019 78,689 51,430 7,447 19,091 156,657 % of total 50.2 32.8 4.8 12.2 100.0 Handset sales Handset sales increased by 81.4% to KZT34,634 million (2019: KZT19,091 million). Expenses Cost of sales Cost of sales up by 9.4% to KZT119,133 million (2019: KZT108,928 million), largely as a result of higher sales of devices. Earnings, financial position and cash flow EBITDA, excluding non-recurring items, increased by 12.1% to KZT72,147 million (2019: KZT64,364 million). EBITDA margin was 41.3% (2019: 41.1%). Net finance cost decreased by 9.8% to KZT9,453 million (2019: KZT10,479 million). Income tax expense amounted to KZT7,044 million compared with KZT2,727 million in 2019. This was due to the recognition of a deferred tax asset on the tax loss carried forward, following the accrual of the fine on the termination of the Network Sharing Agreement with KaR-Tel LLP. Selling and marketing expenses Selling and marketing expenses were down 31.9% to KZT1,965 million (2019: KZT2,887 million). General and administrative expenses General and administrative expenses were up 16.8% to KZT10,426 million (2019: KZT8,925 million). The increase was mainly driven by an increase in headcount. Key financial ratios Return on equity (%) Return on capital employed (%) Equity/assets ratio (%) Net debt/equity ratio (%) Net debt/EBITDA rate* Owners’ equity per share (KZT) *Excluding lease liabilities under IFRS 16. 31 December 2020 31 December 2019 21.4 21.8 37.9 61.2 0.70 410.4 13.5 14.9 37.9 71.7 0.83 370.5 Net income increased by 75.5% to KZT17,578 million (2019: KZT10,015 million), while earnings per share were KZT87.9 (2019: KZT50.1). CAPEX increased to KZT26,842 million (2019: KZT20,200 million) and the CAPEX-to-sales ratio was up at 15.4% (2109: 12.9%). Free cash flow increased by 31.1% to KZT28,708 million (2019: KZT21,900 million). 31 Strategic reportGovernanceFinancial statementsKcell Annual Report and Accounts 2020 SUSTAINABILITY Promoting a culture of responsibility As a prominent company in Kazakhstan and in line with its major shareholder Kazakhtelecom, Kcell promotes sustainable practices throughout all its business activities to both strengthen its business and improve the communities in which it operates. Our approach to sustainability encompasses every aspect of the Company’s activities and is at the core of our business model, strategy and philosophy, ensuring accountability for its long-term effect on society and the environment. As one of Kazakhstan’s leading companies and with Kazakhtelecom as the majority shareholder, Kcell takes its responsibility as a corporate citizen very seriously. We instil the highest ethical standards throughout the business and i n all our interactions with all our stakeholders, whether: investors, customers, employees, partners, suppliers, other organisations or the general public. We believe that promoting a culture of responsibility strengthens both our business and our local communities, creating long-term value for our shareholders and society. Our corporate values and commitment to sustainable practices help to mitigate any negative impacts and create a lasting positive effect. Kcell’s sustainability approach is governed by an ethics and compliance framework. This ensures that the Company has systematic procedures in place for implementation, monitoring and compliance in all areas of the business. Anti-bribery and corruption The Company has a zero-tolerance approach to corruption and implements effective measures to prevent, monitor and eliminate any form of questionable business practice. Antibribery and corruption (ABC) principles are rooted in all aspects of the Company’s activities. In its bid to become a leader in sustainability, the Company takes a zero-tolerance stance on corruption with anti-bribery measures in place as well as systems to report unethical business practice. Its ethics and compliance framework encapsulates effective implementation and monitoring of these, as well as responsible procurement, human rights, customer privacy, freedom of expression, environmental responsibility, occupational health and safety, employees and social investment. Our approach Kcell became a signatory of the United Nations Global Compact more than a decade ago and was the first telecommunications operator in Kazakhstan to do so. Today, we remain committed to following its key principles relating to human rights, labour, environment and anti-corruption – and in accomplishing its mission to create a sustainable and inclusive global economy. 32 Kcell Annual Report and Accounts 2020 Responsible procurement Kcell has now brought its Procurement Procedures into line with the Kazakhtelecom centralised procurement system. The Procurement Procedures have been developed in accordance with subparagraph 40) of paragraph 2 of Article 12 of the Procedure for Procurement by the Joint Stock Company “National Welfare Fund“ Samruk-Kazyna ”. The objectives of the Procedures are: ensuring uniform approaches to the procurement activities of the Companies, creating conditions for the timely and complete satisfaction of the needs of the Companies in goods, works and services with the necessary indicators of price, quality and reliability, efficient use of funds, ensuring transparency of procurement, compliance with the principle of non-disclosure of confidential information. Procurement activities are aimed at the rational use of the Company’s funds, increasing the Company’s profits, ensuring a constant competitive level of costs, reducing the level of risks for business, and guaranteeing the quality of the Company’s purchases. Human rights The UN Guiding Principles on Business and Human Rights form the basis of Kcell’s own ethical approach to business activities. The results of an independent human rights impact assessment, undertaken in 2016, have since been used to improve the day-to-day measures that it uses in respecting human and labour rights. Customer privacy We are committed to respecting and protecting our customers’ privacy. The Kcell Privacy Policy sets out the principles and standards by which the Company carries out its safeguarding role, with particular reference to the collection, processing and retention of personal data, transparency, data accuracy, risk assessments, supplier requirements, and technical and organisational measures to protect integrity and confidentiality. Our belief is that privacy should be integral to all our services, processes, infrastructure and daily activities. We aim to achieve this through the operation of highly secure communication networks and by preventing unauthorised access to customers’ personal data. Environmental responsibility Kcell has a duty of care in all its regions of operation and a structured approach to managing key environmental impacts through its Environmental Policy. We develop, promote and utilise resource-efficient and environmentally friendly services as a means to reduce our environmental footprint but also to contribute to local and global sustainability. We actively maximise the use of best practice and synergies between our businesses, and working in collaboration with our major shareholder Kazakhtelecom over the last year has presented more opportunities to achieve efficiencies. 33 Strategic reportGovernanceFinancial statementsKcell Annual Report and Accounts 2020 SUSTAINABILITY COVID-19 PREVENTION MEASURES Kcell responded rapidly and effectively as the COVID-19 pandemic took hold and the government announced a state of emergency in March 2020. Where possible remote working from home was introduced, with employees supplied with all the necessary equipment, VPN access and technical support to facilitate an easy transition to this new mode of working. Where it was necessary for frontline workers, for example, call centre staff, to travel into work, transportation was laid on and full PPE supplied with offices strictly sanitised and regular testing carried out. The Company allocated a short number to enable employees to raise any concerns directly with a qualified doctor. Communication about COVID-19 and the precautionary measures that were being taken was vital and employees were kept well informed and occasional video messages were broadcast to them from the CEO and management. The Company created a Department of Medical Aid and also opened fully equipped medical offices in Almaty, Nur-Sultan, Shymkent and Atyrau. Material assistance was provided to employees and their families who were victims of the pandemic. Frontline workers were paid a 25% bonus for the sterling efforts. In total, expenses for countering the spread of COVID-19 among employees and their families during 2020 amounted to KZT323 million. In 2021, remote working will largely continue. In the workplace, the protection of employees remains the utmost priority and all the precautionary measures remain in place: supplied PPE, sanitising, regular testing, social distancing and controlled access. The vaccination programme has begun across the country and we hope to see the positive impact of this during the year. In the meantime, the Company has allocated KZT360 million in its budget to safeguard its employees and it customers against the spread of COVID-19. Health and safety The health and safety of Kcell employees are crucial to our business and our primary concern. As the COVID-19 pandemic spread across Kazakhstan during 2020, we were fast to respond and put in place measures to protect our employees – and our customers. You can read more about how we did this in the panel above. Kcell’s Occupational Health and Safety (OHS) Policy sets out the Company’s commitment to safeguarding employees in the workplace. This is in accordance with the Labour Code of Kazakhstan and other corresponding regulations. The OHS Policy is based on the international standard OHSAS 18001 and certification is independently audited and confirmed each year by the British Standard Institution. The Company also conducts its own review of OHS risks twice a year, taking corrective action as required. Our OHS Policy sets out our responsibility to provide safety training and protective clothing and equipment; guarantee optimal labour conditions; standardise sanitary labour conditions; make health care services available; and monitor compliance with occupational safety and health standards. We have also developed and implement specific safety guidelines that cover offices, transport, warehouses and field maintenance. Employees Our employees are the lifeblood of our business. As a people-centric organisation, we aim to hire, develop and retain talented people and to be an employer of choice in Kazakhstan. As well as creating a positive and motivating workplace environment, the Company provides a number of benefits over and above those required by Kazakh legislation to help improve the quality of life of both its employees and their families. These include financial for disabled employees, material assistance for employees with disabled children, night transport for Kcell store and call centre workers, paid mobile expenses and a bonus system for sales and services employees. As of 31 December 2020, Kcell had 2,249 employees (2019: 1,950), up 15.3% year-on-year. We support equality and diversity in the workforce. At the year-end, the Company employed 935 male and 1,314 female staff (2019: 842 male and 1,108 female) representing more than 30 nationalities. 34 Kcell Annual Report and Accounts 2020 Mobile government workplace Kcell is working on a project with National Information Technologies (NIT), the operator of Kazakhstan’s e-Government information and communication infrastructure. This will provide government employees with tablets to offer secure connectivity for a mobile workplace. Big data for tourism The Company is helping the government use big data to identify tourism patterns. By analysing where tourists come from and which destinations they visit in Kazakhstan, the government will be able to optimise public transport routes, etc. Social Digital Kazakhstan Kcell is a major support and active participant in the Digital Kazakhstan programme. One of its aims is to improve access and reduce service costs for both citizens and the government by digitalising government services. During 2020, the Company, along with Kazakhstan’s two other mobile operators, signed up to Project 250+ is another Digital Kazakhstan initiative that aims to deliver high-speed internet access to rural communities with populations of 250 or more. Digital government subscription services Kcell provides subscription services to the government of Kazakhstan, which previously owned and developed its own services. This is more cost-effective but also allows for a broader scope and better implementation. Two examples of this in working practice are: – Digital traffic police tablets that help to simplify the process of issuing traffic fines, including accepting payment on the spot using payment cards and improving transparency and accountability. – Digital ambulance service tablets that help with dispatching, navigation to incident addresses, accessing patient medical information and health records and follow-up patient care checklists ensuring a high standard of service and helping to save lives. Improved traffic camera efficiency In another initiative, Kcell is helping to digitalise the process of issuing violations and receiving payment of fines from traffic cameras by matching government vehicle registration databases with its customer information. The Company’s solution enables the government to send notifications via SMS messages, instead of mailing notices of fines. Because of the cost-savings made with this solution, the government offers digital payment discounts to reduce the fine. 35 Strategic reportGovernanceFinancial statementsKcell Annual Report and Accounts 2020 RISK MANAGEMENT Promoting a culture of risk awareness at all levels All organisations face elements of risk when conducting their activities. Kcell has established a robust risk management system to identify and mitigate issues as early as possible, safeguarding its operations and ensuring business continuity, and to reinforcing this through continuous improvement. Responsibility Kcell’s Board of Directors has overall responsibility for the Company’s risk profile, while the Internal Audit Committee is charged with ensuring that appropriate measures are in place. Kcell seeks to promote a culture of risk awareness, management and accountability at all levels within the Company, empowering employees so that risks are more rapidly identified and mitigated. Framework Developed in line with the Committee of Sponsoring Organisations of the Treadway Commission’s Enterprise Risk Management guidance, Kcell’s risk management framework takes into account the increasing complexity of the evolving business environment and the greater need to identify and evaluate potential threats to ensure continuity. This also takes account of international best practice and recommended governance standards. The Company plans to improve current risk management model in accordance with the recommendations of the majority shareholder of Kazakhtelecom JSC and based on the recommendations of the Committee of Sponsoring Organizations of the Tradeway Commission (COSO) and other best international practices in the field of risk management and internal control. Risk management is fully integrated into the business planning and control processes, with established procedures, clear lines of reporting and regular reviews. On a day-to-day basis, these are delegated to each business area, departmental heads and dedicated risk co-ordinators with responsibility for: – Identifying, assessing, managing and mitigating risks – Making relevant and reasonable efforts to ensure business continuity – Reporting risks in a timely and clear manner – Recruiting staff to oversee effective risk evaluation, mitigation and reporting processes – Maintaining and promoting overall risk awareness – Ensuring that each department’s risk management activities are adequately documented. 36 Process The main principles of the risk management process are: – Integrity – considering risk in its entirety – Openness – making the process easily accessible and understandable – Structuring – defining a clear structure – Awareness – promoting objective, accurate and timely information – Continuity – instigating an ongoing learning process – Cyclicity – creating a constantly recurring cycle Principal risks Using the risk management framework to identify the principal threats to the business, Kcell is able to classify the level of exposure in any given area. This requires drawing on an in-depth knowledge of the Company as well as a thorough understanding of the market and the legal, social, political and cultural environment in which it operates. It also involves simultaneously reviewing Kcell’s strategic and operational objectives, including factors critical to its success such as related threats and opportunities. The Company has identified various principal risks and uncertainties that are key to its day-to-day operations: strategic, operational, financial, legal and natural disaster/catastrophe. Kcell Annual Report and Accounts 2020 COVID-19 pandemic During 2020, the state of emergency in Kazakhstan brought restrictions on the movement of the population and the enforced closure of offices and stores over a significant period of time. The potential impacts that this could pose for our strategic and operational objectives have been reviewed in relation to our principal risks and will continue to be addressed for the foreseeable future. Risks Mitigation Strategic risk Operational risk Financial risk Credit risk Foreign exchange risk Interest rate risk Legal risk Natural disaster/ catastrophe risk Strategic risk is categorised as the potential for losses due to changes or errors in defining and implementing business strategy and development; changes in the political or regional environment; and fluctuations in the market or customer behaviour. This could include increased price competition caused by the activities of other mobile operators or new legislation. Most of these are considered high-risk, requiring the attention of management. Kcell seeks to mitigate these risks by protecting its leadership in ‘strong’ regions and by offering competitive tariffs and products to increase its market share. Operational risk is defined as the potential for losses due to defects or errors in internal processes, the supply chain, recruitment, culture and regulations. Most of these have a low risk rating and mitigating actions are already in place as part of the daily risk management procedures. The exceptions to this are information systems and technologies, which Kcell categorises as high risk. Protecting customer privacy and data management are vital parts of the service that the Company offers. Any data breaches could impact on business in both the short and long term. Kcell’s networks are supported by the latest information security systems with measures and processes in place to mitigate the threat of cyber-attacks. The Company can be subject to financial volatility originating from various sources. The risk management framework seeks to minimise potential adverse effects on performance stemming from fluctuations in financial markets as well as other macro and microeconomic factors. Kcell does not use derivative financial instruments to hedge risk exposure. It has detailed policies covering specific areas of financial risk, including credit, foreign exchange and interest rate risk. The Company’s Credit Risk Policy ensures that products and services are sold only to customers and distributors with appropriate credit histories. Where corporate customers have independent credit ratings, these are applied. Otherwise, a risk control assessment is undertaken of a potential customer’s credit worthiness based on current financial position, credit history and other factors. Outstanding trade receivables and overdue balances are analysed and followed up by the management, and mobile services are disconnected if customers fail to settle their liabilities. With a highly diversified customer portfolio, which includes a large number of both individuals and companies, Kcell has no significant concentration of credit risk. While income could be affected by economic factors, the management sees no significant risk of loss. Kcell has established relationships with several banks, which are considered to have minimal risk of default. Kazakhstan itself is identified as an emerging market and carries certain inherent risks that apply equally to the banks that hold the Company’s cash, cash equivalents and term deposits. The Company has a policy of investing only in financial instruments with high credit ratings, such as US Treasury bills The majority of Kcell’s purchases of property, plant and equipment and inventories, as well as revenues from certain services like roaming, are denominated in US dollars. As such, most of the Company’s foreign exchange risk relates to the movement of the tenge against the US dollar, although profits are less susceptible to this. Given the undeveloped market for financial instruments in Kazakhstan, Kcell does not use derivative financial instruments to hedge its foreign exchange risk. However, the Company has a policy of matching assets and liabilities denominated in foreign currencies where possible and practicable. Overall, Kcell’s income and operating cash flow are not dependent upon changes in market interest rates. As of 31 December 2020, the Company had no assets or liabilities with floating interest rates. However, the terms of the existing loan agreements give the banks the right to unilaterally revise interest rates in case of significant market fluctuations. Legal risk is defined as the potential for uncertainty due to legal action or ambiguity in the application or interpretation of contracts, laws or regulations. Kcell’s Legal Department ensures compliance with current legislation, monitors amendments to legislation and participates in relevant draft law debates whenever possible. Natural disasters or catastrophes are defined as natural phenomena or processes that provoke catastrophic situations and are characterised by a sudden reduction in the population, the destruction of infrastructure and property and/or death. Kcell has implemented measures aimed at minimising disasters such as fires, accidents and incidents arising from human neglect. These include fire drills, fire alarm systems, regular vehicle servicing, preventive measures against seasonal illnesses, medical insurance, annual medical examinations, diesel generators for use during power failures, deliveries of reserve water supplies to employees and other preventive work. Risk level Low Moderate Higher 37 Strategic reportGovernanceFinancial statementsKcell Annual Report and Accounts 2020 BOARD OF DIRECTORS Alexey Buyanov Chairman Alexey Buyanov has been the Chairman of the Board of Directors and an independent, non-executive director at Kcell since 25 January 2019. Mr Buyanov is also an Independent Director at Kazakhtelecom and a director at Bengala Investments. From 2002 to 2014, he was Senior Vice President, Chief Financial Officer and member of the Management Board at Sistema Group, an equity fund that is publicly traded on the London Stock Exchange. From 2014 to 2016, he served as Managing Director and Head of the Investment Committee at Redline Capital Management. Mr Buyanov holds degrees from the Department of Applied Physics and Mathematics at Moscow Institute of Physics and Technology (Russia) and has completed the Oxford Fintech Programme at Said Business School, University of Oxford (UK). P R S Dinara Inkarbekova Independent Director Dinara Inkarbekova has been an independent, non-executive director at Kcell since 25 January 2019. Ms Inkarbekova is also General Manager at Sigma Advisors. From 2010 to 2014, she was General Manager at AKSAI – BMC. In 2015-16, she was a Senior Adviser at Deloitte TCF. In 2016-17, she served as Chief Financial Officer at Estate Management Company. Ms Inkarbekova holds a bachelor’s in Jurisprudence from Turan University (Kazakhstan), a bachelor’s in Finance from Narxoz University (Kazakhstan) and an MBA in Economics and Strategic Research from Kazakhstan Institute of Management (Kazakhstan). A Key to Committee membership Committee Chair A Internal Audit Committee S Sustainability Committee R Personnel and Remuneration Committee P Strategic Planning Committee 38 Jere Calmes Independent Director Jere Calmes has been a member of the Board of Directors at Kcell since 15 January 2020. Jere Calmes has over 20 years’ experience of working in the telecommunications, retail and wholesale industry with a strong focus on emerging markets. Between December 2016 and June 2019, he was CEO of METRO Cash and Carry Russia. Prior to that, Mr Calmes worked in various senior managerial positions in the telecommunications industry, including Deputy CEO in Tele 2, CEO at Tele 2 Russia, COO of Wind Telecomunicazioni (Italy), Executive Vice President, General Manager Moscow at VEON and Director Customer Services and Credit Control at Orange Egypt. He also served on the Board of Datagroup JSC (Ukraine) and worked as Managing Director of Fast Lane Ventures and as President and CEO of the Russian pharmacy chain ‘36.6’. In addition, Mr Calmes was an adviser for Adva Capital. Mr Calmes holds a BA degree in Political Science and Economics from Bates College, Maine, USA, and he completed the Executive Development Programme at Wharton School of Business. P A S Kcell Annual Report and Accounts 2020 Kuanyshbek Yessekeyev Representative of shareholder Kazakhtelecom JSC Kuanyshbek Yessekeyev has been a member of the Board of Directors at Kcell since 25 January 2019. Since 2010, Mr Yessekeyev has been Chairman of the Management Board and a member of the Board of Directors at Kazakhtelecom. Mr Yessekeyev holds a degree in Mathematical Science from the Department of Applied Mathematics at Kazakh State University named after Al-Farabi (Kazakhstan), a specialisation in Management from Kazakh State Academy of Management (Kazakhstan), and an executive MBA from Hult International Business School (UK). P Timur Turlov Representative of shareholder Freedom Finance JSC Timur Turlov has been a member of the Board of Directors at Kcell since 25 January 2019. Mr Turlov is also General Director at IC Freedom Finance LLC, adviser to the Chairman of the Board at Freedom Finance JSC, Director at FFI Brokerage Service Ltd, Independent Director of the Board of Directors at FFINEU Investments Ltd, Chairman of the Supervisory Board at FFIN Bank LLC, Chairman of the Board of Directors at Freedom Finance JSC, Chairman of the Board of Directors at Freedom Finance Life JSC and Chairman of the Board of Directors at Freedom Finance Insurance JSC. Mr Turlov graduated from Russian State Technological University (named after Tsiolkovsky) in 2009 with a bachelor’s in economics and management. P R Rashit Makhat Independent Director Rashit Makhat has been an independent, non-executive director at Kcell since 25 January 2019. Mr Makhat is also the owner of PRIMA Investment Company, as well as an Independent Director and member of the Board of Directors at the Kazakhaltyn metals and mining company. From 2013 to 2016, he was a member of the Board of Directors and Independent Director at Tartyp JSC. In 2014-15, he served as a member of theBoard of Directors and Independent Director at Kazakhstan Engineering. In 2016-17, he was a member of the Board of Directors and Independent Director at Kazkommertsbank JSC. Mr Makhat holds a degree in Economics from Kokshetau State University (Kazakhstan) and is a graduate of the Department of International Economic Relations at Moscow State University of International Relations (Russia). P R Vladimir Popov Independent Director Vladimir Popov has been an independent, non-executive director at Kcell since 25 January 2019. Mr Popov is also a Managing Partner at PRO VIDENS. In addition, he has a service contract as an Independent Legal Adviser on privatisation and M&A projects. From 2010 to 2016, he was Chief Legal Officer at international private investment fund AMUN Capital Advisors KZ. Mr Popov holds a degree in Jurisprudence from Kazakh State Law University (Kazakhstan). S A 39 Kcell Annual Report and Accounts 2020GovernanceFinancial statementsStrategic report MANAGEMENT BOARD Yuri Kharlamov Chairman of the Management Board, Chief Executive Officer Yuri Kharlamov was appointed as Chief Financial Officer at Kcell on 7 March 2019 and has been a Member of the Management Board since 19 June 2020. On 6 February 2021, the Board of Directors appointed Mr Kharlamov as Chairman of the Management Board, Chief Executive Officer. Before joining the Company, Mr Kharlamov had more than 20 years’ experience in the telecommunications industry, having held a number of senior-level management positions including positions of CEO and CFO in Golden Telecom, Corbina Telecom, VympelCom and Svyaznoy. From 2010 to 2019, Mr Kharlamov was a Partner at Constanta, where he managed over 100 management consulting projects for the largest players in the technology, media and telecommunications sector in Russia and the CIS. Just before joining Kcell, Mr Kharlamov held the position of General Director of Risk Service and was a co-founder and CEO of Big Data analytics project at Predictive Technologies. Mr Kharlamov graduated from the Moscow Institute of Electronic Technology with a degree in Management and the University of Birmingham with a degree in Finance, and has an MBA degree from London Business School. Askar Yesserkegenov Chief Technical Officer Askar Yesserkegenov was appointed as Chief Technical Officer at Kcell on 7 March 2019 and has been a Member of the Management Board since 19 June 2019. Before joining the Company, Mr Yesserkegenov worked for 16 years at Kazakhtelecom JSC in numerous roles, including Managing Director from September 2013 and Chief Commercial Officer from September 2007. Prior to that, he spent two years at other telecommunications companies in Kazakhstan, as well as over five years at Kazakhtelecom JSC, which he first joined in 1996. Mr Yesserkegenov graduated with a Bachelor’s degree in Radio Engineering from Moscow Electrotechnical University of Communications (Russia) in 1988 and with an MBA from the International Business Academy (Russia) in 2005. Sergey Yeltsov Chief Legal Officer Sergey Yeltsov was appointed as Chief Legal Officer at Kcell on 7 March 2019 and has been a Member of the Management Board since 19 June 2019.Before joining the Company, Mr Yeltsov was a non-executive member of the Board of Directors at Kazakhaltyn JSC from 2017 to 2019, and a Managing Director and member of the Management Board at Kazkommertsbank JSC from May 2016 to June 2017. He also worked at Kemont JSC, as Corporate Development Director and Administrative Director, from January 2015 to May 2016, and as Managing Director at Green Apple LLP from September 2013 to January 2015. Prior to that, he held numerous executive and advisory positions in the banking, metals and mining and telecommunications sectors. Mr Yeltsov obtained a Bachelor’s in International Law from Kazakh Institute of Law and International Relations (Kazakhstan) in 1997, and a Master’s in Banking and Finance from Almaty Academy of Economics and Statistics (Kazakhstan) in 2005. He also completed an executive education programme in 2007. Changes to the Management Board On 12 April 2021, The Board of Directors announced the following changes to the Management Board: – The resignation of Sergey Yeltsov, member of the Management Board and Chief Legal Officer from 16 April 2021 at his own instigation. – The appointment of the following members of the Management Board from 19 April 2021 to 1 July 2022 of Sevil Gassanova (Chief Legal Officer), from 9 April 2020 to 1 July 2022 of Maria Averchenko (Chief Commercial Officer), and from 9 April to 1 July 2022 of Alexey Bobrov (Chief Financial Officer). 40 Kcell Annual Report and Accounts 2020 CORPORATE GOVERNANCE Strengthening our governance framework The COVID-19 pandemic gave us all pause for thought and prompted initiatives to strengthen and add to our existing corporate governance framework. In addition to adhering to international best practice, Kcell’s corporate governance standards conform to that of its major shareholder Kazakhtelecom JSC and the enhanced standards of National Welfare Fund Samruk-Kazyna. Kcell’s Corporate Governance Code was updated in 2019 in order to align with the National Welfare Fund Samruk- Kazyna’s Corporate Governance Code and the UK Corporate Governance Code. It also complies with the regulations of the Kazakhstan Stock Exchange in relation to joint stock companies and securities. The principles of fairness, honesty, responsibility, transparency, professionalism and expertise form the core of the Company’s approach to corporate governance. These in turn ensure the respect and protection for the rights and interests of all stakeholders; increase Kcell’s efficiency and market value; and promote financial stability and profitability. National Welfare Fund Samruk-Kazyna’s Corporate Governance Code The corporate governance guidelines for National Welfare Fund Samruk- Kazyna companies are established by Kazakhstan’s Model Code and based on international best practice. All National Welfare Fund Samruk-Kazyna companies apply these general rules and recommendations about corporate governance. Corporate governance principles Protecting the rights and interests of shareholders Effective management by the Board of Directors and Management Board Transparency and objectivity in disclosure of information about operations Ethics and compliance Effective dividend policies Effective HR policies Sustainability Management of corporate conflicts and conflict of interest Kcell’s corporate governance practices protect and respect shareholders’ rights and legitimate interests, and contribute to efficient operations, seeking to grow assets and maintain financial stability and profitability. The Board of Directors aim to increase the Company’s market value while following the principles of utmost respect and realisation of shareholders’ interests. Kcell understands the need for a leader in the person of the Chairman of the Management Board to manage day-to-day operations, supported by a collective body to resolve issues that arise during the management process. The Company aims to ensure maximum transparency through the timely and accurate disclosure of reliable information to shareholders and stakeholders, including its financial position, economic indicators, performance, ownership and management structure. Kcell operates in strict accordance with the law and generally accepted standards of business ethics, as well as its Charter, Corporate Governance Code, Regulation on the Board of Directors, listing rules and contractual obligations. The Company pays dividends in accordance with the Dividend Policy, the law, the Charter and the relevant resolutions of the General Meeting of Shareholders. When payment of dividends is declared, such dividends shall be paid in the manner set forth by the law. The Company guarantees its employees’ rights under the law and its Code of Ethics and Conduct. Kcell aims to develop partnership relations with staff to address social issues and regulate working conditions. The Company recognises the importance of its influence on the economy, environment and society. As such, it is committed to ensure its sustainable development in the long term, while striving to balance the interests of stakeholders and increase its long-term value. Members of the Board of Directors and the Management Board, as well as employees, perform their professional duties in good faith and on reasonable grounds, with due care and diligence, in the interests of Kcell and its shareholders, while avoiding conflicts of interest. Should a conflict occur, Company officials declare their interest to the Corporate Secretary. 41 Kcell Annual Report and Accounts 2020GovernanceFinancial statementsStrategic report CORPORATE GOVERNANCE Corporate governance policies In 2020, further efforts were made to strengthen Kell’s corporate governance framework by updating the Company’s governance policies, consistent with the requirements of Kazakhtelecom JSC, National Welfare Fund Samruk-Kazyna, local laws and best international practice. Kcell updated its Accounting Policy and adopted a new key Investment Policy. Kcell also has the following existing corporate policies in place: – Financial Management Policy (second version) – Insurance Policy – Risk Management Policy – Communication Policy – Recruitment Policy – Insider Information Policy – Insider Trading Policy – Security Policy (second version) – Privacy Policy – Freedom of Expression in Telecommunications Policy – Occupational Health and Safety Policy – Supplier Code of Conduct – People Policy – Environmental Policy – Competition Policy – Policy on Enterprise Risk Management – Policy on Electromagnetic Fields – Code of Ethics and Conduct – Anti-Corruption Policy – Regulations of the Board of Directors of Kcell JSC – Dividend Policy 42 Futureproofing the Kcell business While we feel that the Company handled the COVID-19 situation in an exemplary manner, there can be no doubt that Kcell would benefit from having protocols in place to mitigate against future crises. With that in mind, we have instigated a dual approach: setting up a Crisis Management Team (CMT) and plans; formalising a Business Continuity Management (BCM) process. The Kcell CMT is under the chairmanship of the Chairman of the Management Board and is drawn from human resources, communications, legal affairs, technology and business functions. The role of the CMT is to ensure that Kcell has emergency incidents and crisis management plans and procedures in place to protect human life, ensure business continuity and minimise economic losses. A detailed Crisis Management Plan is now in place that details key personnel and resources as well as contingencies for certain scenarios and defined lines of responsibility. All CMT members will receive regular training and the plan will be reviewed annually to affirm its effectiveness. The BCM process is based on Kcell’s Risk Management Policy and Security Policy. Its purpose is to identify and implement measures aimed at ensuring the resilience of critical processes, functions, services and products, whose failure would have a significant impact on Kcell’s ability to provide its core services and products. The BCM process consists of business impact analysis, risk assessment business continuity strategy, business continuity solutions and business continuity plans. It will allow the Company to identify any potential risks and threats to the business and assess the extent of their impact on activities. Training and education will be provided for directors, section/unit heads, owners of services/products critical for the Company, branch managers, and also employees with assigned functions and responsibilities that fall within the BCM scope. BCM will enable Kcell to respond effectively to significant business interruptions and enhance the Company’s sustainability. This will, in turn, protect the interests of Kcell customers and shareholders. Board of Directors Kcell’s Charter sets out the duties of the Board of Directors and Management Board, the latter of which is chaired by the CEO. Under the Charter, the Board is responsible for the general management of Kcell’s activities. Besides formulating strategies and approving plans for the Company’s development, the Board is responsible for taking decisions on establishing Kcell branches and representative offices; on the Company acquiring or disposing of 10% or more of third-party shares; on concluding major transactions and transactions with related parties; on approving annual budgets; and on deciding other issues that belong to the exclusive competence of the Board of Directors according to the Company’s Charter and the Joint-Stock Company Law of Kazakhstan. The status of Kcell’s Board of Directors, working arrangements, procedures for convening and holding meetings, formalising decisions and the responsibilities of members of the Board of Directors are set out in the Regulations of the Board of Directors. Kcell Annual Report and Accounts 2020 Kcell’s CEO and Management Board are a highly professional team with expertise and experience in telecommunications, finance, marketing and information technology. The CEO’s responsibilities in managing daily operations, with the support of the Management Board, are set out in the Company’s Charter. These include all matters that fall outside the exclusive jurisdiction of the Board of Directors or the General Meeting (GM) of Shareholders. In addition, the Management Board is responsible for undertaking decisions taken by a GM and the Board of Directors. Membership of the Board of Directors Members of the Board of Directors are elected at the GM, where their terms of office are also decided. At the time of writing, all but one of the current directors were elected at an Extraordinary General Meeting (EGM) of Shareholders before the reporting period, on 25 January 2019. At an EGM held on 15 January 2020, Jere Calmes was elected as an independent, non-executive director at Kcell. Five of the seven members of the Board were independent directors1, including the Chairman. Of the remaining two directors, one was representative of the controlling shareholder, Kazakhtelecom JSC, and one was a representative of another shareholder, Freedom Finance JSC. The composition of the Board of Directors during the reporting period is presented below: The biographies of the Board of Directors can be found on pages 38-39. At an EGM held after the reporting period, on 26 February 2021, Timur Khudaiberdiyev and Serik Saudabayev were elected to the Board of Directors as representatives of Kazakhtelecom JSC. As such, the Board of Directors currently has five independent directors, including the Chairman, as well as three representatives of Kazakhtelecom JSC and one representative of Freedom Finance JSC. As of 31 December2020, Timur Turlov held 398,576 shares in Kcell. – Alexey Buyanov (independent director) – Rashit Makhat (independent director) – Dinara Inkarbekova (independent director) – Vladimir Popov (independent director) – Jere Calmes (independent director) – Kuanyshbek Yessekeyev (representative of shareholder Kazakhtelecom JSC) – Timur Turlov (representative of shareholder Freedom Finance JSC) 1 The Company Charter and the law require that at least 30% of the members of the Board be independent Directors. Mr Buyanov, Mr Makhat, Ms Inkarbekova, Mr Popov and Mr Calmes, are independent in accordance with the requirements of Kazakh law on joint-stock companies. Corporate Governance framework Shareholders General Meeting Board of Directors Management Board, chaired by the Chief Executive Of ficer Internal Audit Office Strategic Planning Committee Internal Audit Committee Personnel and Remuneration Committee Sustainability Committee 43 Kcell Annual Report and Accounts 2020GovernanceFinancial statementsStrategic report Committee name Role Committee chair and members Strategic Planning Committee Personnel and Remuneration Committee Internal Audit Committee Sustainability Committee Rashit Makhat (Chairman) Alexey Buyanov Kuanyshbek Yessekeyev Timur Turlov Jere Calmes Rashit Makhat (Chairman) Alexey Buyanov Timur Turlov Dinara Inkarbekova (Chairperson) Jere Calmes Vladimir Popov Vladimir Popov (Chairman) Alexey Buyanov Jere Calmes Makes recommendations to the Board of Directors on strategic development. Five meetings were held in 2020. Makes recommendations to the Board of Directors on qualification requirements for employees, appointment and dismissal of certain employees, bonuses and salary for management bodies, and internal documents evaluating staff fitness, training and motivation of employees. Three meetings were held in 2020. Makes recommendations to the Board of Directors on financial statements, internal controls and risk management, and internal and external audits. Six meetings were held in 2020. Makes recommendations to the Board of Directors on internal documents related to social accountability and sustainable development; improvement of the sustainability strategy; development and implementation of policies and procedures relating to environmental and social sustainability, including but not limited to, respecting human rights, environmental safety, social responsibility, and compliance with business ethics requirements in accordance with internal documents and applicable legislation. Two meetings were held in 2020. CORPORATE GOVERNANCE Committees of the Board of Directors Kcell has established the following committees to consider important issues and prepare recommendations for the Board of Directors: Strategic Planning Committee, Personnel and Remuneration Committee, Internal Audit Committee and Sustainability Committee. This is in line with the legal requirements for joint-stock companies in Kazakhstan. Additional committees may be created at the discretion of the Board. The Chairperson of each committee is an independent director. By law, committees must be drawn from members of the Board of Directors with the relevant expertise to serve on the given committee. All committees are advisory bodies of the Board of Directors. 44 Kcell Annual Report and Accounts 2020 The Board has carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. These risks and an explanation of how they are being managed or mitigated are described in the Risk Management section on pages 36-37. The Board monitors Kcell’s risk management and internal control systems, and has reviewed their effectiveness during the year. This review has covered all material controls, including financial, operational and compliance controls. Internal Audit Committee The Internal Audit Committee met six times during 2020. It considered significant issues in relation to financial statements and the findings of an internal audit. An Internal Audit department was established in Kcell JSC in 2013, and the Committee monitors and reviews the effectiveness of its activities. The Committee also has p rimary responsibility for making recommendations to the General Meeting of Shareholders on the appointment, re-appointment and removal of the external auditor. At the AGM on 29 May 2019, Ernst & Young LLP was approved as Kcell’s new external auditor for 2019-21 to replace Deloitte, the Company’s auditor since 2014. To protect its independence, Kcell does not engage Ernst & Young LLP for any non-audit services for the Company; a similar practice was previously in place with Deloitte. Board activities Kcell uses specialist software, which provides end-to-end security for its governance and workflow management as well as helping to improve Board communications and effectiveness. The Board of Directors held 12 meetings in total during 2020: two were conducted in person, eight via conference calls and two meetings by voting in absentia. The Board’s activities during 2020 included: – updates on business, commercial, operational and legal matters, and approvals arising from these; – approval of major transactions; – approval of the appointment and terms of employment of members of the Management Board and executive bodies of Kcell subsidiaries; – preliminary approval of the 2019 annual financial report and approval of quarterly financial reports; – convocation of the 2020 AGM, including dividend proposals; – approval of interested-party transactions; – approval of the auditor’s fee for 2020 audit services; – approval of revisions to policies, including the updated Code of Ethics and Conduct and Accounting Policy as well as approval of new Investment Policy; – approval of changes to the terms and conditions of loan agreements. The Board’s agenda for 2021 is as follows: – updates on business, commercial, operational and legal matters, and approvals arising from these; – approval of major transactions; – approval of the appointment and terms of employment of members of the Management Board; – preliminary approval of the 2020 annual financial report and approval of quarterly financial reports; – convocation of the 2021 AGM, including dividend proposals; – other issues within the Board’s remit. There are eight Board meetings scheduled for 2021, which will cover regular items such as financial results, risks reviews and reports from the Management Board and Board committees. In addition, ad hoc meetings or conference calls will be held as and when required for approvals when there is no scheduled meeting planned. Accountability and viability The Board of Directors is responsible for preparing the Annual Report and Accounts. They consider that the 2020 Annual Report and Accounts, taken as a whole, are fair, balanced and understandable, and provide the information necessary for shareholders to assess the Company’s position and performance, business model and strategy. A description of the basis on which Kcell JSC generates value over the longer term, its business model, and the strategy for delivering its objectives are explained in the Strategic Report on pages 18-23. The Board has assessed Kcell’s prospects over the next year, being the period over which the key risks facing the Company can be accurately evaluated and mitigated. Based on this, the Board has a reasonable expectation that Kcell will be able to continue to operate and meet its liabilities as they fall due over that period. 45 Kcell Annual Report and Accounts 2020GovernanceFinancial statementsStrategic report Management Board Kcell’s Management Board is collectively tasked with managing day-to-day operations. The Company, however, understands the need for a leadership role, one that is undertaken by the CEO as the chairman of the Management Board. The Management Board follows the principles of legality, honesty, good faith, reasonableness, regularity, professionalism and objectivity. It acts with the utmost respect for shareholders’ interests and is fully accountable to the GM and Board of Directors. During the reported period Kcell’s Management Board consisted of the following members: – Kaspars Kukelis – Chairman of the Management Board, Chief Executive Officer – Askar Yesserkegenov – member of the Management Board, Chief Technical Officer – Sergey Yeltsov – member of the Management Board, Chief Legal Officer – Hikmatulla Nasritdinhodjaev – member of the Management Board, Chief Commercial Officer Yuri Kharlamov was appointed to the Board as a Chief Financial Officer on 19 June 2020. Subsequently, on 4 July 2020, Board accepted resignation of Hikmtulla Nasritdinhodjaev, Chief Commercial Officer; Chief Executive Officer, Kaspars Kukelis resigned on 3 January 2021and transferred to a new position within Kazakhtelecom Group. On 6 February 2021, the Board appointed Yuri Kharlamov as Chairman of the Management Board, Chief Executive Officer. Given the above changes Kcell’s Management Board currently comprises three members: – Yuri Kharlamov – Chairman of the Management Board, Chief Executive Officer – Askar Yesserkegenov – member of the Management Board, Chief Technical Officer – Sergey Yeltsov – member of the Management Board, Chief Legal Officer The biographies of the Management Board can be found on page 40. CORPORATE GOVERNANCE Remuneration of the Board of Directors In line with the current Remuneration Policy, the Company remunerates independent directors in two parts: fixed annual remuneration and additional annual remuneration for chairing the Board or one of its committees. The policy also provides for the reimbursement of expenses that Board members incur when performing their duties. The GM held in 2019 established the following gross annual remuneration for independent directors: fixed annual remuneration of US$75,000; annual additional remuneration for chairing the Board of Directors of US$25,000; and annual additional remuneration for chairing a committee of the Board of Directors of US$15,000. According to the payment terms, 50% of the fixed annual remuneration fee and additional annual remuneration for chairing the Board or one of its committees is paid six months after an independent director takes office; and the remaining 50% is paid one year later. In 2020, the total remuneration paid to the Board of Directors was US$422,600 (gross). Relations with shareholders The Board of Directors is in regular dialogue with Kcell’s shareholders through representatives from Kazakhtelecom JSC and Freedom Finance JSC. 46 Kcell Annual Report and Accounts 2020 INDEPENDENT AUDITOR’S REPORT Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. We have fulfilled the responsibilities described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the consolidated financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying consolidated financial statements. Key audit matter Revenue recognition There is a significant risk of misstatement relating to the recognition and measurement of revenue from telecommunication services as the billing systems employed by the Group are complex. In addition, effect of accounting treatment of changing tariff structures and multi-element arrangements on revenue could be significant. The selection and application of revenue recognition policies, including the application of IFRS 15, involve a number of key judgements and estimates, and therefore revenue could be subject to misstatement, whether due to fraud or error, including untimely recognition. The Group’s disclosure of information in respect of the accounting policies on revenue recognition is included in Note 3 to the consolidated financial statements, and detailed revenue disclosures are included in Note 24 to the consolidated financial statements. How our audit addressed the key audit matter We have considered the relevant IT systems and the design of controls, and tested the operating effectiveness of controls over capture and recording of revenue transactions; authorisation of changes and accounting treatment of tariff rates input to the billing systems; and calculation of amounts billed to the customers. We performed substantive analytical procedures, including monthly fluctuations analysis and analysis of changes in key drivers of revenue, and compared financial and non-financial data. We also analysed the timeliness of revenue recognition. We analysed the key judgements and estimates, and the accounting policy for compliance with IFRS 15. We considered revenue disclosures in light of the requirements of IFRS 15. To the Shareholders and the Audit committee of the Board of directors of Kcell JSC Opinion We have audited the consolidated financial statements of Kcell JSC and its subsidiaries (hereinafter, the Group), which comprise the consolidated statement of financial position as at 31 December 2020, and the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 31 December 2020 and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs). Basis for opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report. We are independent of the Group in accordance with the International Ethics Standards Board for Accountants’ (IESBA) International Code of Ethics for Professional Accountants (including International Independence Standards) (IESBA Code), and we have fulfilled our other ethical responsibilities in accordance with the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. 47 Strategic reportFinancial statementsKcell Annual Report and Accounts 2020Governance INDEPENDENT AUDITOR’S REPORT (continued) Key audit matter Accounting for leases in accordance with of IFRS 16 Leases The Group has significant balances of right-of-use assets in the amount of 21 billion tenge and lease liabilities in the amount of 24 billion tenge. We performed testing of the completeness of the identified lease contracts on a sample basis and testing of the accuracy of the input in the lease calculation. How our audit addressed the key audit matter We challenged management assumptions, specifically the assumptions used to determine the discount rates and lease terms, including termination and renewal options. We recalculated the right-of-use assets and lease liabilities by type of lease contracts. We analyzed the updated accounting policy on the lease contracts of technical sites with the governmental entities in light of adoption of IFRIC agenda decision on the determination of the lease term for cancellable or renewable leases. We considered the appropriateness of the related disclosures provided in the Group’s consolidated financial statements. We obtained an understanding of the process around the property and equipment cycle and intangible assets cycle. We have considered the design and tested the operating effectiveness of related controls. We analysed the appropriateness of costs capitalization policies of the Group. We have carried out substantive testing in relation to each element of capitalised costs including inspecting supporting evidence for a sample of the capitalised costs and understanding the nature of the costs capitalised. We assessed the timeliness of the transfer of assets from the constructions-in- progress to the property and equipment and intangibles assets. In addition, we analysed assets recognized as non-current assets for compliance with capitalisation criteria. We considered the appropriateness of the related disclosures provided in the Group consolidated financial statements. The accounting for right-of-use assets and lease liabilities in accordance with IFRS 16 is significant to our audit, as the balances recorded are material. In addition, the procedures of identification and processing all relevant data associated with the leases are complex and the measurement of the right-of-use assets and lease liabilities is based on assumptions such as discount rates and the lease terms, including termination and renewal options. Moreover, in 2020 the Group adopted IFRIC agenda decision on the determination of the lease term for cancellable or renewable leases and retrospectively re-assessed its accounting for the lease contracts of technical sites with the governmental entities. The Group’s disclosure in respect of the accounting policies on lease recognition and measurement in accordance with IFRS 16 Lease is included in Note 3 to the consolidated financial statements, the effect of the IFRIC agenda decision on the Group accounting policy is disclosed in Note 4 to the consolidated financial statements and detailed lease disclosures are included in Note 18 to the consolidated financial statements. Costs capitalization The Group capitalises significant internal labour costs and external costs in respect of major capital projects, including mobile network upgrades. There is risk in respect of valuation and allocation of assets, that costs which do not meet the criteria for capitalisation in accordance with IAS 16 and IAS 38 are capitalised or that assets continue to be recognized as non-current assets despite no longer meeting the relevant capitalisation criteria. Due to the relative size of the Group’s mobile network related property and equipment and intangible assets in the consolidated statement of financial position and the area of judgment around the application of capitalization criteria, we considered this as one of the key audit matters. The Group’s policy on the capitalisation of assets is included in Note 3 to the consolidated financial statements, and detailed property and equipment and intangible assets disclosures are included in Note 8 and Note 9, respectively, to the consolidated financial statements. 48 Other information included in the Group’s 2020 Annual report Other information consists of the information included in the Group’s 2020 Annual report, other than the consolidated financial statements and our auditor’s report thereon. Management is responsible for the other information. The Group’s 2020 Annual report is expected to be made available to us after the date of this auditor’s report. Our opinion on the consolidated financial statements does not cover the other information and we will not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above when it becomes available and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. Responsibilities of management and the Audit committee of the Board of directors for the consolidated financial statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRSs, and for such internal control as management determines is necessary to enable the preparation of the consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease Kcell Annual Report and Accounts 2020 operations, or has no realistic alternative but to do so. reasonableness of accounting estimates and related disclosures made by management. The Audit committee of the Board of directors is responsible for overseeing the Group’s financial reporting process. Auditor’s responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: – Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. – Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. – Evaluate the appropriateness of – Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. – Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. – Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with the Audit committee of the Board of directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the Audit committee of the Board of directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied. From the matters communicated with the Audit committee of the Board of directors, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. The partner in charge of the audit resulting in this independent auditor’s report is Paul Cohn. Paul Cohn Audit Partner Rustamzhan Sattarov Auditor / General Director Ernst & Young LLP Auditor qualification certificate No. MФФ – 0000060 dated 6 January 2012 050060, Republic of Kazakhstan, Almaty,Al-Farabi ave., 77/7, Esentai Tower State audit license for audit activities on the territory of the Republic of Kazakhstan: series MФЮФЮ–2, No. 0000003 issued by the Ministry of finance of the Republic of Kazakhstan dated 15 July 2005 accounting policies used and the 29 January 2021 49 Strategic reportFinancial statementsKcell Annual Report and Accounts 2020Governance CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at 31 December 2020 In millions of tenge Assets Non-current assets Property and equipment Intangible assets Advances paid for non-current assets Right-of-use assets Long-term trade receivables Cost to obtain contracts Other non-current assets Deferred tax assets Total non-current assets Current assets Inventories Trade receivables Other current non-financial assets Other current financial assets Prepaid income tax Financial assets at fair value through other comprehensive income Financial assets at amortized cost Cash and cash equivalents Total current assets Total assets Equity and liabilities Share capital Retained earnings Total equity Non-current liabilities Borrowings: non-current portion Long-term lease liabilities Asset retirement obligation Financial guarantee obligation Other non-current liabilities Deferred tax liabilities Total non-current liabilities Current liabilities Borrowings: current portion Trade payables Contracts liabilities Provisions Due to employees Short-term lease liabilities Property tax payable Total current liabilities Total liabilities Total equity and liabilities 31 December 2020 31 December 2019 (restated)* 1 January 2019 (restated)* Notes 8 9 18 10 30 11 10 12 13 14 15 16 7 17 18 22 20 30 17 19 21 23 18 78,109 39,730 293 20,804 2,421 185 – 1,937 143,479 9,362 17,823 3,063 245 813 – 18,923 23,023 73,252 216,731 33,800 48,283 82,083 49,933 19,447 4,007 563 – – 73,950 23,354 22,353 1,978 4,502 3,691 4,219 601 60,698 134,648 216,731 82,283 38,820 233 24,976 1,118 240 3 1,378 149,051 6,636 15,647 6,704 1,371 2,222 4,965 – 8,825 46,370 195,421 33,800 40,297 74,097 55,548 23,447 1,970 – – 1,183 82,148 6,384 21,175 4,149 188 3,172 3,606 502 39,176 121,324 195,421 88,437 40,115 729 27,816 3,010 389 37 – 160,533 4,728 13,787 5,276 1,011 933 – – 6,029 31,764 192,297 33,800 36,254 70,054 14,936 25,184 1,285 – 77 1,302 42,784 51,783 14,048 3,772 2,911 1,717 3,642 1,586 79,459 122,243 192,297 * Certain amounts shown here do not correspond to the consolidated financial statements for the year ended 31 December 2019, as they reflect the adjustments made, as detailed in Note 4. Yuri Kharlamov Acting Chairman of the Management Board & Chief Financial Officer The accounting policies and notes on pages 54 to 100 are an integral part of these consolidated financial statements. 50 Kcell Annual Report and Accounts 2020 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 December 2020 In millions of tenge Revenue from contracts with customers Cost of sales Gross profit Penalty expenses Provisions for legal claims General and administrative expenses Impairment of financial assets Impairment of property and equipment and intangible assets Selling expenses Reversal of tax and related fines and penalties provision Other operating income Other operating expenses Operating profit Finance costs Finance income Net foreign exchange gain/(loss) Other non-operating income Other non-operating expenses Profit before tax Income tax expenses Profit for the year Other comprehensive income Total comprehensive income for the year, net of tax Earnings per share Basic and diluted, tenge Notes 24 25 26 23 27 10 8, 9 28 33 29 29 30 2020 174,684 (119,133) 55,551 2019 (restated)* 156,657 (108,928) 47,729 – (4,386) (10,426) (1,547) (5,227) (1,965) 684 550 (408) 32,826 (11,753) 2,300 987 262 – 24,622 (7,044) 17,578 – 17,578 (14,552) – (8,925) (2,256) (1,844) (2,887) 5,816 – – 23,081 (11,895) 1,415 (91) 317 (85) 12,742 (2,727) 10,015 – 10,015 7 87.89 50.08 * Certain amounts shown here do not correspond to the consolidated financial statements for the year ended 31 December 2019, as they reflect the adjustments made, as detailed in Note 4. Yuri Kharlamov Acting Chairman of the Management Board & Chief Financial Officer The accounting policies and notes on pages 54 to 100 are an integral part of these consolidated financial statements. 51 Strategic reportFinancial statementsKcell Annual Report and Accounts 2020Governance CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2020 In millions of tenge At 1 January 2019 (as previously reported) Change in accounting policy and correction of errors (Note 4) At 1 January 2019 (restated)* Net profit for the year Other comprehensive income Total comprehensive income Dividends declared (Note 7) At 31 December 2019 (restated)* Net profit for the year Other comprehensive income Total comprehensive income Financial guarantee (Note 20) Dividends declared (Note 7) At 31 December 2020 Share capital 33,800 – 33,800 – – – Retained earnings 33,626 2,628 36,254 10,015 – 10,015 Total equity 67,426 2,628 70,054 10,015 – 10,015 – 33,800 (5,972) 40,297 (5,972) 74,097 – – – 17,578 – 17,578 17,578 – 17,578 – – 33,800 (592) (9,000) 48,283 (592) (9,000) 82,083 * Certain amounts shown here do not correspond to the consolidated financial statements for the year ended 31 December 2019, as they reflect the adjustments made, as detailed in Note 4. Yuri Kharlamov Acting Chairman of the Management Board & Chief Financial Officer The accounting policies and notes on pages 54 to 100 are an integral part of these consolidated financial statements. 52 Kcell Annual Report and Accounts 2020 CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 31 December 2020 In millions of tenge Cash flows from operating activities Profit before tax Adjustments for: Impairment of financial assets Impairment of property and equipment and intangible assets Finance costs Depreciation of property and equipment and right of use assets Amortization of intangible assets Income from accounts payable write-off Write-off of inventory to net realizable value Loss on disposal of property and equipment Finance income Legal disputes expenses Reversal of tax and related fines and penalties provision Gain on cancellation of lease agreements Net foreign exchange (gain)/loss Operating cash flows before changes in operating assets and liabilities Change in inventories Change in trade receivables Change in other current non-financial assets Change in other current financial assets Change in cost to obtain contracts Change in trade payables Change in other current non-financial liabilities Change in other current financial liabilities Change in contract liabilities Change in taxes payable other than income tax Cash flows generated from operations Income tax paid Interest received Interest paid Net cash flows from operating activities Cash flows from investing activities Purchase of property and equipment Purchase of intangible assets Proceeds from disposal of property and equipment Proceeds from redemption of financial assets at amortized cost Proceeds from redemption of financial assets at fair value through other comprehensive income Purchase of financial assets at amortised cost Purchase of financial assets at fair value through other comprehensive income Net cash flows used in investing activities Cash flows from financing activities Proceeds from loans Proceeds from bonds issued Repayment of loans Repayment of principal portion of lease liabilities Dividends paid Net cash flows used in financing activities Net increase in cash and cash equivalents Effect of exchange rate changes on cash and cash equivalents held in foreign currency Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year Notes 2020 2019 (restated)* 24,622 12,742 10 8, 9 29 8, 18 9 11 29 23 33 32 15 14 15 14 32 32 4, 32 7 16 1,547 5,227 11,753 19,792 11,010 (189) 654 273 (2,300) 4,386 (684) (21) (987) 75,083 (3,272) (4,762) 4,254 1,129 54 (1,708) 114 (2,171) 100 68,821 (7,378) 1,719 (10,903) 52,259 (12,142) (11,413) 161 18,139 5,385 (36,751) – (36,621) 27,000 – (16,130) (3,758) (9,000) (1,888) 13,750 448 8,825 23,023 2,256 1,844 11,895 21,122 9,390 – – – (1,415) – (5,816) (10) 91 52,099 (1,908) (2,197) (953) (326) 149 2,017 117 (70) 377 (1,115) 48,190 (3,313) 404 (10,220) 35,061 (8,832) (4,329) – – – – (5,021) (18,182) 20,000 17,025 (42,000) (3,085) (5,972) (14,032) 2,847 (51) 6,029 8,825 ** Certain amounts shown here do not correspond to the consolidated financial statements for the year ended 31 December 2019, as they reflect the adjustments made, as detailed in Note 4. Yuri Kharlamov Acting Chairman of the Management Board & Chief Financial Officer The accounting policies and notes on pages 54 to 100 are an integral part of these consolidated financial statements. 53 Strategic reportFinancial statementsKcell Annual Report and Accounts 2020Governance NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2020 1. General information Kcell JSC (the “Company”) was established as a limited liability partnership (GSM Kazakhstan OAO Kazakhtelecom LLP) on 1 June 1998 to design, construct and operate a cellular telecommunications network in the Republic of Kazakhstan, using the GSM (Global System for Mobile Communications) standard. The Company’s registered address is Samal-2, 100, Almaty, the Republic of Kazakhstan. On 27 August 2012, the Ministry of Justice registered the Company as a Joint Stock Company. Under Kazakhstani law, upon the conversion, retained earnings as of the date of the conversion became share capital of the Company and ceased to be available for distribution to shareholders. On 13 December 2012, the Company successfully completed its offering of Global Depositary Receipts at the London Stock Exchange and common shares at the Kazakhstan Stock Exchange. In 2016 the Group paid 26,000 million tenge for LTE radio frequencies. On 1 March 2016, the Group launched LTE in its network on the previously granted frequencies. As at 31 December 2020 and 2019 the Company is controlled by Kazakhtelecom JSC. Kazakhtelecom JSC is controlled by the Government of the Republic of Kazakhstan through Sovereign Wealth Fund “Samruk-Kazyna” JSC (“Samruk-Kazyna”) which owns 51% of Kazakhtelecom’s controlling shares. As at 31 December 2020 and 31 December 2019, the shareholders of the Company are presented as follow: Kazakhtelecom JSC Raiffeisenbank JSC Other 31 December 2020 75.00% 11.60% 13.40% 100.00% 31 December 2019 75.00% 11.82% 13.18% 100.00% As at 31 December 2020 and 31 December 2019, the Company has the following principal subsidiaries: KazNet Media LLP KT-Telecom LLP 31 December 2020 100% 100% 31 December 2019 75.00% 100.00% The accompanying consolidated financial statements include the financial statement of Kcell JSC and its subsidiaries (further referred as to “the Group”). On 25 December 2010, the competent authority signed an addendum to the existing GSM license, which provided the Group with a right to operate a 3G network. In December 2010, the Group launched 3G services in Astana and Almaty. As of 1 January 2015, the Group provided all locations with a population of over 10,000 people with mobile services using UMTS/ WCDMA based on the terms of the addendum. In January 2016, the Group paid 14,000 million tenge as the first tranche for LTE radio frequencies. In accordance with the decision made by Kazakhstan’s Ministry of Investments and Development (“the MID”) in January 2016, the Group had to pay a one-time fee of 4,000 million tenge by 1 February 2016 for 10/10 MHz radio frequency within the 1700/1800 MHz band, and the first tranche of 10,000 million tenge by 1 March 2016 to gain access to 10/10 MHz radio frequency within the 700/800 MHz band. The second tranche for 10/10 MHz radio frequencies within the 700/800 MHz band in the amount of 12,000 million tenge was to be paid by 1 December 2016. The Group paid the second tranche on 30 November 2016. On 1 March 2016, the Group launched LTE in its network on the previously granted frequencies. The consolidated financial statements were authorised for issue by the acting Chairman of the Management Board on 29 January 2021. 54 Kcell Annual Report and Accounts 2020 2. Basis of preparation These consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (hereinafter, “IFRS”), as issued by International Accounting Standard Board (hereinafter, “IASB”). These consolidated financial statements have been prepared on a historical cost basis, except as described in the accounting policies and the notes to these consolidated financial statements. The consolidated financial statements are presented in Kazakhstan tenge (“tenge”) and all amounts are rounded to the nearest millions, except when otherwise indicated. Going concern The consolidated financial statements have been prepared on a going concern basis, which assumes continuation of the course of business, realization of assets and settlement of liabilities in the normal course of business. Basis of consolidation The consolidated financial statements comprise the financial statements of the Company and its subsidiaries as at 31 December 2020. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Group controls an investee if, and only if, the Group has: – Power over the investee (i.e., existing rights that give it the current ability to direct the relevant activities of the investee); – Exposure, or rights, to variable returns from its involvement with the investee; – The ability to use its power over the investee to affect its returns. Generally, there is a presumption that a majority of voting rights results in control. To support this presumption and when the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including: – The contractual arrangement(s) with the other vote holders of the investee; – Rights arising from other contractual arrangements; – The Group’s voting rights and potential voting rights. The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated financial statements from the date the Group gains control until the date the Group ceases to control the subsidiary. Profit or loss and each component of other comprehensive income (OCI) are attributed to the equity holders of the parent of the Group and to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies in line with the Group’s accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Group loses control over a subsidiary, it derecognises the related assets (including goodwill), liabilities, non controlling interest and other components of equity, while any resultant gain or loss is recognised in profit or loss. Any investment retained is recognised at fair value. 55 Strategic reportFinancial statementsKcell Annual Report and Accounts 2020Governance 3. Summary of significant accounting policies New and amended standards and interpretations The Group applied for the first-time certain standards and amendments, which are effective for annual periods beginning on or after 1 January 2020. The Group has not early adopted any standard, interpretation or amendment that has been issued but are not yet effective. Amendments to IFRS 3 Definition of a Business The amendment to IFRS 3 Business Combination clarifies that to be considered a business, an integrated set of activities and assets must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output. Furthermore, it clarified that a business can exist without including all of the inputs and processes needed to create outputs. These amendments had no impact on the consolidated financial statements of the Group, but may impact future periods should the Group enter into any business combinations. Amendments to IFRS 7, IFRS 9 and IAS 39 Interest Rate Benchmark Reform The amendments to IFRS 9 and IAS 39 Financial Instruments: Recognition and Measurement provide a number of reliefs, which apply to all hedging relationships that are directly affected by interest rate benchmark reform. A hedging relationship i s affected if the reform gives rise to uncertainties about the timing and or amount of benchmark-based cash flows of the hedged item or the hedging instrument. These amendments had no impact on the consolidated financial statements of the Group as it does not have any interest rate hedge relationships. Amendments to IAS 1 and IAS 8 Definition of Material The amendments provide a new definition of material that states “information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity”. The amendments clarify that materiality will depend on the nature or magnitude of information, either individually or in combination with other information, in the context of the financial statements. A misstatement of information is material if it could reasonably be expected to influence decisions made by the primary users. These amendments had no impact on the consolidated financial statements of, nor is there expected to be any future impact to the Group. Conceptual Framework for Financial Reporting issued on 29 March 2018 The Conceptual Framework is not a standard, and none of the concepts contained therein override the concepts or requirements in any standard. The purpose of the Conceptual Framework is to assist the IASB in developing standards, to help preparers develop consistent accounting policies where there is no applicable standard in place and to assist all parties to understand and interpret the standards. This will affect those entities which developed their accounting policies based on the Conceptual Framework. The revised Conceptual Framework includes some new concepts, updated definitions and recognition criteria for assets and liabilities and clarifies some important concepts. These amendments had no impact on the consolidated financial statements of the Group. Amendments to IFRS 16 Covid-19 Related Rent Concessions On 28 May 2020, the IASB issued Covid-19-Related Rent Concessions − amendment to IFRS 16 Leases. The amendments provide relief to lessees from applying IFRS 16 guidance on lease modification accounting for rent concessions arising as a direct consequence of the Covid-19 pandemic. As a practical expedient, a lessee may elect not to assess whether a Covid-19 related rent concession from a lessor is a lease modification. A lessee that makes this election accounts for any change in lease payments resulting from the Covid-19 related rent concession the same way it would account for the change under IFRS 16, if the change were not a lease modification. The amendment applies to annual reporting periods beginning on or after 1 June 2020. Earlier application is permitted. This amendment had no impact on the consolidated financial statements of the Group. Standards issued but not yet effective The new and amended standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Group’s financial statements are disclosed below. The Group intends to adopt these new and amended standards and interpretations, if applicable, when they become effective. 56 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)For the year ended 31 December 2020Kcell Annual Report and Accounts 2020 3. Summary of significant accounting policies (continued) Standards issued but not yet effective (continued) IFRS 17 Insurance Contracts In May 2017, the IASB issued IFRS 17 Insurance Contracts (IFRS 17), a comprehensive new accounting standard for insurance contracts covering recognition and measurement, presentation and disclosure. Once effective, IFRS 17 will replace IFRS 4 Insurance Contracts (IFRS 4) that was issued in 2005. IFRS 17 applies to all types of insurance contracts (i.e., life, non-life, direct insurance and re-insurance), regardless of the type of entities that issue them, as well as to certain guarantees and financial instruments with discretionary participation features. A few scope exceptions will apply. The overall objective of IFRS 17 is to provide an accounting model for insurance contracts that is more useful and consistent for insurers. In contrast to the requirements in IFRS 4, which are largely based on grandfathering previous local accounting policies, IFRS 17 provides a comprehensive model for insurance contracts, covering all relevant accounting aspects. The core of IFRS 17 is the general model, supplemented by: – A specific adaptation for contracts with direct participation features (the variable fee approach); – A simplified approach (the premium allocation approach) mainly for short-duration contracts. IFRS 17 is effective for reporting periods beginning on or after 1 January 2023, with comparative figures required. Early application is permitted, provided the entity also applies IFRS 9 and IFRS 15 on or before the date it first applies IFRS 17. This standard is not applicable to the Group. Amendments to IAS 1 Classification of Liabilities as Current or Non-current In January 2020, the IASB issued amendments to paragraphs 69 to 76 of IAS 1 to specify the requirements for classifying liabilities as current or non-current. The amendments clarify: – What is meant by a right to defer settlement; – That a right to defer must exist at the end of the reporting period; – That classification is unaffected by the likelihood that an entity will exercise its deferral right; – That only if an embedded derivative in a convertible liability is itself an equity instrument would the terms of a liability not impact its classification. The amendments are effective for annual reporting periods beginning on or after 1 January 2023 and must be applied retrospectively. The Group is currently assessing the impact the amendments will have on current practice and whether existing loan agreements may require renegotiation. Reference to the Conceptual Framework – Amendments to IFRS 3 In May 2020, the IASB issued Amendments to IFRS 3 Business Combinations − Reference to the Conceptual Framework. The amendments are intended to replace a reference to the Framework for the Preparation and Presentation of Financial Statements, issued in 1989, with a reference to the Conceptual Framework for Financial Reporting issued in March 2018 without significantly changing its requirements. The Board also added an exception to the recognition principle of IFRS 3 to avoid the issue of potential ‘day 2’ gains or losses arising for liabilities and contingent liabilities that would be within the scope of IAS 37 or IFRIC 21 Levies, if incurred separately. At the same time, the Board decided to clarify existing guidance in IFRS 3 for contingent assets that would not be affected by replacing the reference to the Framework for the Preparation and Presentation of Financial Statements. The amendments are effective for annual reporting periods beginning on or after 1 January 2022 and apply prospectively. Property, Plant and Equipment: Proceeds before Intended Use – Amendments to IAS 16 In May 2020, the IASB issued Property, Plant and Equipment − Proceeds before Intended Use, which prohibits entities deducting from the cost of an item of property, plant and equipment, any proceeds from selling items produced while bringing that asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Instead, an entity recognises the proceeds from selling such items, and the costs of producing those items, in profit or loss. 57 Strategic reportFinancial statementsKcell Annual Report and Accounts 2020Governance 3. Summary of significant accounting policies (continued) Standards issued but not yet effective (continued) Property, Plant and Equipment: Proceeds before Intended Use – Amendments to IAS 16 (continued) The amendment is effective for annual reporting periods beginning on or after 1 January 2022 and must be applied retrospectively to items of property, plant and equipment made available for use on or after the beginning of the earliest period presented when the entity first applies the amendment. The amendments are not expected to have a material impact on the Group. Onerous Contracts – Costs of Fulfilling a Contract – Amendments to IAS 37 In May 2020, the IASB issued amendments to IAS 37 to specify which costs an entity needs to include when assessing whether a contract is onerous or loss-making. The amendments apply a “directly related cost approach”. The costs that relate directly to a contract to provide goods or services include both incremental costs and an allocation of costs directly related to contract activities. General and administrative costs do not relate directly to a contract and are excluded unless they are explicitly chargeable to the counterparty under the contract. The amendments are effective for annual reporting periods beginning on or after 1 January 2022. The Group will apply these amendments to contracts for which it has not yet fulfilled all its obligations at the beginning of the annual reporting period in which it first applies the amendments. IFRS 1 First-time Adoption of International Financial Reporting Standards – Subsidiary as a first-time adopter As part of its 2018-2020 annual improvements to IFRS standards process, the IASB issued an amendment to IFRS 1 First- time Adoption of International Financial Reporting Standards. The amendment permits a subsidiary that elects to apply paragraph D16(a) of IFRS 1 to measure cumulative translation differences using the amounts reported by the parent, based on the parent’s date of transition to IFRS. This amendment is also applied to an associate or joint venture that elects to apply paragraph D16(a) of IFRS 1. The amendment is effective for annual reporting periods beginning on or after 1 January 2022 with earlier adoption permitted. IFRS 9 Financial Instruments – Fees in the ‘10 per cent’ test for derecognition of financial liabilities As part of its 2018-2020 annual improvements to IFRS standards process the IASB issued amendment to IFRS 9. The amendment clarifies the fees that an entity includes when assessing whether the terms of a new or modified financial liability are substantially different from the terms of the original financial liability. These fees include only those paid or received between the borrower and the lender, including fees paid or received by either the borrower or lender on the other’s behalf. An entity applies the amendment to financial liabilities that are modified or exchanged on or after the beginning of the annual reporting period in which the entity first applies the amendment. The amendment is effective for annual reporting periods beginning on or after 1 January 2022 with earlier adoption permitted. The Group will apply the amendments to financial liabilities that are modified or exchanged on or after the beginning of the annual reporting period in which the entity first applies the amendment. The amendments are not expected to have a material impact on the Group. IAS 41 Agriculture – Taxation in fair value measurements As part of its 2018-2020 annual improvements to IFRS standards process the IASB issued amendment to IAS 41 Agriculture. The amendment removes the requirement in paragraph 22 of IAS 41 that entities exclude cash flows for taxation when measuring the fair value of assets within the scope of IAS 41. An entity applies the amendment prospectively to fair value measurements on or after the beginning of the first annual reporting period beginning on or after 1 January 2022 with earlier adoption permitted. This standard is not applicable to the Group. 58 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)For the year ended 31 December 2020Kcell Annual Report and Accounts 2020 3. Summary of significant accounting policies (continued) Standards issued but not yet effective (continued) Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 Interest Rate Benchmark Reform – Phase 2 In 2018, the IASB added a project to its agenda to consider the financial reporting implications of the Reform. It identified two groups of accounting issues that could have financial reporting implications. These were: – Phase 1: pre-replacement issues − issues affecting financial reporting in the period before the replacement of an existing interest rate benchmark with an alternative RFR; – Phase 2: replacement issues − issues that might affect financial reporting when an existing interest rate benchmark is replaced with an alternative RFR. The IASB gave priority to the Phase 1 issues because they were more urgent and in September 2019, The Board issued Interest Rate Benchmark Reform, Amendments to IFRS 9, IAS 39 and IFRS 7 (the Phase 1 Amendments) to address them. The Phase 1 Amendments provided a number of temporary exceptions from applying specific hedge accounting requirements of both IFRS 9 Financial Instruments and IAS 39 Financial Instruments: Recognition and Measurement, but also added some additional disclosure requirements to IFRS 7 Financial Instruments: Disclosures. In August 2020, the IASB issued Interest Rate Benchmark Reform Phase 2, Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 (the Phase 2 Amendments). The Phase 2 Amendments provide the following changes in respect of financial instruments that are directly required by the Reform: – A practical expedient when accounting for changes in the basis for determining the contractual cash flows of financial assets and liabilities, to require the effective interest rate to be adjusted; – Reliefs from discontinuing hedge relationships; – Temporary relief from having to meet the separately identifiable requirement when an RFR instrument is designated as a hedge of a risk component; – Additional IFRS 7 disclosures. The Phase 2 Amendments also affected IFRS 16 Leases and IFRS 4 Insurance Liabilities. The Phase 2 Amendments are effective for annual periods beginning on or after 1 January 2021 and early application is permitted. The amendments are not expected to have a material impact on the Group. Foreign currency translation The consolidated financial statements of the Group are presented in tenge, which is the functional currency of the Company and its main subsidiaries. Tenge is the currency of the primary economic environment in which the Company and its main subsidiaries operate. Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Transactions and balances Transactions in foreign currencies are initially recorded by the Group’s entities at their respective functional currency spot rates at the date the transaction first qualifies for recognition. Monetary assets and liabilities denominated in foreign currency are translated at the official exchange rate ruling at the reporting date established by Kazakhstan Stock Exchange (“KASE”) and published by the National Bank of the Republic of Kazakhstan (“NBRK”). All translation differences are recognized in the consolidated statement of comprehensive income. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. The gain or loss arising on translation of non-monetary items measured at fair value is treated in line with the recognition of the gain or loss on the change in fair value of the item (i.e., translation differences on items whose fair value gain or loss is recognised in OCI or profit or loss are also recognised in OCI or profit or loss, respectively). 59 Strategic reportFinancial statementsKcell Annual Report and Accounts 2020Governance 3. Summary of significant accounting policies (continued) Foreign currency translation (continued) Transactions and balances (continued) Foreign exchange rates are presented in the following table: US dollar Euro Russian rubles 31 December 2020 420.91 516.79 5.62 31 December 2019 382.59 429.00 6.16 Current versus non-current classification The Group presents assets and liabilities in the consolidated statement of financial position based on current/non-current classification. An asset as current when it is: – Expected to be realised or intended to sold or consumed in normal operating cycle; – Held primarily for the purpose of trading; – Expected to be realised within 12 (twelve) months after the reporting period; or – Cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least 12 (twelve) months after the reporting period. All other assets are classified as non-current. A liability is current when: – It is expected to be settled in normal operating cycle; – It is held primarily for the purpose of trading; – It is due to be settled within 12 (twelve) months after the reporting period; or – There is no unconditional right to defer the settlement of the liability for at least 12 (twelve) months after the reporting period. The Group classifies all other liabilities as non-current. Deferred tax assets and liabilities are classified as non-current assets and liabilities. Fair value measurement Fair value related disclosures for financial instruments and non-financial assets that are measured at fair value or where fair values are disclosed, are summarised in the Note 32. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: – In the principal market for the asset or liability; or – In the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible by the Group. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. 60 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)For the year ended 31 December 2020Kcell Annual Report and Accounts 2020 3. Summary of significant accounting policies (continued) Fair value measurement (continued) All assets and liabilities for which fair value is measured or disclosed in the consolidated financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: – Level 1 − quoted (unadjusted) market prices in active markets for identical assets or liabilities; – Level 2 − valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable; – Level 3 − valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable. For assets and liabilities that are recognised in the consolidated financial statements at fair value on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. The respective unit of the Group (hereinafter, the “Working Group”) determines the policies and procedures for both recurring fair value measurement, such as investment properties and unquoted AFS financial assets, and for non recurring measurement, such as assets held for distribution in discontinued operations. The composition of the Working Group is determined by the Management of the Group. External valuers are involved for valuation of significant assets, such as investment properties and unquoted financial assets, and significant liabilities, such as contingent consideration. Involvement of external valuers is determined annually by the Working Group after discussion with and approval by the Group’s Audit Committee. Selection criteria include market knowledge, reputation, independence and whether professional standards are maintained. Valuers are normally rotated every three years. The Working Group decides, after discussions with the Group’s external valuers, which valuation techniques and inputs to use for each case. At each reporting date, the Working Group analyses the movements in the values of assets and liabilities which are required to be remeasured or re-assessed as per the Group’s accounting policies. For this analysis, the Valuation Committee verifies the major inputs applied in the latest valuation by agreeing the information in the valuation computation to contracts and other relevant documents. The Working Group also compares the change in the fair value of each asset and liability with relevant external sources to determine whether the change is reasonable. For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy, as explained above. Property and equipment Property and equipment is stated at cost, net of accumulated depreciation and accumulated impairment losses, if any. Such cost includes the cost of replacing part of the property and equipment and borrowing costs for long-term construction projects if the recognition criteria are met. When significant parts of property and equipment are required to be replaced at intervals, the Group depreciates them separately based on their specific useful lives. Likewise, when a major inspection is performed, its cost is recognised in the carrying amount of the property and equipment as a replacement if the recognition criteria are satisfied. All other repair and maintenance costs are recognised in profit or loss as incurred. The present value of the expected cost for the decommissioning of an asset after its use is included in the cost of the respective asset if the recognition criteria for a provision are met. Please refer to Asset retirement obligation (Note 19) for further information about decommissioning provision recognised. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets, as follows: Buildings and constructions Machinery Equipment, tools and installations Land is not depreciated. Years 10-50 3-10 2-8 61 Strategic reportFinancial statementsKcell Annual Report and Accounts 2020Governance 3. Summary of significant accounting policies (continued) Property and equipment (continued) An item of property and equipment and any significant component initially recognised is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the consolidated statement of comprehensive income when the asset is derecognised. The residual values, useful lives and methods of depreciation of property and equipment are reviewed at each financial year end and adjusted prospectively, if appropriate. Construction-in-progress Construction-in-progress represents property and equipment under construction and machinery and equipment awaiting installation and is recorded at cost. Construction-in-progress includes cost of construction and equipment and other direct costs. When construction of such assets is completed or when the machinery and equipment are ready for their intended use, construction-in-progress is transferred to the appropriate category of depreciable assets. Construction-in-progress is not depreciated. Intangible assets Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and accumulated impairment losses. Internally generated intangibles, excluding capitalised development costs, are not capitalised and the related expenditure is reflected in profit or loss in the period in which the expenditure is incurred. Intangible assets have finite useful lives. Intangible assets with finite useful lives are amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at the end of each reporting period. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are considered to modify the amortisation period or method, as appropriate, and are treated as changes in accounting estimates. Expenses on amortization of intangible assets with finite useful life are recognized in the consolidated statement of comprehensive income in the category of expenses, which corresponds to the function of the intangible asset. Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the consolidated statement of comprehensive income when the asset is derecognised. Intangible assets are amortized on a straight-line basis within the following estimated useful lives. Software and license Other telecom licenses Other Years 3-8 10 8-10 Impairment of non-financial assets The Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset’s recoverable amount. An asset’s or cash-generating unit’s (CGU) recoverable amount is the higher of: the fair value of an asset (cash generating unit) less costs of disposal and its value in use (cash generating unit). The recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs of disposal, recent market transactions are taken into account. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded companies or other available fair value indicators. 62 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)For the year ended 31 December 2020Kcell Annual Report and Accounts 2020 3. Summary of significant accounting policies (continued) Impairment of non-financial assets (continued) The Group bases its impairment calculation on detailed budgets and forecast calculations, which are prepared separately for each of the Group’s CGUs to which the individual assets are allocated. These budgets and forecast calculations are generally covering a period of 5 (five) years. A long-term growth rate is calculated and applied to project future cash flows after the fifth year. Impairment losses of continuing operations are recognised in the consolidated statement of comprehensive income in those expense categories consistent with the function of the impaired asset. An assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the Group estimates the asset’s or CGU’s recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognised. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in the consolidated statement of comprehensive income. Financial assets Initial recognition and measurement Financial assets are classified, at initial recognition, as subsequently measured at amortised cost, fair value through other comprehensive income (OCI), and fair value through profit or loss. The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and the Group’s business model for managing them. With the exception of trade receivables that do not contain a significant financing component or for which the Group has applied the practical expedient, the Group initially measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs. Trade receivables that do not contain a significant financing component or for which the Group has applied the practical expedient are measured at the transaction price determined under IFRS 15. In order for a financial asset to be classified and measured at amortised cost or fair value through OCI, it needs to give rise to cash flows that are ‘solely payments of principal and interest (SPPI)’ on the principal amount outstanding. This assessment is referred to as the SPPI test and is performed at an instrument level. Financial assets with cash flows that are not SPPI are classified and measured at fair value through profit or loss, irrespective of the business model. The Group’s business model for managing financial assets refers to how it manages its financial assets in order to generate cash flows. The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both. Financial assets classified and measured at amortised cost are held within a business model with the objective to hold financial assets in order to collect contractual cash flows while financial assets classified and measured at fair value through OCI are held within a business model with the objective of both holding to collect contractual cash flows and selling. Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the market place (regular way trades) are recognised on the trade date, i.e., the date that the Group commits to purchase or sell the asset. Financial assets of the Group include cash and cash equivalents, trade and other accounts receivable, financial asset at fair value through other comprehensive income. Subsequent measurement For purposes of subsequent measurement financial assets are classified in four categories: – Financial assets at amortised cost (debt instruments); – Financial assets at fair value through OCI with recycling of cumulative gains and losses (debt instruments); – Financial assets designated at fair value through OCI with no recycling of cumulative gains and losses upon derecognition (equity instruments); – Financial assets at fair value through profit or loss. 63 Strategic reportFinancial statementsKcell Annual Report and Accounts 2020Governance 3. Summary of significant accounting policies (continued) Financial assets (continued) Subsequent measurement (continued) Financial assets at amortised cost (debt instruments) This category is the most relevant to the Group. The Group measures financial assets at amortised cost if both of the following conditions are met: – The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows; and – The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Financial assets at amortised cost are subsequently measured using the effective interest (EIR) method and are subject to impairment. Gains and losses are recognised in profit or loss when the asset is derecognised, modified or impaired. The Group’s financial assets at amortised cost includes trade and other receivables. Financial assets designated at fair value through OCI (equity instruments) Upon initial recognition, the Group can elect to classify irrevocably its equity investments as equity instruments designated at fair value through OCI when they meet the definition of equity under IAS 32 Financial Instruments: Presentation and are not held for trading. The classification is determined on an instrument-by-instrument basis. Gains and losses on these financial assets are never recycled to profit or loss. Dividends are recognised as other income in the statement of profit or loss when the right of payment has been established, except when the Group benefits from such proceeds as a recovery of part of the cost of the financial asset, in which case, such gains are recorded in OCI. Equity instruments designated at fair value through OCI are not subject to impairment assessment. The Group elected to classify irrevocably its non-listed equity investments under this category. Derecognition A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognized (i.e. excluded from the Group’s consolidated statement of financial position): – The rights to receive cash flows from the asset have expired; or – The Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a “pass-through” arrangement; and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, the Group evaluates if it has retained the risks and rewards of the property, and to which extent, if any. When it has neither transferred nor retained substantially all of the risks and rewards of the asset, nor transferred control of the asset, the Group continues to recognise the transferred asset to the extent of its continuing involvement. In that case, the Group also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group has retained. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay. 64 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)For the year ended 31 December 2020Kcell Annual Report and Accounts 2020 3. Summary of significant accounting policies (continued) Financial assets (continued) Impairment of financial assets Financial assets carried at amortised cost The Group recognises an allowance for expected credit losses (ECLs) for all debt instruments not held at fair value through profit or loss. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Group expects to receive, discounted at an approximation of the original effective interest rate. The expected cash flows will include cash flows from the credit enhancements that are integral to the contractual terms. ECLs are recognised in two stages. For credit exposures for which there has not been a significant increase in credit risk since initial recognition, ECLs are provided for credit losses that result from default events that are possible within the next 12-months (a 12-month ECL). For those credit exposures for which there has been a significant increase in credit risk since initial recognition, a loss allowance is required for credit losses expected over the remaining life of the exposure, irrespective of the timing of the default (a lifetime ECL). For trade receivables the Group applies a simplified approach in calculating ECLs. Therefore, the Group does not track changes in credit risk, but instead recognises a loss allowance based on lifetime ECLs at each reporting date. The Group has established a provision matrix that is based on its historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment. The Group considers a financial asset in default when contractual payments are 90 days past due. However, in certain cases, the Group may also consider a financial asset to be in default when internal or external information indicates that the Group is unlikely to receive the outstanding contractual amounts in full before taking into account any credit enhancements held by the Group. A financial asset is written off when there is no reasonable expectation of recovering the contractual cash flows. Financial liabilities Initial recognition and measurement Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, loans and borrowings, payables. All financial liabilities are recognised initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs. The Group’s financial liabilities comprise trade and other accounts payable, loans and borrowings, lease liabilities and financial guarantees. Subsequent measurement The subsequent measurement of financial liabilities depends on their classification, as described below: Loans and borrowings This category is the most relevant to the Group. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the EIR method. Gains and losses are recognised in profit or loss when the liabilities are derecognised as well as through the EIR amortisation process. Amortised cost is calculated by taking into account any discount or premium on acquisition and fee or costs that are an integral part of the EIR. The EIR amortisation is included in finance costs in the consolidated statement of comprehensive income. This category generally applies to interest-bearing loans and borrowings. Further details are contained in Note 17. 65 Strategic reportFinancial statementsKcell Annual Report and Accounts 2020Governance 3. Summary of significant accounting policies (continued) Financial liabilities (continued) Subsequent measurement (continued) Financial guarantees The Group has financial guarantee issued to the Parent. Financial guarantee contracts are recognised initially as a liability at fair value, adjusted for transaction costs that are directly attributable to the issuance of the guarantee. The financial guarantee obligation issued to the Parent is initially recognized though equity. Subsequently, the liability is measured at the higher of the amount of the loss allowance determined in accordance with IFRS 9 Financial Instruments and the amount initially recognised less, when appropriate, the cumulative amount of income recognised in accordance with IFRS 15 Revenue from Contracts with Customers. Further details are contained in Note 20. Trade and other accounts payable Liabilities for trade and other accounts payable are recognised at fair value to be paid in the future for goods and services received, whether or not billed to the Group. Derecognition A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the consolidated statement of comprehensive income. Offsetting of financial instruments Financial assets and financial liabilities are only offset and reported at the net amount in the consolidated statement of financial position when there is a legally enforceable right to offset the recognised amounts and the Group intends to either settle on a net basis, to realise the asset and settle the liability simultaneously. Leases The Group assesses at contract inception whether a contract is, or contains, a lease. That is, if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Group as a lessee The Group applies a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. The Group recognises lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets. Right-of-use assets The Group recognises right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. The right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term, as follows: Buildings and constructions Years 5-15 If ownership of the leased asset transfers to the Group at the end of the lease term or the cost reflects the exercise of a purchase option, depreciation is calculated using the estimated useful life of the asset. The right-of-use assets are also subject to impairment. Refer to the accounting policies in section Impairment of non financial assets. 66 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)For the year ended 31 December 2020Kcell Annual Report and Accounts 2020 3. Summary of significant accounting policies (continued) Leases (continued) Group as a lessee (continued) Lease liabilities At the commencement date of the lease, the Group recognises lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including insubstance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Group and payments of penalties for terminating the lease, if the lease term reflects the Group exercising the option to terminate. Variable lease payments that do not depend on an index or a rate are recognised as expenses (unless they are incurred to produce inventories) in the period in which the event or condition that triggers the payment occurs. In calculating the present value of lease payments, the Group uses its incremental borrowing rate at the lease commencement date because the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the lease payments (e.g., changes to future payments resulting from a change in an index or rate used to determine such lease payments) or a change in the assessment of an option to purchase the underlying asset. Short-term leases The Group applies the short-term lease recognition exemption to its short-term leases of base station that have a lease term of 12 months or less from the commencement date and the lessor has unconditional right to terminate contract. Lease payments on short-term leases are recognised as expense on a straight-line basis over the lease term. Inventories Inventories are valued at the lower of: cost of acquisition and net realisable value. Cost comprise expenses incurred in bringing inventory to its present location and condition. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. The same cost formula is used for all inventories having a similar nature and use. All inventories are determined based on weighted average cost method. Provisions General Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. When the Group expects some or all of a provision to be reimbursed, for example, under an insurance contract, the reimbursement is recognised as a separate asset, but only when the reimbursement is virtually certain. The expense relating to a provision is presented in the statement of profit or loss net of any reimbursement. If the effect of the time value of money is material, provisions are discounted using a current pre tax rate that reflects, when appropriate, the risks specific to the liability. When discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost. Decommissioning liability Decommissioning liabilities are recognized in respect of the estimated future costs of closure and restoration and for environmental rehabilitation costs (which include the dismantling and demolition of infrastructure, removal of residual materials and remediation of disturbed areas) in the reporting period when the related environmental disturbance occurs. Decommissioning costs are recorded at the discounted value of expected liability settlement costs calculated using estimated cash flows and recognized as part of the initial cost of the particular asset. Cash flows are discounted at the current rate before tax, which reflects risks inherent to the decommissioning obligations. Unwinding of discount is expensed as incurred and recognised in the consolidated statement of comprehensive income as finance costs. The estimated future costs of decommissioning are reviewed annually and adjusted as appropriate. Changes in the estimated future costs, or in the discount rate applied, are added to or deducted from the cost of the asset. 67 Strategic reportFinancial statementsKcell Annual Report and Accounts 2020Governance 3. Summary of significant accounting policies (continued) Employee benefit Social tax The Group pays social tax according to the current statutory requirements of the Republic of Kazakhstan. Social tax expenses are charged to expenses as incurred. Besides, the Group withholds 10% of the salary of employees paid as contributions of employees to the accumulating pension funds. Under the legislation, employees are responsible for their retirement benefits and the Group has no present or future obligation to further compensate its employees upon their retirement, except as provided below. Pension payments The Group does not incur any expenses in relation to provision of pensions or other post-employment benefits to its employees. In accordance with the legal requirements of the Republic of Kazakhstan, the Group withholds pension contributions from employee salaries and transfers them into state or private pension funds on behalf of its employees. Pension contributions are the responsibility of employees, and the Group has no current or future obligations to make payments to employees following their retirement. Upon retirement of employees, all pension payments are administered by the pension funds directly. Cash dividend and non-cash distribution to equity holders of the Parent The Group recognises a liability to make cash or non-cash distributions to equity holders of the Parent when the distribution is authorised and the distribution is no longer at the discretion of the Group. According to the legislation, distribution is approved by the shareholders. A corresponding amount is recognised directly in equity. Non-cash distributions are measured at the fair value of the assets to be distributed with fair value remeasurement recognised directly in equity. Upon distribution of non-cash assets, any difference between the carrying amount of the liability and the carrying amount of the assets distributed is recognised in the consolidated statement of comprehensive income. Revenue from contracts with customers Revenue from contracts with customers is recognized when control of the goods or services are transferred to the customer at an amount that reflects the consideration to which the Group expects to be entitled in exchange for those goods or services. Revenue is categorised as follows: voice and other services, data services, value added services, and sale of handsets. Voice service includes call out revenue, interconnect fees, roaming revenues charged to the Group’s subscribers for roaming in other wireless operators’ network, and roaming revenues charged to other wireless operators for non-Group subscribers using the Group’s network. Data services include revenues from 3G and LTE internet, WAP services and other data services. Value added services consists of SMS, MMS, info services and providing content of third parties, fax and voice mail services. The Group may bundle services and products into one customer offering. Offerings may involve the delivery or performance of multiple products, services, or rights to use assets (multiple deliverables). In some cases, the arrangements include initial installation, initiation, or activation services and involve consideration in the form of a fixed fee or a fixed fee coupled with a continuing payment stream. Costs associated with the equipment are recognised when revenue is recognised. The revenue is allocated to separate product and services on a relative stand-alone selling price method. The stand-alone selling prices are determined based on the list prices at which the Group sells the mobile devices and telecommunication services. Customised equipment that can be used only in connection with services or products provided by the Group is not accounted for separately and revenue is deferred over the total service arrangement period. In revenue arrangements where more than one performance obligation, transaction price is allocated between the goods and services using relative stand-alone selling price method. Determining the transaction price for each separate performance obligation can require complex estimates. The Group generally determines the stand-alone selling price for each separate performance obligation based on prices at which the good or services are regularly sold on a stand-alone basis after considering volume discounts where appropriate. 68 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)For the year ended 31 December 2020Kcell Annual Report and Accounts 2020 3. Summary of significant accounting policies (continued) Revenue from contracts with customers (continued) As a practical expedient, the Group does not adjust the promised amount of consideration for the effects of a significant financing component if the Group expects, at contract inception, that the period between when the Group transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less. (i) Call out revenue Call out revenue is recognised based on the actual airtime used by the subscribers. Prepayments received for call out revenue are not recognised as revenue until the related service has been provided to the subscriber. Revenue is recognised based on the actual traffic time elapsed, at the customer selected calling plan rates. (ii) Interconnect revenues and costs The Group charges interconnect per minute fees and fixed monthly payments to other local wireless and fixed line operators for calls originated outside and terminated within the Group’s network. The Group recognises such revenues when the services are provided. The Group is charged interconnect fees per minute and fixed monthly payments by other local wireless and fixed line operators for calls originated within the Group’s network and terminated outside of the network. The Group recognises such costs when the services are provided. (iii) Data revenue The data service is recognised when a service is used by a subscriber based on actual data volume traffic or passage of time (monthly subscription fee). (iv) Roaming revenues charged to the Group’s subscribers Roaming revenue from the Group’s subscribers for roaming in other operators’ network is charged based on information provided by other operators to the Group. (v) Roaming fees charged to other wireless operators The Group charges roaming per minute fees to other wireless operators for non-Group subscribers utilising the Group’s network. The Group recognises such revenues when the services are provided. (vi) Value added services Value added services mainly consists of content provided by third parties, different info services, fax and voice mail. When invoicing the end-customer for third party content service, amounts collected on behalf of the principal are excluded from revenue. Roaming discounts The Group enters into roaming discount agreements with a number of wireless operators. According to the terms of the agreements the Group is obliged to provide and entitled to receive a discount that is generally dependent on the volume of inter operator roaming traffic. The Group uses various estimates and assumptions, based on historical data and adjusted for known changes, to determine the amount of discount to be received or granted. Such estimates are adjusted monthly to reflect newly-available information. The Group accounts for discounts received as a reduction of roaming expenses and discounts granted as reduction of roaming revenue. The Group considers terms of the various roaming discount agreements to determine the appropriate presentation of amount of receivable from and payable to its roaming partners in its consolidated statements of financial position. Costs to obtain a contract The Group sells part of payment scratch cards, sim cards, and handsets using dealers. The Group pays a certain commission to dealers depending on the number of payment scratch cards, sim cards or handset sold. Sales commissions and equipment subsidies granted to dealers for obtaining a specific contract are capitalised and deferred over the period over which the Group expects to provide services to the customer. Other commissions to dealers are recognised when the item is sold to the subscriber. 69 Strategic reportFinancial statementsKcell Annual Report and Accounts 2020Governance 3. Summary of significant accounting policies (continued) Contract balances Contract assets A contract asset is the right to consideration in exchange for goods or services transferred to the customer. If the Group performs by transferring goods or services to a customer before the customer pays consideration or before payment is due, a contract asset is recognised for the earned consideration that is conditional. Trade receivables A receivable is recognised if an amount of consideration that is unconditional is due from the customer (i.e., only the passage of time is required before payment of the consideration is due). Refer to accounting policies of financial assets in section “Financial instruments − initial recognition and subsequent measurement”. Contract liabilities A contract liability is recognised if a payment is received or a payment is due (whichever is earlier) from a customer before the Group transfers the related goods or services. Contract liabilities are recognised as revenue when the Group performs under the contract (i.e., transfers control of the related goods or services to the customer). Interest income For all financial instruments measured at amortised cost and interest-bearing financial assets classified as AFS, interest income is recorded using the effective interest rate (EIR). The EIR is the rate that exactly discounts the estimated future cash receipts over the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset. The interest income is recorded as part of finance income in the consolidated statement of comprehensive income. Dividends Revenue is recognised when the Group’s right to receive the payment is established, which is generally when shareholders approve the dividend. Expense recognition Expenses are recognized as incurred and reported in the consolidated statement of comprehensive income in the period to which they relate on the accrual basis. Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of the asset. All other borrowing costs are expensed in the period in which they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds. Taxes Current income tax Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the reporting date in the countries where the Group operates and generates taxable income. Current income tax relating to items recognised directly in equity is recognised in equity and not in the statement of profit or loss. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate. Deferred tax Deferred tax is provided using the liability method on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes at the reporting date. 70 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)For the year ended 31 December 2020Kcell Annual Report and Accounts 2020 3. Summary of significant accounting policies (continued) Taxes (continued) Deferred tax (continued) Deferred tax liabilities are recognized for all taxable temporary differences, except: – When the deferred tax liability arises from the initial recognition of goodwill or an asset or liability in transaction that is not a business combination and, at the same time of transaction, affects neither the accounting profit nor taxable profit or loss; – In respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint arrangements, when the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax assets are recognised for all deductible temporary differences, the carry forward of unused tax credits and any unused tax losses. Deferred tax assets are recognised to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilised, except: – When the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; – In respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint arrangements, deferred tax assets are recognised only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are re-assessed at each reporting date and are recognised to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. Deferred tax relating to items recognised outside profit or loss is recognised outside profit or loss. Deferred tax items are recognised in correlation to the underlying transaction either in OCI or directly in equity. The Group offsets deferred tax assets and deferred tax liabilities if and only if it has a legally enforceable right to set off current tax assets and current tax liabilities and the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered. Contingent assets and liabilities Contingent assets are not recognized in the consolidated financial statements. Where an inflow of economic benefits is probable, they are disclosed. Contingent liabilities are not recognized in the consolidated financial statements unless an outflow of resources embodying economic benefits has become probable. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. Related parties In accordance with IAS 24 Related Party Disclosures, 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 or operational decisions. Transactions with related parties are used to reflect the status of settlements for property, works and services received from companies or sold to companies that are related parties to the Group. Items of a similar nature are disclosed in aggregate except when separate disclosure is necessary for an understanding of the effects of related party transactions on the consolidated financial statements. 71 Strategic reportFinancial statementsKcell Annual Report and Accounts 2020Governance 4. Restatement of comparative information Change in accounting policies Certain amounts in the consolidated statements of financial position as at 31 December 2019 and 1 January 2019, consolidated financial statements of comprehensive income for the year ended 31 December 2019 and consolidated statements of cash flows for the year ended 31 December 2019 were restated to reflect the effect of changes in the accounting policy as a result of adoption of the IFRIC agenda decision, as described below. IFRS Interpretations Committee’s agenda decision on cancellable or renewable leases, and related non- removable leasehold improvements In November 2019, the IFRS Interpretations Committee published an agenda decision on cancellable or renewable leases, and related non-removable leasehold improvements. The conclusions are summarized below: Lease term The IFRS Interpretations Committee noted that, in determining the enforceable period of the lease, an entity considers: – The broader economic sand not only the contractual termination payments. For example, if either party has an economic incentive not to terminate the lease such that it would incur a penalty on termination that is more than insignificant, the contract is enforceable beyond the date on which the contract can be terminated; – Whether each of the parties has the right to terminate the lease without permission of the other party with no more than an insignificant penalty. A lease is no longer enforceable only when both parties have such a right. Consequently, if only one party has the right to terminate the lease without permission from the other party with no more than an insignificant penalty, the contract is enforceable beyond the date on which the contract can be terminated by that party. If an entity concludes that the contract is enforceable beyond the notice period of a cancellable lease, it should assess whether the lessee is reasonably certain not to exercise the option to terminate the lease. Useful life of non-removable leasehold improvements An entity applies IAS 16 in determining the useful life of non-removable leasehold improvements. If the lease term of the related lease is shorter than the economic life of those leasehold improvements, the entity considers whether it expects to use the leasehold improvements beyond that lease term. If the entity does not expect to do so, then, applying IAS 16, it concludes that the useful life of the non-removable leasehold improvements is the same as the lease term. Since the Group’s current practice is in line with this clarification, it will not impact on the interim condensed consolidated financial statements of the Group. This IFRIC agenda decision should be applied retrospectively and are effective immediately from date of its publication in November 2019. Effect of agenda decision on the Group accounting policy The Group re-assessed its accounting for the lease contracts of technical sites with the governmental entities which were previously recognized as short-term leases as the Group applied recognition exemptions for short-term leases as in accordance with paragraph 5 of IFRS 16. As the Group applies the agenda decision it considers all relevant facts and circumstances that create an economic incentive for the lessee but not only contractual termination penalties, in assessing whether the Group is reasonably certain to extend (or not to terminate) a lease. The Group determined the lease term for technical sites lease contracts with the governmental entities equaled to average useful lives of cellular network stations. The Group adopted the agenda decision and retrospectively recalculated lease contracts with governmental entities effective as at 1 January 2019, the Group’s date of adoption IFRS 16.The right-of-use assets for the leases were recognised based on the carrying amount as if the agenda decision had always been applied, apart from the use of incremental borrowing rate at the date of initial application. Lease liabilities were recognised based on the present value of the remaining lease payments, discounted using the incremental borrowing rate at the date of initial application. 72 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)For the year ended 31 December 2020Kcell Annual Report and Accounts 2020 4. Restatement of comparative information (continued) Change in accounting policies (continued) IFRS Interpretations Committee’s agenda decision on cancellable or renewable leases, and related non-removable leasehold improvements (continued) Effect of agenda decision on the Group accounting policy (continued) The effect of changes in the accounting policy is disclosed below. In millions of tenge Consolidated statement of financial position as at 31 December 2019 Non-current assets Right-of-use assets Total non-current assets Current assets Prepaid income tax Total current assets Total assets Equity Retained earnings Total equity Non-current liabilities Long-term lease liabilities Deferred tax liabilities Total non-current liabilities Current liabilities Short term lease liabilities Income tax payable Total current liabilities Total liabilities Total equity and liabilities As previously reported Change in accounting policy Correction of errors Note As restated 23,067 147,142 1,909 1,909 – – 30 44,178 191,320 – – 1,909 2,192 2,192 2,192 37,771 71,571 (261) (261) 2,787 2,787 21,619 1,248 80,385 3,199 595 39,364 119,749 191,320 1,828 (65) 1,763 407 – 407 2,170 1,909 – – – – (595) (595) (595) 2,192 1 2 1 1 1 1 2 24,976 149,051 2,222 46,370 195,421 40,297 74,097 23,447 1,183 82,148 3,606 – 39,176 121,324 195,421 73 Strategic reportFinancial statementsKcell Annual Report and Accounts 2020Governance 4. Restatement of comparative information (continued) Change in accounting policies (continued) IFRS Interpretations Committee’s agenda decision on cancellable or renewable leases, and related non-removable leasehold improvements (continued) Effect of agenda decision on the Group accounting policy (continued) The effect of changes in the accounting policy is disclosed below. In millions of tenge Consolidated statement of financial position as at 1 January 2019 Non-current assets Right-of-use assets Total non-current assets Current assets Prepaid income tax Total current assets Total assets Equity Retained earnings Total equity Non-current liabilities Long-term lease liabilities Deferred tax liabilities Total non-current liabilities Current liabilities Short term lease liabilities Income tax payable Total current liabilities Total liabilities Total equity and liabilities In millions of tenge Consolidated statement of comprehensive income for the year ended 31 December 2019 Cost of sales Gross profit Operating profit Finance costs Profit before income tax Income tax expenses Total comprehensive income for the year, net of tax As previously reported Change in accounting policy Correction of errors Note As restated 24,070 156,787 3,746 3,746 – 30,831 187,618 – – 3,746 – – 933 933 933 33,626 67,426 (159) (159) 2,787 2,787 22,192 1,342 39,832 2,689 1,854 80,360 120,192 187,618 2,992 (40) 2,952 953 – 953 3,905 3,746 – – – – (1,854) (1,854) (1,854) 933 1 2 1 1 1 2 2 27,816 160,533 933 31,764 192,297 36,254 70,054 25,184 1,302 42,784 3,642 – 79,459 122,243 192,297 As previously reported Change in accounting policy Note As restated (109,195) 47,462 22,814 (11,500) 12,870 (2,753) 10,117 267 267 267 (395) (128) 26 (102) 1 1 1 (108,928) 47,729 23,081 (11,895) 12,742 (2,727) 10,015 74 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)For the year ended 31 December 2020Kcell Annual Report and Accounts 2020 4. Restatement of comparative information (continued) Change in accounting policies (continued) IFRS Interpretations Committee’s agenda decision on cancellable or renewable leases, and related non-removable leasehold improvements (continued) Effect of agenda decision on the Group accounting policy (continued) In millions of tenge Consolidated statement of cash flows for the year ended 31 December 2019 Profit before tax Adjustments for: Finance costs Depreciation of property and equipment and right of use assets Operating cash flows before changes in operating assets and liabilities Cash flows generated from operations Interest paid Net cash flows from operating activities Repayment of principal portion of lease liabilities Net cash flows used in financing activities Net increase in cash and cash equivalents As previously reported Change in accounting policy Note As restated 12,870 (128) 11,500 20,558 51,268 47,359 (9,825) 34,625 (2,649) (13,596) 2,847 395 564 831 831 (395) 436 (436) (436) – 1 1 1 1 1 12,742 11,895 21,122 52,099 48,190 (10,220) 35,061 (3,085) (14,032) 2,847 1 The Group adopted IFRS Interpretations Committee’s agenda decision on cancellable or renewable leases, and related non-removable leasehold improvements and restated the comparative information as required by IAS 8. 2 In 2020 the Group revised the calculation of income tax recognized by the Group in its 2015-2018 consolidated financial statements for the purpose of the re-submission of income tax declarations for 2015-2018 periods, and as a result, the Group identified certain errors in calculation of income tax related to 2015-2018 periods. Identified errors are mainly related with delay in receipt of fiscal documents and long reconciliation process between the Group and its counterparties. All the disclosure amounts within the comparative information were changed respectively. 5. Critical accounting judgements, estimates and assumptions The preparation of the Group’s consolidated financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the accompanying disclosures, and the disclosure of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods. Other disclosures relating to the Group’s exposure to risks and uncertainties includes: – Financial instruments and financial risk management objectives and principles Note 32. Estimates and assumptions The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below. The Group based its assumptions and estimates on parameters available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising that are beyond the control of the Group. Such changes are reflected in the assumptions when they occur. 75 Strategic reportFinancial statementsKcell Annual Report and Accounts 2020Governance 5. Critical accounting judgements, estimates and assumptions (continued) Judgements In the process of applying the Group’s accounting policies, management has made the following judgements, which have the most significant effect on the amounts recognised in the consolidated financial statements: Determining the lease term of contracts with renewal and termination options − Group as lessee The Group determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised. The Group has several lease contracts that include extension and termination options. The Group applies judgement in evaluating whether it is reasonably certain whether or not to exercise the option to renew or terminate the lease. That is, it considers all relevant factors that create an economic incentive for it to exercise either the renewal or termination. After the commencement date, the Group reassesses the lease term if there is a significant event or change in circumstances that is within its control and affects its ability to exercise or not to exercise the option to renew or to terminate (e.g., construction of significant leasehold improvements or significant customisation to the leased asset). Leases − estimating the incremental borrowing rate The Group cannot readily determine the interest rate implicit in the lease, therefore, it uses its incremental borrowing rate (IBR) to measure lease liabilities. The IBR is the rate of interest that the Group would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. The IBR therefore reflects what the Group ‘would have to pay’, which requires estimation when no observable rates are available (such as for subsidiaries that do not enter into financing transactions) or when they need to be adjusted to reflect the terms and conditions of the lease (for example, when leases are not in the subsidiary’s functional currency). The Group estimates the IBR using observable inputs (such as market interest rates) when available and is required to make certain entity-specific estimates (such as the subsidiary’s stand-alone credit rating). Useful lives of property and equipment and intangible assets The Group assesses the remaining useful lives of items of property and equipment and intangible assets at least at each financial year-end and, if expectations differ from previous estimates, the changes are accounted for as a change in an accounting estimate in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. Impairment of non-financial assets Impairment exists when the carrying value of an asset or cash generating unit exceeds its recoverable amount, which is the higher of its fair value less costs of disposal and its value in use. The fair value less costs of disposal calculation is based on available data from binding sales transactions, conducted at arm’s length, for similar assets or observable market prices less incremental costs of disposing of the asset. The value in use calculation is based on a DCF model. The cash flows are derived from the budget for the next five years and do not include restructuring activities that the Group is not yet committed to or significant future investments that will enhance the performance of the assets of the CGU being tested. The recoverable amount is sensitive to the discount rate used for the DCF model as well as the expected future cash-inflows and the growth rate used for extrapolation purposes. Decommissioning liability Decommissioning liabilities are recognized in respect of the estimated future costs of closure and restoration and for environmental rehabilitation costs in the reporting period when the related environmental disturbance occurs. Decommissioning costs are recorded at the discounted value of expected liability settlement costs calculated using estimated cash flows and recognized as part of the initial cost of the particular asset. Cash flows are discounted at the current rate before tax, which reflects risks inherent to the decommissioning obligations. Unwinding of discount is expensed as incurred and recognised in the consolidated statement of comprehensive income as finance costs. The estimated future costs of decommissioning are reviewed annually and adjusted as appropriate. Changes in the estimated future costs, or in the discount rate applied, are added to or deducted from the cost of the asset. 76 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)For the year ended 31 December 2020Kcell Annual Report and Accounts 2020 5. Critical accounting judgements, estimates and assumptions (continued) Judgements (continued) Provision for expected credit losses The Group recognizes provision for expected credit losses for trade and other accounts receivable and funds in credit institutions (cash and cash equivalents, bank deposits). For trade and other receivable, the Group has applied the standard’s simplified approach and has calculated expected credit losses based on lifetime of these financial instruments. The Group used a provision model that is prepared taking into account Group’s historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment. The Group will calibrate the matrix to adjust the historical credit loss experience with forward looking information. For instance, if forecast economic conditions (i.e., gross domestic product) are expected to deteriorate over the next year which can lead to an increased number of defaults in the manufacturing sector, the historical default rates are adjusted. At every reporting date, the historical observed default rates are updated and changes in the forward-looking estimates are analysed. The assessment of the correlation between historical observed default rates, forecast economic conditions and ECLs is a significant estimate. The amount of ECLs is sensitive to changes in circumstances and of forecast economic conditions. The Group’s historical credit loss experience and forecast of economic conditions may also not be representative of customer’s actual default in the future. The information about the ECLs on the Group’s trade receivables and contract assets is disclosed in Note 10. For funds in credit institutions (cash and cash equivalent, bank deposits), the Group calculated expected credit losses based on the 12-month period. The 12-month expected credit losses is the portion of lifetime expected credit losses that results from default events on a financial instrument that are possible within 12 months after the reporting date. However, when there has been a significant increase in credit risk since origination, the allowance will be based on the lifetime expected credit losses. The Group considers that there has been a significant increase in credit risk when contractual payments are more than 30 days past due. Also it is considered a financial asset in default when contractual payment are 90 days past due. However, in certain cases, the Group may also consider a financial asset to be in default when internal or external information indicates that the Group is unlikely to receive the outstanding contractual amounts in full before taking into account any credit enhancements held by the Group. Thus, as at 31 December 2020 provision for expected credit losses was created in the amount of 9,964 million tenge (as at 31 December 2019: 8,605 million tenge) (Notes 10). Changes in the economy, industry or specific customer conditions would have impact to these allowance recorded in the consolidated financial statements. Costs to obtain a contract The Group considers commission to sales agents to be an additional cost to obtain a contract, and capitalizes such costs as an asset on expenses under contracts with customers. The Group depreciates the costs to obtain a contract with customers on a systematic basis, which corresponds to the timing of the provision of services to customers. The Group reviews depreciation periods if the expected service dates have changed. 77 Strategic reportFinancial statementsKcell Annual Report and Accounts 2020Governance 5. Critical accounting judgements, estimates and assumptions (continued) Judgements (continued) Contract liabilities Deferred revenues are recognized as contract liabilities and recognized over the expected period of the customer relationship. In making its judgments, management considered the detailed criteria for the recognition of revenues from contract with customers set out in IFRS 15, industry practice and the Group’s historical churn rate. Deferred tax assets Deferred tax assets are recognised for unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and the level of future taxable profits, together with future tax planning strategies. As at 31 December 2020, net deferred tax assets of the Group were equal to 1,937 million tenge (at 31 December 2019: 195 million tenge). Further details are contained in Note 30. In 2019 the Group reconsidered the tax treatment of deductibility of doubtful debts from individuals, and derecognized deferred tax assets on the allowance on expected credit losses related to the trade receivables from individuals in the amount of 1,378 million tenge (Note 30). Fair value measurement of financial instruments When the fair value of financial instruments and financial liabilities recorded in the consolidated statement of financial position cannot be measured based on data in active markets, their fair value is measured using valuation techniques including the discounted cash flow (DCF) model. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgement is required in establishing fair values. The judgements include considerations of inputs such as liquidity risk, credit risk and volatility. Changes in assumptions about these factors could affect the fair value reported in the consolidated financial statements. For more details on the fair values refer to Note 33. 6. Segment information The Group’s main operations are concentrated in the Republic of Kazakhstan and are mainly represented by provision of mobile communication services. The Group identifies the segment in accordance with the criteria set in IFRS 8 Operating Segments and based on the way the operations of the Group are regularly reviewed by the chief operating decision maker to analyse performance and allocate resources among business units of the Group. The Group’s Chairman of the Management Board has been determined as the chief operating decision-maker (“CODM”). The CODM reviews the Group’s internal reporting in order to assess performance and allocate resources. Segment performance is evaluated based on operating profit or loss and is measured consistently with operating profit or loss in the consolidated financial statements prepared in accordance with IFRS. Management has determined a single operating segment being mobile communication services based on these internal reports. 78 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)For the year ended 31 December 2020Kcell Annual Report and Accounts 2020 7. Share capital and earnings per share Share capital of the Group is as follows: Kazakhtelecom JSC Raiffeisenbank JSC Other 31 December 2020 31 December 2019 Share Number of shares 75.00% 150,000,000 11.60% 23,209,124 13.40% 26,790,876 100.00% 200,000,000 Share Number of shares 75.00% 150,000,000 23,641,857 11.82% 26,358,143 13.18% 100.00% 200,000,000 The total authorized number of ordinary shares is 200,000,000 shares with a par value of 169 tenge per share, all of which are issued and fully paid. The calculation of basic and diluted earnings per share is based on the following data: In millions of tenge Profit for the period attributable to equity shareholders Weighted average number of ordinary shares Earnings per share (Kazakhstani tenge), basic and diluted The Group has no dilutive or potentially dilutive securities outstanding. 2020 17,578 2019 10,015 200,000,000 200,000,000 50.08 87.89 Additional information disclosed in accordance with Kazakhstan Stock Exchange (KASE) requirements The cost of ordinary shares calculated in accordance with the requirements of the KASE According to the requirements of the Kazakhstan Stock Exchange (“KASE”), the Group has calculated its cost per ordinary share, which was calculated based on the number of ordinary shares outstanding at the reporting date. The cost per ordinary share as at 31 December 2020 and 2019 is presented below. In millions of tenge Net assets, excluding intangible assets Number of ordinary shares in issue Cost of ordinary share, calculated in accordance with listing requirements of KASE (Kazakhstani tenge) 31 December 2020 42,353 31 December 2019 35,277 200,000,000 200,000,000 211.77 176.39 During year ended 31 December 2020 and 2019, the Group declared and paid dividends in the amount of 9,000 million tenge and 5,972 million tenge, respectively. Dividends per share for the year ended 31 December 2020 were equal to 45 tenge (31 December 2019: 29.86 tenge). 79 Strategic reportFinancial statementsKcell Annual Report and Accounts 2020Governance 8. Property and equipment Movements of property and equipment in 2020 and 2019 were as follows: In millions of tenge Cost At 1 January 2019 Additions Provision for dismantling (Note 22) Transfer between the groups Disposals At 31 December 2019 Additions Provision for dismantling (Note 22) Transfer between the groups Disposals Transfer to Inventory At 31 December 2020 Accumulated depreciation and impairment As at 1 January 2019 Depreciation charge Disposals Impairment At 31 December 2019 Depreciation charge Disposals Impairment At 31 December 2020 Net book value At 31 December 2019 At 31 December 2020 Buildings and construction Equipment, tools and installations Assets under construction Machinery 19,653 445 – – – 20,098 265 – – – – 20,363 213,725 153 542 10,683 – 225,103 223 1,899 9,766 (1,071) (23) 235,897 (6,539) (370) – – (6,909) (167,291) (13,536) – (1,844) (182,671) (358) – (165) (7,432) (11,944) 1,059 (79) (193,635) 31,289 3,282 – – (113) 34,458 4,804 – – (193) – 39,069 (25,342) (3,054) 112 – (28,284) (2,926) 188 – (31,022) Total 287,609 12,109 542 – (113) 300,147 14,451 1,899 – (1,681) (107) 314,709 20,820 8,229 – (10,683) – 18,366 9,159 – (9,766) (417) (84) 17,258 – – – – – (199,172) (16,960) 112 (1,844) (217,864) – – (4,511) (4,511) (15,228) 1,247 (4,755) (236,600) Land 2,122 – – – – 2,122 – – – – – 2,122 – – – – – – – – – 2,122 2,122 13,189 12,931 42,432 42,262 6,174 8,047 18,366 12,747 82,283 78,109 As at 31 December 2020 and 2019, assets under construction are represented by equipment for installation for base transmission stations, mobile switch servers and other telecommunication equipment and services works. As at 31 December 2020, the gross carrying value of property and equipment, which has been fully depreciated and still i n use, was 164,522 million tenge (31 December 2019: 150,824 million tenge). Impairment test The coronavirus (Covid-19) outbreak has affected many countries and resulted in significant volatility in financial and commodity markets around the world. There is already evidence that the virus has significantly impacted the global economy (Note 33). The Group’s management analyzed external and internal sources of information, including the current and future impact of the Covid-19 pandemic on the Group and on macroeconomic environment, and did not observe any significant negative impacts on the Group’s business, financial conditions and results of operations. During 2020, the Group did not identify impairment factors for all CGUs related with Covid-19 impact, except certain items of property and equipment as described below. During 2020 the Group recognized an impairment loss in the amount of 244 million tenge (2019: 1,844 million tenge) for property and equipment and 4,511 million tenge for construction-in-progress (2019: nil), which represented the write-down of certain assets to the recoverable amount as a result of technological obsolescence and damage. Loss was recognized in the consolidated statement of comprehensive income as an operating expense. 80 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)For the year ended 31 December 2020Kcell Annual Report and Accounts 2020 9. Intangible Assets Movements of intangible assets for 2020 and 2019 were as follows: In millions of tenge Cost At 1 January 2019 Additions Disposals At 31 December 2019 Additions Transfers Disposals At 31 December 2020 Accumulated amortization and impairment At 1 January 2019 Amortisation charge Disposals At 31 December 2019 Amortisation charge Disposals Impairment At 31 December 2020 Net book value At 31 December 2019 At 31 December 2020 Software and licenses Intangible assets in progress 88,402 8,094 (678) 95,818 12,392 718 (906) 108,022 (49,477) (9,390) 679 (58,188) (11,010) 906 – (68,292) Total 89,592 8,094 (678) 97,008 12,392 – (906) 108,494 1,190 – – 1,190 – (718) – 472 – – – – (49,477) (9,390) 679 (58,188) – – (472) (472) (11,010) 906 (472) (68,764) 37,630 39,730 1,190 – 38,820 39,730 As at 31 December 2020, the carrying amount of the 3G license was 1,667 million tenge (31 December 2019: 2,000 million tenge) and its remaining amortisation period was 5 years. As at 31 December 2020, the carrying amount of the 4G license was 17,478 million tenge (31 December 2019: 19,211 million tenge) and its remaining amortisation period was 10 years. During 2020, the Group recognized an impairment loss of 472 million tenge, which represented the write-down of billing system. Loss was recognized in the consolidated statement of comprehensive income as an operating expense. As at 31 December 2020, the gross carrying value of intangible assets, which has been fully depreciated and still in use, was 36,451 million tenge (31 December 2019: 36,192 million tenge). 81 Strategic reportFinancial statementsKcell Annual Report and Accounts 2020Governance 10. Trade receivables As at 31 December 2020 and 2019, trade receivables comprised of the following: In millions of tenge Trade receivable from subscribers Trade receivable from interconnect services Trade receivables from roaming operators Trade receivables from dealers and distributors Trade receivables from related parties (Note 31) Less: allowance for expected credit losses Less: long-term portion of trade receivable from subscribers During the year movements in the allowance for expected credit losses were as follows: In millions of tenge Allowance for expected credit losses at the beginning of the year Charge for the year Write-offs for the year Allowance for expected credit losses at the end of the year 31 December 2020 27,412 986 170 452 1,188 (9,964) 20,244 31 December 2019 23,735 407 302 39 887 (8,605) 16,765 (2,421) 17,823 (1,118) 15,647 2020 (8,605) (1,547) 188 (9,964) 2019 (6,680) (2,256) 331 (8,605) Below is information as of 31 December 2020 and 2019 about the credit risk exposure on the Group’s trade receivables using a provision matrix: In millions of tenge 31 December 2020 Estimated total gross book value for default Expected credit losses In millions of tenge 31 December 2019 Estimated total gross book value for default Expected credit losses Total Current 1 to 30 days 31 to 60 days 61 to 90 days 91 to 180 days Over 180 days Days past due 30,208 9,964 17,761 17 1,574 25 467 55 271 62 543 289 9,592 9,516 Total Current 1 to 30 days 31 to 60 days 61 to 90 days 91 to 180 days Over 180 days Days past due 25,370 8,605 12,248 40 1,553 41 776 64 362 57 837 345 9,594 8,058 As at 31 December 2020 and 2019 the Group’s trade receivables were denominated in the following currencies: 31 December 2020 20,074 170 20,244 31 December 2019 16,463 302 16,765 In millions of tenge Tenge US dollars 82 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)For the year ended 31 December 2020Kcell Annual Report and Accounts 2020 11. Inventories As at 31 December 2020 and 2019, inventories comprised: In millions of tenge Handsets and accessories (at lower of cost and net realizable value) Start packages (at cost) Marketing materials (at cost) SIM-cards (at cost) Other materials (at cost) 31 December 2020 8,523 255 150 77 357 9,362 31 December 2019 6,071 159 61 71 274 6,636 During 2020, the Group recognised as an expense 654 million tenge (2019: nil) for inventories carried at net realisable value. This is recognised in general and administrative expenses. 12. Other current non-financial assets As at 31 December 2020 and 2019, other current non-financial assets comprised of the following: In millions of tenge Advances paid VAT recoverable Prepaid taxes other than income taxes Prepaid expenses 13. Other current financial assets As at 31 December 2020 and 2019, other current financial assets comprised of the following: In millions of tenge Other receivables Due from employees Other 31 December 2020 1,548 397 710 408 3,063 31 December 2019 2,928 1,891 1,883 2 6,704 31 December 2020 94 151 – 245 31 December 2019 914 336 121 1,371 As at 31 December 2020 and 2019, other current non-financial assets were fully denominated in tenge. 14. Financial assets at fair value through other comprehensive income As at 31 December 2020 financial assets at fair value through other comprehensive income, represented by investments in US treasury bills acquired in August 2019, were fully redeemed (31 December 2019: 4,965 million tenge). The Group recognized the financial assets at fair value through other comprehensive income as the contractual cash flows were solely principal and interest and the financial assets were held within a business model for collecting contractual cash flows and selling financial assets. Nominal amount was 12,880,000 USD (equivalent to 5,021 million tenge at the date of acquisition), with maturity till August 2020 and yield to maturity at 2.6%. Fair value of debt instrument was determined by reference to published price quotations in an active market (Level 1). On 18 August 2020 US treasury bills were repaid and the Group received the nominal amount and coupon income in the amount of 12,880,000 USD and 338,100 USD, respectively (equivalent to 5,385 million tenge and 141 million tenge, respectively). 83 Strategic reportFinancial statementsKcell Annual Report and Accounts 2020Governance 15. Financial assets at amortized cost As at 31 December 2020 financial assets at amortized cost in the amount of 18,923 million tenge (31 December 2019: nil) were represented by short-term discount notes of National Bank of the Republic of Kazakhstan (“NBRK”) denominated in tenge, which were acquired at purchase price 36,751 million tenge in June-December 2020. During 2020, short-term NBRK discount note was redeemed for a total amount of 18,139 million tenge of nominal value and interest income of 761 million tenge. The Group recognized the financial assets at amortized cost as the contractual cash flows are solely principal and interest and the financial assets are held within a business model for collecting contractual cash flows. As at 31 December 2020 financial assets at amortised cost comprised of the following: In millions of tenge NBRK note NBRK note NBRK note NBRK note Maturity date 13 January 2021 15 January 2021 22 January 2021 22 January 2021 Yield to maturity 8.92% 9.41% 9.85% 9.85% Nominal value 10,000 4,000 3,000 2,000 19,000 31 December 2020 9,969 3,984 2,982 1,988 18,923 31 December 2019 – – – – – 16. Cash and cash equivalents As at 31 December 2020 and 2019, cash and cash equivalents comprised of the following: In millions of tenge Cash on current bank accounts Bank deposits with original maturity of less than 90 days Cash on hand 31 December 2020 14,202 8,782 39 23,023 31 December 2019 5,549 3,256 20 8,825 As of 31 December 2020, short-term bank deposit for the amount of 8,781 million tenge represents overnight deposits in tenge placed in Altyn Bank JSC at interest rate 8.5% and 658 thousand tenge overnight deposits in tenge placed in Citibank Kazakhstan JSC at interest rate 6.5%. As at 31 December 2020 and 2019, cash and cash equivalents were denominated in various currencies as follows: 31 December 2020 12,982 9,398 642 – 1 23,023 31 December 2019 3,767 4,923 111 18 6 8,825 In millions of tenge US dollars Tenge Euro Russian roubles Other 84 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)For the year ended 31 December 2020Kcell Annual Report and Accounts 2020 17. Borrowings As at 31 December 2020 and 2019, borrowings comprised of the following: In millions of tenge Bonds Eurasian Development Bank JSC Halyk Bank of Kazakhstan JSC Bank of China Kazakhstan JSC VTB Bank JSC Less: non-current portion Borrowings are repayable as follows: In millions of tenge Current portion of borrowings Maturity between 1 and 2 years Maturity between 2 and 5 years Maturity over 5 years Total non-current portion of borrowings Currency Tenge Tenge Tenge Tenge Tenge Effective interest rate 11.84% 13.06% 11.20% 10.70% 11.90% Maturity date 16 January 2021 20 June 2024 21 April 2023 20 August 2022 15 October 2023 31 December 2020 22,871 18,129 15,223 11,059 6,005 73,287 31 December 2019 22,828 28,956 – 5,060 5,088 61,932 (49,933) 23,354 (55,548) 6,384 31 December 2020 23,354 31 December 2019 6,384 10,972 38,961 – 49,933 21,706 33,842 – 55,548 The Group’s borrowings are denominated in Kazakhstani tenge and represent unsecured loans and bonds. The borrowings have financial and non-financial covenants. Breaches in meeting the covenants would permit the banks to immediately call loans and borrowings. As at 31 December 2020 and 2019, there have been no breaches of the covenants. As at 31 December 2020 current portion of borrowings includes principal amount and interest accrued of bonds in the amount of 22,649 million tenge and interest accrued of other borrowings in the amount of 705 million tenge. The Group has not entered into any hedging arrangements in respect of its interest rate exposures. On 21 February 2019, the Group undertook a bond placement at the Kazakhstan Stock Exchange, in which bonds in the amount of 17,025 million tenge were placed with investors at a yield of 11.5% and on 16 January 2018 a bond placement with the value of 4,950 million tenge. On 3 February 2020, the Group fully repaid loan obtained from VTB Bank JSC in the amount of 5,133 million tenge, including principal and interest accrued in the amount of 5,000 million tenge and 133 million tenge, respectively. On 15 October 2020 the Group signed credit line agreement with VTB Bank JSC for the amount of 6,000 million tenge at interest rate of 10.7% per annum. On 16 March 2020, the Group obtained additional loan in the amount of 4,500 million tenge within credit line agreement with Bank of China Kazakhstan JSC with a repayment period of 30 months and a fixed interest rate of 10.5% per annum. On 14 October 2020 the Group has signed addendum to loan agreement with Bank of China to decrease interest rate from 10.5% to 10.3% per annum under credit line agreement. The change in the interest rate from 10.5% to 10.3% does not represent a substantial modification as in accordance with IFRS 9 and thus, it did not lead to the derecognition of the original liability. The Group recognized finance income in the amount of 33 million tenge as a result of change in the interest rate. The loan is secured by the financial guarantee provided by Kazakhtelecom JSC, the parent company. The Group considers the financial guarantee provided by the parent to be an integral part of the loan, and therefore does not recognize the guarantee received separately in its consolidated financial statements. 85 Strategic reportFinancial statementsKcell Annual Report and Accounts 2020Governance 17. Borrowings (continued) On 23 April 2020, the Group obtained loan in the amount of 15,000 million tenge within credit line agreement with Halyk Bank of Kazakhstan JSC with a maturity of 36 months and a fixed interest rate of 11.5% per annum. On 14 July 2020 interest rates of loan was decreased from 11.5% to 11.2% per annum under credit line agreement. The change in the interest rate from 11.5% to 11.2% does not represent a substantial modification as in accordance with IFRS 9 and thus, it did not lead to the derecognition of the original liability. The Group recognized finance income in the amount of 115 million tenge as a result of change in the interest rate. On 21 September 2020 and 4 December 2020, the Group repaid principal amount of the loan obtained from Eurasian Development Bank in the amount of 3,630 million tenge and 1,500 million tenge ahead of schedule. On 28 October 2020 the Group obtained loan in the amount of 6,000 million tenge within the credit line agreement with VTB Bank JSC with maturity till October 2023 at interest rate 11.9% per annum. On 8 December 2020 the Group has obtained additional loan in the amount of 1,500 million tenge from Bank of China. 18. Right-of-use assets and lease liabilities The Group’s right of use assets are represented by buildings and constructions. Set out below are the carrying amounts of right-of-use assets and lease liabilities recognised and the movements during the period: Total 27,816 535 801 (19) 29,133 161 491 (300) 29,485 – (4,162) 5 (4,157) (4,564) 40 (8,681) 24,976 20,804 In millions of tenge Cost At 1 January 2019 Modification Additions Cancellation At 31 December 2019 Modification Additions Cancellation At 31 December 2020 Accumulated depreciation At 1 January 2019 Depreciation charge Cancellation At 31 December 2019 Depreciation charge Cancellation At 31 December 2020 Net book value At 31 December 2019 At 31 December 2020 86 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)For the year ended 31 December 2020Kcell Annual Report and Accounts 2020 18. Right-of-use assets and lease liabilities (continued) Set out below are the carrying amounts of lease liabilities and the movements during the period: In millions of tenge At the beginning of the period Interest expenses (Note 29) Payments Additions Modifications Cancellation At the end of the period Long-term lease liabilities Short-term lease liabilities The following are the amounts recognised in profit or loss: In millions of tenge Depreciation expense of right-of-use assets Interest expense on lease liabilities Expenses related to short-term leases Total amount recognised in profit or loss 31 December 2020 27,053 3,150 (6,908) 491 161 (281) 23,666 31 December 2019 28,826 3,309 (6,394) 802 535 (25) 27,053 19,447 4,219 23,447 3,606 2020 4,564 3,150 49 7,763 2019 4,162 3,309 197 7,668 The Group had total cash outflows for leases of 6,957 thousand tenge in 2020 (2019: 6,591 million tenge). The Group did not have non-cash additions to right-of-use assets and lease liabilities in 2020 (2019: 2,080 million tenge). 19. Trade payables As at 31 December 2020 and 2019, trade payables comprised of the following: In millions of tenge Trade payables to third parties Trade payables to related parties (Note 31) 31 December 2020 21,259 1,094 22,353 31 December 2019 20,043 1,132 21,175 As at 31 December 2020 and 2019, the Group’s trade payables were denominated in the following currencies: In millions of tenge Tenge US dollars Other currency 31 December 2020 21,043 1,304 6 22,353 31 December 2019 17,293 3,813 69 21,175 87 Strategic reportFinancial statementsKcell Annual Report and Accounts 2020Governance 20. Financial guarantee obligation On 27 November 2020 the Group issued the financial guarantee on loan agreement of Kazakhtelecom JSC obtained from Eurasian Bank of Development JSC in the amount of 18,266 million tenge. The financial guarantee has maturity till 19 December 2024. The Group initially recognised the financial guarantee at fair value in the amount of 592 million tenge through retained earnings in equity (as at 31 December 2019: nil). At the reporting date, the Group measured financial guarantee obligation at the higher of the amount of the loss allowance determined in accordance with IFRS 9 Financial Instruments and the amount initially recognised less, when appropriate, the cumulative amount of income recognised in accordance with IFRS 15 Revenue from Contracts with Customers. As of 31 December 2020 financial guarantee obligation equaled to 563 million tenge, which represents the initial amount less the cumulative amount of income recognised in accordance with IFRS 15. 21. Contract liabilities As at 31 December 2020 and 2019, trade contract liabilities comprised of the following: In millions of tenge Contract liabilities as at 1 January Deferred during the year Recognised as revenue during the year Contract liabilities as at 31 December 22. Asset retirement obligation 2020 4,149 107,352 (109,523) 1,978 2019 3,772 106,270 (105,893) 4,149 Decommissioning liabilities Provision for decommissioning liabilities is recorded at the discounted value of expected costs to bring the sites and facilities to their original condition using estimated cash flows and is recognised as part of the cost of the specific asset. The cash flows are discounted at a current pre-tax rate that reflects the risks specific to the decommissioning liability. Movements in provision for decommissioning liabilities for the years ended 31 December 2020 and 2019 were as follows: In millions of tenge Provision for decommissioning liabilities as at 1 January Additional provisions (Note 8) Unwinding of discount (Note 29) Provision for decommissioning liabilities as at 31 December 2020 1,970 1,899 138 4,007 2019 1,285 542 143 1,970 The provision was determined at the end of the reporting period using the projected inflation rate for the expected period of the fulfilment of obligation, and the discount rate at the end of the year which is presented below: Discount rate Inflation rate Period of fulfillment of obligation 2020 6.83% 5.5% 11 years 2019 6.98% 5.5% 12 years 23. Provisions In 2020 the Group accrued certain amount of payable amount related to legal claims on contractual obligation and fines and penalties that Management considers as probable in the amount of 3,685 million tenge and 701 million, respectively. In millions of tenge Legal claims on contractual obligation Provision of fines and penalties (Note 33) Other liabilities 88 31 December 2020 3,685 701 116 4,502 31 December 2019 – – 188 188 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)For the year ended 31 December 2020Kcell Annual Report and Accounts 2020 24. Revenue from contracts with customers In millions of tenge Voice and other services Data service Sale of handsets Value added services Over time At a point of time 25. Cost of sales In millions of tenge Cost of SIM-card, scratch card and handsets sales Depreciation and amortization Interconnect fees and expenses Personnel costs Transmission services Repair and maintenance Fees for use of frequency range Electricity Mobile service tax Network sharing agreement Security and safety Materials Rent expenses Other 2020 73,852 58,446 34,634 7,752 174,684 140,050 34,634 174,684 2020 28,430 27,377 19,163 11,090 9,998 7,065 6,310 2,939 1,960 919 284 284 49 3,265 119,133 2019 78,689 51,430 19,093 7,445 156,657 137,564 19,093 156,657 2019 16,450 27,037 24,729 9,392 9,197 7,552 5,578 3,511 1,846 180 391 281 197 2,587 108,928 26. Penalty expenses On 12 April 2019, the Group received from Kar-Tel LLP a notice on termination of the Network Sharing Agreement (hereinafter referred to as the “Agreement”), since there was a change in the Group’s controlling shareholder in December 2018, which represents, in accordance with the Agreement, a breach of conditions of the Agreement, giving the right to the second party to terminate the Agreement and request payment of termination fine, determined in accordance with the methodology specified in the Agreement. The Group received from Kar-Tel LLP an invoice for payment of a termination fine in the amount of 14,552 million tenge. The Group repaid the termination fine in full in September 2019. 27. General and administrative expenses In millions of tenge Personnel costs Depreciation and amortization Taxes other than income tax Write-down of inventories to net realizable value Consulting services Repair and maintenance Security and safety Representative expenses Business trips Inventories Insurance Trainings Other 2020 3,633 3,425 898 654 430 405 108 104 55 45 26 12 631 10,426 2019 2,885 3,475 1,124 – 451 321 28 102 51 30 24 33 401 8,925 89 Strategic reportFinancial statementsKcell Annual Report and Accounts 2020Governance 28. Selling expenses In millions of tenge Marketing and advertising Amortization of cost to obtain a contract Commissions for dealers and cash collection Other 29. Finance costs/finance income In millions of tenge Finance costs Interest expense on loans Interest on lease liabilities (Note 18) Unwinding of discount (provision for decommissioning liability) (Note 22) Other Finance income Interest income on financial assets at amortised cost (Note 15) Interest income on cash balances and deposit Recognition of discount on long-term loans (Note 32) Unwinding of issued financial guarantee Other 30. Income tax expenses In millions of tenge Current income tax expense Adjustments in respect of income tax of previous year Deferred income tax benefit 2020 1,361 253 42 309 1,965 2019 1,849 338 205 495 2,887 2020 2019 8,386 3,150 138 79 11,753 1,072 817 148 29 234 2,300 8,358 3,309 143 85 11,895 – 404 904 – 107 1,415 2020 (8,611) (175) 1,742 (7,044) 2019 (4,300) 76 1,497 (2,727) The Group are subject to taxation in the Republic of Kazakhstan. Tax rate for the Group and subsidiaries was 20% in 2020 and 2019. A reconciliation of income tax expenses applicable to profit before taxation at the statutory rate, with the current corporate income tax expenses for the years ended 31 December 2020 and 31 December 2019 is set out below: In millions of tenge Profit before taxation Income tax at statutory income tax rate of 20% Non-taxable income Non-deductible expenses Legal disputes expenses Impairment of construction-in-progress Recognition of tax loss carry forward Derecognition of deferred tax assets of expected credit losses Adjustments in respect of income tax of previous year Adjustments in respect of deferred income tax of previous year Total income tax expenses 2020 24,622 4,924 (351) 328 877 997 (234) – 175 328 7,044 2019 12,742 2,548 (1,163) 1,020 – – (1,378) 1,150 (76) 626 2,727 Non-taxable income is mainly represented by income from reversal of tax and related fines and penalties provision in the amount of 684 million tenge and interest income on NBRK notes in the amount of 1,072 million tenge. Non deductible expenses mainly represented by representative expenses, taxes at own expenses, and other expenses which are in accordance with Tax Code of the Republic of Kazakhstan are non-deductible. 90 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)For the year ended 31 December 2020Kcell Annual Report and Accounts 2020 30. Income tax expenses (continued) Deferred tax assets and liabilities are presented in the consolidated statement of financial position as follows: In millions of tenge Deferred tax assets Expected credit losses Accrued bonuses to employees Tax loss carry forward Lease liabilities Provision for unused vacation Asset retirement obligation Deferred services Other Deferred tax assets Deferred tax liabilities Property and equipment and intangible asset Other Deferred tax liabilities Deferred tax assets/(liabilities), net Consolidated statement of financial position Consolidated statement of comprehensive income 31 December 2020 31 December 2019 2020 2019 391 402 1,612 572 166 801 793 148 4,885 343 360 1,378 415 116 394 651 133 3,790 (2,854) (94) (2,948) 1,937 (3,390) (205) (3,595) 195 48 42 234 157 50 407 142 15 1,095 536 111 647 1,742 (993) 290 1,378 188 (2) 137 30 109 1,137 413 (79) 334 1,471 The Group performs offsetting of tax assets and liabilities only if a legally enforceable right exists to set off current tax assets against current tax liabilities and deferred tax assets and deferred tax liabilities relating to income tax collected by the same taxation authority. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. In accordance with legislation of the Republic of Kazakhstan, tax losses may be deferred for 10 (ten) years from the date of their origination. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. As at 31 December 2020, the Group has not recognised deferred tax assets in relation to the temporary difference in the amount of 225 million tenge (as at 31 December 2019: 813 million tenge) related to investments in subsidiaries as the Group is able to control the timing of the reversal of those temporary differences and does not expect to reverse them in the foreseeable future. Deferred tax assets and liabilities are presented in the consolidated statement of financial position as follow: In millions of tenge Deferred tax assets Deferred tax liabilities 2020 1,937 – 1,937 2019 1,378 (1,183) 195 91 Strategic reportFinancial statementsKcell Annual Report and Accounts 2020Governance 31. Related party disclosures Parties are generally considered to be related if one party has the ability to control the other party, is under common control, or can exercise significant influence or joint control over the other party in making financial and operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. The Group’s primary transactions with related parties are consulting services, technical assistance and operational support, transmission rent, roaming and interconnect. As at 31 December 2020, the Group recognized an allowance for expected credit losses in the amount of 56 million tenge in respect of receivables from related parties (31 December 2019: 98 million tenge). Related party transactions were made on terms agreed between parties that may not necessarily be at market rate. Sales and purchases with related parties during 2020 and 2019, and the balances with related parties as at 31 December 2020 and 2019, were as follows: In millions of tenge Sales of goods and services Entities of Samruk Kazyna group Entities of Kazakhtelecom group Government entities Purchases of goods and services Entities of Samruk Kazyna group Entities of Kazakhtelecom group Government entities In millions of tenge Trade receivables (Note 10) Entities of Samruk Kazyna group Entities of Kazakhtelecom group Government entities Trade payables (Note 19) Entities of Samruk Kazyna group Entities of Kazakhtelecom group Government entities 2020 2019 210 12,351 1,244 445 19,723 77 197 11,674 303 745 18,988 26 31 December 2020 31 December 2019 43 1,100 45 62 1,018 14 65 816 6 156 975 1 Compensation to key management personnel For the years ended 31 December 2020 and 2019, the total compensation to key management personnel included in the accompanying consolidated statement of comprehensive income under general and administrative expenses was 249 million tenge and 118 million tenge, respectively. Compensation to key management personnel consists of wages fixed in the employment agreement, as well as remuneration based on the performance for the year. 92 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)For the year ended 31 December 2020Kcell Annual Report and Accounts 2020 32. Financial instruments and financial risk management objectives and principles The Group’s principal financial instruments include loans, bonds, lease liabilities, cash and cash equivalents, bank deposits and accounts receivable and accounts payable. The main risks associated with the Group’s financial instruments include, currency and credit risk. In addition, the Group monitors market risk and liquidity risk associated with all financial instruments. Impairment losses on financial assets Impairment losses on financial assets for the year ended 31 December 2020 and 2019, comprise accruing reserve on expected credit losses for trade receivables in amount 1,547 million tenge and 2,256 million tenge, respectively (Note 10). Interest rate risk Interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market interest rates. As at 31 December 2020 and 2019, the Group had no loans or borrowings with floating interest rates and was not subjected to the risk of changes in market interest rates. Foreign currency risk Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The majority of the Group’s purchases of property, plant and equipment and inventories, as well as certain services such as roaming are denominated in US dollars, the Group’s consolidated statement of financial position can be affected significantly by movement in the US dollar / tenge exchange rates. The following table demonstrates the sensitivity to a reasonably possible change in the exchange rates of US dollar to tenge, with all the variables held constant, of the Group’s profit before income tax (due to changes in the fair value of monetary assets and liabilities). There is no impact on the Group’s equity. In millions of tenge US dollars 2020 2019 Increase/ (decrease) in exchange rate 14% -11% Effect on profit before tax 1,659 (1,303) Increase/ (decrease) in exchange rate 12% -9% Effect on profit before tax 626 (470) Credit risk Credit risk is the risk that the Group will incur finance costs because its customers, clients or counterparties failed to discharge their contractual obligations. The Group is exposed to credit risk associated with its operating activities (primarily with respect to trade receivables) and financial activities, including bank deposits and financial organizations, foreign exchange transactions and other financial instruments. Trade receivables Financial instruments in which the Group’s credit risk is concentrated are primarily trade receivables. The credit risk associated with these assets is limited due to the large number of the Group’s customers and the continuous monitoring procedures for customers and other debtors. An impairment analysis is performed at each reporting date using a provision matrix to measure expected credit losses. The provision rates are based on days past due for groupings of various customer segments with similar loss patterns (i.e., by geographical region, product type, customer type and rating, and coverage by letters of credit or other forms of credit insurance). The calculation reflects the probability-weighted outcome, the time value of money and reasonable and supportable information that is available at the reporting date about past events, current conditions and forecasts of future economic conditions. Generally, trade receivables are written-off if past due for more than three years and are not subject to enforcement activity. The maximum exposure to credit risk at the reporting date is the carrying value of each class of financial assets disclosed in Note 10. 93 Strategic reportFinancial statementsKcell Annual Report and Accounts 2020Governance 32. Financial instruments and financial risk management objectives and principles (continued) Financial instruments and cash deposits In accordance with the financial policy, the Group places free cash in several of the largest Kazakhstani banks (with the highest credit ratings). To manage the credit risk associated with the placement of free cash in banks, the Group’s management periodically conducts procedures for assessing the solvency of banks. To facilitate such an assessment, deposits are primarily placed in banks, where the Group already has comparable credit obligations, a current checking account and can easily monitor the activities of such banks. In millions of tenge Citibank Kazakhstan JSC Altyn Bank JSC Credit Suisse (Schweiz) AG Halyk Bank Kazakhstan JSC Kaspi Bank JSC SB Sberbank JSC Halyk Finance JSC Bank of China Kazakhstan JSC Total Rating 2020 BBB+ BBB- A+ BB BB- BB+ BB Rating 2019 A+ BBB- A+ BB BB- B BB BBB+ A+ Cash balance Balance on deposit accounts 2020 2,886 1,301 1,057 8,861 88 8 – 1 14,202 2019 3,120 35 466 1,316 514 96 1 1 5,549 2020 1 8,781 – – – – – – 8,782 2019 139 3,117 – – – – – – 3,256 Liquidity risk Liquidity risk is the risk that the Group will be unable to meet its payment obligations when they fall due under normal and stress circumstances. The Group monitors its risk of a shortage of funds using a liquidity planning tool. This tool considers the maturity of both its financial investments and financial assets (e.g. accounts receivables, other financial assets) and projected cash flows from operations. The table below summarises the maturity profile of the Group’s financial liabilities based on contractual undiscounted payments. In millions of tenge At 31 December 2020 Borrowings Financial guarantees* Trade payables Lease liabilities Due to employees At 31 December 2019 Borrowings Trade payables Lease liabilities Due to employees On demand 1 to 3 months 3 months to 1 year From 1 to 5 years More than 5 years – – – – – – – – – – – 24,398 852 22,353 1,592 3,691 52,886 7,384 21,175 1,456 3,172 33,187 4,258 3,593 – 4,780 – 12,631 4,253 – 4,372 – 8,625 56,244 14,586 – 19,706 – 90,536 70,368 – 22,920 – 93,288 – – – 3,597 – 3,597 – – 4,619 – 4,619 Total 84,900 19,031 22,353 29,675 3,691 159,650 82,005 21,175 33,367 3,172 139,719 * Based on the maximum amount that can be called for under the financial guarantee’s contract (Note 20). 94 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)For the year ended 31 December 2020Kcell Annual Report and Accounts 2020 32. Financial instruments and financial risk management objectives and principles (continued) Cash flow risk Cash flow risk is the risk that future cash flows associated with a monetary financial instrument will fluctuate in amount. Cash flows requirements are monitored on a regular basis and management provides for availability of sufficient funds required to fulfil any liabilities when they arise. The management of the Group believes that any possible fluctuations of future cash flows associated with a monetary financial instrument will not have material impact on the Group’s operations. Capital management The primary objective of the Group’s capital management is to ensure that it maintains a strong credit rating and healthy capital ratios in order to support its business and maximise shareholder value. The Group manages its capital structure and makes adjustments to it, in light of changes in economic conditions. To maintain or adjust the capital structure, the Group may adjust the dividend payment to the holders of common shares, return equity to shareholders or issue new shares. No changes were made by the Group in the capital management objectives, policies or processes in 2020 and 2019. Fair values The fair value of non-current financial assets is estimated using discounted cash flow based on deposit rates currently available to the Group with similar terms and average maturities. The fair value of non-current financial assets is estimated using discounted cash flow based on credit rates currently available to the Group with similar terms and average maturities. The table below presents fair value hierarchy of assets and liabilities of the Group. Disclosure of quantitative information of fair value hierarchy of financial instruments as at 31 December 2020 was as follow: Date of valuation Price Price quotation on active market (Level 1) Significant observable in-puts (Level 2) In millions of tenge Assets for which fair values are disclosed Financial assets at amortized cost Short-term trade receivables Long-term trade receivables Other current financial assets 31 December 2020 31 December 2020 31 December 2020 31 December 2020 Liabilities for which fair values are disclosed Borrowings Trade payables Due to employees 31 December 2020 31 December 2020 31 December 2020 18,624 – – – – – – – – – – – – – Total 18,624 17,823 2,504 245 – 17,823 2,504 245 72,692 22,353 3,691 72,692 22,353 3,691 The table below presents fair value hierarchy of assets and liabilities of the Group. Disclosure of quantitative information of fair value hierarchy of financial instruments as at 31 December 2019 was as follow: In millions of tenge Assets measured at fair value Financial assets at fair value through other comprehensive income Date of valuation Price 31 December 2019 4,965 Assets for which fair values are disclosed Short-term trade receivables Long-term trade receivables Other current financial assets 31 December 2019 31 December 2019 31 December 2019 Liabilities for which fair values are disclosed Borrowings Trade payables Due to employees 31 December 2019 31 December 2019 31 December 2019 – – – – – Price quotation on active market (Level 1) Significant observable in-puts (Level 2) Total – – – – – – – 4,965 15,647 1,147 1,371 61,778 21,175 3,172 15,647 1,147 1,371 61,778 21,175 3,172 95 Strategic reportFinancial statementsKcell Annual Report and Accounts 2020Governance 32. Financial instruments and financial risk management objectives and principles (continued) Fair values (continued) As at 31 December 2020 and 2019, the carrying amounts of the Group’s financial assets and liabilities presented as follows: In millions of tenge Financial assets Cash and cash equivalents Financial assets at fair value through other comprehensive income Financial assets at amortized cost Short-term trade receivables Long-term trade receivables Other current financial assets Financial liabilities Borrowings Trade payables Due to employees Total unrecognised change in unrealised fair value Carrying amount 31 December 2020 Fair value 31 December 2020 Unrecog- nised gain/(loss) Carrying amount 31 December 2019 Fair value 31 December 2029 Unrecog- nised gain/(loss) 23,023 23,023 – 8,825 8,825 – 18,923 17,823 2,421 245 – 18,624 17,823 2,504 245 73,287 22,353 3,691 72,692 22,353 3,691 161,766 160,955 – (299) – 83 – 595 – – 379 4,965 4,965 15,647 1,118 1,371 61,932 21,175 3,172 15,647 1,147 1,371 61,778 21,175 3,172 118,205 118,080 – – – 28 – (154) – – (126) Valuation techniques and assumptions The following describes the methodologies and assumptions used to determine fair values for those financial instruments which are not already recorded at fair value in the financial statements. Assets for which fair value approximates carrying value For financial assets and financial liabilities that are liquid or having a short term maturity (less than three months) it is assumed that their fair value approximates to the carrying amount. This assumption is also applied to demand deposits and savings accounts without a specific maturity. Financial liabilities carried at amortised cost The fair value of loans obtained is measured by discounting future cash flows using rates currently existing for outstanding amounts with similar terms, credit risk and maturity. 96 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)For the year ended 31 December 2020Kcell Annual Report and Accounts 2020 32. Financial instruments and financial risk management objectives and principles (continued) Changes in liabilities arising from financial activities Changes in liabilities arising from financial activities for 2020 were as follows: Changes in liabilities due to financial activities for 2019 were as follows: In millions of tenge Borrowings: non-current portion Borrowings: current portion Long-term lease liabilities Short-term lease liabilities Total In millions of tenge Borrowings: non-current portion Borrowings: current portion Long-term lease liabilities Short-term lease liabilities Total 1 January 2020 Loan ob- tained New leases Princi- pal repaid Interest accrued Interest paid Reclas- sifica- tion Modifi- cations Cancel- lation of leases Com- mission recog- nized Dis- count recog- nized 31 Decem- ber 2020 55,548 27,000 – (11,130) – – (21,337) – (5,000) 8,386 (7,753) 21,337 – – – – 6,384 23,447 – – 3,606 – 88,985 27,000 491 – – – (4,371) 161 (281) – (3,758) (3,150) 491 (19,888) 11,536 (10,903) 3,150 4,371 – – 161 – (281) – – – – – (148) 49,933 – 23,354 – 19,447 – 4,219 (148) 96,953 1 January 2019* Loan obtained New leases Principal repaid Interest accrued Interest paid Reclas- sification Modifi- cations Cancel- lation of leases Com- mission recog- nized Discount recog- nized 31 Decem- ber 2019* 14,936 32,025 – – 8,358 (6,911) 8,399 51,783 5,000 – (42,000) 25,184 – 802 – – – – – – – – (8,399) – (3,049) 534 (24) (355) (904) 55,548 – – – 6,384 – 23,447 3,642 95,545 – 37,025 – (3,085) (3,309) 802 (45,085) 11,667 (10,220) 3,309 3,049 – – 534 – (24) – (355) – 3,606 (904) 88,985 97 Strategic reportFinancial statementsKcell Annual Report and Accounts 2020Governance 33. Commitments and contingent liabilities Operating environment Kazakhstan continues economic reforms and development of its legal, tax and regulatory frameworks as required by a market economy. The future stability of the Kazakhstan economy will largely depend on these reforms, as well as on the effectiveness of the Government’s actions in the area of economy, financial and monetary policy. Coronavirus pandemic and market conditions Starting from March 2020, there has been significant volatility in the stock, currency and commodity markets, including a drop-in oil prices and a devaluation of tenge against the US dollar and the euro. Moreover, in connection with the recent rapid development of the coronavirus pandemic (COVID-19), on 16 March 2020 Kazakhstan introduced state emergency measures during the period through 16 April 2020, and subsequently extended until 15 May 2020, including quarantine in major cities, which had a significant impact on the level and scale of business activity. Later the Government of Kazakhstan introduced new quarantine period from 5 July 2020 till 2 August 2020. As the date of issuance of the consolidated financial statements, Kazakhstan has not introduced strict quarantine measures to confront the possible second wave of coronavirus pandemic. However, if measures such as smart distancing do not succeed in keeping the rate of new infections to a minimum and restrictions cannot be eased further to restore a sense of safety to businesses and households, then a sustained period of weakness is to be expected. The Group keeps analysing and monitoring the situation. The coronavirus pandemic has developed into a global economic crisis. Due to higher demand for certain telecommunications services the impact of the crisis was felt less severely by the telecommunications industry than by other industries. The Group experienced a direct impact on roaming revenues from lower international travel and expected economic pressures to impact the Group’s customer revenues over time. However, the Group sustained significant increases in data volumes. Despite trade restrictions revenue from sales of handsets and equipment was not highly affected. The management assessed that even there is currently a deal of uncertainty regarding the pandemic, the results of operations and financial position of the Group would not be significantly affected. Further possible future effects on the measurement of individual assets and liabilities are continued to be analysed. The Group has put in place cost saving measures to mitigate potential effects on earnings. Recognition of expected credit losses (ECL) on the Group’s financial assets that are not measured at fair value considered estimated impacts of the COVID-19 pandemic. For financial assets whose counterparties have ratings published by credit risk agencies, when already reflecting the effects of the pandemic, the information was used to calculate the ECL. For other financial assets, in general, the expected effects of COVID-19 pandemic were incorporated into the ECL by identifying the changes in default probability based on observable data. No significant effects were identified. The Group believes that there were no impairment indicators of its long-term non-financial assets as at 31 December 2020. As uncertainties in market trend and economic conditions may remain persistent considering duration of the spread of COVID-19 and countermeasures taken by country, actual results in any future periods could be differ materially from the estimates. The Group will continue to monitor the situation closely. Capital commitments The Group generally enters into contracts for the completion of construction projects and purchase of equipment. As at 31 December 2020, the Group had contractual commitments totaling 4,375 million tenge, excluding VAT (as at 31 December 2019: 5,213 million tenge, excluding VAT). Taxation Tax legislation and regulatory framework of the Republic of Kazakhstan are subject to constant changes and allow for different interpretations. Instances of inconsistent opinions between local, regional and national tax authorities are not unusual. The current regime of penalties and interest related to reported and discovered violations of Kazakhstan’s tax laws are severe. Penalties are generally 80% of the taxes additionally assessed and interest is assessed at the refinancing rate established by the National Bank of the Republic of Kazakhstan multiplied by 1.25. As a result, penalties and interest can amount to multiples of any assessed taxes. Fiscal periods remain open to review by the authorities in respect of taxes for five calendar years preceding the year of review. 98 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)For the year ended 31 December 2020Kcell Annual Report and Accounts 2020 33. Commitments and contingent liabilities (continued) Taxation (continued) Tax audit for 2012 − 3rd quarter 2015 In July 2017, the Kazakhstan tax authority completed its comprehensive tax audit for the period of 2012 − 3rd quarter 2015. Based on the results of the tax audit, the tax authority made an accrual of additional taxes and fines and penalties in the total amount of 9,008 million tenge, of which 5,790 million tenge is for unpaid taxes and 3,218 million tenge represents fines and penalties. The Group did not agree with some results of tax audit and filed an appeal. In January 2018, Kcell disputed the results of the tax authority in the First Instance Court and the Group’s appeal was dismissed. In June 2018, the Court of Appeal reviewed the appeal claim and left the unfavorable ruling of the First Instance Court in force. Although the decision was binding, the Group reserved the right to further appeal it in the Supreme Court. On 5 November 2018, the Group filed a petition to the cassation instance of the Supreme Court of the Republic of Kazakhstan. On 5 December 2018, the petition was dismissed by the Supreme Court of the Republic of Kazakhstan. In February 2019, the Group appealed to the Supreme Court of the Republic of Kazakhstan. Based on resolution of the Supreme Court of the Republic of Kazakhstan dated 23 July 2019, the appeal of the Group was partially satisfied. Precisely, First Instance Court’s act in the part of concerning following cases was cancelled: – Additional charge on withholding tax for services provided by non-resident legal entities in the amount of 2,197 million tenge; – Additional VAT on software technical support services provided by non-resident legal entities in the amount of 780 million tenge; – Related fines and penalties in the amount of 2,839 million tenge. For the year ended 31 December 2019, the Group recognised income from reversal of tax and related penalties provision in the amount of 5,816 million tenge. For the year ended 31 December 2020, the Group recognised income from reversal of the tax and related fines and penalties provision in the amount of 216 million tenge recognized due to expiration of the limitation period for tax liabilities. Tax risks assessment In the beginning of 2020, the Group performed recalculation of the tax risk provisions for VAT and PIT recognized by the Group in previous years. As a result, for the year ended 31 December 2020, the Group recognized income from reversal of provision on VAT and personal income tax in the amount of 257 million tenge and 211 million tenge, respectively. New technical regulations Order No. 91 of the Committee of the National Security dated 20 December 2016 on approval of the Technical Regulations General Requirements to the Telecommunication Equipment in Ensuring Conducting of Operative Search Measures, Collection and Storage of Subscribers’ Information was published on 7 February 2017 and came into force on 8 February 2018. According to the new regulations, there are additional requirements to the telecommunication equipment that include expansion of technical capabilities of equipment to conduct operative search activities, collection and storage of subscribers’ information (hereinafter − “ORA”). Currently, the Group is in the process of modernization of the telecommunication equipment of the Kcell’s network in order to comply with the requirements of the Technical Regulations. Cases related to the abuse of dominant position Tariffication of Kcell’s mobile internet services On 19 October 2018, the Committee on Regulation of Natural Monopolies, Protection of Competition and Consumer Rights of the Ministry of National Economy of the Republic of Kazakhstan (“Committee”) initiated administrative proceedings against the Group for an alleged administrative violation related to the abuse of its dominant position in 2017. The potential fine, which can be imposed by the court, constitutes approximately 2,000 million tenge. According to the Committee, the violation resulted in the establishment of different prices for Kcell’s mobile Internet access service, when the data allowance was exceeded or the monthly subscription fee was not paid in a timely manner. In addition, the Committee issued an order for the Group to return to Kcell brand subscribers all fees charged in 2017 when the monthly data allowance was exceeded and when the monthly subscription fee for mobile Internet access services had not been paid. The Group did not agree with the order issued by the Committee. On 3 July 2019, the Group appealed to the Court. 99 Strategic reportFinancial statementsKcell Annual Report and Accounts 2020Governance 33. Commitments and contingent liabilities (continued) Cases related to the abuse of dominant position (continued) On 25 October 2019, Specialised Inter-district Economic Court of Almaty issued the resolution to cancel administrative proceedings due to the lack of an offense. However, the Committee had the right to appeal within 180 days after announcement of the resolution. On 14 April 2020, the Committee appealed the decision of Specialised Inter-district Economic Court of Almaty. On 4 May 2020 the administrative proceedings were finalized after the decision of the Supreme Court of RK to reject the Committee’s appeal due to lack of offence. The decision of Supreme Court of RK (as the superior level of authority) is final decision, that essentially not subject to revision. Billing cycle of mobile phone plans On 27 December 2019, the Company received a notification from the Committee on Regulation and Protection of Competition of the Ministry of National Economy of the Republic of Kazakhstan (“Committee”) prescribing that the Group should bring its existing and legacy mobile phone plans in line with Rules for provision of mobile services (“Rules”), namely to set a calendar month as default billing cycle, as follows from the definition of the term “accounting period”. According to the Committee, by establishing a one-day, a weekly, a 28-day or a 30-day billing cycle on mobile phone plans the Group breaches article 174.1 of the Business Code of the Republic of Kazakhstan. The Committee also sees the reduction of billing cycle as possible abuse of the dominant position through violation of the rights of consumers. On 15 July 2020 the Company received a copy of the Committee’s Order on conducting an investigation. In the course of the investigation, the Company has provided the relevant data and information requested by the Committee. On 7 September 2020 the Company received Investigation Report stating that there were no violations of the legislation in the actions of the mobile operator. The investigation in relation to the Company’s activity was terminated. Kcell Solution tax legal case In 2018, tax authorities initiated tax audit in respect to Kcell Solutions LLP (Kcell Solutions) with regard to CIT and VAT. According to the result of audit tax, generated tax losses carried forward and recognized VAT input by Kcell Solutions in 2013-2017 have been reduced by the total amount of 427 million tenge and 165 million tenge respectively. Kcell Solutions disputed the results of the tax authority in Judicial Board for Civil Cases of Almaty City Court. On 29 January 2020, Judicial Board for Civil Cases of Almaty City Court dismissed the appeal of Kcell Solutions. Kcell Solutions did not agree with results and filed an appeal to the Supreme Court of the Republic of Kazakhstan. Based on resolution of the Supreme Court of the Republic of Kazakhstan dated 25 August 2020, the Kcell Solutions’s appeal was fully satisfied, thus previously reduced tax losses carried forward and VAT input in the amount of 427 million tenge and 165 million tenge, respectively, were fully recovered. Accordingly, the Group recognised deferred tax assets on the tax losses carried forward and other income on recovered VAT input in the amount of 427 million tenge and 108 milion tenge, respectively. Customs inspection On 13 September 2019, the Customs Control Department (“CCD”) of Almaty issued an order on initiation of custom audit i n relation to the Group’s operation for the period 2014-2019. CCD examines the Group’s tax reporting documents for the purpose of the revealing of violations on incorrect determination of the customs value of goods and its incorrect classification. On 9 October 2019, CCD suspended the custom audit to allow the Group to prepare required documents. On 9 September 2020, the Group provided the entire package of documents requested by the CCD, which are currently being examined by the auditors of CCD. The ongoing custom audit is related to the revealing of violations of customs regulations, incorrect determination of the customs value of goods, and if violations are identified, the Group may be brought to administrative penalty and be liable to pay appropriate customs charges, including import VAT and late payment fees. On 15 October 2020 the Customs Control Department issued the notice to postpone the customs inspection of the Group for an indefinite period. The Group estimated probability of the outflow of resources embodying economic benefits as probable and accrued provision on additional charge, fines and penalties in the amount of 701 million tenge (Note 23). 34. Subsequent events On 6 January 2021 the Group obtained loan from Alfa Bank in the amount of 12,000 million tenge with interest rate of 10.7% per annum with maturity till 5 January 2024. On 8 January 2021 the Group partially repaid loan obtained from Eurasian Development Bank in the amount of 12,000 million tenge ahead of the schedule. On 27 January 2021 the Group additionally acquired notes of the National Bank of Republic of Kazakhstan in the amount of 2,980 million tenge. 100 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)For the year ended 31 December 2020Kcell Annual Report and Accounts 2020