CONTENTS
UNIQUE INTEGRATED BUSINESS
MODEL
ALTERNATIVE PERFORMANCE
MEASURES
KEY PERFORMANCE
INDICATORS
CHAIRMAN STATEMENT
CEO STATEMENT
RISK MANAGEMENT
CORPORATE GOVERNANCE
OVERVIEW
BOARD OF DIRECTOR’S
DIRECTOR’S REPORT
2
4
6
8
10
13
15
21
26
28
CONTENTS
Continued
AUDIT COMMITTEE REPORT
FINANCIAL RESULTS FOR THE
FOURTH QUARTER AND TWELVE
MONTHS ENDED 31 DECEMBER
2016
STATEMENT OF THE BOARD OF
DIRECTORS’ RESPONSIBILITIES
FOR THE PREPARATION
AND APPROVAL OF THE
CONSOLIDATED FINANCIAL
STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2016
INDEPENDENT AUDITOR’S
REPORT
CONSOLIDATED FINANCIAL
RESULTS
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
31
36
44
45
47
53
3
UNIQUE
INTEGRATED
BUSINESS MODEL
MHP business model —
a key cost competitive
advantage to its peers
worldwide
Less exposure to commodity
cost volatility due to high
level of vertical integration
and diversification of sales
370,000
hectares of land
under control in
Ukraine
Around
342,000
tonnes of sunflower
oil, over 34,000
tonnes of soybean
oil
3 fodder mills,
own grain storage
facilities
2 breeding farms,
around 420 mln*
hatching eggs
per year
* MHP is again self-sufficient in hatching eggs since July, 2016.
4
UNIQUE
INTEGRATED
BUSINESS MODEL
Continued
3 vertically
integrated
poultry complexes:
from hatching to
rearing and
processing
Growing self-
sufficiency
in energy to ensure
lower costs, being
environmentally
friendly
Around
34,000 tonnes
of sausages and
cooked meat per
year
100% of poultry
delivered to
customers
within 24 hours
2,012
dedicated franchise
outlets
5
ALTERNATIVE
PERFORMANCE
MEASURES
MHP has included certain measures in this Director’s Report that
are not measures of performance under IFRS, including earnings
interest, taxation, depreciation and amortisation
before
(“EBITDA”) and last twelve months EBITDA (“LTM EBITDA”) both
at a consolidated and at a segment level.
EBITDA, LTM EBITDA and Segment EBITDA are presented in this
EBITDA, LTM EBITDA and Segment EBITDA are measures of MHP’s
Director’s report because directors consider them to be important
operating performance that are not required by, or presented
supplemental measures of the Group’s financial performance.
in accordance with IFRS. EBITDA, LTM EBITDA and Segment
Additionally, the directors believe these measures are frequently
EBITDA are not measurements of MHP’s operating performance
used by investors, securities analysts and other interested parties to
under IFRS and should not be considered as an alternative to
evaluate the efficiency of the Group’s operations and its ability to
profit for the year, operating profit, segment result or any other
employ its earnings toward repayment of debt, capital expenditures
performance measures derived in accordance with IFRS or as an
and working capital requirements.
alternative to cash flow from operating activities or as a measure
We define EBITDA as profit for the year before income tax expense,
finance costs, finance income, depreciation and amortisation
Such measures presented in this Annual Report may not
expense, net after-tax exceptional and non-recurring items, foreign
be comparable to similarly titled measures of performance
exchange loss, net, and other expenses, net. Depreciation and
presented by other companies, and it should not be considered
amortisation expense are components of both cost of sales and
as substitutes for the information contained in the consolidated
selling, general and administrative expenses in the consolidated
financial statements.
of MHP’s liquidity.
financial statements.
LTM EBIDTA defines as EBITDA for the prior 12 consecutive months
ending on such date of measurement; LTM EBIDTA for the year
ended 31 December equals EBITDA.
The Group’s segment measure in the consolidated financial
statements is defined as “segment result” and represents operating
profit by segment before unallocated corporate expenses, being
the segment measure reported to the chief operating decision
maker for the purposes of resource allocation and assessment of
segment performance. Within the Director’s Report, we adjust
the reported segment result for the amount of depreciation and
amortisation per segment in order to present “Segment EBITDA” to
external users, which we feel is a more commonly-used external
metric familiar to investors.
6
ALTERNATIVE
PERFORMANCE
MEASURES
Reconciliation of EBITDA is as follows:
Profit/(Loss) for the year
Income tax (benefit)/expense
Finance costs
Finance income
Loss on impairment of property, plant and equipment
Loss on disposal of subsidiaries
Depreciation and amortisation expense
Other expenses, net
Foreign exchange (gain)/loss, net
EBITDA
Continued
2016
US$, mln
2015
US$, mln
69
(13)
107
(2)
1
-
99
9
145
415
(113)
(41)
106
(3)
-
5
89
3
390
436
Segment results represent operating profit, as adjusted for unallocated corporate expenses,
which is reconciled to segment EBITDA before unallocated expenses by adding back segment
depreciation as illustrated in the following tables:
US$, mln
External sales
Sales between business segments
Total revenue
Segment results
Add back
Depreciation and amortisation
Segment EBITDA before
unallocated expenses
US$, mln
External sales
Sales between business segments
Total revenue
Segment results
Add back
Depreciation and amortisation
Segment EBITDA before
unallocated expenses
Year ended 31 December 2016
Poultry and related
operations
Grain growing
operations
Other agricultural
operations
Eliminations
Consolidated
970
30
1,000
208
61
269
85
196
281
117
33
150
80
0
80
10
3
13
-
(226)
(226)
-
-
-
1,135
-
1,135
335
97
432
Year ended 31 December 2015
Poultry and related
operations
Grain growing
operations
Other agricultural
operations
Eliminations
Consolidated
878
25
903
281
62
343
118
145
263
71
24
95
66
0
66
9
2
11
-
(170)
(170)
-
1,062
-
1,062
361
88
449
7
KEY PERFORMANCE
INDICATORS
Revenue
US$mln
1600
1400
1200
1000
800
600
400
200
550
500
450
400
350
300
250
200
150
100
50
600
550
500
450
400
350
300
250
200
150
100
50
1,229
944
803
711
1,408
1,496
1,379
1,183
1,135
2008
2009
2010
2011
2012
2013
2014
2015
2016
Gross profit
US$mln
501
422
361
324
366
362
293
238
247
2008
2009
2010
2011
2012
2013
2014
2015
2016
EBITDA
US$mln
555
468
401
391
459
415*
325
312
271
2008
2009
2010
2011
2012
2013
2014
2015
2016
8
* Without operations in Crimea.
KEY PERFORMANCE
INDICATORS
BY SEGMENT
Poultry Segment
1.3
1.0
0.9
567
573
0.8 0.8
0.8
0.7
547
473
404
384
225
285
360
0.7*
0.5*
2008
2009
2010
2011
2012
2013
2014
2015
2016
US$
1.5
1.0
0.5
0
EBITDA per kg, US$ (Net of IAS 41)
Production of poultry, thousand tonnes
Grain Growing Segment
US$
2,027
1,984
1,892
1,712
1,607
2,371
500
400
300
200
EBITDA per ha, US$
960
913
735
2008
2009
2010
2011
2012
2013
2014
2015
2016
100
Production of grains, thousand tonnes
Consolidated and by Segment EBITDA
EBITDA margin (Poultry)
EBITDA margin (Grain Growing)
Consolidated EBITDA margin of the Group
600
500
400
300
200
100
2400
2200
2000
1800
1600
1400
1200
1000
800
600
400
200
60%
50%
40%
30%
20%
10%
0
* Without operations in Crimea.
* Without operations in Crimea.
9
2008
2009
2010
2011
2012
2013
2014
2015*
2016*
CHAIRMAN
STATEMENT
Financial and
Operational
Overview
Another successful year
for MHP in spite of the
challenges faced by the
global poultry industry in
2016
Dr John C Rich, Chairman
of the Board
10
I am pleased to report our 9th set of annual results since the
Company listed on the London Stock Exchange in 2008.
2016 was another successful year for MHP given the challenges
presented by both the global poultry industry as well as the internal
difficulties of Ukraine. Notwithstanding these difficulties, production
volumes of poultry increased 10% year-on-year to 573,003 tonnes,
with a revenue increase by 7% year-on-year.
MHP is a leading producer of chicken meat in Ukraine representing
domimant and strong position. At the same time, MHP has been
intensively developing its exports during the year. Export sales in
2016 increased by 52% year-on-year to 189,939 tonnes and now
represent 36% of the Group’s total poultry sales, an impressive
performance.
We believe MHP to be the lowest cost volume producer of poultry
globally, due to its unique vertical integration and innovative
feed technology. This is supported by at or above benchmark
performance in live poultry operations, record yields in the farming
division in 2016 and the effect of higher production volumes being
processed at the company’s state-of-the-art facilities.
In July 2016, the Company achieved self-sufficiency in hatching
eggs production following the closure of the Eastern Ukraine
parent stock facility in August 2014 due to regional instability.
There was a temporary loss of access to EU markets between
December 2016 and January 2017 due to an avian influenza
outbreak elsewhere in Ukraine. While this was located in a village
500 km away from MHP’s facilities, the system of compartmentation
of disease locality had to be properly established between the
local Ukraine and EU veterinary authorities before exports could be
recommenced, resulting in a cessation of exports to the western
EU for 7 weeks. This had only a marginal effect on EBITDA.
The company performed well financially in challenging market
environments. While Ukraine prices increased 14% year-on-year
following previous significant currency devaluations, the global
poultry market traded at more recent historic lows. Notwithstanding
this, the Company achieved an EBITDA of US$ 415 million, with a
37% EBITDA margin, well above global peers. Net Debt to EBITDA
ended the year at 2.6 times, with around 80% of total debt being
long term. In early 2017, MHP sold its production activities in Crimea
at fair value with the proceeds now being allocated to future
investment by the Company.
CHAIRMAN
STATEMENT
Continued
Strategy
Corporate
Governance
The Company has a clear and consistent strategy. From a
It was with regret that the Company’s Chairman of 10 years,
historical perspective, it has:
Charles Adriaenssen, stepped down in July 2016 due to family
commitments. He was instrumental in driving the Company
1.successfully built a position as a high quality, lowest cost
during its inauguration and establishment phase and steered
producer;
the Company through its IPO in 2008 and the subsequent global
financial crisis. The Board and Management wish to thank him for
2. successfully established and maintained a leading share of the
his strong commitment and invaluable service during this period.
Ukrainian domestic market;
3. invested in increasing capacity to service the ever expanding
the strategic business direction, including potential M&A activity.
The Board continues to take a strong lead in the development of
export market;
The Board welcomes recent recommendations from the US
corporate regulatory authorities regarding continuing education
4. successfully established a growing international presence, with
for independent directors and is increasing its commitment to
around 70 export market destinations now served;
relevant professional development programs in 2017.
5.with its vertical integration business model, delivered consistently
Following the retirement of Charles Adriaenssen, Dr John Rich
strong profitability and operational cash generation;
was appointed Chairman of the Board and Chairman of the
Nominations and Remunerations Committee.
6. paying meaningful annual dividend.
In recent developments, the commissioning of a processing
experience in areas relevant to the Company’s activities and
facility in the Netherlands has enabled further development
future direction, and that the time commitment of directors is
of distribution and sales in Western Europe. In addition, the
sufficient to provide appropriate governance and guidance
Company has a clear strategy for the development of the MENA
on the strategic direction and operational effectiveness for the
The Board believes the directors possess diverse business
region, as part of which it has established a sales and distribution
business.
chain there in conjunction with a local partner.
The Company will continue its strategic aims of developing
activities, the Committee has considered the appropriate
Western Europe and the EMENA regions which are logistically
composition of the Board required to support the planned
close to the Company’s production base in Ukraine
growth of the Company and has concluded that, in addition to
In relation to the Nominations and Remunerations Committee
The board continues to
take a strong lead in the
development of the strategic
business direction including
potential M&A activity.
replacing Dr John Rich as an independent NED, an additional
independent NED should be appointed in due course to provide
additional depth and diversity of experience. Currently the
Committee is leading a search for the replacement of Dr John
Rich as NED and during 2017 the Committee will undertake a full
succession planning exercise for all senior roles in the Company.
11
CHAIRMAN
STATEMENT
Continued
Looking Forward
MHP expects to maintain its position
as one of the world’s lowest cost
producers of high quality chicken. In
the short term, this will be assisted by
the large internally produced grain
harvest during 2016 which forms the
basis of the 2017 cost of goods sold.
The key risk to the poultry business globally is avian influenza
outbreaks close to production bases which can result in market
access being closed. While MHP maintains rigorous biosecurity
in its own facilities, outbreaks of avian influenza within regions of
our operations can be problematic. Recent changes in disease
regionalization in Ukraine have assisted in some mitigation of
this risk. In addition, the Company has developed a robust
contingency program for alternative sourcing of poultry in case
of restricted market access related to this disease.
Sovereign risk, which may be abating, is ever present and any
escalation of conflicts in the Eastern Ukraine could lead to lower
than budgeted local poultry prices. The recent sale of all our
operations in Crimea has been a positive development for the
Group.
Any further devaluation of the Hryvna would lead to forex loss
and non-cash translation effect on the income statement and
balance sheet.
Land reform is still on its way. In October 2016, the moratorium
has been prolonged until 1 January 2018. MHP has been working
closely with its lessees across Ukraine for many years and is ready
for any changes in legislation. All MHP’s lease agreements include
a pre-emption clause giving MHP the right to be the first buyer.
12
CEO STATEMENT
The Company has continued to deliver its strategy of
consistent growth in poultry, grain and meat processing
operations, despite all the challenges in Ukraine.
Financial results are in line with management’s expectations, with
EBITDA of US$ 415 million and EBITDA margin of 37%.
Having previously announced our
intentions, the Company
followed its strategy for growth both in poultry, grain and meat
processing operations. In line with our targets for 2016, MHP
completed a number of poultry production projects, increased
poultry exports and optimized its costs by achieving self-sufficiency
in hatching eggs. MHP also achieved close to record yields from
its land and, as is customary, far exceeded national averages for
Ukraine.
While sustaining our leading market position in Ukraine, we
continued to develop export opportunities worldwide, establishing
new partnerships in the EU and MENA and introducing market
targeting for specific products. To improve access to the EU
markets, in the first quarter of 2016 the Company invested US$
3.5 million to commission a chicken processing operation in the
Netherlands. This will enable MHP to increase the level of service to
European customers by offering both commodity and packaged
products for food service channels, and will allow better control of
export volumes. Later in the year, we opened a distribution and
sales office in UAE.
13
Yuriy Kosyuk, CEO
CEO STATEMENT
Continued
In 2016, we exceeded our own expectations for poultry exports, with
a 53% increase to almost 190,000 tonnes. Taken together, exports
of poultry, oils and grains generated a significant increase in hard
currency revenues, from 49% to 56% of total revenue.
Our targets for 2017 are:
- to start the construction of Phase 2 (Line1) of the Vinnytsia project
with the ultimate aim of elevating production to around 730,000
tonnes per year by 2020;
- to continue our focus on exports, cementing our position in existing
territories and investigating new opportunities;
- to maintain our investment in people and build on our reputation
as a high-quality, responsible and transparent employer;
- to promote sustainable development of the business, with a
particular focus on environmental impact (including alternative
energy projects), animal welfare and social responsibility.
I am confident that our strategy of consistent growth of the
Company will continue to deliver strong operational and financial
performance in 2017 and beyond.
14
RISK
MANAGEMENT
The Board of Directors and Management
view risk management as an integral
part of value creation, so MHP’s risk
management process is closely aligned
with the Group’s strategy.
Systematic management of risks, including carefully designed
mitigation actions, is a key element of our management of
business performance.
How we manage risks
MHP is in the process of adopting international standards such as
COSO (Committee of Sponsoring Organizations) ERM framework
and ISO 31000 to provide an appropriate framework for the
identification and management of risks which could prevent the
Group from achieving its business objectives. Once identified,
risks are evaluated to establish the likelihood of their occurrence
and their potential financial or non-financial impact. For risks
assessed as significant, mitigation action plans are developed
and implemented by operating management.
The summary of key risks is discussed regularly with MHP
management and reported at least annually to the Board of
Directors through the Audit Committee.
In 2016, a new Risks and Process Management Department
was established to focus on identifying and managing risks and
analysing and improving business processes.
Principal risks
Principal risks facing the Group and mitigating actions are
summarized below:
15
RISK
MANAGEMENT
BUSINESS RISKS
Continued
Fluctuation in global prices
for grains and poultry
MHP for several years has pursued a strategy of diversifying sales,
resulting in 36% of MHP’s chicken meat now being exported to
more than 70 different countries, reducing dependence on the
Impact:
Changes in global prices for grains and poultry affect MHP’s
business, operating results, financial condition and prospects.
Mitigations:
MHP drives cost efficiency across all its businesses, supported
by its vertically integrated business model, experienced and
skillful management, modern technologies and state- of-the-art
production facilities.
MHP minimizes the impact of fluctuations in world grain prices
by growing internally 100% of the corn required for poultry feed
production. The Company has also adopted an innovative
approach by replacing a significant portion of expensive
imported soya protein with protein from sunflower seeds
grown by MHP; 24% of sunflower seed and 60% of soya bean
requirements are produced internally with the balance procured
from domestic growers.
domestic Ukrainian market.
MHP continues to focus on further development of its operational
efficiency, product enhancement and innovation through an
unceasing R&D process, and on selling the most appropriate
products for each market to achieve higher profitability per unit.
Outbreaks of avian flu and
other livestock diseases
Impact:
Avian flu may results in:
• loss of flock;
• loss of customers;
•export restrictions;
• distribution of disease, and
• significant financial losses.
Since 2015, soya protein has been produced at our oil extraction
Mitigations:
plant located in Katerynopil.
Fluctuations in demand and
market prices of chicken
meat in Ukraine
Impact:
Domestic sales of chicken meat account for a significant portion
of MHP’s total revenues. Accordingly, any factors influencing the
supply of, demand for, or price of, chicken products in Ukraine could
have a material impact on MHP’s business and financial results.
Mitigations:
The trend of low meat consumption in Ukraine in comparison to the
To ensure the well-being of livestock at MHP’s facilities, the
Company has implemented high biosecurity supplemented by
a set of preventive veterinary-sanitary and hygienic measures,
including:
- ongoing monitoring of avian flu cases worldwide followed by
double-checking of MHP’s existing biosecurity systems based on
identified reasons causing those cases;
- geographic separation of poultry rearing facilities with a remote
distance between each facility;
- in case of identification of any infected areas, immediate
actions are taken to limit access of all visitors to MHP facilities;
- regular monitoring of poultry conditions, including analysis of
indicators of their well-being and health and investigation of
the quality of raw materials (litter, food, water) and products
European countries still persists. Demand for chicken is expected
(carcasses of poultry);
to remain strong and to have further growth potential as beef
and pork are mostly produced by households and small farms and
- monitoring compliance with biosafety rule;
- strict control over the implementation of preventive and control
are far more expensive to produce and purchase than chicken.
measures.
Chicken meat is the most affordable kind of meat from both a
price and diet perspective.
MHP products are available for purchase through different sales
channels all times and the Company offers competitive trade
terms to its customers.
16
RISK
MANAGEMENT
Continued
Labor market disruption risk
Impact:
The agriculture industry is facing a threat caused by aging of the
current workforce and changes in the skills base. Lack of science,
engineering, technical and working staff could increase the risk
to the long-term future of the business.
Mitigations:
MHP maintains positive relations with employees and promotes
positive working conditions.
MHP provides education and professional programs for the
younger generation.
MHP provides a “Personnel Reserve” program for prospective
employees.
MHP also follows a strategic action plan to build and support
schools in regions where its facilities operate.
Fluctuation in commodity
prices such as gas, fuel and
energy
Impact:
Changes in certain commodity prices (including, gas, fuel) affect
MHP production and distribution costs that influence operating
results and cash flows.
Mitigations:
Gas, fuel and energy price changes do not exceed 3% of our
overall costs each.
Energy price risks are mitigated by a priority focus on developing
renewable sources of energy and a consistent increase in the use
of co-generation and alternative energy technology. Processing
of sunflower seeds leaves a huge amount of husks that are burned
to generate steam heat for our processing plants.
Unfavorable weather
conditions
Impact:
Extreme changes in temperature or rainfall including weather
change in summer and winter could influence agricultural
productivity as a whole and crop yield, harvesting and
transportation costs in particular.
Mitigations:
Ukraine’s weather is generally temperate, with plenty of sunshine
in summer and adequate rainfall. This combines with extremely
fertile soil to create excellent growing conditions.
In addition, MHP’s management supports the use of modern
technology to achieve a yield which is significantly higher than
the average for Ukraine.
17
RISK
MANAGEMENT
Continued
FINANCIAL RISKS
Fluctuation in foreign
exchange rates and
inflation
Impact:
MHP operates globally and has operations and transactions in
different currencies. Devaluation of the UAH against US dollars
and changes in exchange rates give rise to transactional
exposures.
Mitigations:
The majority of MHP borrowings is denominated in US dollars; the
resulting exposure is hedged by earning 56% of total revenue in
US dollars from the export of sunflower and soybean oils, chicken
meat and grain. The amount of export sales will continue to
increase with further expansion of the Vinnytsia poultry complex
and strengthening of positions in export markets. This will allow
MHP to continue to service all dollar-denominated loans and
payments for operating activities.
In 2016
the Company developed and
implemented a
Procurement Policy that defines restrictions
in conducting
purchase contracts denominated in foreign currencies. MHP’s
policy promotes the conduct of purchase contracts mostly in its
functional currency (UAH).
Fluctuation in interest rates
inflation
Impact:
Changes in interest rates affect the cost of borrowings, the
value of our financial instruments, and our profit and loss and
shareholders’ equity.
Mitigations:
Credit risk
Impact:
Counterparties involved in transactions with MHP may fail to
make scheduled payments, resulting in financial losses to MHP.
Mitigations:
MHP has a diversified pool of customers. The amount of credit allowed
to any one customer or group of customers is strictly controlled.
Credit offered to major groups of customers, including supermarkets
and franchisees, on average is between 5 and 21 days.
To hedge the risk, MHP procedures require verification of
counterparties’ solvency prior to signing of an agreement with
contractors. Policies and operating guidelines include limits in
respect of counterparties to ensure that there is no significant
concentration of credit risk.
Credit risks are managed by legal activities which include security
paragraphs into agreements with customers.
Liquidity risk
Impact:
If, in the long term, MHP is unable to generate and maintain
positive operating cash flows and operating income, it may need
additional funding. MHP’s inability to raise capital on favorable
terms could lead to a default on its payment obligations and
could have a material adverse effect on MHP’s business, results
of operations, financial condition and prospects.
Mitigations:
MHP maintains efficient budgeting and cash management
processes to ensure that adequate funds are available to meet
business requirements.
MHP monitors its interest rate exposures and analyzes the
MHP adopts a flexible CAPEX program enabling capital projects
potential impact of interest rate movements on its net interest
to be deferred if necessary.
expenses.
MHP’s debt portfolio is well balanced with 60/40 share of fixed/
MHP has an
irreducible balance
in hard currency on
correspondent accounts and maintains a certain level of
floating interest rates. The majority of MHP’s borrowings are from
undrawn credit lines.
foreign banks at rates lower than those available in Ukraine; a
significant part of our debt is also in the form of Eurobonds issued
at fixed interest rates.
18
RISK
MANAGEMENT
Continued
REPUTATIONAL RISKS
Community relations risk
Impact:
Failure to successfully manage relations with local communities
and NGOs (non-government organization), could disrupt our
operations and adversely affect the Group’s reputation.
Mitigations:
MHP closely cooperates with local communities and other
stakeholders in the regions of its operational activities, interacts
with them and implements programs and initiatives to improve
the quality and standard of living.
For these purposes MHP organizes regular meetings with the local
communities during which MHP representatives discuss relevant
issues, actual business performance, further action plans and
answer questions raised by local residents.
MHP business representatives organize roadshows for local
citizens when they have the opportunity to ask questions.
MHP uses communication channels
including personal
communication, communication via official web-site/entities
web-site/ social networks/
information boards/corporate
publications and media, enterprises tours.
The Company cooperates with governments,
local and
community organizations to contribute to and anticipate
important changes in public policy.
MHP has implemented Corporate Social Responsibility (‘CSR’)
and Communication Policies, and an Animal Welfare Policy.
19
RISK
MANAGEMENT
Continued
COMPLIANCE RISKS
Legal and regulatory risk
Sovereign risk
Impact:
Impact:
The Group’s business may be affected by
regulatory
Political instability may negatively affect the economy as a whole
developments in any of the countries in which the MHP
and have a material adverse effect on MHP’s business, results
operates, including changes in fiscal, tax or other regulatory
in operations, financial conditions and prospects including civil
regimes. Potential impacts include higher costs to meet new
unrest, harvesting permits, land leases or purchases, decrease in
environmental requirements, the possible expropriation of assets,
profitability and impairment of assets.
other taxes, or new requirements for local ownership.
Mitigations:
MHP management
is actively monitoring
regulatory
developments in the countries where the Group operates.
MHP’s financial control framework has adopted tax and treasury
approaches fully in compliance with relevant local laws in the
jurisdiction where the business is registered. MHP pays its taxes
in full.
Moreover, MHP is consistently developing and integrating into
its business practice Market Abuse Regulation and Sustainability
reporting, etc.
Mitigations:
MHP’s operations extend through all regions of Ukraine with wide
regional diversification. Deep vertical integration and internally
developed supply chains allow operations located in potentially
distressed regions of Ukraine to remain self-sufficient with both
production needs and markets, even in a case of temporary
regional isolation.
MHP minimizes political risks associated with its business presence
in Ukraine by expanding the territory of operations and access to
the new European and other priority markets.
20
CORPORATE
GOVERNANCE
OVERVIEW
MHP S.A. ( the ‘‘Company’’) is a
Luxembourg public limited liability
company (société anonyme),
whose shares in the form of global
depositary receipts (“GDRs”) are
listed and admitted to trading on
the London Stock Exchange.
The Company complies with the Ten Principles of Corporate
Governance approved by the Luxembourg Stock Exchange and
voluntary corporate governance regime stated in the UK Corporate
Governance Code. The Company upholds and practices the
highest standards of ethics and integrity in its relationships with its
shareholders, directors, personnel, business community and other
third parties including government and regulatory agencies.
The main aspects of the Company’s corporate governance policy
Board of Directors
The Board is responsible for the overall conduct of the Company’s
business and has the powers, authorities and duties vested in it by
and pursuant to the relevant Luxembourg laws and regulations and
the Articles of association of the Company: http://www.mhp.com.
ua/en/investor-relations/corporate-governance/articles-of-
association.
Members of the Board are elected by a majority vote of shareholders
at the annual general meeting (“AGM”), may be elected for a six-
year period and may be re-elected an unlimited number of times.
As of 31 December 2016, of the Board’s six directors, three are
independent. The Board is assisted by two Board committees: the Audit
Committee and the Nominations and Remunerations Committee.
These committees handle business within their respective areas and
present recommendations and reports on which the Board may base
its decisions and actions.
The Senior Independent Director, John Grant, is available to shareholders
if they have any concerns that they cannot resolve through the normal
channels (e.g. chairman, chief executive or other directors).
are described in the Corporate Governance Charter approved by
The Senior Independent Director also provides a sounding board for
the Board of Directors in May 2012 and published on the Company’s
corporate website at http://www.mhp.com.ua/en/investor-
relations/corporate-governance.
the Chairman, and is responsible for the evaluation of the Chairman
and serves as a trusted intermediary for Non-executive Directors as
and when necessary. In 2016 the Senior Independent Director was not
made aware of any concerns by shareholders or other stakeholders.
In 2016, the Board conducted an annual effectiveness review in order to
evaluate its performance as well as that of its committees and individual
Directors. The evaluation process was initiated by a questionnaire.
The conclusions were analyzed by the Board to further strengthen its
composition and performance.
21
CORPORATE
GOVERNANCE
OVERVIEW
During the year, the Board
comprised:
Continued
Dr John C Rich, Non-executive Interim Chairman of the Board*,
The remuneration and benefits of all members of the Board of
Chairman of the Nominations and Remunerations Committee,
Directors, including the Chief Executive Officer, regardless of
Member of the Audit Committee
whether such remuneration is paid by the Company or by any
John Grant, Senior Independent Director, Non-executive Director,
other entity within the Group, is established by the Nominations
Chairman of the Audit Committee, Member of the Nominations
and Remuneration Committee. In addition, the remuneration
and Remunerations Committee
paid to Non-executive Directors is approved by the AGM. The
Philippe Lamarche, Non-executive Director, Member of the Audit
remuneration and benefits paid by the Company to the persons
Committee
responsible for the day-to-day management of the Company is
Yuriy Kosyuk, Chief Executive Officer, Executive Director
reported by the Board of Directors to the AGM.
Yuriy Melnyk, Chief Operating Officer, Executive Director
Viktoria Kapelyushnaya, Chief Financial Officer, Executive Director
During 2016, each director attended 100% of the Board’s meetings.
The term of office of each member of the Board of Directors was
renewed at the AGM held on 16 June 2016.
Each Director has signed a letter of appointment with the Company
For 2016 AGM results please follow the link: http://www.mhp.
com.ua/library/file/results-of-agm-2016.pdf.
Remuneration of auditors
which applies for as long as he or she remains a Director. The letters
Remuneration paid to the auditors was USD 554 thousand and USD 702
do not provide for any benefits on termination of directorship. In
thousand for the years ended 31 December 2016 and 2015
the case of Dr Rich, Mr Grant and Mr Lamarche, the letters provide
respectively. Such remuneration includes both audit and non-
for payment of compensation and the reimbursement of business-
audit services, with the audit fees component representing USD
related expenses. Ms Kapelyushnaya and Mr Melnyk do not
390 thousand and USD 430 thousand for the years ended 31
receive compensation for their service as Directors of MHP S.A. in
December 2016 and 2015.
addition to their remuneration as executive management.
The terms and conditions for Mr Kosyuk’s appointment as Chief
independence of the auditors, including a limitation on non-audit
Executive Officer (“CEO”) were agreed and signed on 21 June
fees set by the Board, prior approval by the Audit Committee of
2006. The terms are for the duration of his office and do not
non-audit fees in excess of specified limits and an annual review
provide for any benefits on termination of his directorship. Mr
by the Audit Committee of whether any services provided are
Kosyuk is required to give three months’ notice of resignation from
incompatible with independence of the auditors.
The Company has policies and processes in place to ensure
his position as CEO. The terms contain confidentiality obligations
applicable to Mr Kosyuk for a period of five years after termination
of his office.
*Mr Charles E Adriaenssen was Chairman of the Board of Directors of MHP S.A. and Chairman of the Nomination and Remuneration Committee until 19 July 2016.
Please read MHP’s announcement about resignation and appointment of a new Chairman following the link: http://www.mhp.com.ua/library/file/chairman-resignation-
appointment.pdf. Dr John Rich was appointed Interim Chairman of the Board of Directors of MHP S.A. and Chairman of the Nominations and Remuneration Committee
on 19 July 2016.
22
CORPORATE
GOVERNANCE
OVERVIEW
Continued
Internal control and risk
management
Financial reporting process
The Board of Directors is ultimately responsible for the Company’s
MHP has in place a comprehensive financial review cycle, which
governance, risk management, internal control environment and
includes a comprehensive annual budgeting process. The annual
processes and reviews their effectiveness at least annually.
budget and the business plan, upon which the budget is based, is
reviewed and approved by the Board of Directors.
Once identified, risks are evaluated to establish their potential
financial or non-financial impact and the likelihood of their
Major commercial and financial risks are assessed as part of the
occurrence. For risks assessed as significant, mitigation action
business planning process. There is a comprehensive system of
plans are developed and implemented by operational business
financial reporting, with monthly performance reports presented to
management. The summary of key risks is regularly discussed with
the Board of Directors.
MHP management and reported at least annually to the Board of
Directors through the Audit Committee.
MHP has in place common accounting policies and procedures
across the Group on financial reporting and closing. Management
The Company has an independent Risk and Process Management
monitors the publication of new accounting and reporting
department whose activities are overseen by the Chief Financial
standards and works closely with the external auditors in evaluating
Officer and reported to the Audit Committee.
in advance the potential impact of these standards.
The Board of Directors, management and employees follows ethical
principles of doing business that are in line with the approved Conflict
of Interest Policy. This covers any transactions involving conflicts of
interest (whether actual or potential) of: (1) MHP’s management
team members, including directors of subsidiaries and branches
(“key management”); (2) MHP’s line managers who have authority
Compensation of key
management
to authorize transactions on behalf of MHP (“line managers”); (3)
Personnel
other MHP employees who are authorized to internally approve any
decisions as to significant provisions of transactions based on the
internal policies and instructions (“responsible employees”) or have
power to influence such decisions.
A full description of risks and their management is on page 15 of this
report.
Total compensation of the Group’s key management personnel
amounted to USD 8,421 thousand and USD 7,778 thousand for
the years ended 31 December 2016 and 2015 respectively.
Compensation of key management personnel consists of
contractual salary and performance bonuses.
Total compensation of the Group’s non-executive directors, which
consists of contractual fees, amounted to USD 451 thousand and
USD 496 thousand in 2016 and 2015, respectively.
Key management personnel totaled 40 individuals as of
31 December 2016 and 2015 respectively, including 3 and
4 independent directors as of 31 December 2016 and 2015
respectively.
23
CORPORATE
GOVERNANCE
OVERVIEW
Litigation statement on the
directors and officers
No member of the Board of Directors or of MHP’s senior management
had, for at least five years:
1. Any convictions relating to fraudulent offences;
2. Been a senior manager or a member of the administrative or
supervisory bodies of any company at the time of, or preceding, any
bankruptcy, receivership or liquidation; or
3. Deen subject to any official public incrimination and/or sanction
by any statutory or regulatory authority (including any designated
professional body) nor had ever been disqualified by a court
from acting as a member of the administrative, management or
supervisory bodies of a company, or from acting in the management
or conduct of the affairs of a company.
Transactions with related
parties
In December 2016 the Group increased its effective ownership
interest in Starynska breeding farm to 100% through the acquisition
of a non-controlling interest previously held by one of its key
management personnel in exchange for 531,395 treasury shares
held by the Group. As of 31 December 2016, these shares were
in the process of registration as owned by new shareholder. The
difference between fair value of shares transferred and their
carrying value in the amount of USD 2,901 thousand was recognized
as an adjustment to additional paid-in capital (Note 22).
Additional disclosures
At the date of this annual report, no takeover bids had been made to
acquire the Company’s shares. According to the terms of the Senior
Notes, the Company may be required to offer to repurchase the
Senior Notes from the holders if a change in control as a result of a
takeover bid occurs.
There are no agreements between the Company and its Directors
or employees providing for compensation on loss of office or
employment (whether through resignation, purported redundancy
or otherwise) that would occur because of a takeover bid.
24
Continued
3
NEDs
3
Executive Directors
2
Commitees
Senior Independent
Director since 2011
Corporate Governance
Charter since 2012
CORPORATE
GOVERNANCE
OVERVIEW
Continued
COMMITTEES
Nominations and
Remuneration Committee
Audit Committee
Dr John C Rich, Chairman*
John Grant
John Grant, Chairman
John C Rich
Philippe Lamarche
The Committee’s main tasks are:
The Committee’s main tasks are:
• To recommend to the Board the appointment or renewal of
• To review and monitor the integrity of the financial statements,
Directors, to review remuneration and monitor performance of
including the Annual Report and any formal announcements relating
the Board, and to make recommendations to the Board in respect
to financial performance.
of the necessary skills and experience required to improve the
functioning of the Board.
• To ensure compliance with legal and regulatory requirements.
• To monitor the performance of key officers of the Company
• To keep under review the effectiveness of the Company’s financial
and evaluate results versus stated objectives, to monitor training
reporting, risk management and internal control systems.
needs and programmes to improve employee effectiveness, to
ensure the Company develops successors for all key positions.
• To review the independence, objectivity and effectiveness of
• To oversee the development and approval by the Board of the
regarding the appointment, re-appointment and replacement of
Company’s overall compensation policy including its long-term
external auditors and their terms of engagement.
the external auditors, and make recommendations to the Board
incentive plans, to ensure that top managers are incentivized to
achieve and are compensated for exceptional performance,
• To review policy and practice regarding engaging the external
to oversee the maintenance and continuous improvement of
auditor to supply non-audit services.
the Company’s compensation policy with a view to aligning the
interests of employees with the interests of shareholders.
• To ensure compliance with accounting standards and consistency
• To submit for approval to the Board the compensation packages
of the CEO and of the Executive Management.
• To review and challeng the going concern assumption.
of accounting policies.
• To approve all external hiring of key officers.
• To review the Annual Report and financial statements to ensure
During 2016, the Committee held one meeting, which was
attended by all members of the Committee. (Note: a meeting took
During 2016, the Committee held 5 meetings. Each Committee
place in March 2016 under former Chairman, Mr Adriaenssen).
member attended 100% of the meetings.
they are fair, balanced and understandable.
The Audit Committee Report is on page 31.
* Mr Charles E Adriaenssen was Chairman of the Nominations and Remuneration Committee until 19 July 2016, when Dr John Rich replaced him as Chairman.
25
BOARD OF
DIRECTORS
26
Dr John C Rich
Non-executive Interim Chairman of the Board, Chairman of the
Nominations and Remunerations Committee, Member of the Audit
Committee
Dr Rich joined the board in 2006.
He is the Managing Director of Australian Agricultural Nutrition and
Consulting Pty Ltd (AANC) and is a specialist agri-business consultant
for the IFC and IFC invested clients. From 1990 to 2003, he was an
executive director of Austasia Pty Ltd, an agri-business conglomerate
which has operations in Australia, South East Asia and China, and
from 1995 to 2002 was a director of AN-OSI Pty Ltd, a company that
specialized in supply-chain management for feedlot beef, poultry
and dairy operations in Asia and Europe.
Dr Rich holds a BSc and a BVSc from the University of Sydney, is a
member of the Australian College of Veterinary Scientists and a
registered financial member of the Australian College of Veterinary
Surgeons.
He has completed a number of post-graduate courses in agricultural
and food-related industries.
John Grant
Senior Independent Director, Chairman of the Audit Committee,
Member of the Nominations and Remunerations Committee
Mr Grant joined the board in 2006.
He is currently Senior Independent Director of Melrose plc, a non-
executive director of Augean plc and Chairman of the British Racing
Drivers’ Club Ltd. He was previously a non-executive director of National
Grid plc, Pace plc, Wolfson Microelectronics plc and chairman or non-
executive director of a number of smaller companies. From 1992 to
1996, he was Finance Director of Lucas Industries plc and Lucas Varity
plc, and before that was Director of Corporate Strategy for Ford Motor
Company.
Mr Grant holds an MBA from Cranfield School of Management, a
BSc in Economics from Queen’s University Belfast and an Honorary
Doctorate in Engineering from University of Bolton.
Philippe Lamarche
Non-executive Director, Member of the Audit Committee
Mr Philippe Lamarche joined the board in 2011.
He is the Senior Private Banker of Banque Puilaetco Dewaay,
Luxembourg.
He holds a Degree in Law and Economics from The Catholic University
of Louvain (IAG).
Philippe Lamarche is a member of the Belgian Association of Financial
Analysts.
BOARD OF
DIRECTORS
Continued
Yuriy Kosyuk
Chief Executive Officer
Mr Kosyuk founded MHP in 1998 and is also the CEO of PJSC MHP.
In 1995 he founded the Business Centre for the Food Industry (BCFI) and
was President until 1999. BCFI operated in the domestic and export
markets for grain and other agricultural products.
Mr Kosyuk graduated as a processing engineer in meat and milk
production from the Kiev Institute of Food Industry in 1992.
Yuriy Melnyk
Chief Operating Officer
In July 2010 Yuriy Melnyk was appointed First Deputy CEO of Myronivsky
Hliboproduct (“MHP”).
Prior to joining MHP, Mr Melnyk held the position of Agricultural Minister
for Ukraine and Deputy Prime Minister of Ukraine, as well as serving
as an advisor to the Prime Minister of Ukraine. Mr Melnyk is a Doctor
of Agriculture and has been a correspondent member of National
Academy of Sciences of Ukraine from 2002. In 2004 he was awarded
the State Prize of Ukraine in science and technology.
He graduated from the Academy of Agriculture of Ukraine as a Zoo
engineer in 1985.
Viktoria Kapelyushnaya
Chief Financial Officer
Ms Kapelyushnaya, who is also Financial Director of PJSC MHP, joined
MHP in 1998 and was elected to the board in 2006. She was previously
Deputy Chief Accountant, then Chief Accountant, of BCFI. She
holds diplomas in meat processing engineering, 1992, and financial
auditing, 1998, from the Kiev Institute of Food Industry.
27
DIRECTOR’S
REPORT
Incorporated information
Disclosures elsewhere in the Annual Report are cross-referenced
where appropriate. Taken together, they fulfil the combined
requirements of the Companies Act 2006 and of the Disclosure and
Transparency Rules and the Listing Rules of the Financial Conduct
Authorities.
Principal activities and review
of the business
MHP is one of the leading agro-industrial companies and the largest
producer of chicken in Ukraine. The business is run on a vertically
integrated principle with the objective of making it self-sufficient and
is structured into three segments: Poultry and related operations,
Grain growing operations, and Other agricultural operations.
Poultry and related operations
This division produces and sells chicken meat, vegetable oil, mixed
fodder and convenience foods. It incorporates three chicken and
two breeder farms, three sunflower oil plants and a soya crushing
plant, three feed mills, and convenience food facilities.
In 2016 production of:
• three chicken meat facilities produced 573,003 tonnes of chicken
meat;
• two breeding farms produced 408,696,000 eggs;
• three sunflower oil plants produced 342,240 tonnes;
• one soya crushing plant produced 34,150 tonnes;
• three feed mill plants produced 1,593,520 tonnes;
• meat-processing plant produced 33,896 tonnes;
Grain growing operations
This division grows crops for fodder and for sale to third parties on
370,000 hectares of land incorporating a number of arable farms
in Ukraine and grain storage facilities of 1,585,000 m3 and over
377,000 tonnes capacity in plastic bags (land ‘sleeves’). In 2016
MHP harvested 355,000 hectares of land and gathered 2,351,491
tonnes of crops.
Other agricultural operations
This division produces and sells sausages and cooked meat, beef,
goose and foie gras, and fruit. It incorporates one mixed farm,
a goose farm and two facilities for producing prepared meat
products. Meat processing business is the flagship of the division
with 38,781 tonnes of production in 2016.
Future developments
The Group’s strategy is to:
• expand its poultry production capacity to around 730,000 tonnes
by 2020;
• expand its land bank in Ukraine to around 550,000 hectares within
the next 5 years to provide stability in the ingredients for fodder and
additional hard currency revenues from grain exports;
• continue expansion of poultry exports – market targeting,
diversification of sales, joint venture opportunities, sales and
distribution offices abroad;
• seek new business opportunities (e.g. acquisition) in meat-
processing business in international markets;
• increase the efficiency of production through modernization and
innovation, improvement in cost and quality controls, and use of
up-to-date technology deepening vertical integration;
• promote and further develop its strong brands through consumer-
driven innovations and introduction of new products;
• convenience food plant produced 10,218 tonnes.
• expand its processed meat business;
• invest in additional alternative energy projects (e.g. biogas);
• continue
to
improve already high biosecurity standards,
environmental, health and safety (EHS) and animal welfare
practices.
28
DIRECTOR’S
REPORT
Continued
Board meetings
Dividend policy
During 2016, the Board of Directors held eight meetings. Each director
attended 100 % of the meetings (sometimes via conference call).
Since 2011, the Board has conducted effectiveness reviews in order
to evaluate its performance as well as that of its committees and
individual directors. The evaluation process is normally initiated by
a questionnaire and then supplemented by individual interviews
by the Chairman with each of the directors. The conclusions are
analyzed by the Board to further strengthen its composition and
performance.
AGM
The next AGM meeting according will take place on 16 June 2017,
at 5, rue Guillaume Kroll, L-1882 Luxembourg.
In March 2013 the Board of Directors approved the adoption of a
dividend policy which maintained a balance between the need to
invest in further development and the right of shareholders to share
the net profit of the Company. The Company paid dividends of
US$ 80 million in 2016 and US$ 50 million of dividends in 2015. On 14
March 2017, the Board of Directors approved an interim dividend
for 2016 of US$ 0.7492 per share, equivalent to US$ 80 million.
Research and Development
MHP Group has consistently maintained a wide range of
research and development projects and actively integrates new
technologies throughout all its activities. Our target is to sustain
our position as a world leader in poultry production cost by being
highly efficient while at the same time sustaining a responsible
approach towards society, the environment and animal welfare.
Directors
The Directors of the Company as at the date of this Annual Report,
together with their biographic details, can be found on pages 26
and 27.
After 10 years of successful chairmanship, on 19 July 2016 Mr Charles
Adriaenssen announced his resignation as Chairman of the Board
of Directors of MHP S.A. and Chairman of the Nomination and
Remuneration Committee for family reasons, with immediate effect.
On the same date, Dr. John Rich was named interim Chairman of the
Board of Directors of MHP S.A. and Chairman of the Nomination and
Remuneration Committee. Dr. Rich has had ten years’ experience
on the Board of Directors of MHP S.A. as a Non-Executive Director
and is a consulting agribusiness industry specialist for IFC. On 14
March 2017, the Board confirmed Dr John Rich as Chairman of the
Board of Directors of MHP S.A. on a permanent basis.
Business review and risks
A review of the Group’s performance, including key risks and
uncertainties and likely developments, can be found in the
Chairman’s Statement on page 10 and the Risk Management
section on page 15 of this Annual Report.
CSR Reporting
In 2016, the Group initiated Corporate Social Responsibility (“CSR”)
reporting, with its first report being for 2015. The main stakeholders
and
issues covered were employees and employment
developments, local communities, clients and partners, and
international financial institutions (“IFIs”). The Company plans to
report on CSR annually and expects its 2016 CSR Report to be
issued in June 2017.
29
DIRECTOR’S
REPORT
Going concern
After reviewing the 2017 budget and longer-term plans, the Directors
are satisfied that, at the time of the approval of the financial
statements, it was appropriate to adopt the going concern basis in
preparing the financial statements of the Group.
Communication with
shareholders
The directors are committed to effective and clear communication
with the Group’s shareholders. During 2015, shareholders had a number
of meetings and discussions with Board members, predominantly with
Mr Yuriy Kosyuk, Mr Yuriy Melnyk, amd Ms Victoria Kapelyushnaya,
including meetings at conferences and regular conference calls.
To facilitate communication with independent directors, the board
has introduced a direct communication channel with independent
directors (details can be found on http://www.mhp.com.ua/en/
investor-relations/ir-contacts).
Disclosure of information to
auditors
So far as each director is aware, all information which is relevant to
the audit of the Group’s consolidated financial statements has been
supplied to the Group’s auditors. Each director has taken all steps
that he/she ought reasonably to have taken in his/her duty as a
director in order to make himself/herself aware of any relevant audit
information, and to establish that the Group’s auditors are aware of
that information.
30
Continued
Dividend Policy since 2013
2016 Dividend US$ 80 million
CSR Report since 2016
Next AGM: 16 June 2017
Approval
Approved by the Board and signed on its behalf by:
Corporate Secretary
Anastasiya Sobotyuk
AUDIT COMMITTEE
REPORT
The responsibilities of the Audit
Committee (the “Committee”)
include overseeing financial
reporting, risk management and
internal controls and making
recommendations to the Board
regarding the appointment of
external and internal auditors
John Grant, Chairman
of the Audit Committee
Role and responsibilities
The Committee’s role and responsibilities are set out in its terms
of reference, which are available on the Company’s website:
http://www.mhp.com.ua/en/investor-relations/corporate-
governance/MHP-S-A-Luxembourg/terms-of-references-of-
committees. The Committee accepts
its
responsibility
for
protecting the interests of shareholders with respect to the
integrity of financial information published by the Company and
the effectiveness of the audit.
The Committee is
responsible specifically for:
• reviewing and monitoring the integrity of the financial statements,
including the Annual Report and any formal announcements
relating to financial performance;
• ensuring compliance with legal and regulatory requirements;
• keeping under review the effectiveness of the Company’s
financial reporting, risk management and internal control systems;
• reviewing the independence, objectivity and effectiveness of
the external auditors, and making recommendations to the Board
regarding the appointment, re-appointment and replacement
of external auditors and their terms of engagement;
• reviewing policy and practice regarding engaging the external
auditor to supply non-audit services;
• considering the requirement for, and monitoring the effectiveness
of, the internal audit function;
• ensuring compliance with accounting standards and consistency
of accounting policies;
• reviewing and challenging the going concern assumption;
• reviewing the Annual Report and financial statements to ensure
they are fair, balanced and understandable.
31
AUDIT COMMITTEE
REPORT
Continued
Composition
Significant issues related to
the financial statements
The Committee comprises a minimum of two (currently three)
The Committee undertook the following recurring activities in
non-executive directors, each of whom is deemed by the Board
relation to the financial statements:
to be independent. The Chairman of the Committee is John
Grant, who has recent and relevant financial experience from
• reviewed the Annual Report and annual and quarterly financial
senior executive and/or non-executive roles (see biography on
statements, including consideration of the external auditor’s
page 26).
report on their audit of the full year results;
The Committee invites the Chief Financial Officer, the Head
• considered the processes in place for the valuation of assets,
of Internal Control, the Head of Internal Audit and senior
including the reasonableness and consistency of assumptions;
representatives of the external auditor to attend meetings
as appropriate. The Committee has the right to invite any
• reviewed the effectiveness of the Company’s risk management
other director or employee to attend meetings as it considers
and internal controls;
appropriate.
The Committee meets with the external auditors at least once a
financial statements to ensure they were fair, balanced and
• considered the Annual Report and annual and quarterly
year in the absence of management.
Meetings in the year
understandable, and provided the information necessary for
shareholders to assess the company’s position and performance,
business model and strategy, and advised the board accordingly;
• reviewed and agreed the scope of the audit work to be
The Committee meets at least four times a year. The scheduling
undertaken by the external auditor.
of meetings is intended to align with the financial reporting
timetable, enabling the Committee to review the annual
and quarterly financial statements, to agree the audit plan in
advance of the full year audit, and to maintain oversight of the
internal controls and processes. In 2016, the Committee met five
times, including an extra meeting to consider and implement the
results of a tender for provision of external audit services.
The attendance of members at these meetings is shown in the
table above.
32
Member
No of meetings
John Grant
(Chairman)
John C Rich
Philippe
Lamarche
5
5
5
AUDIT COMMITTEE
REPORT
Continued
In addition, the Committee
considered the following
significant issues in relation
to the financial statements:
Significant issue considered
How the issue was addressed by the Committee
Valuation of property, plant and equipment
The Company applies a revaluation model to the valuation of grain storage
facilities and, since 2014, for vehicles, agricultural and production machinery,
and for buildings and structures.
The Committee reviewed management’s approach, including the
use of an independent external valuation expert, and assessed the
competence and independence of the valuer and verified that the
methods and assumptions used were appropriate and consistent
with accounting standards.
Valuation of agricultural assets
Valuation of agricultural assets requires the use of complex models to arrive at
fair values.
The Committee has tested the assumptions and judgements applied
by management and verified the reasonableness of input data and
the accuracy of calculations.
Revenue recognition
Auditors are required to investigate the risk of misstatement of revenue
recognition.
The Committee has undertaken appropriate testing procedures and
that no material misstatements had been identified.
Compliance with bond and bank covenants
Continued compliance with covenants included in bond and bank debt
agreements is a prime focus for the Committee.
The Committee has performed appropriate stress tests taking
account of potential depreciation of the Ukrainian currency due to
ongoing crisis.
No of meetings
Tax risks
In view of the ambiguity of tax legislation, certain transactions may be
challenged by the relevant governmental authorities
The Committee has performed appropriate procedures to evaluate
the Company’s tax position and risk and the accuracy of tax
contingency disclosures.
Ukraine country risk
In view of the continuing crisis in Ukraine, the Committee required assurance
that the implications had been fully recognised in considering the Company’s
status as a going concern
The Committee has performed procedures to check the Company’s
exposure to political, economic and legal risks. The appropriate
safeguards were in place to mitigate these risks, and that all relevant
disclosures were made in the financial statements.
Going concern
Assessment of the going concern assumptions, taking account of political and
economic uncertainties in Ukraine
The Committee reviewed the assumptions underlying the assessment
of the Company’s ability to continue as a going concern and,
after considering the stress test, supported management’s
recommendation that the going concern assumption continued to
be appropriate due to potential depriciation of Ukrainian currency.
33
AUDIT COMMITTEE
REPORT
Continued
External Audit
Auditor rotation
Non-audit services
In accordance with European regulatory requirements and the
A policy is in place covering engagement of the external
guidance provided by the Competition and Markets Authority
auditor for the supply of non-audit services to ensure that the
regarding the statutory audit of public-interest entities, the
independence and objectivity of the external auditor are not
Company was required to conduct a tender process to select
impaired. An analysis of fees earned by the external auditor
the provider of the statutory audit with effect from the 2017
for audit and non-audit services can be found in Note 8 to the
financial year. Deloitte Audit Société à responsabilité limitée had
financial statements.
been the Company’s auditor since 2003. In September 2016, the
Company invited proposals from the four largest international
Under new EU and Competition Commission rules that became
audit firms. The selection process included:
effective in January 2017, new restrictions will apply from 2020
limiting the cost of non-audit services provided by the external
• meetings with management to more clearly define the scope
auditor to 70% of the average audit fee for the previous three
of work;
years. Although this is not expected to have a material impact on
the Company, the audit tender process provided the opportunity
• submission of written proposals for review by management and
to build relationships with other firms that could provide non-audit
the Committee;
services in future. It is the Committee’s intention to use these
relationships to ensure future provision of non-audit services is
• short-listing by the Committee of candidates deemed to have
diversified so as to ensure both independence of the external
the strongest capabilities;
audit and best quality and best value provision of non-audit
• presentations by the short-listed candidate teams to
management and the Committee;
Auditor objectivity and independence
services.
• decision by the Committee.
The Committee has a policy and procedures in place to ensure
that auditor independence and objectivity is never compromised.
These include approval requirements for engagement of the
The final steps in the process took place in December 2016, at
external auditor for non-audit services, periodic review of the
which point the Committee concluded, based on its assessment
cost of non-audit services provided by the external auditor and
of which firm had the strongest capabilities, that Deloitte Audit
requirements for rotation of the audit partner every 5 years.
Société à responsabilité
limitéeshould be re-appointed as
Each year, the auditor is required to provide evidence to the
statutory auditor.
Assessment of effectiveness
Committee of how it believes its independence and objectivity
have been maintained. Based on these requirements and
procedures, the Committee remains confident that auditor
In view of the auditor selection process, it was not considered
independence and objectivity have been maintained.
necessary to conduct a separate formal assessment of auditor
effectiveness in 2016. The Committee remains satisfied with the
quality, integrity and effectiveness of the work undertaken by
Deloitte Audit Société à responsabilité limitée.
34
AUDIT COMMITTEE
REPORT
Continued
Internal Audit
In recognition of the increased scale and complexity of the
Company, an Internal Audit function was put in place in 2011
with the primary purpose of providing independent assurance to
management and the Committee, and hence the Board, on the
Company’s risk management and control environment. Internal
Audit coverage includes all of the Company’s operations, resources,
services and responsibilities to other bodies, with no department or
business unit of the Company being exempt from review.
Internal Audit responsibilities include:
• examining and evaluating the adequacy of the Company’s
system of internal control;
Risk management and internal control
The Committee monitors the effectiveness of the Company’s risk
management and control systems through regular updates from
management, reviews of the key findings of the external and
internal auditors and an annual review of the risk management
process and risk matrix. Results are reported regularly to the
Board, which has overall responsibility for risk management.
The annual review covers key risks that could potentially impact
the achievement of MHP’s strategic and financial objectives.
New risks and changes in existing risks are identified on a
continuous basis. A risk scoring system is used to help quantify
both the probability and potential impact of each major risk
after the effect of mitigating actions, to assess residual risks
against the Company’s risk appetite, and to prioritise further risk
• assessing the reliability and accuracy of information provided
management actions.
to stakeholders;
• assessing compliance with statutory and regulatory requirements;
identified at any time during the year.
No incidents of significant control weaknesses or failures were
• assessing compliance with Company policies and procedures;
• ensuring that the Company’s assets are properly accounted for
and safeguarded;
• assessing the efficiency and effectiveness with which resources
are employed;
• liaising with external auditors in audit planning and assisting the
external auditors as required;
• investigating any instances of fraud, irregularity or corruption.
The Internal Audit programme is approved annually by the
Committee and the Head of Internal Audit reports findings
periodically to the Committee. During 2016, implementation of
the Internal Audit programme was delayed following departure
of the Head of Internal Audit to another company. A search for
a suitably qualified replacement is in process.
John Grant Chairman,
Audit Committee
35
FINANCIAL RESULTS FOR
THE YEAR ENDED 31
DECEMBER 2016
MHP S.A. (LSE:MHPC), one of the leading agro-industrial companies in Ukraine,
focusing on the production of poultry and cultivation of grain, today announces its
results for the twelve months and fourth quarter ended 31 December 2016.
In view of management’s intention to dispose of the MHP companies located in the
Autonomous Republic of Crimea (ARC), these assets were classified as discontinued
operations. As previously announced, the sale of all these companies was completed
on 17 February 2017. The profit or loss after tax from discontinued operations is shown
as a single amount in the statement of comprehensive income. Comparative figures
have been adjusted to represent results of continuing operations only.
OPERATIONAL HIGHLIGHTS
12M 2016 highlights
10%
in poultry production
52%
in poultry export
• Poultry production volumes reached 573,003 tonnes, up by 10%
year-on-year (12M 2015: 519,495 tonnes)
• The average chicken meat price increased by 10% year-on-
year to UAH 29.81 per kg (12M 2015: UAH 27.19 per kg) (excluding
VAT)
• Chicken meat exports increased by 52% to 189,939 tonnes
(12M 2015: 124,604 tonnes) as a result of increased exports to the
MENA countries, the EU and Africa
• Starting from July 2016, following expansion of its breeding
farms, MHP became self-sufficient in hatching eggs
• The Company established processing plant in the EU and a
sales office in the Middle East as part of its export strategy
36
FINANCIAL RESULTS FOR
THE YEAR ENDED 31
DECEMBER 2016
Continued
FINANCIAL HIGHLIGHTS
12M 2016 highlights
7%
Revenue
21%
Export Revenue
37%
EBITDA margin
• Revenue of US$ 1,135 million, increased by 7% year-on-year
(12M 2015: US$1,062 million)
• Export revenue amounted to US$ 635 million, 56% of total
revenue (12M 2015: US$ 524 million, 49% of total revenue)
• Operating profit of US$ 316 million decreased by 9%; operating
margin was 28%
• EBITDA margin decreased to 37% from 41%; EBITDA decreased
to US$ 415 million from US$ 436 million
• Net profit for the period is US$ 69 million, compared to loss of
US$ 113 million for 12M 2015, including US$ 145 million (12M 2015:
US$ 390 million) of non-cash foreign exchange translation loss
Net Profit US$ 69 million
37
FINANCIAL RESULTS FOR
THE YEAR ENDED 31
DECEMBER 2016
Continued
FINANCIAL OVERVIEW
(in mln. US$, unless indicated otherwise)
12M 2016
12M 2015
% change*
Revenue
IAS 41 standard gains/(losses)
Gross profit
Gross profit margin
Operating profit**
Operating profit margin
EBITDA
EBITDA margin
Net profit before foreign exchange differences
Net profit margin before forex gain/(loss)
Foreign exchange gain/(loss)
Net profit (loss)
Net profit margin
1,135
39
362
32%
316
28%
415
37%
214
19%
(145)
69
6%
1,062
20
342
32%
347
33%
436
41%
277
26%
(390)
(113)
-11%
7%
95%
6%
0 pps
-9%
-5 pps
-5%
-4 pps
-23%
-7 pps
-63%
-161%
17 pps
* pps – percentage points
** Operating profit before loss on impairment of property, plant and equipment
Average official FX rate for 12 months: UAH/US$ 25.5458 in 2016 and UAH/US$ 21.8290 in 2015
SEGMENT PERFORMANCE
Poultry and related operations
Sales volume, third parties tonnes
Export sales volume, third parties tonnes
Price per 1 kg net of VAT, UAH
Sunflower oil
Sales volume, third parties tonnes
Soybeans oil
Sales volume, third parties tonnes
12M 2016
12M 2015
% change*
534,977
189,939
29.81
489,816
124,604
27.19
342,240
286,745
9%
52%
10%
19%
34,150
13,950
145%
As a result of increased production, the aggregate volume of chicken meat sold to third parties increased by 9% during 12M 2016. Export
sales in 12M 2016 increased by 52% to 189,939 tonnes, constituting 36% of total poultry sales. During the reporting period (12M 2016), in line
with our export diversification strategy, sales to the Middle East countries increased year-over-year by 67%, in the EU by 29%, and in Africa
by more than 4 times. As a result of higher exports, domestic sales decreased slightly to 345,038 tonnes in 12M 2016 (12M 2015: 365,212
tonnes).
38
(in mln. US$, unless indicated otherwise)
12M 2016
12M 2015
% change*
Revenue
IAS 41 standard gains/(losses)
Gross profit
Gross profit margin
Operating profit**
Operating profit margin
EBITDA
EBITDA margin
Net profit before foreign exchange differences
Net profit margin before forex gain/(loss)
Foreign exchange gain/(loss)
Net profit (loss)
Net profit margin
Sales volume, third parties tonnes
Export sales volume, third parties tonnes
Price per 1 kg net of VAT, UAH
Sunflower oil
Soybeans oil
Sales volume, third parties tonnes
Sales volume, third parties tonnes
1,135
39
362
32%
316
28%
415
37%
214
19%
69
6%
(145)
1,062
20
342
32%
347
33%
436
41%
277
26%
(390)
(113)
-11%
7%
95%
6%
0 pps
-9%
-5 pps
-5%
-4 pps
-23%
-7 pps
-63%
-161%
17 pps
9%
52%
10%
19%
FINANCIAL RESULTS FOR
THE YEAR ENDED 31
DECEMBER 2016
Continued
Through 12M 2016, the aggregate average chicken meat price was UAH 29.81 respectively, 10% higher compared to 12M 2015 in Hryvnia
terms. The average chicken meat price on the domestic market increased by 14% during 12M 2016 compared to 12M 2015. At the same
time the US$ denominated export price for chicken meat decreased by 16% during 12M 2016 compared to 12M 2015, in line with global
commodity trends.
During 12M 2016 MHP’s sales of sunflower oil increased by 19% compared to 12M 2015 and reached 342,240 tonnes mainly as a result of
increased sale of sunflower cake to third parties as well as an increased percentage of oil extraction. Sales of soybean oil have increased
substantially in line with increased production of our soybean crushing plant.
(in mln. US$, unless indicated otherwise)
12M 2016
12M 2015
% change*
Revenue
- Poultry and other
- Vegetable oil
IAS 41 standard gains/(losses)
Gross profit
Gross margin
EBITDA
EBITDA margin
12M 2016
12M 2015
% change*
EBITDA per 1 kg (net of IAS 41)
* pps – percentage points
534,977
189,939
29.81
489,816
124,604
27.19
970
678
292
5
242
25%
270
28%
0.50
878
644
234
20
275
31%
343
39%
0.66
10%
5%
25%
-75%
-12%
-6 pps
-21%
-11 pps
-24%
342,240
286,745
decrease in international export prices for chicken.
In 12M 2016, revenue increased by 10% as a result of the increase in sales volumes of chicken meat and vegetable oil, partly offset by a
34,150
13,950
145%
Gross profit of the poultry and related operations segment for 12M 2016 decreased by 12% compared to 12M 2015 mainly as a result of the
decrease in sales price (in dollar terms) and the fair value adjustment to parent stock.
EBITDA for 12M 2016 has decreased by 21% , mainly due to decrease in gross profit as a result of lower export prices as well as due to reduction
in VAT refunds due to changes in the Ukraine Tax Code that became effective on 1 January 2016.
39
FINANCIAL RESULTS FOR
THE YEAR ENDED 31
DECEMBER 2016
Continued
SEGMENT PERFORMANCE
Grain growing operations
IIn 2016 MHP harvested 355,000 hectares of land in Ukraine. MHP’s harvest yielded around 2.3 million tons of crops, 24% more than
in 2015, mainly as a result of higher yields of corn, soybeans and wheat due to favorable weather conditions during 2016 as well as
operational efficiency and employment of best practices.
2016 [1]
2015 [1]
Production volume
in tonnes
1,056,887
379,693
218,049
98,607
68,325
529,930
2,351,491
Corn
Wheat
Sunflower
Soybeans
Rapeseed
Other [2]
Total
Cropped
land
in hectares
123,350
58,813
67,399
40,771
20,069
44,598
355,000
Production volume
in tonnes
841,745
322,055
176,170
56,650
76,385
418,690
1,891,695
Cropped
land
in hectares
125,994
53,752
57,541
35,831
22,653
44,229
340,000
[1] Only land of grain growing segment;
[2] Including barley, rye, sugar beet, sorghum and other and excluding land left fallow as part of crop rotation;
2016
2015
Corn
Wheat
Sunflower
Rapeseed
Soya
MHP’s
average [1]
8.6
6.5
3.2
3.4
2.4
Ukraine’s average [1]
6.6
4.6
2.2
2.6
2.3
[1] MHP yields are net weight, Ukraine – bunker weight;
MHP’s
average [1]
6.7
6.0
3.1
3.4
1.6
Ukraine’s average [1]
5.7
3.9
2.2
2.6
1.9
(in mln. US unless
indicated otherwise)
Revenue
IAS 41 standard gains
Gross profit
EBITDA
EBITDA per hectare
12M 2016
12M 2015
% change
85
32
107
150
423
117
(3)
55
94
276
-27%
n/a
95%
60%
53%
Grain growing segment’s revenue for 12M 2016 amounted to US$ 85 million compared to US$ 117 million in 12M 2015. The decrease
is mainly attributable to lower amounts of crops in stock designated for sale as of 31 December 2015 as a result of low yields in 2015.
IAS 41 standard gain for 12M 2016 amounted to US$ 32 million. The gain represents the effect of revaluation of agricultural produce
(sunflower, corn, wheat and soya) remaining in stock as of 31 December 2016. The increase in IAS 41 gains is mainly related to higher
stocks as of 31 December 2016 compared to 2015 (due to higher yields and production volume in 2016) as well as higher prices on the
domestic market caused by the return of a zero VAT regime for grain exports in 2016.
Grain segment EBITDA for the 12M 2016 increased by 60% compared to 12M 2015 due to higher domestic grain prices (compared to
2015) and higher yields. VAT refunds decreased as a result of changes in tax legislation, although this was partly offset by an increase
in grain prices on the domestic market due to the return of the zero VAT regime for grain exports.
40
FINANCIAL RESULTS FOR
THE YEAR ENDED 31
DECEMBER 2016
Continued
SEGMENT PERFORMANCE
Other agricultural operations
Meat processing products
Sales volume, third parties tonnes
Price per 1 kg net VAT, UAH
12M 2016
33,896
42.40
12M 2015
24,520
39.28
% change
38%
8%
2015 [1]
Production volume
The main driver of the segment is meat processing operations.
Sales volume of meat processing products substantially increased by 38% year-on-year to 33,896 tonnes in 12M 2016,
mainly as a result of a new product promotion strategy and advertisement campaign not only for the product range, but
also for the brand.
The average processed meat price increased by 8% year-over-year to UAH 42.40 per kg in 12M 2016, mostly in line with
the increase in the price of poultry.
(in mln. US$, except margin data)
12M 2016
12M 2015
% change
Revenue
- Meat processing
- Other
IAS 41 standard gains
Gross profit
Gross margin
EBITDA
EBITDA margin
* pps – percentage points
80
55
25
2
13
16%
12
15%
66
44
22
3
12
18%
11
17%
21%
25%
14%
-33%
8%
-2 pps
9%
-2 pps
Segment revenue for the 12M 2016 increased by 21% year-on-year, in line with the increase in sales volume and price in
meat processing, to US$ 80 million. The segment’s EBITDA increased to US$ 12 million in 12M 2016 compared to US$ 11million
in 12M 2015, an increase by 9% year-on-year, mostly in line with the increase in gross profit.
in tonnes
841,745
322,055
176,170
56,650
76,385
418,690
1,891,695
Cropped
land
in hectares
125,994
53,752
57,541
35,831
22,653
44,229
340,000
41
FINANCIAL RESULTS FOR
THE YEAR ENDED 31
DECEMBER 2016
Continued
CURRENT GROUP FINANCIAL
POSITION AND CASH FLOW
DEBT STRUCTURE AND
LIQUIDITY
(in mln. US$)
12M 2016
12M 2015
(in mln. US$)
31 December
2016
30 September
2016
31 December
2015
Total Debt
LT Debt
ST Debt
Cash and bank
deposits
Net Debt
LTM EBITDA
Net Debt / LTM
EBITDA
1,236
991
245
(155)
1,081
415
2.60
1,238
968
270
(78)
1,160
409
2.84
1,279
1,016
263
(59)
1,220
436
2.80
Cash from operations
Change in working
capital
inc. PXF financing
Net Cash from
operating activities
Cash used in investing
activities
Non-cash financing
CAPEX
Cash from financing
activities
Inc. Dividends
Non-cash financing
Deposits
Total financial
activities
Total change in cash
273
52
(24)
325
(108)
(4)
(112)
(120)
(84)
4
-
(116)
97
335
(144)
80
191
(163)
(7)
(170)
(65)
(50)
7
-
(58)
(37)
Cash flow from operations before changes in working capital for 12M 2016 amounted to US$ 273 million (12M 2015: US$ 335 million). The lower cash
generation compared to EBITDA is mainly attributable to a non-cash IAS 41 gain on revaluation of crops that will be realized in 2017.
Positive cash flow from changes in working capital during 12M 2016 compared to 12M 2015 is mostly related to lower investment in sunflower
seed used for poultry feed during 12M 2016 compared to 12M 2015 and reimbursement of VAT receivable in 2016.
During 12M 2016 total CAPEX amounted to US$ 112 million mainly related to expansion of the Starynska breeding farm as well as rearing sites
expansion at Vinnitsa, Myronivka and Oril Leader poultry complexes and purchases of agricultural machinery.
As of 31 December 2016, the Group’s Net Debt / LTM EBITDA ratio improved to 2.60 compared with 2.80 as of 31 December 2015, well within
the Eurobond covenant limit of 3.0.
Net debt decreased to US$ 1,081 million compared with US$ 1,220 million as at 31 December 2015, with cash and bank deposits of US$ 155
million compared with US$ 59 million as at 31 December 2015.
Debt structure remained relatively unchanged compared to 31 December 2015, with long-term debt representing about 80% of the total
outstanding. The weighted average interest rate was around 8%.
As a hedge for currency risks, revenues from the export of grain, sunflower and soybean oil, sunflower husks and chicken meat are denominated
in US Dollars, more than covering debt service expenses. Export revenues for 12M 2016 amounted to US$ 635 million or 56% of total revenue (US$
524 million or 49% of total sales for 12M 2015).
42
FINANCIAL RESULTS FOR
THE YEAR ENDED 31
DECEMBER 2016
Continued
DIVIDENDS
On 16 March 2016, the Board of Directors of MHP S.A. approved payment of an interim dividend of US$ 0.7529 per share for 2015, equivalent to
approximately US$ 80 million. This was paid to shareholders in March 2016.
On 14 March 2017, the Board of Directors of MHP S.A. approved payment of an interim dividend of US$ 0.7492 per share, equivalent to approximately
US$ 80 million. According to press release web link: http://www.mhp.com.ua/en/investor-relations/press-releases, this will paid to shareholders on
29 March 2017.
CHAIRMAN RESIGNATION/
APPOINTMENT
On 19 July, 2016, Mr. Charles Adriaenssen, Chairman of the Board of Directors of MHP S.A. and Chairman of the Nomination and Remuneration
Committee, resigned for personal reasons. Dr. John Rich has been named interim Chairman of the Board of Directors of MHP S.A. and
Chairman of the Nomination and Remuneration Committee. On 14 March 2017, the Board confirmed Dr John Rich as Chairman of the Board
of Directors of MHP S.A. on a permanent basis.
OUTLOOK
MHP’s outlook for the 2016 harvest of winter wheat and winter rapeseeds is positive.
The main developments in 2017 will be:
- Start of construction of Phase 2, Line 1 of the Vinnytsia complex, to provide 130,000 tonnes additional capacity;
- An increase in export sales of chicken meat across all regions to an expected 220,000 tonnes;
- Market targeting in export sales to ensure the right product mix combined with the optimal geographic allocation;
- Start of construction of an alternative energy project at Vinnytsia.
We are confident that, with our vertically integrated business model, we will continue to deliver strong financial results, supported by a
significant and growing share of hard currency revenues from exports of chicken, oils and grain.
43
STATEMENT OF THE BOARD OF
DIRECTORS’ RESPONSIBILITIES FOR
THE PREPARATION AND APPROVAL
OF THE CONSOLIDATED FINANCIAL
STATEMENTS FOR THE YEAR ENDED
31 DECEMBER 2016
The Board of Directors is responsible for the preparation of the
consolidated financial statements that present fairly the financial
position of MHP S.A. and its subsidiaries (the “Group” or the
“Company”) as of 31 December 2016 and the results of its operations,
cash flows and changes in equity for the year then ended, in
accordance with International Financial Reporting Standards as
adopted in the European Union (“IFRS”).
In preparing the consolidated financial statements, the Board of
Directors is responsible for:
• properly selecting and applying accounting policies;
• presenting information, including accounting policies, in a manner
that provides relevant, reliable, comparable and understandable
information;
Board of Directors’
responsibility statement
We confirm that, to the best of our knowledge, the Consolidated
Financial Statements as of and for the year ended 31 December
2016 have been prepared in accordance with International
Financial Reporting Standards (IFRS) as adopted by the European
Union and give a true and fair view of the assets, liabilities, financial
position and results of the Company and the undertakings
included in the consolidation taken as a whole. We also confirm
that, to the best of our knowledge, the 2016 Director’s Report and
Consolidated Financial Statements include a fair review of the
development and performance of the business and the position of
the Company and the undertakings included in the consolidation
taken as a whole, together with a description of the principal risks
• providing additional disclosures when compliance with the specific
and uncertainties they face.
requirements in IFRSs are insufficient to enable users to understand the
impact of particular transactions, other events and conditions on the
Group’s consolidated financial position and financial performance; and
On behalf of the Board:
•making an assessment of the Group’s ability to continue as a going
Chief Executive Officer
Yuriy Kosyuk
concern.
Chief Financial Officer
Viktoria Kapelyushnaya
The Board of Directors, within its competencies, is also responsible for:
• designing, implementing and maintaining an effective and sound
system of internal controls, throughout the Group;
• maintaining adequate accounting records that are sufficient
to show and explain the Group’s transactions and disclose with
reasonable accuracy at any time the consolidated financial position
of the Group, and which enable them to ensure that the consolidated
financial statements of the Group comply with IFRS;
• maintaining statutory accounting records in compliance with local
legislation and accounting standards in the respective jurisdictions;
• taking such steps as are reasonably available to them to safeguard
the assets of the Group; and
• preventing and detecting fraud and other irregularities.
The consolidated financial statements of the Group for the year
ended 31 December 2016 were authorized for issue by the Board of
Directors on 14 March 2017.
44
INDEPENDENT
AUDITOR’S
REPORT
to the Shareholders of MHP S.A. 5, rue Guillaume
Kroll L-1882 Luxembourg
Report on the consolidated financial statements
Following our appointment by the General Meeting of the Shareholders, we have audited the accompanying consolidated financial
statements of MHP S.A. and its subsidiaries, which comprise the consolidated statement of financial position as of December 31, 2016, the
consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash
flows for the year then ended, and a summary of significant accounting policies and other explanatory information.
Responsibility of the Board of Directors for the Consolidated Financial Statements
The Board of Directors is responsible for the preparation and fair presentation of these consolidated financial statements in accordance
with International Financial Reporting Standards as adopted in the European Union, and for such internal control the Board of Directors
determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether
due to fraud or error.
Responsibility of the réviseur d’entreprises agréé
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit
in accordance with International Standards on Auditing as adopted for Luxembourg by the Commission de Surveillance du Secteur
Financier. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable
assurance whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on the Réviseur d’Entreprises Agréé’s judgement including the assessment of the risks
of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the
Réviseur d’Entreprises Agréé considers internal control relevant to the entity’s preparation and fair presentation of the consolidated
financial statements 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 entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies
used and the reasonableness of accounting estimates made by the Board of Directors, as well as evaluating the overall presentation of
the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial position of MHP S.A. and its
subsidiaries as of December 31, 2016, and of its consolidated financial performance and its consolidated statement of cash flows for the
year then ended in accordance with International Financial Reporting Standards as adopted in the European Union.
Other information
The Board of Directors is responsible for the other information. The other information comprises the information included in the annual
report, including the Corporate Governance section of the management report, but does not include the consolidated financial
statements, the annual accounts of the parent company, and our reports of Réviseur d’Entreprises Agréé thereon.
Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance
conclusion thereon.
45
INDEPENDENT
AUDITOR’S
REPORT
to the Shareholders of MHP S.A. 5, rue Guillaume
Kroll L-1882 Luxembourg
Continued
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information 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. If, based on the work we have performed, we conclude that there is a material
misstatement of this other information, we are required to report this fact. We have nothing to report in this regard.
Other matter
The Corporate Governance overview of the director`s report includes the information required by Article 68bis paragraph (1) of the law
of December 19, 2002 on the commercial and companies register and on the accounting records and annual accounts of undertakings,
as amended.
Report on other legal and regulatory requirements
The director`s report is consistent with the consolidated financial statements and has been prepared in accordance with the applicable
legal requirements.
The information required by Article 68bis paragraph (1) letters c) and d) of the law of December 19, 2002 on the commercial and
companies register and on the accounting records and annual accounts of undertakings, as amended and included in the Corporate
Governance overview of the director`s report is consistent with the consolidated financial statements and has been prepared in
accordance with applicable legal requirements.
For Deloitte Audit, Cabinet de Révision Agréé
John Psaila, Réviseur d’Entreprises Agréé
Partner
March 14, 2017
For Deloitte Audit, Cabinet de révision agréé ______________, Réviseur d’entreprises agréé
Partner
46
CONSOLIDATED STATEMENT OF
COMPREHENSIVE INCOME
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continuing operations
Revenue
Net change in fair value of biological assets and agricultural produce
Cost of sales
Gross profit
Selling, general and administrative expenses
VAT refunds and other government grants income
Other operating (expense)/income, net
Impairment of property, plant and equipment
Operating profit
Finance income
Finance costs
Loss on disposal of subsidiaries
Foreign exchange loss, net
Other expenses, net
Other expenses, net
Profit/(Loss) before tax
Income tax benefit
Profit/(Loss) for the period from continuing operations
Discontinued operations
Loss for the period from discontinued operations
Profit/(Loss) for the period
Notes
2016
6
7
8
9
12
10
2
32
11
2
1,135,462
38,894
(812,250)
362,106
(78,773)
34,056
(1,125)
(1,443)
314,821
2,234
(106,843)
-
(145,217)
(9,289)
(259,115)
55,706
13,080
68,786
(9,538)
59,248
2015
1,061,915
19,851
(739,436)
342,330
(72,329)
75,435
1,315
-
346,751
2,567
(105,571)
(4,725)
(389,557)
(3,346)
(500,632)
(153,881)
41,142
(112,739)
(12,987)
(125,726)
The accompanying notes on the pages 53 to 110 form an integral part of this Annual Report.
47
CONSOLIDATED STATEMENT
OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED
31 DECEMBER 2016
(in thousands of US dollars, unless otherwise indicated)
Other comprehensive income/(loss)
Items that will not be reclassified to profit or loss:
Effect of revaluation of property, plant and equipment
Deferred tax on revaluation of property, plant and equipment charged directly to other
comprehensive income
Items that may be reclassified to profit or loss:
Cumulative translation difference
Other comprehensive income/(loss)
Total comprehensive income/(loss) for the year
Profit/(Loss) attributable to:
Equity holders of the Parent
Non-controlling interests
Total comprehensive income/(loss) attributable to:
Equity holders of the Parent
Non-controlling interests
Continued
Notes
2016
2015
12
11
22
113,317
(16,143)
(51,918)
45,256
104,504
53,452
5,796
59,248
97,302
7,202
104,504
224,142
(30,842)
(292,103)
(98,803)
(224,529)
(133,399)
7,673
(125,726)
(212,847)
(11,682)
(224,529)
Earnings/(loss) per share from continuing and discontinued operations
Basic and diluted earnings/(loss) per share (USD per share)
0.50
(1.26)
Earnings/(loss) per share from continuing operations
Basic and diluted earnings/(loss) per share (USD per share)
34
0.60
(1.13)
The accompanying notes on the pages 53 to 110 form an integral part of this Annual Report.
On behalf of the Board:
Chief Executive Officer
Yuriy Kosyuk
Chief Financial Officer
Viktoria Kapelyushnaya
48
CONSOLIDATED STATEMENT
OF FINANCIAL POSITION
for the year ended
31 December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
Notes
31 December 2016
31 December 2015
ASSETS
Non-current assets
Property, plant and equipment
Land lease rights
Deferred tax assets
Non-current biological assets
Long-term bank deposits
Other non-current assets
Current assets
Inventories
Biological assets
Agricultural produce
Other current assets, net
Taxes recoverable and prepaid
Trade accounts receivable, net
Cash and cash equivalents
Assets classified as held for sale
TOTAL ASSETS
EQUITY AND LIABILITIES
Equity
Share capital
Treasury shares
Additional paid-in capital
Revaluation reserve
Retained earnings
Translation reserve
Equity attributable to equity holders of the Parent
Non-controlling interests
Total equity
Non-current liabilities
Bank borrowings
Bonds issued
Finance lease obligations
Deferred tax liabilities
Current liabilities
Trade accounts payable
Other current liabilities
Bank borrowings
Accrued interest
Finance lease obligations
Liabilities directly associated with assets classified as held for sale
TOTAL LIABILITIES
TOTAL EQUITY AND LIABILITIES
On behalf of the Board:
12
13
11
14
15
14
16
17
18
19
20
21
2
12
22
23
24
25
11
26
27
23
23, 24
25
20
1,180,334
1,258,250
43,845
1,561
14,558
577
13,554
46,252
5,740
15,204
4,125
9,241
1,254,429
1,338,812
187,332
116,214
167,389
25,424
31,235
50,868
154,570
88,396
821,428
2,075,857
284,505
(48,503)
175,291
570,649
719,340
(1,024,916)
676,366
16,698
693,064
259,567
725,361
5,581
11,264
1,001,773
46,508
61,766
236,807
22,731
8,044
5,164
381,020
1,382,793
2,075,857
279,028
139,800
120,574
27,345
72,031
38,800
59,343
-
736,921
2,075,733
284,505
(56,053)
178,192
567,525
645,020
(974,467)
644,722
28,127
672,849
278,131
728,530
9,595
13,227
1,029,483
47,669
39,320
249,057
23,328
14,027
-
373,401
1,402,884
2,075,733
Chief Executive Officer Yuriy Kosyuk Chief Financial Officer Viktoria Kapelyushnaya
49
CONSOLIDATED STATEMENT
OF CHANGES IN EQUITY
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
Share
Treasury
shares
Additional
paid-in
capital
Revaluation
reserve
Retained
earnings
Translation
reserve
Total
Non-
controlling
interests
Total equity
Balance at 31 December 2014
284,505
(67,741)
181,982
646,049
547,994
(710,372)
882,417
63,105
945,522
(Loss)/profit for the year
Other comprehensive income/(loss)
Total comprehensive income/(loss) for the
year
Transfer from revaluation reserve to
retained earnings
Dividends declared by the Parent
Dividends declared by subsidiaries
Non-controlling interests acquired (Note 2)
Derecognition of interests in subsidiaries
(Note 2)
Translation differences on revaluation
reserve
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
11,688
(3,790)
-
-
-
-
-
(133,399)
-
(133,399)
7,673
(125,726)
187,914
-
(267,362)
(79,448)
(19,355)
(98,803)
187,914
(133,399)
(267,362)
(212,847)
(11,682)
(224,529)
(36,825)
36,825
-
-
(50,000)
-
13,987
-
-
-
-
(50,000)
-
-
-
(50,000)
-
(408)
(408)
21,885
(21,885)
-
(9,738)
9,738
3,267
3,267
(1,003)
2,264
(219,875)
219,875
-
-
-
-
Balance at 31 December 2015
284,505
(56,053)
178,192
567,525
645,020
(974,467)
644,722
28,127
672,849
(Loss)/profit for the year
Other comprehensive income/(loss)
Total comprehensive income/(loss) for the
year
Transfer from revaluation reserve to
retained earnings
Dividends declared by the Parent (Note 30)
Dividends declared by subsidiaries
Non-controlling interests acquired (Note 2)
Translation differences on revaluation
reserve
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
53,452
-
53,452
5,796
59,248
94,299
-
(50,449)
43,850
1,406
45,256
94,299
53,452
(50,449)
97,302
7,202
104,504
(44,627)
44,627
-
-
(80,000)
-
-
-
-
-
(80,000)
-
-
-
(80,000)
-
(4,289)
(4,289)
7,550
(2,901)
-
9,693
-
14,342
(14,342)
-
-
(46,548)
46,548
-
-
-
-
-
Balance at 31 December 2016
284,505
(48,503)
175,291
570,649
719.340
(1,024,916) 676,366
16,698
693,064
The accompanying notes on the pages 53 to 110 form an integral part of this Annual Report.
On behalf of the Board:
Chief Executive Officer
Yuriy Kosyuk
Chief Financial Officer
Viktoria Kapelyushnaya
50
CONSOLIDATED STATEMENT
OF CASH FLOWS
for the year ended
31 December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
Share
Treasury
shares
Additional
paid-in
capital
Revaluation
reserve
Retained
earnings
Translation
reserve
Total
controlling
Total equity
Non-
interests
Operating activities
Profit /(loss) before tax
Notes
2016
2015
46,582
(166,091)
Balance at 31 December 2014
284,505
(67,741)
181,982
646,049
547,994
(710,372)
882,417
63,105
945,522
Non-cash adjustments to reconcile profit before tax to net cash flows
(Loss)/profit for the year
Other comprehensive income/(loss)
Total comprehensive income/(loss) for the
year
Transfer from revaluation reserve to
retained earnings
Dividends declared by the Parent
Dividends declared by subsidiaries
Derecognition of interests in subsidiaries
Translation differences on revaluation
(Note 2)
reserve
(Loss)/profit for the year
Other comprehensive income/(loss)
Total comprehensive income/(loss) for the
year
Transfer from revaluation reserve to
retained earnings
Dividends declared by the Parent (Note 30)
Dividends declared by subsidiaries
Translation differences on revaluation
reserve
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Non-controlling interests acquired (Note 2)
7,550
(2,901)
-
9,693
-
14,342
(14,342)
-
(46,548)
46,548
Balance at 31 December 2016
284,505
(48,503)
175,291
570,649
719.340
(1,024,916) 676,366
16,698
693,064
(133,399)
(133,399)
7,673
(125,726)
Depreciation and amortization expense
187,914
-
(267,362)
(79,448)
(19,355)
(98,803)
Net change in fair value of biological assets and agricultural produce
187,914
(133,399)
(267,362)
(212,847)
(11,682)
(224,529)
Loss on disposal/(Gain) from acquisition of subsidiaries
(36,825)
36,825
(50,000)
(50,000)
(50,000)
Change in allowance for irrecoverable amounts and direct write-offs
Loss/(reversal) of impairment of property, plant and equipment, net
(408)
(408)
Loss on disposal of property, plant and equipment and other non-current
assets
Non-controlling interests acquired (Note 2)
11,688
(3,790)
13,987
21,885
(21,885)
-
(9,738)
9,738
3,267
3,267
(1,003)
2,264
(219,875)
219,875
Balance at 31 December 2015
284,505
(56,053)
178,192
567,525
645,020
(974,467)
644,722
28,127
672,849
Finance income
Finance costs
Withholding tax related to interest and payment of dividends
Non-operating foreign exchange loss, net
Operating cash flows before movements in working capital
5, 12
5
2
10
53,452
53,452
5,796
59,248
94,299
-
(50,449)
43,850
1,406
45,256
94,299
53,452
(50,449)
97,302
7,202
104,504
(44,627)
44,627
Working capital adjustments
Change in inventories
Change in biological assets
Change in agricultural produce
Change in other current assets, net
(80,000)
(80,000)
(80,000)
(4,289)
(4,289)
Change in taxes recoverable and prepaid, net
Change in trade accounts receivable, net
Change in other liabilities
Change in trade accounts payable
Cash generated by operations
Interest received
Interest paid
Withholding tax related to interest paid
Income taxes paid
Net cash flows from operating activities
Investing activities
Purchases of property, plant and equipment
Purchases of other non-current assets
Purchase of land lease rights
Acquisition of subsidiaries, net of cash acquired
Proceeds from disposals of property, plant and equipment
Purchases of non-current biological assets
Withdrawals of short-term and long-term deposits
Investments in short-term deposits
Loans provided to by employees, net
Loans provided to by related parties, net
Net cash flows used in investing activities
105,865
(36,067)
-
(167)
8,308
1,521
(2,281)
106,666
5,478
142,162
378,067
57,327
(4,029)
(36,050)
(822)
32,443
(18,415)
37,301
9,020
454,842
2,234
(105,139)
(2,073)
(334)
349,530
(91,651)
(6,021)
(7,755)
-
1,196
(1,704)
418
(408)
(55)
(1,818)
(107,798)
94,665
(21,786)
4,725
157
-
461
(2,567)
105,571
1,294
418,926
435,355
(154,396)
(38,324)
(9,279)
(9,464)
(46,592)
8,802
7,321
16,473
209,896
2,314
(99,182)
(1,294)
(1,589)
110,145
(145,255)
(1,004)
(6,644)
(8,633)
779
(1,588)
252
43
(641)
(73)
(162,850)
The accompanying notes on the pages 53 to 110 form an integral part of this Annual Report.
51
CONSOLIDATED STATEMENT
OF CASH FLOWS (continued)
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
Notes
2016
2015
Financing activities
Proceeds from bank borrowings
Repayment of bank borrowings
Repayment of bonds
Transaction costs related to bank loans received
Repayment of finance lease obligations
Dividends paid to shareholders
Dividends paid by subsidiaries to non-controlling shareholders
Withholding tax related to dividends paid
Consent payment related to corporate bonds
Net cash flows from/(used in) financing activities
Net increase/(decrease) in cash and cash equivalents
Net foreign exchange difference
Cash and cash equivalents at 1 January
Cash and cash equivalents attributable to disposal group classified as held for
sale
Cash and cash equivalents at 31 December
Non-cash transactions
Effect of revaluation of property, plant and equipment
Additions of property, plant and equipment under finance leases
Property, plant and equipment purchased for credit
28, 30
28, 30
24
19
12
208,396
(240,926)
-
-
(14,651)
(80,000)
(4,289)
(3,403)
(9,148)
(144,021)
97,711
(3,974)
59,343
(2,098)
150,982
105,009
3,907
-
556,335
(251,547)
(219,567)
(1,051)
(18,327)
(49,996)
(408)
-.
-
15,439
(37,266)
(3,062)
99,628
59,300
224,142
3,059
4,383
During the year ended 31 December 2016, other non-cash transactions included acquisitions and disposals of subsidiaries as well as
change in non-controlling interest (Note 2).
On behalf of the Board:
Chief Executive Officer
Yuriy Kosyuk
Chief Financial Officer
Viktoria Kapelyushnaya
52
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
1. Corporate information
MHP S.A. (the “Parent” or “MHP S.A.”), a limited liability company (société anonyme) registered under the laws of Luxembourg, was
formed on 30 May 2006. MHP S.A. was formed to serve as the ultimate holding company of PJSC “Myronivsky Hliboproduct” (“MHP”) and
its subsidiaries. Hereinafter, MHP S.A. and its subsidiaries are referred to as the “MHP S.A. Group” or the “Group”. The registered address
of MHP S.A. is 5, rue Guillaume Kroll, L-1882 Luxembourg.
The controlling shareholder of MHP S.A. is the Chief Executive Officer of MHP S.A. Mr. Yuriy Kosyuk (the “Principal Shareholder”), who owns
100% of the shares of WTI Trading Limited (“WTI”), which is the immediate majority shareholder of MHP S.A.
The principal business activities of the Group are poultry and related operations, grain growing, as well as other agricultural operations
(meat processing, cultivation and selling fruits and producing beef and meat products ready for consumption). The Group’s poultry
and related operations integrate all functions related to the production of chicken, including hatching, fodder manufacturing, raising
chickens to marketable age (“grow-out”), processing and marketing of branded chilled products, and include the production and
sale of chicken products, sunflower oil, mixed fodder and convenience food products. Grain growing comprises the production and
sale of grains. Other agricultural operations comprise the production and sale of cooked meat, sausages, beef, milk, goose meat, foie
gras, fruits and feed grains. During the year ended 31 December 2016 the Group employed about 31,000 people (2015: 30,900 people).
The primary subsidiaries, the principal activities of the companies forming the Group and the Parent’s effective ownership interest as of
31 December 2016 and 2015 were as follows:
Country of
registration
Year established/
acquired
Principal activities
2016
2015
Sub-holding Company
Sub-holding Company
100.0%
100.0%
Name
Raftan Holding Limited
Larontas Limited
MHP
Myronivsky Zavod po Vygotovlennyu Krup i Kombikormiv
oil production
Vinnytska Ptahofabryka
Peremoga Nova
Druzhba Narodiv Nova
Oril-Leader
Tavriysky Kombikormovy Zavod
Myronivska Ptahofabryka
Starynska Ptahofabryka
Ptahofabryka Snyatynska Nova
Zernoproduct
Katerynopilsky Elevator
Druzhba Narodiv
NPF Urozhay
Agrofort
Urozhayna Krayina
Ukrainian Bacon
AgroKryazh
Baryshevka
Zakhid-Agro MHP
Scylla Capital Limited
Cyprus
Cyprus
Ukraine
Ukraine
88.5%
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
British Virgin
Islands
2006
2015
1998
1998
88.5%
2011
1999
2002
2003
2004
2004
2003
2005
2005
2005
2006
2006
2006
2010
2008
2013
2013
2015
2014
Management,
marketing and sales
Fodder and sunflower
Chicken farm
Chicken farm
Chicken farm
Chicken farm
Chicken farm
Fodder production
Chicken farm
Breeder farm
Geese breeder farm
Grain cultivation
Fodder production and
grain storage, sunflower
oil production
Cattle breeding, plant
cultivation
Grain cultivation
Grain cultivation
Grain cultivation
Meat processing
Grain cultivation
Grain cultivation
Grain cultivation
Trading in sunflower oil
and poultry meat
100.0%
100.0%
99.9%
88.5%
99.9%
99.9%
99.9%
99.9%
88.5%
99.9%
99.9%
99.9%
100.0%
100.0%
99.9%
99.9%
99.9%
100.0%
99.9%
99.9%
99.9%
99.9%
99.9%
94.9%
99.9%
89.9%
99.9%
99.9%
99.9%
99.9%
99.9%
86.1%
99.9%
79.9%
99.9%
51.0%
100.0%
99.9%
86.1%
99.9%
79.9%
99.9%
51.0%
100.0%
100.0%
100.0%
53
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
1. Corporate information (continued)
The Group’s operational facilities are located in different regions of Ukraine, including Kyiv, Cherkasy, Dnipropetrovsk, Donetsk, Lviv,
Ternopil, Ivano-Frankivsk, Vinnytsia, Kherson, Sumy, Khmelnitsk regions and Autonomous Republic of Crimea.
2. Changes in the group structure
Plan to dispose of the Crimean companies
Board of Directors has authorized the management of the Group to pursue negotiations in relation to a planned disposal of the
Crimean companies. At the end of December 2016, by virtue of a Board resolution, management of the Group committed to a plan
to dispose of the following Group companies that are located in the Autonomous Republic of Crimea (“Crimean companies”):
• Druzhba Narodiv Nova – engaged in the production and sale of chicken meat products in poultry and related operation
segment;
• Druzhba Narodiv – engaged in the production and sale of sausages and cooked meats in other agricultural segment; and
• Crimea Fruit Company – engaged in the cultivating and sale of fruits in other agricultural segment.
At the year-end date the management of the Group were in negotiation with potential buyers for its Crimean companies and
expected to complete the sale shortly after year-end. The sale was consummated on 17 February 2017 (Note 35). The Group has
recognised impairment losses in respect of the Property, plant and equipment, immediately prior to classifying the assets and liabilities
of disposal group as held for sale (Note 20). No impairment loss was recognised on classification disposal group as held for sale as the
management of the Group expect that the fair value less costs to sell equals or is not less than the carrying amount.
Analysis of profit for the year from discontinued operations
The combined results of the discontinued operations set out below. The comparative losses and cash flows from discontinued operations
have been represented to include those operations classified as discontinued in the current year.
Results for the year from discontinued operations
Revenue
Other gains
Expenses
Loss on impairment of property, plant and equipment, net
Loss before tax
Income expense
Loss for the year from discontinued operations attributable to:
Equity holders of the Parent
Non-controlling interests
Cash flows from discontinued operations
Net cash inflows from operating activities
Net cash outflows from investing activities
Net cash inflows from financing activities
Net decrease in cash and cash equivalents
54
2016
105,574
10,357
115,931
(118,190)
(6,865)
(9,124)
(414)
(10,383)
845
(9,538)
2016
1,940
(3,475)
-
(1,535)
2015
121,368
1,935
123,303
(135,513)
-
(12,210)
(777)
(13,657)
670
(12,987)
2015
645
(1,671)
-
(1,026)
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
2. Changes in the group structure (continued)
The Crimea business has been classified and accounted for at 31 December 2016 as a disposal group held for sale (Note 20).
Discontinued operations are excluded from the results of continuing operations and are presented as a single amount as profit or loss
after tax from discontinued operations in the statement of comprehensive income. All other notes to the financial statements include
amounts for continuing operations, unless otherwise mentioned.
Acquisitions
Agrokultura
In May 2015 the Group signed an asset swap agreement with Agrokultura AB, whereby the equity ownership in Voronezh Agro Holding
was swapped with the equity ownership in a group of companies Agrokultura Ukraine. The transaction was completed with effective
transfer of control in June 2015.
Voronezh Agro Holding, is a grain growing business, cultivating a land bank of about 40,000 hectares in the Voronezh region of the
Russian Federation, with approximately 150,000 tonnes of grain storage capacities.
Group of companies Agrokultura Ukraine is a grain growing business cultivating a land bank of about 60,000 hectares in Lviv, Ternopil
and Ivano-Frankivsk regions of Ukraine, with approximately 90,000 tonnes of grain storage capacities.
The following table presents the provisional fair value at the date of acquisition of identifiable assets and liabilities of group of
companies Agrokultura Ukraine acquired:
Property, plant and equipment (Note 12)
Land lease rights (Note 13)
Other non-current assets less non-current liabilities
Deferred tax liability
Biological assets (Note 14)
Current assets less current liabilities
Cash and cash equivalents
Total consideration received
2015
27,194
25,663
(412)
(1,834)
13,977
654
115
65,357
The following table presents the carrying amount of identifiable assets and liabilities of Voronezh Agro Holding at the date of disposal:
Property, plant and equipment (Note 12)
Other non-current assets less non-current liabilities
Biological assets (Note 14)
Other current assets less current liabilities
Cash and cash equivalents
Net assets disposed
2015
46,754
(5)
15,844
2,920
2,305
67,818
55
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
2. Changes in the group structure (continued)
The following table presents the net result of the transaction:
Total consideration received
Net assets disposed
Non-controlling interest disposed
Cumulative translation reserve in respect of the net assets of the subsidiary reclassified
from equity to profit or loss on loss of control in subsidiary
Loss on disposal
2015
65,357
(67,818)
1,003
(3,267)
(4,725)
As acquisition of group of companies Agrokultura Ukraine was conducted through exchange of equity interest, the fair value of the
equity interest was determined by the amount of consideration received in group of companies Agrokultura Ukraine.
Cumulative exchange loss in respect of the net assets of the subsidiary reclassified from equity to profit or loss on loss of control of
subsidiary relates to the reclassification of translation difference on consolidation of foreign subsidiaries, previously recognised in other
comprehensive loss.
Dnister-Agro
In July 2015 the Group acquired from third parties a 100% interest in a group of companies “Dnister-Agro”, a grain growing business,
cultivating a land bank of approximately 10,000 hectares in the Vinnytsia region of Ukraine. The transaction was accounted for under
the acquisition method.
The following table presents the provisional fair value at the date of acquisition of identifiable assets and liabilities acquired:
Provisional fair value of identifiable assets and liabilities:
Property, plant and equipment (Note 12)
Land lease rights (Note 13)
Inventories and biological assets
Trade and other payables
Total identifiable net assets at fair value
Goodwill from acquisition of subsidiaries
Total Cash consideration due and payable
Cash paid
Cash acquired
56
Dnister-Agro
669
4,999
3,779
(5,070)
4,377
2,066
(6,443)
(6,490)
47
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
2. Changes in the group structure (continued)
The goodwill of USD 2,066 thousand arising from the acquisition of Dnister-Agro consists mainly of the synergies and economies of scale
expected from combining the operations of Dniester-Agro and other grain-growing companies of the Group in the nearby region.
The advantage of this acquisition giving rise to value is the high concentration of sectors (higher economies on logistics and fuel) and
good integration of land to other assets of the Group.
Since 1 January 2015 and up to the date of disposal, the disposed group of companies (“Voronezh Agroholding”) contributed USD
18,790 thousand of Revenue and USD 5,046 thousand of profit to the consolidated results of the Group.
From the date of acquisition, the acquired group of companies contributed USD 16,036 thousand of Revenue and USD 1,291 thousand
of loss to the Consolidated results of the Group. Had the transactions related to acquisitions as discussed above, occurred on 1
January 2015, “Pro forma” revenue and loss for the year ended 31 December 2015 would have been USD 21,469 thousand and USD
4,589 thousand, respectively.
In 2015 the Group made certain other insignificant acquisitions during each of the periods presented. These acquisitions have been
accounted for based on the Group’s accounting policies. The impact of these acquisitions was not significant to the consolidated
financial statements of the Group, either individually or in aggregate.
Changes in non-controlling interests in subsidiaries
In December 2016 the Group increased its effective ownership interest in Starynska breeding farm to 100% through the acquisition of
a non-controlling interest previously held by one of its key management personnel in exchange for 531,395 treasury shares held by
the Group. As of 31 December 2016, these shares were in the process of registration as owned by new shareholder. The difference
between fair value of shares transferred and their carrying value in the amount of USD 2,901 thousand was recognized as an
adjustment to additional paid-in capital (Note 22).
In December 2015 the Group increased its effective ownership interest in Zernoproduct to 100% through the acquisition of a non-
controlling interest previously held by one of its key management personnel in exchange for 830,511 treasury shares held by the
Group. The difference between fair value of shares transferred and their carrying value in the amount of USD 3,790 thousand was
recognized as an adjustment to additional paid-in capital.
3. Summary of significant accounting policies
Basis of presentation and accounting
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as
adopted by the European Union (“IFRS”). The operating subsidiaries of the Group maintain their accounting records under Ukrainian
Accounting Standards (“UAS”).
UAS principles and procedures may differ from those generally accepted under IFRS. Accordingly, the consolidated financial
statements, which have been prepared from the Group entities’ UAS records, reflect adjustments necessary for such financial
statements to be presented in accordance with IFRS.
Basis of preparation
The consolidated financial statements of the Group are prepared on the basis of historical cost, except for revalued amounts of
buildings and structures, grain storage facilities, production machinery, vehicles and agricultural machinery, biological assets,
agricultural produce, and certain financial instruments, which are carried at fair value.
57
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
3. Summary of significant accounting policies (continued)
Adoption of new and revised International Financial Reporting Standards
The following standards were adopted by the Group on 1 January 2016:
• Amendments to IFRS 10, IFRS 12 and IAS 28: Investment Entities – Applying the Consolidation Exception
• Amendments to IAS 27: Equity Method in Separate Financial Statements
• Amendments to IAS 1: Disclosure Initiative
• Amendments to IAS 16 and IAS 38: Clarification of Acceptable Methods of Depreciation and Amortisation
• Amendments to IFRS 11: Accounting for Acquisitions of Interests in Joint Operations
• Amendments to IAS 16 and IAS 41: Bearer Plants
• Amendments to IFRSs - «Annual Improvements to IFRSs 2012–2014 Cycle» (amendments to IFRS 3, IFRS 8, IFRS 13, IFRS 21, IAS 16, IAS
24, IAS 39)
The adoption of new or revised standards did not have any material effect on the consolidated financial position or performance of
the Group and any disclosures in the Group’s consolidated financial statements, except Amendments to IAS 16 and IAS 41: Bearer
Plants. The Group has retrospectively applied these amendments for the first time in the current year. The amendments define a bearer
plant and require biological assets that meet the definition of a bearer plant to be accounted for as property, plant and equipment in
accordance with IAS 16, instead of IAS 41. The produce growing on bearer plants continues to be accounted for in accordance with
IAS 41. Such bearer plant has been reclassified from biological assets to property, plant and equipment in the amount of USD 9,489
thousand and USD 8,578 thousand for the years ended 31 December 2016 and 2015, respectively.
Standards and Interpretations in issue but not effective
At the date of authorization of these consolidated financial statements, the following Standards and Interpretations, as well as
amendments to the Standards were in issue but not yet effective:
Standards and Interpretations
Amendments to IAS 12: Recognition of Deferred Tax Assets for Unrealised Losses
Amendments to IAS 7: Disclosure Initiative
Amendments to IFRSs - "Annual Improvements to IFRSs 2014 –2016 Cycle”
IFRS 9 “Financial Instruments”(1)
IFRS 15 “Revenue from contracts with customers” including amendments to IFRS 15: Effective date of IFRS 15(1)
IFRIC Interpretation 22 Foreign Currency Transactions and Advance Consideration
Amendments to IAS 40: Transfers of Investment Property
Amendments to IFRS 2: Classification and Measurement of Share-based Payment Transactions
Amendments to IFRS 4: Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts
IFRS 16 “Leases”
Amendments to IFRS 10 and IAS 28: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture
Effective for annual period
beginning on or after
1 January 2017
1 January 2017
1 January 2017
1 January 2018
1 January 2018
1 January 2018
1 January 2018
1 January 2018
1 January 2018
1 January 2019
Deferred indefinitely
IFRS 16 introduces a comprehensive model for the identification of lease agreements and accounting treatments for both lessors
and lessees. IFRS 16 distinguishes lease and service contracts on the basis of whether an identified asset is controlled by a customer.
Distinctions of operating leases (off balance sheet) and finance lease (on balance sheet) are removed for lessee accounting, and
is replaced by a model where a right-of-use asset and corresponding liability have to be recognised for all leases by lessees (i.e. on
balance sheet) except for short-term leases and leases of low value assets.
(1)- Standards have been endorsed for use in the European Union.
58
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
3. Summary of significant accounting policies (continued)
3. Summary of significant accounting policies (continued)
Standards and Interpretations in issue but not effective (continued)
As of 31 December 2016, the Group has non-cancellable operating lease commitments in amount of USD 117,920 thousand. IAS 17
does not require the recognition of any right-of-use asset or liability for future payments for these leases; instead, certain information
is disclosed as operating lease commitments in Note 29. A preliminary assessment indicates that these arrangements will meet the
definition of a lease under IFRS 16, and hence the Group will recognise a right-of-use asset and a corresponding liability in respect of
all these leases unless they qualify for low value or short-term leases upon the application of IFRS 16. The new requirement to recognise
a right-of-use asset and a related lease liability is expected to have a significant impact on the amounts recognised in the Group’s
consolidated financial statements and the Management are currently assessing it’s potential impact and expects to be able to
provide such information year-end 2017. It is not practicable to provide a reasonable financial estimate of the effect until the such
detailed analysis will be completed.
IFRS 9 Financial Instruments issued on 24 July 2014 is the IASB’s replacement of IAS 39 Financial Instruments: Recognition and
Measurement. The Standard includes the classification and measurement of financial assets and financial liabilities; Impairment
methodology and Hedge accounting.
With respect to the classification and measurement under IFRS 9, all recognised financial assets that are currently within the scope
of IAS 39 will be subsequently measured at either amortised cost or fair value through profit and loss or fair value through other
comprehensive income.
The impairment model under IFRS 9 introduces a new impairment model based on expected loss, rather than incurred loss as per IAS
39. Under the impairment approach in IFRS 9, it is no longer necessary for a credit event to have occurred before credit losses are
recognised. Instead, an entity always accounts for expected credit losses and changes in those expected credit losses.
The general hedge accounting requirements of IFRS 9 retain the three types of hedge accounting mechanisms in IAS 39. However,
greater flexibility has been introduced to the types of transactions eligible for hedge accounting, specifically broadening the types
of instruments that qualify as hedging instruments and the types of risk components of non-financial items that are eligible for hedge
accounting. In addition, the effectiveness test has been overvalued and replaced with the principle of an ‘economic relationship’.
Retrospective assessment of hedge effectiveness is no longer required. Far more disclosure requirements about an entity’s risk
management activities have been introduced.
The Board of Directors of the Company anticipate that the application of IFRS 9 in the future will not have a material impact on
financial instruments because the Company does not use a hedge accounting, but the application of the new standard may have
some impact on amounts of bad debt provision for accounts receivable due to introduction of a new impairment model based on
expected credit losses, rather than incurred losses. However, it is not practicable to provide a reasonable estimate of the effect until
the Group performs a detailed review. Management expects to be able to provide such information at year-end 2017.
IASB has published a new Standard, IFRS 15 Revenue from Contracts with Customers.
The new Revenue Standard has a single model to deal with revenue from contracts with customers. Its core principle is that an
entity should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services.
59
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
3. Summary of significant accounting policies (continued)
Standards and Interpretations in issue but not effective (continued)
- Step 3: Determine the transaction price;
- Step 4:Allocate the transaction price to performance obligations in the contract; and
- Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation.
The standard is effective for annual periods beginning on or after January 1, 2018 (as amended in September 2015). It applies to
new contracts created on or after the effective date and to existing contracts that are not yet complete as of the effective date.
Therefore, the current year figures reported in the first year of adoption will be prepared as if the Standard`s requirements had always
been applied.
The Board of Directors of the Company anticipate that the application of IFRS 15 in the future will not have a material impact on
sales but in respect of export sales it may be necessary to recognize a separate performance obligation and allocate part of the
transaction price to a distinct “shipping and risk coverage” service. However, it is not practicable to provide a reasonable estimate of
the effect of IFRS 15 until the Group performs a detailed review of a wide range of existing contracts.
For other Standards and Interpretations management anticipates that their adoption will not have a material effect on the consolidated
financial statements of the Group in future periods.
The standard is effective for annual periods beginning on or after 1 January 2018 (as amended in September 2015). It applies to
new contracts created on or after the effective date and to existing contracts that are not yet complete as of the effective date.
Therefore, the current year figures reported in the first year of adoption will be prepared as if the Standard`s requirements had always
been applied.
The Board of Directors of the Company anticipate that the application of IFRS 15 in the future will not have a material impact on
sales but in respect of export sales it may be necessary to recognize a separate performance obligation and allocate part of the
transaction price to a distinct “shipping and risk coverage” service. However, it is not practicable to provide a reasonable estimate
of the effect of IFRS 15 until the Group performs a detailed review of a wide range of existing contracts. Management expects to be
able to provide such information at year-end 2017.
For other Standards and Interpretations management anticipates that their adoption will not have a material effect on the consolidated
financial statements of the Group in future periods.
Functional and presentation currency
The functional currency of Ukrainian, Cyprus and Luxemburg companies of the Group is the Ukrainian Hryvnia (“UAH”); the functional
currency of the Autonomous Republic of Crimea companies of the Group is the Russian Rouble (“RUB”). Transactions in currencies
other than the functional currency of the entities concerned are treated as transactions in foreign currencies. Such transactions are
initially recorded at the rates of exchange ruling at the dates of the transactions. Monetary assets and liabilities denominated in
such currencies are translated at the rates prevailing on the reporting date. All realized and unrealized gains and losses arising on
exchange differences are recognised in the consolidated statement of comprehensive income for the period.
These consolidated financial statements are presented in US Dollars (“USD”), which is the Group’s presentation currency.
The results and financial position of the Group are translated into the presentation currency using the following procedures:
• Assets and liabilities for each consolidated statement of financial position presented are translated at the closing rate as
of the reporting date of that statement of financial position;
• Income and expenses for each consolidated statement of comprehensive income are translated at exchange rates at
the dates of the transactions;
• All resulting exchange differences are recognized as a separate component of equity.
• All equity items, except for the revaluation reserve, are translated at the historical exchange rate. The revaluation reserve
is translated the closing rate as of the date of the statement of financial position.
For practical reasons, the Group translates items of income and expenses for each period presented in the financial statements using
the quarterly average exchange rates, if such translations reasonably approximate the results translated at exchange rates prevailing
at the dates of the transactions.
60
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
3. Summary of significant accounting policies (continued)
3. Summary of significant accounting policies (continued)
Standards and Interpretations in issue but not effective (continued)
Functional and presentation currency (continued)
The relevant exchange rates were:
Currency
UAH/USD
UAH/EUR
UAH/RUB
Closing rate as of 31 December
2016
Average for 2016
Closing rate as of 31 December
2015
27.1909
28.4226
0.4511
25.5458
28.2828
0.3832
24.0007
26.2231
0.3293
Average for 2015
21.8290
24.2054
0.3617
Basis of consolidation
The consolidated financial statements incorporate the financial statements of the MHP S.A. and its subsidiaries. Control is achieved
when the Company:
• has power over the investee;
• is exposed, or has rights, to variable returns from its involvement with the investee; and
• has the ability to use its power to affect its returns.
The Company reassesses 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 listed above. Consolidation of a subsidiary begins when the Company obtains control over
the subsidiary and ceases when the Company loses control of the subsidiary. Specifically, income and expenses of a subsidiary
acquired or disposed of during the year are included in the consolidated statement of comprehensive income from the date the
Company gains control until the date when the Company ceases to control the subsidiary. Profit or loss and each component of
other comprehensive income are attributed to the owners of the Company and to the non-controlling interests. Total comprehensive
income of subsidiaries is attributed to the owners of the Company and to the non-controlling interests even if this results in the non-
controlling interests having a deficit balance.
All significant intercompany transactions, balances and unrealized gains or losses on transactions are eliminated on consolidation,
except when the intragroup losses indicate an impairment that requires recognition in the consolidated financial statements.
Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used in line with
those adopted by the Group.
Accounting for acquisitions
The acquisitions of subsidiaries from third parties are accounted for using the acquisition method. On acquisition, the assets, liabilities
and contingent liabilities of a subsidiary are measured at their fair values.
The consideration transferred by the Group is measured at fair value, which is the sum of the acquisition-date fair values of the assets
transferred by the Group, liabilities incurred by the Group to the former owners of the acquired subsidiary and the equity interests
issued by the Group in exchange for control of the subsidiary. Acquisition-related costs are generally recognized in the statement of
comprehensive income as incurred.
When the consideration transferred by the Group in a business combination includes assets and liabilities resulting from a contingent
consideration arrangement, the contingent consideration is measured at its acquisition-date fair value and is included as part of the
consideration transferred. Changes in the fair value of the contingent consideration that qualify as measurement period adjustments
are adjusted retrospectively, with corresponding adjustments against goodwill. Measurement period adjustments are adjustments
that arise from additional information obtained during the measurement period (which may not exceed one year from the acquisition
date) about facts and circumstances that existed at the acquisition date.
Non-controlling interests that are present ownership interests and entitle their holders to a proportionate share of the subsidiary’s net
assets in the event of liquidation may be initially measured either at fair value or at the non-controlling interests’ proportionate share
of the recognized amounts of the subsidiary’s identifiable net assets. The choice of measurement basis is made on a transaction-by-
transaction basis. Other types of non-controlling interests, if any, are measured at fair value or, when applicable, on the basis specified
in other IFRS standards.
61
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
3. Summary of significant accounting policies (continued)
Accounting for acquisitions (continued)
Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the
acquired subsidiary, and the fair value of the Group’s previously held equity interest in the acquired subsidiary (if any) over the
net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If, after reassessment, the net of
the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed exceeds the sum of the consideration
transferred, the amount of non-controlling interests in the subsidiary and the fair value of the Group’s previously-held interest in the
subsidiary (if any), the excess is recognized in the consolidated statement of comprehensive income, as a bargain purchase gain.
Changes in the Group’s ownership interests in subsidiaries that do not result in the Group losing control over the subsidiaries are
accounted for as equity transactions. The carrying amounts of the Group’s interests and the non-controlling interests are adjusted to
reflect the changes in their relative interests in subsidiaries. Any difference between the amount by which the non-controlling interests
are adjusted and the fair value of the consideration paid or received is recognized directly in equity and attributed to owners of the
Parent.
When an acquisition of a legal entity does not constitute a business, the cost of the group of assets is allocated between the individual
identifiable assets in the group based on their relative fair values.
Accounting for transactions with entities under common control
The assets and liabilities of subsidiaries acquired from entities under common control are recorded in these consolidated financial
statements at pre-acquisition carrying values. Any difference between the carrying value of net assets of these subsidiaries, and
the consideration paid by the Group is accounted for in these consolidated financial statements as an adjustment to shareholders’
equity. The results of the acquired entity are reflected from the date of acquisition.
Any gain or loss on disposals to entities under common control are recognized directly in equity and attributed to owners of the Parent.
Fair value measurement
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 to 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, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.
All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized 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 recognized in the financial statements on a recurring basis, the Group determines whether transfers
have occurred between Levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the
fair value measurement as a whole) at the end of each reporting period.
62
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
3. Summary of significant accounting policies (continued)
Borrowing costs
Borrowing costs include interest expense, finance charges on finance leases and other interest-bearing long-term payables and debt
service costs.
Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily
take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as
the assets are substantially ready for their intended use or sale.
Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is
deducted from the borrowing costs eligible for capitalization.
All other borrowing costs are recognized in the statement of comprehensive income in the period in which they are incurred.
Contingent liabilities and assets
Contingent liabilities are not recognized in the consolidated financial statements. Rather, they are disclosed in the notes to the
consolidated financial statements unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent
assets are recognized only when the contingency is resolved.
Segment information
Segment reporting is presented on the basis of management’s perspective and relates to the parts of the Group that are defined
as operating segments. Operating segments are identified on the basis of internal reports provided to the Group’s chief operating
decision maker (“CODM”). The Group has identified its top management team as its CODM and the internal reports used by the top
management team to oversee operations and make decisions on allocating resources serve as the basis of information presented.
These internal reports are prepared on the same basis as these consolidated financial statements.
Based on the current management structure, the Group has identified the following reportable segments:
• Poultry and related operations;
• Grain growing operations;
• Other agricultural operations.
Reportable segments represent the Group’s principal business activities. Poultry and related operations segment include sales of
chicken meat, sales of by-products such as vegetable oil and related products and other poultry-related products. CODM is considering
oil extraction as a part of mixed fodder production rather than a separate line of business as primarily quality and effectiveness of
mixed fodder production prevails over oil output. Grain growing operations include sale of grain other than feed grains and green-
fodder. Other agricultural operations segment primarily includes sales of other than poultry meat and meat processing products, fruit,
feed grains and milk.
The Group does not present information on segment assets and liabilities as the CODM does not review such information for decision-
making purposes.
Non-current assets held for sale
Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered principally through
a sale transaction rather than through continuing use. This condition is regarded as met only when the asset (or disposal group) is
available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such asset (or
disposal group) and its sale is highly probable. Management must be committed to the sale, which should be expected to qualify for
recognition as a completed sale within one year from the date of classification.
When the Group is committed to a sale plan involving loss of control of a subsidiary, all of the assets and liabilities of that subsidiary
are classified as held for sale when the criteria described above are met, regardless of whether the Group will retain a non-controlling
interest in its former subsidiary after the sale.
Non-current assets (and disposal groups) classified as held for sale are measured at the lower of their carrying amount and fair value
less costs to sell.
63
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
3. Summary of significant accounting policies (continued)
Revenue recognition
The Group generates revenue primarily from the sale of agricultural products to the end customers. Revenue is recognized when the
significant risks and rewards of ownership of the goods have passed to the buyer, the amount of revenue can be measured reliably
and it is probable that collection will occur and costs incurred or to be incurred in respect of the transaction can be measured reliably.
The point of transfer of risk, which may occur at delivery or shipment, varies for contracts with different types of customers.
Revenue is measured at the fair value of the consideration received or receivable. Revenue is reduced for estimated customer
returns, rebates and other similar allowances.
When goods are exchanged or swapped for goods which are of a similar nature and value, the exchange is not regarded as
a transaction which generates revenue. When goods are sold in exchange for dissimilar goods, the exchange is regarded as a
transaction which generates revenue, and revenue is measured at the fair value of the goods received, adjusted by the amount of
any cash or cash equivalents transferred.
VAT refunds and other government grants
The Group’s companies are subject to special tax treatment for value-added tax (“VAT”). The Group’s entities, which qualify as
agricultural producers, are entitled to retain the net VAT payable. VAT amounts payable are not transferred to the State, but credited
to the entity’s separate special account to support the agriculture activities of the Group. Net result on VAT operations, calculated as
excess of VAT liability over VAT credit is charged to profit or loss. VAT receivable exceeding VAT liability is used as a reduction in tax
liabilities of the next period.
Government grants are recognized as income over the periods necessary to match them with the related costs, or as an offset against
finance costs when received as compensation for the finance costs for agricultural producers. To the extent the conditions attached
to the grants are not met at the reporting date, the received funds are recorded in the Group’s consolidated financial statements as
deferred income.
Other government grants are recognized at the moment when the decision to disburse the amounts to the Group is made.
Government grants are not recognised until there is reasonable assurance that the Group will comply with the conditions attaching
to them and that the grants will be received.
Property, plant and equipment
All groups of property, plant and equipment are carried at revalued amounts, being their fair value at the date of the revaluation
less any subsequent depreciation and impairment losses, ecxept land and other fixed assets that are carried at historical cost less
accumulated depreciation.
The historical cost of an item of property, plant and equipment comprises (a) its purchase price, including import duties and non-
refundable purchase taxes, after deducting trade discounts and rebates; (b) any costs directly attributable to bringing the item to the
location and condition necessary for it to be capable of operating in the manner intended by the management of the Group; (c)
the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, (d) the obligation for
which the Group incurs either when the item is acquired or as a consequence of having used the item during a particular period for
purposes other than to produce inventories during that period; and (e) for qualifying assets, borrowing costs capitalized in accordance
with the Group’s accounting policy.
Subsequently capitalized costs include major expenditures for improvements and replacements that extend the useful lives of the
assets or increase their revenue generating capacity. Repairs and maintenance expenditures that do not meet the foregoing criteria
for capitalization are charged to the consolidated statement of comprehensive income as incurred.
64
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
3. Summary of significant accounting policies (continued)
3. Summary of significant accounting policies (continued)
Property, plant and equipment (continued)
The Group moved to revaluation model for Auxiliary and other machinery and utilities and infrastructure during the year ended 31
December 2016. For all groups of property, plant and equipment carried at revaluation the model revaluations are performed with
sufficient regularity such that the carrying amount does not differ materially from that which would be determined using fair values at
the reporting date. If the asset’s carrying amount is increased as a result of a revaluation, the increase is credited directly to equity as
a revaluation reserve. However, such increase is recognized in the statement of comprehensive income to the extent that it reverses
a revaluation decrease of the same asset previously recognized in the statement of comprehensive income. If the asset’s carrying
amount is decreased as a result of a revaluation, the decrease is recognized in the statement of comprehensive income.
However, such decrease is debited directly to the revaluation reserve to the extent of any credit balance existing in the revaluation
reserve in respect of that asset.
Depreciation on revalued assets is charged to the statement of comprehensive income. The excess of depreciation charge on the
revalued asset over the depreciation that would have been charged based on the historical cost of the asset is transferred from
revaluation reserve directly to retained earnings over the assets useful life. On the subsequent sale or retirement of a revalued asset,
the attributable revaluation surplus remaining in the revaluation reserve is transferred directly to retained earnings.
Depreciation of property, plant and equipment is charged so as to write off the depreciable amount over the useful life of an asset
and is calculated using a straight line method. Useful lives of the groups of property, plant and equipment are as follows:
Buildings and structures
Grain storage facilities
Production machinery
Auxiliary and other machinery
Utilities and infrastructure
Vehicles and agricultural machinery
Other fixed assets
15 - 65 years
20 - 60 years
10 - 25 years
5 - 25 years
20 - 50 years
5 - 15 years
3 - 10 years
Depreciable amount is the cost of an item of property, plant and equipment, or revalued amount, less its residual value. The residual
value is the estimated amount that the Group would currently obtain from disposal of the item of property, plant and equipment,
after deducting the estimated costs of disposal, if the asset was already of the age and in the condition expected at the end of its
useful life.
Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter,
the term of the relevant lease.
65
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
3. Summary of significant accounting policies (continued)
Property, plant and equipment (continued)
The residual value, the useful lives and depreciation method are reviewed at each financial year-end. The effect of any changes from
previous estimates is accounted for prospectively as a change in an accounting estimate.
The gain or loss arising on sale or disposal of an item of property, plant and equipment is determined as the difference between the
sales proceeds and the carrying amount of the asset and is recognised in the statement of comprehensive income.
Construction in progress comprises costs directly related to the construction of property, plant and equipment including an appropriate
allocation of directly attributable variable overheads that are incurred in construction. Construction in progress is not depreciated.
Depreciation of construction in progress commences when the assets are available for use, i.e. when they are in the location and
condition necessary for them to be capable of operating in the manner intended by the management.
Intangible assets
Intangible assets, which are acquired by the Group and which have finite useful lives, consist primarily of land lease rights.
Land lease rights acquired separately are carried at cost less accumulated amortization and accumulated impairment losses.
Land lease rights acquired in a business combination and recognized separately from goodwill are initially recognized at their fair
value at the acquisition date (which is regarded as their cost). Subsequent to initial recognition, land lease rights acquired in a business
combination are reported at cost less accumulated amortization and accumulated impairment losses, on the same basis as land
lease rights acquired separately.
Amortization of intangible assets is recognized on a straight line basis over their estimated useful lives. For land lease rights, the
amortization period varies from 3 to 15 years.
The amortization period and the amortization method for intangible assets with finite useful lives are reviewed at least at the end of
each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.
An intangible asset is derecognised on disposal, or when no future economic benefits are expected from use or disposal. Gains or
losses arising from derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the
carrying amount of the asset, are recognised in profit or loss when the asset is derecognised.
Impairment of tangible and intangible assets other than goodwill
At each reporting date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is
any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is
estimated in order to determine the extent of the impairment loss (if any).
For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows
(cash-generating units). Recoverable amount is the higher of fair value less costs to sell and value in use. 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.
If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of
the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognized immediately in the statement
of comprehensive income unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as
a revaluation decrease.
Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised
estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would
have been determined had no impairment loss been recognized for the asset (cash-generating unit) in prior years. A reversal of
an impairment loss is recognized immediately in the statement of comprehensive income, unless the relevant asset is carried at a
revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.
66
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
3. Summary of significant accounting policies (continued)
3. Summary of significant accounting policies (continued)
Impairment of goodwill
For the purposes of impairment testing, goodwill is allocated to each of the Group’s cash generating units (or groups of cash-generating
units) that is expected to benefit from the synergies of the combination.
A cash-generating unit to which goodwill has been allocated is tested for impairment annually, or more frequently when there is an
indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than its carrying amount, the
impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of
the unit pro rata based on the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognized directly in the
statement of comprehensive income. An impairment loss recognized on goodwill is not reversed in subsequent periods.
Income taxes
Income taxes have been computed in accordance with the laws currently enacted or substantially enacted in jurisdictions where
operating entities are located. Income tax is calculated based on the results for the year as adjusted for items that are non-assessable
or non-tax deductible. It is calculated using tax rates that have been enacted by the reporting date.
Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences
between the carrying amount of assets and liabilities in the consolidated financial statements and the corresponding tax basis used in
the computation of taxable profit. Deferred tax liabilities are generally recognized for all taxable temporary differences and deferred
tax assets are recognized to the extent that it is probable that taxable profits will be available against which deductible temporary
differences can be utilized.
The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer
probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
Deferred tax liabilities and assets are measured at the tax rates that are expected to apply in the period in which the liability is settled
or the asset realised, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting
period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which
the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.
Deferred tax is charged or credited to the statement of comprehensive income, except when it relates to items credited or charged directly
to equity or other comprehensive income, in which case the deferred tax is also dealt with in equity or other comprehensive income.
Deferred tax assets and liabilities are offset when:
• The Group has a legally enforceable right to set off the recognized amounts of current tax assets and current tax liabilities;
• The Group has an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously;
• The deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation authority in each
future period in which significant amounts of deferred tax liabilities and assets are expected to be settled or recovered.
The majority of the Group companies that are involved in agricultural production (poultry farms and other entities engaged in agricultural
production) benefit substantially from the status of an agricultural producer. These companies are exempt from income taxes and pay
the Fixed Agricultural Tax instead (Note 11).
67
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
3. Summary of significant accounting policies (continued)
Withholding tax
Passive income (dividends, interest, royalties, etc) from Ukrainian sources that is paid to non-resident entities is generally subject to
withholding tax (WHT).
The WHT tax rates 15% (base rates) should be applied unless more favorable rates (reduced rates) are provided by a relevant double
taxation treaty (DTT) signed between Ukraine and foreign country.
In order to benefit from reduced tax rate in DTT, the non-resident recipient of income must confirm its tax residency and should also be
considered the beneficial owner of such income.
Tax residency status should be confirmed by tax residency certificate issued by tax authorities of the recipient’s country of residence
for tax year in which the income is paid.
According to the Tax Code of Ukraine, agents, nominee holders, and other intermediaries in respect of received income cannot
be beneficial owners of income sourced in Ukraine and are not entitled to favorable treaty provisions. The Ukrainian tax authorities
use both legal and economic substance approach for the beneficial owner definition considering also economic substance of the
transaction and the substance of the recipient of income.
As result, in order to prove the beneficial ownership status of the non-resident recipient, there should be additional documental
support to justify the substance of transactions.
No formal requirements exist to the above documents and, in practice, such documents may include evidence that the recipient
of income has a real office, employees and that the recipient is fully entitled to manage and dispose the received income without
limitations.
Inventories
Inventories are stated at the lower of cost and net realizable value. Costs comprise raw materials and, where applicable, direct labour
costs and those overheads that have been incurred in bringing the inventories to their present locations and condition.
Cost is calculated using the FIFO (first-in, first-out) method. Net realizable value is determined as the estimated selling price less all
estimated costs of completion and costs to be incurred in marketing, selling and distribution.
Agriculture related production process results in production of joint products: main and by-products. A by-product arising from the
process is measured at net realizable value and this value is deducted from the cost of the main product.
Biological assets and agricultural produce
Agricultural activity is defined as a biological transformation of biological assets for sale into agricultural produce or into additional
biological assets. The Group classifies hatchery eggs, live poultry and other animals and plantations as biological assets.
The Group recognizes a biological asset or agricultural produce when the Group controls the asset as a result of past events, it is
probable that future economic benefits associated with the asset will flow to the Group, and the fair value or cost of the asset can
be measured reliably.
Biological assets are stated at fair value less estimated costs to sell at both initial recognition and as of the reporting date, with any
resulting gain or loss recognized in the consolidated statement of comprehensive income. Costs to sell include all costs that would be
necessary to sell the assets, including costs necessary to get the assets to market.
68
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
3. Summary of significant accounting policies (continued)
Biological assets and agricultural produce (continued)
The difference between fair value less costs to sell and total production costs is allocated to biological assets held in stock as of each
reporting date as a fair value adjustment.
The change in this adjustment from one period to another is recognized as “Net change in fair value of biological assets and agricultural
produce” in the statement of comprehensive income.
Agricultural produce harvested from biological assets is measured at its fair value less costs to sell at the point of harvest. A gain or loss
arising on initial recognition of agricultural produce at fair value less costs to sell is included in the statement of comprehensive income.
Based on the above policy, the principal groups of biological assets and agricultural produce are stated as follows:
Biological Assets
(I) Broiler chickens
Broilers comprise poultry held for chicken meat production. The fair value of broilers is determined by reference to the cash flows that
will be obtained from the sales of 42-day aged chickens, with an allowance for costs to be incurred and risks to be faced during the
remaining transformation process.
(II) Breeders
The fair value of breeders is determined using the discounted cash flow approach based on hatchery eggs’ market prices.
(III) Cattle and pigs
Cattle and pigs comprise cattle held for regeneration of livestock population and animals raised for milk and beef and pork meat
production. The fair value of livestock is determined based on market prices of livestock of similar age, breed and genetic merit. Cattle,
for which market-determined prices or values are not available and for which alternative estimates of fair value are determined to be
clearly unreliable, are measured using the present value of expected net cash flows from the asset discounted at a current market-
determined pre-tax rate.
(IV) Crops in fields
The fair value of crops in fields is determined by reference to the cash flows that will be obtained from sales of harvested crops, with
an allowance for costs to be incurred and risks to be faced during the remaining transformation process.
(V) Hatchery eggs
The fair value of hatchery eggs is determined by reference to market prices at the point of harvest.
Agricultural Produce
(I) Dressed poultry, beef and pork
The fair value of dressed poultry, beef and pork is determined by reference to market prices at the point of harvest.
(II) Grain and fruits
The fair value of fodder grain and fruits is determined by reference to market prices at the point of harvest.
The Group’s biological assets are classified into bearer and consumable biological assets depending upon the function of a particular
group of biological assets in the Group’s production process. Consumable biological assets are those that are to be harvested as
agricultural produce, and include hatchery eggs and live broiler chickens intended for the production of meat, as well as pork and
meat cows. Bearer biological assets include poultry held for hatchery eggs production, orchards, milk cows and breeding bulls.
69
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
3. Summary of significant accounting policies (continued)
Financial instruments
Financial assets and financial liabilities are recognized on the Group’s consolidated statement of financial position when the Group
becomes a party to the contractual provisions of the instrument. Regular way purchases and sales of financial assets and liabilities are
recognized using settlement date accounting. The settlement date is the date that an asset is delivered to or by an entity. Settlement
date accounting refers to (a) the recognition of an asset on the day it is received by the entity, and (b) the derecognition of an asset
and recognition of any gain or loss on disposal on the day that it is delivered by the entity. Financial assets and financial liabilities of
the Group are represented by cash and cash equivalents, account receivables, borrowings, account payables and other financial
liabilities. The accounting policies for initial recognition and subsequent measurement of financial instruments are disclosed in the
respective accounting policies set out below in this Note.
Financial assets and financial liabilities are initially recognised at fair value. Transaction costs that are directly attributable to the
acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through
profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial
recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit
or loss are recognised immediately in profit or loss.
The effective interest method is a method of calculating the amortised cost of a debt instrument and of allocating interest income
over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all
fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or
discounts) through the expected life of the debt instrument, or, where appropriate, a shorter period, to the net carrying amount on
initial recognition.
The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or when it transfers the
financial asset and substantially all the risks and rewards of ownership of the asset to another party. On derecognition of a financial
asset in its entirety, the difference between the asset’s carrying amount and the sum of the consideration received and receivable
and the cumulative gain or loss that had been recognised in other comprehensive income and accumulated in equity is recognised
in profit or loss.
The Group derecognises financial liabilities when, and only when, the Group’s obligations are discharged, cancelled or they expire.
The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is
recognised in profit or loss.
Accounts receivable
Accounts receivable are measured at initial recognition at fair value, and are subsequently measured at amortized cost using the
effective interest rate method. Accounts receivable, which are non-interest bearing, are stated at their nominal value. Appropriate
allowances for estimated irrecoverable amounts are recognized in the statement of comprehensive income when there is objective
evidence that the asset is impaired. The allowance recognized is measured as the difference between the asset’s carrying amount
and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition.
Cash and cash equivalents
Cash and cash equivalents include cash on hand, cash with banks, deposits and marketable securities with an original maturity of
less than three months.
70
3. Summary of significant accounting policies (continued)
3. Summary of significant accounting policies (continued)
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
Bank borrowings, corporate bonds issued and other long-term payables
Interest-bearing bank borrowings, bonds issued and other long-term payables are initially measured at fair value net of directly
attributable transaction costs, and are subsequently measured at amortized cost using the effective interest rate method. Any
difference between the proceeds (net of transaction costs) and the settlement or redemption amount is recognized over the term of
the borrowings and recorded as finance costs.
Derivative financial instruments
The Group enters into derivative financial instruments to purchase sunflower seeds. Derivatives are initially recognized at fair value
at the date the derivative contracts are entered into and subsequently remeasured to their fair value at the end of each reporting
period. The resulting gain or loss is recognised in profit or loss immediately unless the derivative is designated and effective as a
hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship.
Embedded derivatives
Derivatives embedded in non-derivative host contracts are treated as separate derivatives when their risks and characteristics are
not closely related to those of the host contracts and the host contracts are not remeasured at fair value through statement of
comprehensive income.
As of 31 December 2016 and 2015 there were no material derivative financial instruments that were recognized in these consolidated
financial statements.
Trade and other accounts payable
Accounts payable are measured at initial recognition at fair value, and are subsequently measured at amortized cost using the
effective interest rate method.
Leases
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to
the Group. All other leases are classified as operating leases.
Assets held by the Group under finance leases are recognized as assets of the Group at their fair value at the date of acquisition or,
if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the consolidated
statement of financial position as a finance lease obligation. Lease payments are apportioned between finance charges and a
reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance
expenses are recognised directly to the statement of comprehensive income and are classified as finance costs.
Rental income or expenses under operating leases are recognized in the consolidated statement of comprehensive income on a
straight line basis over the term of the lease.
Provisions
Provisions are recognized when the Group has a present legal or constructive obligation (either based on legal regulations or implied)
as a result of past events, and it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate
of the obligation can be made.
Reclassifications and revisions
Certain comparative information presented in the consolidated financial statements for the year ended 31 December 2015 has been
revised in order to achieve comparability with the presentation used in the consolidated financial statements for the year ended 31
December 2016. Such reclassifications and revisions were not significant to the Group financial statements.
71
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
4. Critical accounting judgments and key sources of
estimation uncertainty
In the application of the Group’s accounting policies, which are described in Note 3, management is required to make judgements,
estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The
estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant.
Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the
period in which the estimate is revised if the revision affects both current and future periods.
Critical judgements in applying accounting policies
The following are the critical judgments, apart from those involving estimations (see below), that management has made in the
process of applying the Group’s accounting policies and that have the most significant effect on the amounts recognized in the
consolidated financial statements.
Revenue recognition
In the normal course of business, the Group engages in sale and purchase transactions with the purpose of exchanging crops in
various locations to fulfil the Group’s production requirements. In accordance with the Group’s accounting policy, revenue is not
recognized with respect to the exchange transactions involving goods of similar nature and value. The Group management applies
judgment to determine whether each particular transaction represents an exchange or a transaction that generates revenue. In
making this judgment, management considers whether the underlying crops are of similar type and quality, as well as whether the
time passed between the transfer and receipt of the underlying crops indicates that the substance of the transaction is an exchange
of similar goods. The amount of exchange transaction involving goods of similar nature amounted to USD 14,755 thousand and USD
18,566 thousand for the years ended 31 December 2016 and 2015, respectively.
Revaluation of property, plant and equipment
At each reporting date, the Group carries out a review of the carrying amount of the groups of property plant and equipment
accounted for using a revaluation model to determine whether the carrying amount differs materially from fair value.
Grain storage facilities, Utilities and infrastructure: The Group carries out impairment review by preparing a discounted cash flow
analysis involving assumptions on projected revenues and costs, and a discount rate. Additionally, the Group considers economic
stability and availability of transactions with similar assets in the market when determining whether to perform a fair value assessment
in a given period. Based on the results of this review, the Group concluded that grain storage facilities, utilities and infrastructure should
be revalued during the year ended 31 December 2016.
The Group appointed an independent valuer for a revaluation of these groups during the year ended 31 December 2016 and
performed revaluation as of 31 March 2016. Key assumptions used by the independent valuer in assessing the fair value of buildings
and structures using the replacement cost method were as follows:
• present condition of particular assets was ranked from excellent to good;
• changes in prices of assets and construction materials from the date of their acquisition/construction to the date of
valuation; and
• other external and internal factors that might have effect on fair value of the assets.
Results of the revaluation based on the replacement cost approach were compared with a revaluation performed using the income
approach to check for impairment indicators of revalued assets, if any.
72
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
4. Critical accounting judgments and key sources of
estimation uncertainty (continued)
Revaluation of property, plant and equipment (continued)
Vehicles and agricultural machinery, Auxiliary and other machinery: The fair value of items of Vehicles and agricultural machinery,
Auxiliary and other machinery is determined generally by reference to market-based evidence, which are the amounts for which the
assets could be exchanged between knowledgeable, willing customers in an arm’s length transaction as of the valuation date. For the
items of unique nature, replacement cost method is used.
For the market approach the Group carries at each reporting date a review of the carrying amount of these assets to determine
whether the carrying amount differs from fair value. The Group considers economic stability and the availability of transactions with
similar assets in the market when determining whether to perform fair value assessment in a given period. Based on the results of review
the Group concluded that vehicles and agricultural machinery, auxiliary and other machinery should be revalued during the year
ended 31 December 2016.
The Group appointed an independent valuer to value Vehicles and agricultural machinery, Auxiliary and other machinery during the
year ended 31 December 2016; the revaluation was performed as of 31 March 2016.
Key assumptions used by the independent valuer in assessing the fair value of production machinery, vehicles and agricultural machinery
using the market approach method were as follows:
• present condition of particular assets was ranked from excellent to good; and
• external prices provided by suppliers of machinery and vehicles for similar items were considered.
Income approach test and test for impairment: Results of the revaluation based on the replacement cost approach were compared
with a revaluation performed using the income approach to check for impairment indicators of revalued assets, if any.
The following unobservable inputs were used to measure Utilities and infrastructure, Grain storage facilities, Vehicles and agricultural
machinery and Auxiliary and other machinery:
Description
Fair value as at
31 December
2016
Valuation technique(s)
Unobservable inputs
Range of unobservable
inputs (average)
Relationship of
unobservable inputs to fair
value
Utilities and infrastructure
78,236
Grain storage facilities
80,850
Depreciated
replacement cost
method
Depreciated
replacement cost
method
Vehicles and agricultural
machinery
185,198
Auxiliary and other
machinery
39,239
Market
comparable
approach
Market
comparable
approach
Index of physical
depreciation
Cumulative index
of inflation of
construction works
Index of physical
depreciation
Cumulative index
of inflation of
construction works
Index of physical
depreciation
Index of physical
depreciation
0-81%
The higher the index of
physical depreciation,
the lower the fair value
1.72-2.34
The higher the index, the
higher the fair value
6-56%
The higher the index of
physical depreciation,
the lower the fair value
1.72-1.99
The higher the index, the
higher the fair value
0-90%
5-100%
The higher the index of
physical depreciation,
the lower the fair value
The higher the index of
physical depreciation,
the lower the fair value
73
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
4. Critical accounting judgments and key sources of
estimation uncertainty (continued)
Key sources of estimation uncertainty
The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the
reporting period that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the
next financial year.
Fair value less costs to sell of biological assets and agricultural produce
Biological assets are recorded at fair values less costs to sell. The Group estimates the fair values of biological assets based on the
following key assumptions:
• Average meat output for broilers and livestock for meat production;
• Average productive life of breeders and cattle held for regeneration and milk production;
• Expected crops output;
• Estimated changes in future sales prices;
• Projected production costs and costs to sell; and,
• Discount rate.
During the year ended 31 December 2016 the fair value of biological assets and agricultural produce was estimated using discount
factors of 14.9% and 21.4% (31 December 2015: 23.0% and 34.6%) for non-current and current assets, respectively.
Although some of these assumptions are obtained from published market data, the majority of these assumptions are estimated
based on the Group’s historical and projected results (Note 14).
Useful lives of property, plant and equipment
The estimation of the useful life of an item of property, plant and equipment is a matter of management estimate based upon
experience with similar assets. In determining the useful life of an asset, management considers the expected usage, estimated
technical obsolescence, physical wear and tear and the physical environment in which the asset is operated. Changes in any of
these conditions or estimates may result in adjustments for future depreciation rates.
Deferred tax assets
Deferred tax assets, including those arising from unused tax losses are recognised to the extent that it is probable that they will be
recovered, which is dependent on the generation of sufficient future taxable profit. Based on management assessment the Group
decided to recognise deferred tax assets on unused tax losses, which will be utilized in future against existing deferred tax liabilities
and available future tax profits.
VAT recoverable
The balance of VAT recoverable may be realized by the Group either through a cash refund from the state budget or by set off
against VAT liabilities in future periods. Management classified the VAT recoverable balance as current or non-current based on
expectations as to whether it will be realized within twelve months from the reporting date. In addition, management assessed
whether an allowance for irrecoverable VAT needed to be created.
In making this assessment, management considered past history of receiving VAT refunds from the state budget. For VAT recoverable
expected to be set off against VAT liabilities in future periods, management based its estimates on detailed projections of expected
excess of VAT output over VAT input in the normal course of the business.
74
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
5. Segment information
The majority of the Group’s operations and non-current assets are located within Ukraine.
Segment information is analysed on the basis of the types of goods supplied by the Group’s operating divisions. The Group’s reportable
segments under IFRS 8 are as follows:
Poultry and related operations segment:
• sales of chicken meat
• sales of vegetable oil and related products
• other poultry related sales
Grain growing operations segment:
• sales of grain
Other agricultural operations segment:
• sales of meat processing products and other meat
• other agricultural operations (milk, feed grains and other)
The accounting policies of the reportable segments are the same as the Group’s accounting policies described in Note 3. Sales
between segments are carried out at market prices. The segment result represents operating profit under IFRS before unallocated
corporate expenses and loss on impairment of property, plant and equipment. Unallocated corporate expenses include management
remuneration, representative expenses, and expenses incurred in respect of the maintenance of office premises. This is the measure
reported to the chief operating decision maker for the purposes of resource allocation and assessment of segment performance.
The Group does not disclose geographical revenue information as it is not available and the cost to develop it would be excessive.
As of 31 December and for the year then ended the Group’s segmental information from continuing operations was as follows:
Year ended 31
December 2016
Poultry and
related
operations
Grain growing
operations
Other agricultural
operations
Total reportable
segments
Eliminations
Consolidated
External sales
970,387
84,753
80,322
1,135,462
-
1,135,462
29,759
195,872
1,000,146
207,969
280,625
116,670
249
80,571
10,259
1,361,342
334,898
225,880
(225,880)
-
(225,880)
1,135,462
-
-
-
-
334,898
(18,634)
(1,443)
(259,115)
55,706
97,463
97,010
38,894
74,823
18,955
60,767
33,336
3,685
2,907
5,039
32,198
1,657
97,463
97,010
38,894
1) Include finance income, finance costs, foreign exchange loss (net) and other expenses (net).
2) Additions to property, plant and equipment in 2016 (Note 12) do not include unallocated additions in the amount of USD 2,520 thousand.
3) Depreciation and amortization for the year ended 31 December 2016 does not include unallocated depreciation and amortization in the amount of
USD 1,557 thousand.
75
Sales between business
segments
Total revenue
Segment results
Unallocated corporate
expenses
Loss on impairment
of property, plant and
equipment
Other expenses, net1
Profit before tax from
continuing operations
Other information:
Additions to property,
plant and equipment2
Depreciation and
amortization expense3
Net change in fair value
of biological assets and
agricultural produce
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
5. Segment information (continued)
Year ended 31
December 2015
Poultry and
related
operations
Grain growing
operations
Other agricultural
operations
Total reportable
segments
Eliminations
Consolidated
External sales
878,393
117,240
66,282
1,061,915
-
1,061,915
Sales between business
segments
Total revenue
Segment results
Unallocated corporate
expenses
Other expenses, net 1
Loss before tax
from continuing
operations
Other information:
Additions to property,
plant and equipment 2
Depreciation and
amortization expense 3
Net change in fair value
of biological assets and
agricultural produce
24,795
903,188
280,913
145,535
262,775
70,606
90
66,372
9,200
170,420
1,232,335
360,719
(170,420)
(170,420)
-
97,166
62,568
54,164
23,753
1,330
1,778
152,660
88,099
19,483
(2,582)
2,950
19,851
-
-
-
1,061,915
360,719
(13,968)
(500,632)
(153,881)
152,660
88,099
19,851
1) Include loss from disposal of subsidiaries, finance income, finance costs, foreign exchange loss (net) and other expenses (net).
2) Additions to property, plant and equipment in 2015 (Note 12) do not include unallocated additions in the amount of USD 3,396 thousand.
3) Depreciation and amortization for the year ended 31 December 2015 does not include unallocated depreciation and amortization in the amount of
USD 802 thousand.
The Group’s export sales to external customers by major product types were as follows during the years ended 31 December 2016 and 2015:
Vegetable oil and related products
Chicken meat and related products
Grain
Other agricultural segment products
2016
295,596
243,725
80,990
14,409
634,720
2015
241,481
189,175
92,094
1,146
523,896
Export sales of vegetable oil and related products and export sales of grains are primarily made to global trading companies at CPT
port terms. The major markets for the Group’s export sales of chicken meat are Middle East, CIS countries and EU, as well as, to a lesser
extent, Northern Africa and Asia.
76
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
6. Revenue
Revenue for the years ended 31 December 2016 and 2015 was as follows:
Poultry and related operations segment
Chicken meat
Vegetable oil and related products
Other poultry related sales
Grain growing operations segment
Grain
Other agricultural operations segment
Other meat
Other agricultural sales
7. Cost of sales
Cost of sales for the years ended 31 December 2016 and 2015 was as follows:
Poultry and related operations
Grain growing operations
Other agricultural operations
2016
617,930
295,596
56,861
970,387
84,753
84,753
54,705
25,617
80,322
1,135,462
2016
680,574
62,526
69,150
812,250
For the years ended 31 December 2016 and 2015 cost of sales comprised the following:
Costs of raw materials and other inventory used
Payroll and related expenses
Depreciation and amortization expense
Other costs
2016
548,061
89,870
87,992
86,327
812,250
2015
599,839
241,794
36,760
878,393
117,240
117,240
43,852
22,430
66,282
1,061,915
2015
584,174
97,840
57,422
739,436
2015
502,174
85,787
79,946
71,529
739,436
By-products arising from the agricultural production process are measured at net realizable value, and this value is deducted from
the cost pool.
77
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
8. Selling, general and administrative expenses
Selling, general and administrative expenses for the years ended 31 December 2016 and 2015 were as follows:
Payroll and related expenses
Services
Depreciation expense
Fuel and other materials used
Representative costs and business trips
Advertising expense
Bank services and conversion fees
Insurance expense
Other
2016
26,882
17,188
10,575
8,032
6,886
4,633
469
398
3,710
78,773
2015
25,022
13,627
8,955
8,520
7,412
5,031
350
630
2,782
72,329
Remuneration to the auditors, included in Services above, approximate to USD 554 thousand and USD 702 thousand for the years
ended 31 December 2016 and 2015, respectively. Such remuneration includes both audit and non-audit services, with the audit fees
component approximating USD 390 thousand and USD 430 thousand for the years ended 31 December 2016 and 2015, respectively.
9. VAT refunds and other government grants income
The Ukrainian legislation provides for a number of different grants and tax benefits for companies involved in agricultural operations. The
below mentioned grants and similar privileges are established by Verkhovna Rada (the Parliament) of Ukraine, as well as by the Ministry
of Agrarian Policy of Ukraine, the Ministry of Finance of Ukraine, the State Committee of Water Industry, the customs authorities and local
district administrations.
VAT refunds and other government grants recognized by the Group as income during the years ended 31 December 2016 and 2015
were as follows:
VAT refunds
Other government grants
2016
34,056
-
34,056
2015
75,410
25
75,435
VAT refunds for agricultural industry
According to the Tax Code of Ukraine issued in December 2010 and effective since 1 January 2011 (“Tax Code”), companies that generated
not less than 75% of gross revenues for the previous tax year from sales of own agricultural products are entitled to retain VAT on sales of
agricultural products, net of VAT paid on purchases, for use in agricultural production.
During the year ended 31 December 2015 and before, VAT collected from agricultural producers was fully retained by these companies. On
24 December 2015, the Law “On amending the Tax Code of Ukraine and certain legislative acts of Ukraine in terms of ensuring the balanced
budget receipts in 2016” was adopted effective 1 January 2016. In accordance with the new legislation, agricultural producers will be
entitled to retain only a portion of VAT on agricultural operations. Producers of grain and industrial crops, cattle and dairy producers, poultry
and other agriculture producers shall retain VAT in a portion of 15%, 80% and 50%, respectively.
78
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
9. VAT refunds and other government grants income (continued)
On 30 December 2016 the President of Ukraine signed the Law No. 1791 On Amendments to the Tax Code of Ukraine Regarding the
Balancing of Budget Revenues in 2017 (hereinafter the “Law No. 1791”). The Law No. 1791 introduces changes to VAT administration
for agricultural companies which previously enjoyed a special VAT regime.
However, in order to continue state support for agricultural companies, the Law No. 1791 introduces budget subsidies for agricultural
companies by amending the Law of Ukraine On State Support of Agriculture of Ukraine. From 2017 onwards, budget subsidies will be
provided for 5 consecutive calendar years, until 1 January 2022. The agricultural producers eligible for the subsidies will include those
involved in poultry production and animal farming, as well as fruit and vegetable farmers.
For each agricultural producer, the amount of the subsidy is not to exceed the amount of VAT tax paid by the producers, and will be
distributed on a monthly basis.
10. Finance costs
Finance costs for the years ended 31 December 2016 and 2015 were as follows:
Interest on corporate bonds
Interest on bank borrowings
Interest on obligations under finance leases
Bank commissions and other charges
Total finance costs
Less:
Finance costs included in the cost of qualifying assets
2016
68,184
35,186
1,835
6,063
111,268
(4,425)
106,843
2015
74,321
24,812
2,288
6,645
108,066
(2,495)
105,571
For qualifying assets, the weighted average capitalization rate on funds borrowed during the year ended 31 December 2016 was
9.69% (2015: 9.29%).
Interest on corporate bonds for the years ended 31 December 2016 and 2015 includes amortization of premium and debt issue costs
on bonds issued in the amounts of USD 5,978 thousand and USD 5,020 thousand, respectively.
11. Income tax
The majority of the Group’s operating entities are located in Ukraine, therefore the effective tax rate reconciliation is completed
based on Ukrainian statutory rates. The net results of the Group companies incorporated in jurisdictions other than Ukraine were
insignificant during the years ended 31 December 2016 and 2015.
During the year ended 31 December 2016, the Group’s companies that have the status of Corporate Income Tax (the “CIT”) payers
in Ukraine were subject to income tax. The Tax Code of Ukraine introduced an 18% income tax rate effective from 1 January 2014.
The deferred income tax assets and liabilities as of 31 December 2016 and 2015 are measured based on the tax rates expected to be
applied to the period when the temporary differences are expected to reverse.
79
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
11. Income tax (continued)
The majority of the Group companies that are involved in agricultural production (poultry farms and other entities engaged in
agricultural production) benefit substantially from the status of an agricultural producer. On 1 January 2015, the Law “On Amendments
to the Tax Code of Ukraine and Certain Legislative Acts of Ukraine on Tax Reform” (the “Law”) became effective. Under the Law, the
fixed agricultural tax regime (“FAT”) was transformed, without substantial changes to tax rules, by means of introducing a separate (4th)
group of single taxpayers – agricultural manufacturers. The tax rates calculated as a percentage of the target-ratio based monetary
valuation per hectare of agricultural land resulting in substantially lower tax charges compared to CIT. Agricultural manufacturers are
eligible to apply for a single tax if they meet both the following two requirements:
1. The share of the entity’s income from agricultural production (i.e., sale of the entity’s cultivated and processed products) to the total
share of its income equals or exceeds 75 per cent; and
2. These agriproducts were cultivated on land that such agricultural manufacturers own or lease, and the ownership title and leases
have been duly registered.
The components of income tax expense/(benefit) were as follows for the years ended 31 December 2016 and 2015
Current income tax expense/(benefit)
Deferred tax benefit
Income tax benefit
2016
621
(13,701)
(13,080)
2015
(1,460)
(39,682)
(41,142)
The reconciliation between profit before tax from continuing operations multiplied by the statutory tax rate and the tax expense for the
years ended 31 December 2016 and 2015 was as follows:
Profit/(Loss) before income tax
Income tax expense calculated at rates effective during the year ended in respective
jurisdictions
Tax effect of:
Income generated by FAT payers (exempt from income tax)
Non-deductible expenses
Expenses not deducted for tax purposes
Translation loss
Income tax benefit
2016
55,706
7,763
(40,678)
12,463
7,004
368
(13,080)
2015
(153,881)
(28,483)
(41,413)
14,493
11,136
3,125
(41,142)
During the years ended 31 December 2016 and 2015 the Group did not recognize deferred tax assets arising from temporary
differences of USD 38,911 thousand, USD 61,867 thousand, respectively, as the Group did not intend to deduct the relevant expenses
for tax purposes in subsequent periods, as there are uncertainties on whether sufficient taxable profits will be generated by particular
companies of the Group in the future. There is no expiration date of accounting tax losses according to Tax Code of Ukraine.
Deferred tax liabilities have not been recognized in respect of unremitted earnings of Ukrainian subsidiaries as the earnings can be
remitted free from taxation currently and in future years, based on current legislation.
80
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
11. Income tax (continued)
As of 31 December 2016 and 2015 deferred tax assets and liabilities comprised the following:
Deferred tax assets arising from:
Property, plant and equipment
Other current liabilities
Inventories
Tax losses
Total deferred tax assets
Deferred tax liabilities arising from:
Property, plant and equipment
Inventories
Prepayments to suppliers
Total deferred tax liabilities
Net deferred tax liabilities
2016
6
761
326
81,923
83,016
(92,700)
(19)
-
(92,719)
(9,703)
2015
170
926
1,066
79,758
81,920
(89,396)
(4)
(7)
(89,407)
(7,487)
Certain Group’s companies incurred losses during the 2016 and preceding years. The Group has recognised deferred tax assets on
accounting tax losses to the extent of possible future taxable income.
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against
current tax liabilities and when the deferred income taxes relate to the same fiscal authority. The following amounts, determined after
appropriate offsetting, are presented in the consolidated statement of financial position as of 31 December 2016 and 2015:
Deferred tax assets
Deferred tax liabilities
2016
1,561
(11,264)
(9,703)
The movements in net deferred tax liabilities for the years ended 31 December 2016 and 2015 were as follows:
Net deferred tax liabilities as of beginning of the year
Deferred tax benefit
Deferred tax liabilities arising on acquisition of subsidiaries
Deferred tax on revaluation of property, plant and equipment charged directly to
other comprehensive income
Translation difference
Net deferred tax liabilities as of end of the year
2016
(7,487)
13,701
-
(16,143)
226
(9,703)
2015
5,740
(13,227)
(7,487)
2015
(20,424)
39,682
42
(30,842)
4,055
(7,487)
81
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
12. Property, plant and equipment
The following table represents movements in property, plant and equipment for the year ended 31 December 2016:
Cost or fair value:
Land
Buildings
and
structures
Grain
storage
facilities
Production
machinery
Auxiliary
and other
machinery
Utilities
and
infrastructure
Vehicles and
agricultural
machinery
Other
fixed
assets(1)
Construction
in progress
Total
At 1 January 2016
775
595,322
65,181
280,493
36,947
57,575
214,391
16,348
79,803
1,346,835
Additions
Disposals
Transfers
Reclassified as held for
sale (Note 20)
Revaluations
Impairment loss(2)
567
17,433
340
18,304
10,389
5,356
18,744
2,185
26,665
99,983
(39)
(1,157)
(93)
(676)
(379)
(76)
(2,900)
(139)
(247)
(5,706)
-
19,500
-
(37,450)
-
-
11,228
144
2,684
906
88
(34,550)
-
(8,223)
-
(842)
(19,089)
(10,531)
(243)
(76,378)
-
-
-
28,433
-
2,691
24,263
31,500
-
-
86,887
(24,315)
-
(2,437)
(688)
(229)
(6,052)
(75)
(2,798)
(36,594)
Translation difference
(86)
(51,181)
(8,594)
(33,750)
(7,575)
(8,701)
(18,759)
(328)
(9,229)
(138,203)
At 31 December 2016
1,217
518,152
85,267
264,939
41,529
80,030
218,741
7,548
59,401
1,276,824
Accumulated depreciation
and impairment:
At 1 January 2016
Depreciation charge for
the year(3)
Elimination upon disposal
Eliminated on revaluation
Reclassified as held for
sale (Note 20)
Translation difference
At 31 December 2016
Net book value
At 1 January 2016
-
-
-
-
-
-
-
-
5,083
20,224
10,999
14,503
31,805
5,971
15,967
5,090
27,010
3,106
2,665
45,218
1,341
(213)
-
(626)
(145)
(63)
(2,180)
(132)
-
(5,034)
-
(9,059)
(12,993)
(27,630)
-
(8,808)
-
(3,860)
-
(602)
(12,692)
(922)
2,235
(722)
(2,974)
(2,611)
(1,716)
(978)
(767)
9,181
4,417
39,774
2,290
1,794
33,543
5,491
-
-
-
-
-
-
-
88,585
100,397
(3,359)
(54,716)
(26,884)
(7,533)
96,490
775
595,322
60,098
260,269
25,948
43,072
182,586
10,377
79,803
1,258,250
At 31 December 2016
1,217
508,971
80,850
225,165
39,239
78,236
185,198
2,057
59,401
1,180,334
1) Other fixed assets include bearer plants, office furniture and equipment;
2) Impaiment loss contains USD 35,151 thousand of loss on impairment of property, plant and equipment included in a disposal group held for sale;
3) Depreciation charge for the year included in results from discontinued operations USD 7,298 thousand.
82
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
12. Property, plant and equipment (continued)
The following table represents movements in property, plant and equipment for the year ended 31 December 2015:
Cost or fair value:
Land
Buildings
and
structures
Grain
storage
facilities
Production
machinery
Auxiliary
and other
machinery
Utilities
and
infrastructure
Vehicles and
agricultural
machinery
Other
fixed
assets(1)
Construction
in progress
Total
At 1 January 2015
14,099
723,297
99,774
300,537
54,903
80,638
208,456
23,317
40,661
1,545,682
Additions
Disposals
Transfers
Disposals of Voronezh
Agroholding (Note 2)
Acquisitions of
subsidiaries (Note 2)
Revaluations
-
-
405
18,157
2,426
28,059
1,087
3,624
37,131
1,236
63,931
156,056
-
23
(294)
(108)
(567)
3,553
-
1,460
(305)
936
(224)
882
(2,075)
(163)
-
(3,736)
110
(36)
(6,928)
-
(12,470)
(7,732)
(9,172)
4,427
4,574
-
-
(2,620)
(193)
(17,095)
(4)
(164)
(49,450)
1,300
636
16,603
139
184
27,863
101,054
-
54,787
-
-
39,228
-
-
195,069
Translation difference
(1,282)
(247,140)
(32,313)
(103,783)
(18,354)
(27,788)
(67,967)
(8,141)
(17,881)
(524,649)
At 31 December 2015
775
595,322
65,181
280,493
36,947
57,575
214,391
16,348
79,803
1,346,835
Accumulated depreciation
and impairment:
At 1 January 2015
Depreciation charge for
the year(2)
Elimination upon
disposal
Eliminated on revaluation
Disposals of Voronezh
Agroholding (Note 2)
Translation difference
At 31 December 2015
Net book value
-
-
-
-
-
-
-
-
3,584
-
15,671
17,970
-
8,598
20,301
3,440
27,693
1,632
3,239
44,040
511
(290)
(108)
(485)
(302)
(223)
(923)
(158)
(17,675)
-
(4,921)
-
-
(6,477)
(166)
(398)
-
(644)
(23)
(1,465)
-
-
(2,170)
(1,435)
(2,063)
(5,358)
(6,460)
(3,370)
(2,980)
-
5,083
20,224
10,999
14,503
31,805
5,971
-
-
-
-
-
-
-
45,823
100,856
(2,489)
(29,073)
(2,696)
(23,836)
88,585
At 1 January 2015
14,099
723,297
96,190
300,537
39,232
62,668
208,456
14,719
40,661
1,499,859
At 31 December 2015
775
595,322
60,098
260,269
25,948
43,072
182,586
10,377
79,803
1,258,250
1) Other fixed assets include bearer plants, office furniture and equipment
2) Depreciation charge for the year included in results from discontinued operations USD 5,764 thousand
83
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
12. Property, plant and equipment (continued)
As of 31 December 2016, included within construction in progress were prepayments for property, plant and equipment in the amount
of USD 8,661 thousand (2015: USD 20,501 thousand).
As of 31 December 2016, included within property, plant and equipment were fully depreciated assets with the original cost of USD
9,490 thousand (2015: USD 9,431 thousand).
As of 31 December 2016 and 2015 the net carrying amount of property, plant and equipment, represented by vehicles and agricultural
machinery, held under finance lease agreements was USD 39,460 thousand and USD 64,018 thousand, respectively.
Impairment assessment
The Group reviews its property, plant and equipment each period to determine if any indication of impairment exists. Based on these
reviews, there were no indicators of impairment as of 31 December 2016 and 2015, except for impairment of certain assets in the
amount of USD 1,443 thousand.
Revaluation of vehicles and agricultural machinery
During the year ended 31 December 2016 and 2015, the Group engaged independent appraisers to revalue its vehicles and agricultural
machinery. The effective dates of revaluation were 31 March 2016 and 31 March 2015 respectively. The valuation, which conformed
to the International Valuation Standards, was determined using market comparable approach adjusted based on age and condition
of the machinery.
Revaluation of production machinery
During the year ended 31 December 2015, the Group engaged independent appraisers to revalue its production machinery. The
effective date of revaluation was 31 March 2015. The valuation, which conformed to the International Valuation Standards, was
determined using market comparable approach adjusted based on age and condition of the machinery or for items of specialized
nature replacement cost method. During the year ended and as of 31 December 2016, the Group evaluated if the fair value of
production machinery is materially different from the reported book values. Based on analysis of fluctuations of the cumulative index
of producers prices, index of physical depreciation and functional currency depreciation, the Management assessed it not to be
materially different from the reported book values.
Revaluation of buildings and structures
During the year ended 31 December 2015, the Group engaged independent appraisers to revalue its buildings and structures. The
effective date of revaluation was 31 December 2015. The valuation, which conformed to the International Valuation Standards, was
determined using replacement cost method by reference to observable prices in an active market adjusted based on age and
condition of the buildings and structures. During the year ended and as of 31 December 2016, the Group evaluated if the fair value of
buildings and structures is materially different from the reported book values. Based on analysis of fluctuations of the cumulative index
of inflation of construction works and index of physical depreciation, the Management assessed it not to be materially different from
the reported book values.
Revaluation of grain storage facilities
During the year ended 31 December 2016, the Group engaged independent appraisers to revalue its grain storage facilities as of 31
March 2016. The valuation, which conformed to the International Valuation Standards, was determined using replacement cost method
by reference to observable prices in an active market adjusted based on age and condition of the facilities. During the year ended 31
December 2015, the Group assessed the fair value of grain storage not to be materially different from the reported book values.
84
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
12. Property, plant and equipment (continued)
Revaluation of Auxiliary and other machinery
During the year ended 31 December 2016 the Group engaged an independent appraiser to determine the fair value of its Auxiliary
and other machinery as of 31 March 2016. The valuation, which conformed to the International Valuation Standards, was determined
using the market comparable approach adjusted based on age and condition of the machinery or for items of specialized nature
replacement cost method.
Revaluation of Utilities and infrastructure
During the year ended 31 December 2016, the Group engaged independent appraisers to revalue its utilities and infrastructure as of
31 March 2016. The valuation, which conformed to the International Valuation Standards, was determined using replacement cost
method by reference to observable prices in an active market adjusted based on age and condition of the facilities.
Had the Group’s property plant and equipment been measured on a historical cost basis, their carrying amount would have been as follows:
Fair value hierarchy
Fair value
Net book value if carried at cost
Buildings and structures
Grain storage facilities
Production machinery
Vehicles and agricultural machinery
Utilities and infrastructure
Auxiliary and other machinery
Level 3
Level 3
Level 2
Level 2
Level 3
Level 2,3
2016
508,971
80,850
225,165
185,198
78,236
39,239
2015
595,322
60,098
260,269
182,586
43,072
25,948
2016
142,990
38,504
109,178
39,791
42,427
26,477
2015
188,420
44,319
111,018
51,695
43,072
25,948
There are no restrictions on the distribution of the revaluation surplus to the shareholders.
85
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
13. Land lease rights
Land lease rights represent rights for operating leases of agricultural land plots. The following table represents the movements in land
lease rights for the years ended 31 December 2016 and 2015:
Cost:
As of 1 January
Additions
Disposal of subsidiaries (Note 2)
Acquired through business combinations (Note 2)
Translation difference
As of 31 December
Accumulated amortization:
As of 1 January
Amortization charge for the year
Disposal of subsidiaries (Note 2)
Translation difference
As of 31 December
Net book value:
As of 1 January
As of 31 December
2016
53,868
7,755
-
-
(6,750)
54,873
7,616
4,582
-
(1,170)
11,028
46,252
43,845
2015
34,301
6,644
(2,212)
30,662
(15,527)
53,868
7,065
3,519
(424)
(2,544)
7,616
27,236
46,252
86
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
14. Biological assets
The balances of non-current biological assets were as follows as of 31 December 2016 and 2015:
Thousand units
Carrying amount
Thousand units
Carrying amount
2016
2015
Milk cows, units
Boars and sows, units
Other non-current bearer biological assets
Total bearer non-current biological assets
Non-current cattle and pigs, units
Total consumable non-current biological
assets
Total non-current biological assets
18.1
1.7
3.5
12,532
232
323
13,087
1,471
1,471
14,558
18.4
4.2
3.6
11,343
2,494
50
13,887
1,317
1,317
15,204
The balances of current biological assets were as follows as of 31 December 2016 and 2015:
Thousand units
Carrying amount
Thousand units
Carrying amount
2016
2015
Breeders held for hatchery eggs
production, units
Total bearer current biological assets
Broiler chickens, units
Hatchery eggs, units
Crops in fields, hectare
Cattle and pigs, units
Other current consumable biological assets
Total consumable current biological
assets
Total current biological assets
3,741
38,685
30,701
93
16.7
46,483
46,483
40,558
6,202
20,977
1,845
149
69,731
116,214
Other current consumable biological assets include geese and other livestock.
3,381
42,426
31,102
109
40
52,523
52,523
49,234
8,157
27,224
2,412
250
87,277
139,800
87
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
14. Biological assets (continued)
The following table represents movements in major biological assets for the years ended 31 December 2016 and 2015:
As of 31 December 2014
Costs incurred
Changes on business combination (Note 2)
Gains arising from change in fair value of biological assets less
costs to sell
Transfer to consumable biological assets
Transfer to bearing non-current biological assets
Decrease due to sale
Decrease due to harvest
Translation difference
As of 31 December 2015
Costs incurred
Gains arising from change in fair value of biological assets less
costs to sell
Transfer to consumable biological assets
Transfer to bearing non-current biological assets
Decrease due to sale
Decrease due to harvest
Reclassified as held for sale
Translation difference
As of 31 December 2016
Broiler chickens
Crops in fields
Milk cows, boars, sows
15,133
4,906
-
10,304
-
5,192
(319)
(15,800)
(5,579)
13,837
5,611
7,454
-
5,506
(498)
Breeders held for
hatchery eggs
production
38,701
87,002
-
54,720
387,420
-
52,604
217,095
(104,134)
104,134
-
-
(5,681)
(15,969)
52,523
64,707
29,415
-
-
(694,045)
(20,090)
49,234
459,893
162,626
(85,857)
85,857
-
-
-
-
28,570
180,460
213
57,053
-
-
-
(228,744)
(10,328)
27,224
219,285
107,259
-
-
-
(17,485)
(8,134)
(712,668)
(329,794)
-
(1,661)
12,764
-
(6,171)
46,483
1,204
(5,588)
40,558
-
(2,997)
20,977
Information on movements in hatchery eggs and cattle and pigs groups have been considered immaterial for disclosure.
Biological assets of the Group are measured at fair value within Level 3 of the fair value hierarchy, except for cattle and pigs that can
be measured based on market prices of livestock of a similar age, breed and genetic merit, and which are therefore measured at fair
value within Level 2 of the fair value hierarchy. There were no transfers between any levels during the year.
88
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
14. Biological assets (continued)
The following unobservable inputs were used to measure biological assets:
Description
Fair value
as at 31
December
2016
Crops in fields
20,977
Valuation
technique(s)
Unobservable inputs
Range of unobservable
inputs (average)
Relationship of unobservable inputs
to fair value
Discounted
cash flows
Crops yield - tonnes
per hectare
Crops price – per
tonne
3.3 – 6.2 (5.2)
USD 101 - 341 (185)
Discount rate
21.4%
Breeders held for hatchery
eggs production
46,483
Discounted
cash flows
Broiler chickens
40,558
Cash flows
Number of hatchery
eggs produced by
one breeder
Hatchery egg price
– per egg
Discount rate
Average weight of
one broiler - kg
Poultry meat price –
per kg
165
USD 0.20
14.9%
2.4
UAH 6.7 – 35.6 (23.59)
The higher the crops yield, the
higher the fair value
The higher the market price, the
higher the fair value
The higher the discount rate,
the lower the fair value
The higher the number, the
higher the fair value
The higher the market price, the
higher the fair value
The higher the discount rate,
the lower the fair value
The higher the weight, the
higher the fair value
The higher the market price, the
higher the fair value
Milk cows
12,532
Discounted
cash flows
Daily milk yield - litre
per cow
13.12 - 20.58 (18.13)
The higher the milk yield, the
higher the fair value
Weight of the cow -
kg per cow
514 - 545 (531)
Milk price – per litre
UAH 5.36 – 6.17 (5.83)
Meat price – per kg
UAH 13.55 - 18.88
(17.10)
Discount rate
14.9%
The higher the weight, the
higher the fair value
The higher the market price, the
higher the fair value
The higher the market price, the
higher the fair value
The higher the discount rate,
the lower the fair value
If the above unobservable inputs to the valuation model were 10% higher/lower while all the other variables were held constant, the
carrying amount of the current and non-current biological assets would increase /decrease by USD 46,227 thousand and USD 42,296
thousand, respectively.
89
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
15. Inventories
The balances of inventories were as follows as of 31 December 2016 and 2015:
Components for mixed fodder production
Work in progress
Other raw materials
Spare parts
Sunflower oil
Packaging materials
Mixed fodder
Other inventories
2016
108,571
26,073
24,186
10,201
9,958
3,478
3,191
1,674
187,332
2015
185,455
31,343
24,373
10,395
16,186
4,705
4,756
1,815
279,028
As of 31 December 2016 and 2015 work in progress in the amount of USD 26,073 thousand and USD 31,343 thousand comprised
expenses incurred in cultivating fields to be planted in the years 2017 and 2016 respectively.
As of 31 December 2016, components for mixed fodder production with carrying amount of USD 106,101 thousand (2015: USD 112,500
thousand) were pledged as collateral to secure bank borrowings (Note 23).
16. Agricultural produce
The balances of agricultural produce were as follows as of 31 December 2016 and 2015:
Chicken meat
Other meat
Grain
Fruits, vegetables and other crops
Thousand tonnes
Carrying amount
Thousand tonnes
Carrying amount
2016
2015
33.8
N/A1
847
N/A1
36,441
2,354
116,316
12,278
167,389
24.7
N/A1
757
N/A1
26,806
2,139
79,997
11,632
120,574
1) Due to the diverse composition of noted produce unit of measurement is not applicable.
The fair value of Agricultural produce was estimated based on market price as of date of harvest and is within Level 2 of the fair value
hierarchy.
As of 31 December 2016, grains with carrying amount of USD 4,000 thousand were pledged as collateral to secure advances received
from customers (Note 27).
90
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
17. Taxes recoverable and prepaid
Taxes recoverable and prepaid were as follows as of 31 December 2016 and 2015:
VAT recoverable
Miscellaneous taxes prepaid
2016
26,034
5,201
31,235
18. Trade accounts receivable, net
The balances of trade accounts receivable were as follows as of 31 December 2016 and 2015:
Agricultural operations
Due from related parties (Note 28)
Sunflower oil sales
Less: allowance for irrecoverable amounts
2016
50,737
113
284
(266)
50,868
2015
67,538
4,493
72,031
2015
36,620
173
2,892
(885)
38,800
The allowance for irrecoverable amounts is estimated at the level of 25% of trade accounts receivable on sales of poultry meat which
are over 30 days past due (for trade accounts receivable on other sales – over 60 days). Trade accounts receivable on sales of poultry
meat which are aged over 270 days and trade accounts receivable on other sales which are aged over 360 days are provided in full.
The Group also performs specific analysis of trade accounts receivable due from individual customers to determine whether any
further adjustments are required to the allowance for irrecoverable amounts assessed on the percentages disclosed above. Based on
the results of such a review as of 31 December 2016 the Group determined that trade accounts receivable on sales of poultry meat of
USD 1,909 thousand (2015: USD 5 thousand) were overdue but do not require allowance for irrecoverable amounts.
For the years ended 31 December 2016 and 2015 the Group has not recorded any impairment of receivables relating to amounts
owed by related parties as management is certain about their recoverability.
91
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
18. Trade accounts receivable, net (continued)
The ageing of trade accounts receivable that were impaired as of 31 December 2016 and 2015 was as follows:
Trade accounts receivable on sales of
poultry meat:
Over 30 but less than 270 days
Over 270 days
Trade accounts receivable on other sales:
Over 60 but less than 360 days
Over 360 days
Trade accounts receivable
Allowance for irrecoverable amounts
2016
2015
2016
2015
-
-
-
334
120
454
454
7
558
565
183
279
462
1,027
-
-
-
(146)
(120)
(266)
(266)
(2)
(558)
(560)
(46)
(279)
(325)
(885)
19. Cash and cash equivalents
The balances of cash and cash equivalents were as follows as of 31 December 2016 and 2015:
Cash on hand and with banks
EUR short-term deposits with banks
UAH short-term deposits with banks
2016
150,951
3,588
31
154,570
2015
57,633
43
1,667
59,343
During the year ended 31 December 2016, UAH denominated short-term deposits earned an effective interest rate of 7.3% (2015:
12.5%). All cash and cash equivalents are held within reputable foreign and Ukrainian banks.
Cash and cash equivalents included in disposal group classified as held for sale as of 31 December 2016 comprised USD 2,098
thousand.
As of 31 December 2016, EUR short-term deposits with banks in the amount of USD 3,588 thousand (2015: USD 43 thousand) were
restricted as collateral to secure bank borrowings.
92
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
20. Assets classified as held for sale
As described in Note 2, by year-end the management of the Group had committed to a plan to dispose of its Crimean companies
and anticipated that the disposal was completed on 17 February 2017 (Note 35).
Immediately before the classification of Crimean companies as a disposal group held for sale, the recoverable amount was estimated
for certain items of property, plant and equipment and an impairment loss was recognised in the amount of USD 35,151 thousand.
The impairment loss in the amount of USD 28,286 thousands is recognised in other comprehensive income to the extent of any credit
balance existing in the revaluation reserve. The remaining part of the impairment loss in the amount of USD 6,865 thousands is recognised
in profit or loss for the period.
The ultimate disposal value was higher than the aggregate carrying amount of the assets comprising the discontinued operations (Note 35).
As such, as at 31 December 2016, no further impairment loss on reclassification of disposal group as held for sale was recognized.
The major classes of assets and liabilities of the Crimean companies at the end of the reporting period are as follows:
Property, plant and equipment, net
Other non-current assets
Biological assets
Agricultural produce
Inventories
Trade accounts receivable, net
Taxes recoverable and prepaid, net
Other current assets
Cash and cash equivalents
Total assets classified as held for sale
Trade accounts payable
Other current liabilities
Total liabilities associated with assets classified as held for sale
Intragroup accounts receivable and payable eliminated on consolidation, net
Net assets of disposal group
As at 31 December 2016
49,494
1,367
9,364
8,708
11,113
1,806
2,745
1,701
2,098
88,396
(3,472)
(1,692)
(5,164)
(5,691)
77,541
93
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
21. Shareholders’ equity
Share capital
As of 31 December 2016 and 2015 the authorized, issued and fully paid share capital of MHP S.A. comprised the following number of
shares:
Number of shares authorized for issue
Number of shares issued and fully paid
Number of shares outstanding
2016
159,250,000
110,770,000
106,781,794
2015
159,250,000
110,770,000
106,250,399
The authorized share capital as of 31 December 2016 and 2015 was EUR 318,500 thousand represented by 159,250,000 shares with par
value of EUR 2 each.
All shares have equal voting rights and rights to receive dividends, which are payable at the discretion of the Group
22. Non-controlling interests
The table below shows details of non-wholly owned subsidiaries of the Group that have material non-controlling interests:
Name of subsidiary
Proportion of ownership interests and
voting rights held by non-controlling
interests
Profit (loss) allocated to
non-controlling interests
Accumulated non-controlling interests
Myronivsky Zavod po Vygotovlennyu Krup i
Kombikormiv
Starynska Ptahofabryka (Note 2)
Other subsidiaries with immaterial non-
controlling interests
2016
11.5%
0.0%
n/a
n/a
2015
11.5%
5.0%
n/a
n/a
2016
2015
2016
(921)
(1,615)
3,638
-
3,449
-
6,717
5,796
5,839
7,673
13,060
16,698
2015
3,977
16,500
7,650
28,127
Summarised financial information in respect of each of the Group’s subsidiaries that has material non-controlling interests is set out
below. The summarised financial information below represents amounts before intragroup eliminations.
94
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
22. Non-controlling interests (continued)
Myronivsky Zavod po Vygotovlennyu Krup i
Kombikormiv
Starynska Ptahofabryka
2016
2015
2015
312,765
368,048
335,617
104,578
113,468
299,919
361,248
Current assets
Non-current assets
Current liabilities
30,503
30,850
-
318,770
97,474
(28,495)
Non-current liabilities
85,648
85,488
Equity attributable to owners of the Group
28,138
30,803
Revenue
Expenses
509,114
428,458
(517,121)
(442,501)
(Loss)/profit for the year
(8,007)
(14,043)
68,979
(Loss)/profit attributable to owners of the Group
(7,086)
(12,428)
(Loss)/profit attributable to the non-controlling interests
(921)
(1,615)
(Loss)/profit for the year
(8,007)
(14,043)
65,530
3,449
68,979
Other comprehensive income/(loss) attributable to owners of the
Company
4,480
5,765
(123,638)
Other comprehensive income/(loss) attributable to the non-controlling
interests
582
749
(6,507)
Other comprehensive income/(loss) for the year
5,062
6,514
(130,145)
Total comprehensive income/(loss) attributable to owners of the
Company
(2,606)
(6,663)
(58,108)
Total comprehensive income/(loss) attributable to the non-controlling
interests
(339)
(866)
Total comprehensive income/(loss) for the year
(2,945)
(7,529)
Net cash inflow from operating activities
4,723
863
Net cash outflow from investing activities
(2,420)
(1,095)
Net cash outflow from financing activities
-
(11,337)
(3,058)
(61,166)
1,209
(1,025)
-
95
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
23. Bank borrowings
The following table summarizes bank borrowings and credit lines outstanding as of 31 December 2016 and 2015:
Bank
Non-current
Foreign banks
Foreign banks
Current
Ukrainian banks
Foreign banks
Current portion of
long-term bank borrowings USD,EUR
Total bank borrowings
Currency
WAIR 1
USD’ 000
WAIR 1
USD’ 000
2016
2015
USD
EUR
USD
USD
8,09%
1,33%
7,20%
6,93%
7.87%
1.49%
7.03%
6.43%
241,823
17,744
259,567
68,752
65,500
102,555
236,807
496,374
234,463
43,668
278,131
50,985
90,000
108,072
249,057
527,188
1) WAIR represents the weighted average interest rate on outstanding borrowings.
The Group’s borrowings are drawn from various banks as term loans, credit line facilities and overdrafts. Repayment terms of principal
amounts of bank borrowings vary from monthly repayment to repayment on maturity depending on the agreement reached with
each bank. Interest on the borrowings drawn with the Ukrainian banks is payable on a monthly or quarterly basis. Interest on borrowings
drawn with foreign banks is payable semi-annually.
Term loans and credit line facilities were as follows as of 31 December 2016 and 2015:
Credit lines
Term loans
2016
134,252
362,122
496,374
2015
140,985
386,203
527,188
As of 31 December 2016 and 2015 all of the Group’s bank term loans and credit lines bear floating interest rates.
Bank borrowings and credit lines outstanding as of 31 December 2016 and 2015 were repayable as follows:
Within one year
In the second year
In the third to fifth year inclusive
After five years
96
2016
236,944
134,837
113,758
10,835
496,374
2015
249,057
97,952
164,979
15,200
527,188
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
23. Bank borrowings (continued)
As of 31 December 2016, the Group had available undrawn facilities of USD 56,479 thousand (2015: USD 84,774 thousand). These
undrawn facilities expire during the period from Aigust 2017 until January 2020.
The Group, as well as, particular subsidiaries of the Group have to comply with certain covenants imposed by the banks providing the
loans. The main covenants which are to be complied with by the Group are as follows: liability to equity ratio, net debt to EBITDA ratio,
EBITDA to interest expenses ratio and current ratio. The Group subsidiaries are also required to obtain approval from lenders regarding
the property to be used as collateral.
During the years ended 31 December 2016 and 2015 the Group has complied with all covenants imposed by banks providing the
loans.
As of 31 December 2016, the Group had borrowings of USD 89,046 thousand (2015: USD 94,168 thousand) that were secured. These
borrowings were secured by inventories with a carrying amount of USD 106,101 thousand (2015: USD 112,500 thousand) (Note 15) and
deposits with banks in the amount of USD 4,165 thousand (2015: USD 4,168 thousand) that were restricted as collateral to secure bank
borrowings.
As of 31 December 2016 and 2015 accrued interest on bank borrowings was USD 7,606 thousand and USD 8,203 thousand, respectively.
24. Bonds issued
Bonds issued and outstanding as of 31 December 2016 and 2015 were as follows:
8.25% Senior Notes due in 2020
Unamortized debt issuance cost
Less:
Current portion of bonds issued
Total long-term portion of bonds issued
2016
750,000
(24,639)
725,361
-
725,361
2015
750,000
(21,470)
728,530
-
728,530
As of 31 December 2016 and 2015 accrued interest on bonds issued was USD 15,125 thousand and USD 15,125 thousand, respectively.
8.25% Senior Notes
On 2 April 2013, MHP S.A. issued USD 750,000 thousand of 8.25% Senior Notes due in 2020 at an issue price of 100% of the principal
amount. USD 350,000 thousand out of issued USD 750,000 thousand 8.25% Senior Notes were used to facilitate the early redemption and
exchange of its existing 10.25% Senior Notes due in 2015.
The early redemption of 10.25% Senior Notes due in 2015 from the issue of 8.25% Senior Notes due in 2020, which were placed with the
same holders, resulted in a change in the net present value of the future cash flows of less than 10%, and thus was accounted for as
modification and all the related expenses, including consent fees, were capitalized and will be amortized over the maturity period of
the 8.25% Senior Notes due in 2020 in the amount of USD 28,293 thousand.
97
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
24. Bonds issued (continued)
8.25% Senior Notes (continued)
Other related expenses, including consent fees, in the amount of USD 16,654 thousand were expensed as incurred.
The Senior Notes are jointly and severally guaranteed on a senior basis by MHP, Druzhba Narodiv, Druzhba Narodiv Nova, Myronivsky
Zavod po Vygotovlennyu Krup i Kombikormiv, Oril-Leader, Katerynopilsky Elevator, Ptahofabryka Peremoga Nova, Zernoproduct,
Myronivska Ptahofabryka, Starynska Ptahofabryka, Agrofort, NPF Urozhay, Vinnytska Ptahofabryka, Raftan Holding Limited, Scylla
Capital Limited.
Interest on the Senior Notes was payable semi-annually in arrears. These Senior Notes are subject to certain restrictive covenants
including, but not limited to, limitations on the incurrence of additional indebtedness in excess of certain financial ratios as defined
by indebtedness agreement, restrictions on mergers or consolidations, limitations on liens and dispositions of assets and limitations on
transactions with affiliates.
If the Group fails to comply with certain covenants imposed, all outstanding Senior Notes will become due and payable without further
action or notice. If a change of control occurs, the Group shall make an offer to each holder of the Senior Notes to purchase such
Senior Notes at a purchase price in cash in an amount equal to 101% of the principal amount thereof, plus accrued and unpaid interest
and additional amounts, if any.
Consent solicitation
On 7 March 2016, the Group has received consent from the Holders of the outstanding USD 750,000 thousand 8.25% Senior Notes for
certain proposed amendments to the Indenture and the Notes. Amendments were obtained before the Consent Expiration Date
(7 March 2016). The Amendments were implemented by way of execution of the Supplemental Indenture on March 8, 2016, and
became effective from the Consent Settlement Date (9 March 2016).
In relation to the Notes, the Company has, on the Consent Settlement Date, paid to those Holders from whom valid Consents were
delivered and not revoked on or prior to the Consent Expiration Date and which Consents are accepted by the Company the Consent
Payment of USD 12.50 for each USD 1 thousand in principal amount of the Notes that were subject of the relevant Electronic Instructions
and comprised USD 9,148 thousand.
During the years ended 31 December 2016 and 2015 the Group has complied with all covenants defined by indebtedness agreement.
The weighted average effective interest rate on the Senior Notes was 9.69% per annum for the year ended 31 December 2016, 9.29%
per annum for the year ended 31 December 2015. The Notes are listed on London Stock Exchange.
98
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
25. Finance lease obligations
Long-term finance lease obligations represent amounts due under agreements for the leasing of trucks, agricultural machinery and
equipment with Ukrainian and foreign companies. As of 31 December 2016, the weighted average interest rates on finance lease
obligations were 6.46% and 8.04% for finance lease obligations denominated in EUR and USD, respectively (2015: 6.46% and 8.04%).
The following are the minimum lease payments and present value of minimum lease payments under the finance lease agreements
as of 31 December 2016 and 2015:
Payable within one year
Payable in the second year
Payable in the third to fifth year inclusive
Less:
Future finance charges
Present value of finance lease obligations
Less:
Current portion
Finance lease obligations, long-term portion
Minimum lease payments
Present value of minimum lease
payments
2016
8,854
3,060
3,411
15,325
(1,700)
13,625
2015
15,207
7,507
2,341
25,055
(1,433)
23,622
2016
8,044
2,648
2,933
13,625
-
13,625
(8,044)
5,581
2015
14,027
7,277
2,318
23,622
-
23,622
(14,027)
9,595
26. Trade accounts payable
Trade accounts payable were as follows as of 31 December 2016 and 2015:
Trade accounts payable to third parties
Payables due to related parties (Note 28)
27. Other current liabilities
Other current liabilities were as follows as of 31 December 2016 and 2015:
Accrued payroll and related taxes
Advances from and other payables due to third parties
Amounts payable for property, plant and equipment
Other payables
2016
46,502
6
46,508
2016
24,638
26,382
5,960
4,786
61,766
2015
47,659
10
47,669
2015
22,163
3,852
7,605
5,700
39,320
As of 31 December 2016, the Group had advances received from customers of USD 10,000 thousand that were secured. This advance
received was secured by agricultural produce with a carrying amount of USD 4,000 thousand (Note 16).
99
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
28. Related party balances and transactions
For the purposes of these financial statements, parties are considered to be related if one party controls, is controlled by, or is under
common control with the other party, or exercises significant influence over the other party in making financial or operational decisions. In
considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form.
Related parties may enter into transactions which unrelated parties might not, and transactions between related parties may not be
effected on the same terms and conditions as transactions between unrelated parties.
Transactions with related parties under common control
The Group enters into transactions with related parties that are the companies under common control of the Principal Shareholder of
the Group (Note 1) in the ordinary course of business for the purchase and sale of goods and services and in relation to the provision
of financing arrangements.
Terms and conditions of sales to related parties are determined based on arrangements specific to each contract or transaction.
Management believes that amounts receivable due from related parties do not require an allowance for irrecoverable amounts
and that the amounts payable to related parties will be settled at cost. The terms of the payables and receivables related to trading
activities of the Group do not vary significantly from the terms of similar transactions with third parties.
The transactions with the related parties during the years ended 31 December 2016 and 2015 were as follows:
Sales of goods to related parties
Sales of services to related parties
Purchases from related parties
2016
-
-
69
The balances owed to and due from related parties were as follows as of 31 December 2016 and 2015:
Trade accounts receivable (Note 18)
Payables due to related parties (Note 26)
Advances and finance aid receivable
2016
113
6
3,310
2015
290
2
115
2015
173
10
1,228
Compensation of key management personnel
Total compensation of the Group’s key management personnel included primarily in selling, general and administrative expenses in the
accompanying consolidated statements of comprehensive income amounted to USD 8,421 thousand and USD 7,778 thousand for the
years ended 31 December 2016 and 2015, respectively. Compensation of key management personnel consists of contractual salary and
performance bonuses.
Total compensation of the Group’s independent non-executive directors, which consists of contractual salary, amounted to USD 451
thousand and USD 496 thousand in 2016 and 2015, respectively.
100
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
28. Related party balances and transactions (continued)
Compensation of key management personnel (continued)
Key management personnel totalled 39 and 40 individuals as of 31 December 2016 and 2015, respectively, including 3 and 4
independent non-executive directors as of 31 December 2016 and 2015 respectively.
Other transactions with related parties
In December 2016 the Group increased its effective ownership interest in Starynska breeding farm to 100% through the acquisition of
a non-controlling interest previously held by one of its key management personnel in exchange for 531,395 treasury shares held by the
Group. The transaction was recognised within equity (Note 2).
In December 2015 the Group increased its effective ownership interest in Zernoproduct to 100% through the acquisition of a non-
controlling interest previously held by one of its key management personnel in exchange for 830,511 treasury shares held by the Group.
The transaction was recognised within equity (Note 2).
29. Contingencies and contractual commitments
Operating Environment
In the recent years, Ukraine has been in a political and economic turmoil. Crimea, an autonomous republic of Ukraine, was effectively
annexed by the Russian Federation. In 2016, an armed conflict with separatists continued in certain parts of Luhansk and Donetsk
regions. These events resulted in higher inflation, devaluation of the national currency against major foreign currencies, illiquidity and
volatility of financial markets. In January 2016, the agreement on the free trade area between Ukraine and the EU came into force. As
a result, the Russian Federation implemented a trade embargo or import duties on key Ukrainian export products. In response, Ukraine
implemented similar measures against Russian products.
In 2016, average inflation amounted to 13.9% comparing to 48.7% in 2015. Despite the fact that the cumulative inflation in Ukraine
for the three latest years slightly exceeded 100%, management believes that the Ukrainian economy is not hyperinflationary due to
slowing down of inflation during 2016 and lack of qualitative characteristics of the hyperinflationary economic environment.
The economic situation began to stabilize in 2016, which resulted in GDP growth around 1% and stabilization of Ukrainian Hryvnia. This
allowed the National Bank of Ukraine to ease some foreign exchange restrictions imposed during 2014-2015, including decrease of the
required share of foreign currency proceeds sale to 65% and permission of dividends remittance. However, certain other restrictions
were prolonged. Significant external financing is required to support the economy. During 2015 and 2016, Ukraine received the first
tranches of extended fund facilities (EFF) agreed with the IMF. Further stabilization of the economic and political situation depends,
to a large extent, upon success of the Ukrainian government’s efforts, yet further economic and political developments are currently
difficult to predict.
Taxation and legal issues
Ukrainian tax authorities are increasingly directing their attention to the business community as a result of the overall Ukrainian economic
environment. In respect of this, the local and national tax environment in Ukraine is constantly changing and subject to inconsistent
application, interpretation and enforcement. Non-compliance with Ukrainian laws and regulations can lead to the imposition of
severe penalties and fines. Future tax examinations could raise issues or assessments which are contrary to the Group companies’ tax
filings. Such assessments could include taxes, penalties and fines, and these amounts could be material. While the Group believes it
has complied with local tax legislation, there have been many new tax and foreign currency laws and related regulations introduced
in recent years which are not always clearly written.
101
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
29. Contingencies and contractual commitments (continued)
Taxation and legal issues (continued)
Facing current economic and political issues, the Government has implemented certain reforms in the tax system of Ukraine by
adopting the Law of Ukraine ‘On Amending the Tax Code of Ukraine and Certain Laws of Ukraine’, which is effective from 1 January
2015, except for certain provisions which will take effect at a later date.
Management believes that the Group has been in compliance with all requirements of effective tax legislation and currently is assessing
the possible impact of the introduced amendments.
Starting from 1 September 2013 the Tax Code of Ukraine introduced new, based on the OECD transfer pricing guidelines, rules for
determining and applying fair market prices, which significantly changed transfer pricing (“TP”) regulations in Ukraine.
The Group exports Vegetable oil, Chicken meat and related products, performs intercompany transactions, which may potentially
be in the scope of the new Ukrainian TP regulations. The Group has submitted the controlled transaction report for the year ended 31
December 2015 within the required deadline, and has prepared all necessary documentation on controlled transactions for the year
ended 31 December 2016 as required by legislation and plans to submit report.
As of 31 December 2016, the Group’s management assessed its possible exposure to tax risks for a total amount USD 4,210 thousand
related to corporate income tax (31 December 2015: USD 4,639 thousand). No provision was charged of such possible tax exposure.
As of 31 December 2016, companies of the Group were engaged in ongoing litigation with tax authorities for the amount of USD 6,069
(2015: USD 8,840 thousand), including USD 2,689 thousand (2015: USD 6,272 thousand) of litigations with the tax authorities related
to disallowance of certain amounts of VAT refunds and deductible expenses claimed by the Group. Out of this amount, USD 2,592
thousand as of 31 December 2016 (2015: USD 5,784 thousand) relates to cases where court hearings have taken place and where the
court in either the first or second instance has already ruled in favour of the Group. Manage¬ment believes that based on the past
history of court resolutions of similar lawsuits by the Group, it is unlikely that a significant settlement will arise out of such lawsuits and no
respective provision is required in the Group’s financial statements as of the reporting date.
Contractual commitments on purchase of property, plant and equipment
During the years ended 31 December 2016 and 2015, the companies of the Group entered into a number of contracts with foreign
suppliers for the purchase of property plant and equipment for development of agricultural operations. As of 31 December 2016,
purchase commitments amounted to USD 2,656 thousand (2015: USD 13,312 thousand).
Commitments on land operating leases
The Group has the following contractual obligations in respect of land operating leases as of 31 December 2016 and 2015:
Within one year
In the second to the fifth year inclusive
After fifth year
2016
18,207
57,212
43,257
118,676
2015
14,443
44,037
37,848
96,328
Ukrainian legislation provides for a ban on sales of agricultural land plots till 1 January 2018. There are significant uncertainties as to the
subsequent extension of the ban. The current legislation has resulted in the Group holding land lease rights, rather than the land itself.
.
102
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
30. Dividends
On 16 March 2016, the Board of Directors of MHP S.A. approved a payment of the interim dividends in an amount of USD 0.7529 per
share, equivalent to approximately USD 80,000 thousand, which were paid to shareholders during the year ended 31 December 2016.
31. Fair value of financial instruments
Fair value disclosures in respect of financial instruments are made in accordance with the requirements of IFRS 7 “Financial Instruments:
Disclosure” and 13 “Fair value measurement”. Fair value is defined as the amount at which the instrument could be exchanged in a
current transaction between knowledgeable willing parties in an arm’s length transaction, other than in forced or liquidation sale. As no
readily available market exists for a large part of the Group’s financial instruments, judgment is necessary in arriving at fair value, based
on current economic conditions and specific risks attributable to the instrument. The estimates presented herein are not necessarily
indicative of the amounts the Group could realize in a market exchange from the sale of its full holdings of a particular instrument.
The fair value is estimated to approximate the carrying value for cash and cash equivalents, short-term bank deposits, trade accounts
receivables, and trade accounts payable due to the short-term nature of the financial instruments.
Set out below is the comparison by category of carrying amounts and fair values of all the Group’s financial instruments, excluding
those discussed above, that are carried in the consolidated statement of financial position:
Financial liabilities
Bank borrowings (Note 23)
Senior Notes due in 2020 (Note 24)
Finance lease obligations (Note 25)
Carrying amount
Fair value
2016
2015
2016
2015
503,980
740,486
13,625
535,391
743,655
23,622
490,923
729,000
14,079
522,469
656,250
23,654
The carrying amount of Senior Notes issued includes interest accrued at each of the respective dates.
The fair value of bank borrowings and finance lease obligations as of 31 December 2016 was estimated by discounting the expected
future cash outflows by a market rate of interest for bank borrowings: 8.3% (2015: 8.0%) and for finance lease obligations of 8.0% (2015:
7.0%), and is within Level 2 of the fair value hierarchy.
The fair value of Senior Notes was estimated based on market quotations and is within Level 1 of the fair value hierarchy.
103
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
32. Risk management policies
During the years ended 31 December 2016 and 2015 there were no material changes to the objectives, policies and process for credit
risk, capital risk, liquidity risk, currency risk, interest rate risk, livestock diseases risk and commodity price and procurement risk managing.
Capital risk management
The Group manages its capital to ensure that entities of the Group will be able to continue as a going concern while maximising the
return to the equity holders through maintaining a balance between the higher returns that might be possible with higher levels of
borrowings and the security afforded by a sound capital position. The management of the Group reviews the capital structure on a
regular basis. Based on the results of this review, the Group takes steps to balance its overall capital structure through new share issues
and through the issue of new debt or the redemption of existing debt.
The Group’s target is to achieve a leverage ratio (net debt to adjusted operating profit) of not higher than 3.0. The Group defines its
leverage ratio as the proportion of net debt to adjusted operating profit.
As of 31 December 2016 and 2015 the leverage ratio was as follows:
Bank borrowings (Note 23)
Bonds issued (Note 24)
Finance lease obligations (Note 25)
Total Debt
Less:
Cash and cash equivalents and Short-term bank deposits (Note 19)
Net debt
Operating profit before loss on impairment of property, plant and
equipment
Adjustments for:
Depreciation and amortization expense (Notes 7, 8)
Adjusted operating profit
Net debt to adjusted operating profit
2016
503,980
740,486
13,625
1,258,091
(154,570)
1,103,521
316,264
98,567
414,831
2.66
2015
535,391
743,655
23,622
1,302,668
(59,343)
1,243,325
346,751
88,901
435,652
2.85
Debt is defined as bank borrowings, bonds issued and finance lease obligations. Net debt is defined as debt less cash and cash
equivalents and short-term bank deposits. For the purposes of the leverage ratio, debt does not include interest-bearing liabilities,
which are included in trade accounts payable (Note 27). Adjusted operating profit is defined as operating profit adjusted for the
depreciation and amortization expense and losses and gains believed by the management to be non-recurring in nature, as this
measure produces results substantially comparable to those reviewed for the purposes of financial covenants under the Group’s
borrowings.
104
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
32. Risk management policies (continued)
Major categories of financial instruments
Financial assets:
Long-term bank deposits
Loans to employees and related parties
Other receivables
Trade accounts receivable, net (Note 18)
Cash and cash equivalents (Note 19)
Financial liabilities:
Bank borrowings (Note 23)
Bonds issued (Note 24)
Finance lease obligations (Note 25)
Amounts payable for property, plant and equipment (Note 27)
Accrued interest (Note 23,24)
Trade accounts payable (Note 26)
Accrued payroll and related taxes (Note 27)
tOther payables (Note 27)
2016
577
1,222
12,555
50,868
154,570
219,792
496,374
725,361
13,625
5,960
22,731
46,508
24,638
4,786
2015
4,125
1,086
5,796
38,800
59,343
109,150
527,188
728,530
23,622
7,605
23,328
47,669
22,163
5,700
1,339,983
1,385,805
The main risks inherent to the Group’s operations are those related to credit risk, liquidity risk, currency risk, interest rate risk, livestock
diseases risk, and commodity price and procurement risk.
Credit risk
The Group is exposed to credit risk which is the risk that one party to a financial instrument will fail to discharge an obligation and cause
the other party to incur a financial loss.
The Group structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one customer or
group of customers. The approved credit period for major groups of customers, which include franchisees, distributors and supermarkets,
is set at 5-21 days.
Limits on the level of credit risk by customer are approved and monitored on a regular basis by the management of the Group. The
Group’s management assesses amounts receivable from the customers for recoverability starting from 30 and 60 days for receivables
on sales of poultry meat and receivables on other sales, respectively. No assessment is performed immediately from the date credit
period is expired. As of 31 December 2016 about 28% (2015: 32%) of trade accounts receivable comprise amounts due from 12 large
supermarket chains, which have the longest contractual receivable settlement period among customers.
105
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
32. Risk management policies (continued)
Liquidity risk
Liquidity risk is the risk that the Group will not be able to settle all liabilities as they are due. The Group’s liquidity position is carefully
monitored and managed. The Group has in place a detailed budgeting and cash forecasting process to help ensure that it has
adequate cash available to meet its payment obligations the following table details the Group’s remaining contractual maturity for its
non-derivative financial liabilities. The table has been drawn up based on the undiscounted cash flows of financial liabilities using the
earliest date on which the Group can be required to pay. The table includes both interest and principal cash flows as of 31 December
2016 and 2015. The amounts in the table may not be equal to the statement of financial position carrying amounts since the table
includes all cash outflows on an undiscounted basis.
Year ended 31 December 2016
Bank borrowings
Bonds issued
Finance lease obligations
Total
Year ended 31 December 2015
Bank borrowings
Bonds issued
Finance lease obligations
Carrying
amount
Contractual
Amounts
Less than 1 year
From 2nd to 5th
year
503,980
740,486
13,625
547,622
966,563
15,325
261,040
61,875
8,854
274,611
904,688
6,471
1,258,091
1,529,510
331,769
1,185,770
535,391
743,655
23,622
589,901
1,028,438
25,055
275,066
61,875
15,207
297,949
966,563
9,848
Total
1,302,668
1,643,394
352,148
1,274,360
After
5th year
11,971
-
-
11,971
16,886
-
-
16,886
All other financial liabilities (excluding those disclosed above) are repayable within one year.
The Group’s target is to maintain its current ratio, defined as the proportion of current assets to current liabilities, at the level of not less
than 1.2. As of 31 December 2016 and 2015, the current ratio was as follows:
Current assets
Current liabilities
2016
821,428
381,020
2.16
2015
736,921
373,401
1.97
106
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
32. Risk management policies (continued)
Currency risk
Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Group
undertakes certain transactions denominated in foreign currencies. The Group does not use any derivatives to manage foreign
currency risk exposure, but the management of the Group sets limits on the level of exposure to foreign currency fluctuations in order
to manage currency risk.
The carrying amounts of the Group’s foreign currency denominated monetary assets and liabilities as of 31 December were as follows:
2016
2015
ASSETS
Long-term bank deposits
Other non-current assets, net
Trade accounts receivable
Other current assets, net
Cash and cash equivalents
LIABILITIES
Current liabilities
Trade accounts payable
Other current liabilities
Accrued interest
Short-term bank borrowings
Short-term finance lease obligations
Current portion of bonds issued
Non-current liabilities
Long-term bank borrowings
Bonds issued
Long-term finance lease obligations
USD
-
5,039
20,315
8,408
107,539
141,301
2,365
368
22,570
212,289
5,138
-
242,730
241,685
725,361
4,730
971,776
1,214,506
EUR
577
-
117
-
10,240
10,934
4,544
3,380
161
24,518
2,906
-
35,509
17,882
-
853
18,735
54,244
USD
-
-
12,823
1,554
38,834
53,211
4,012
9
23,023
220,409
7,477
-
254,930
234,463
728,530
5,485
968,478
1,223,408
EUR
4,125
-
-
-
5,836
9,961
4,999
3,341
305
28,648
5,029
-
42,322
43,668
-
4,022
47,690
90,012
The table below (next page) illustrates the Group’s sensitivity to a change in the exchange rate of the Ukrainian Hryvnia against the
US Dollar and EUR. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their
translation at the period end for possible change in foreign currency rates.
107
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
32. Risk management policies (continued)
Currency risk (continued)
2016
Increase in USD exchange rate
Increase in EUR exchange rate
Decrease in USD exchange rate
Decrease in EUR exchange rate
2015
Increase in USD exchange rate
Increase in EUR exchange rate
Decrease in USD exchange rate
Decrease in EUR exchange rate
Change in foreign currency exchange
rates
Effect on profit before tax, gain/(loss)
10%
10%
5%
5%
10%
10%
5%
5%
(107,321)
(4,331)
53,660
2,166
(117,020)
(8,005)
58,510
4,003
The effect of foreign currency sensitivity on shareholders’ equity is included in the statement of comprehensive income. There are no
hedging activities in the other comprehensive income, so the statement of comprehensive income and the statement of changes in
equity impacts are the same.
During the year ended 31 December 2016 the Ukrainian Hryvnia depreciated against the EUR and USD by 7.74% and 11.73% respectively
(2015: depreciated against the EUR by 26.66% and 34.30% against the USD). As a result, during the year ended 31 December 2016 the
Group recognized net foreign exchange losses in the amount of USD 145,217 thousand (2015: foreign exchange losses in the amount
of USD 389,557 thousand) in the consolidated statement of comprehensive income.
In June 2016 the National Bank of Ukraine (“NBU”) decreased a requirement to sell foreign currency proceeds from any export sales at
Ukrainian interbank currency market to 65%. During the year ended 31 December 2016 USD 235 thousand (2015: USD 2,957 thousand)
net foreign exchange gain resulting from the difference in NBU and Ukrainian interbank currency market exchange rates, was included
in Other operating income.
The currency risk is mitigated by the existence of USD-denominated proceeds from sales of sunflower oil, grain and chicken meat,
which are sufficient for servicing the Group’s foreign currency denominated liabilities and were as follows during the years, ended 31
December 2016 and 2015:
Vegetable oil and related products
Chicken meat and related products
Grain1
Other agricultural segment products
2016
295,596
243,725
85,960
14,409
639,690
2015
241,481
189,175
109,444
1,146
541,246
1) Grain export sales during the year ended 31 December 2016 includes USD 4,970 thousand (2015: USD 17,350 thousand) of gain
received from operations, when goods are exchanged or swapped for goods which are of similar nature.
108
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
32. Risk management policies (continued)
Interest rate risk
Interest rate risk arises from the possibility that changes in interest rates will affect primarily borrowings by changing either their fair value
(fixed rate debt) or future cash flows (variable rate debt). For variable rate borrowings, interest is linked to LIBOR or EURIBOR.
The below table illustrates the Group’s sensitivity to increases or decreases of interest rates by 5% (2015: 5%). The analysis was applied
to interest bearing liabilities (bank borrowings, finance lease obligations and accounts payable under grain purchase financing
arrangements) based on the assumption that the amount of liability outstanding as of the reporting date was outstanding for the
whole year.
2016
LIBOR
LIBOR
EURIBOR
EURIBOR
2015
LIBOR
LIBOR
EURIBOR
EURIBOR
Increase/ (decrease) of floating rate
Effect on profit before tax, gain/(loss)
USD ‘ 000
5%
-5%
5%
-5%
5%
-5%
5%
-5%
(23,192)
23,192
(2,308)
2,308
(23,392)
23,392
(4,068)
4,068
The effect of interest rate sensitivity on shareholders’ equity is equal to that on statement of comprehensive income.
Livestock diseases risk
The Group’s agro-industrial business is subject to risks of outbreaks of various diseases. The Group faces the risk of outbreaks of diseases,
which are highly contagious and destructive to susceptible livestock, such as avian influenza or bird flu for its poultry operations. These
and other diseases could result in mortality losses. Disease control measures were adopted by the Group to minimize and manage
this risk. The Group’s management is satisfied that its current existing risk management and quality control processes are effective and
sufficient to prevent any outbreak of livestock diseases and related losses.
Commodity price and procurement risk
Commodity price risk arises from the risk of an adverse effect on current or future earnings from fluctuations in the prices of commodities.
To mitigate this risk the Group continues expansion of its grain growing segment, as part of vertical integration strategy, and also
accumulates sufficient commodity stock to meet its production needs.
109
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
for the year ended 31
December 2016
(in thousands of US dollars, unless otherwise indicated)
Continued
33. Pensions and retirement plans
The employees of the Group receive pension benefits from the government in accordance with the laws and regulations of Ukraine. The
Group’s contributions to the State Pension Fund for the year ended 31 December 2016 was USD 18,652 thousand and is recorded in the
consolidated statement of comprehensive income on an accrual basis (2015: USD 24,826 thousand). In January 2011 in accordance with
the Law of Ukraine “On charge and accounting of unified social contribution” certain changes in the administration of social charges
were made and social charges are to become payable in the form of Unified Social Contribution, including contributions to the State
Pension Fund by 22% of gross salary cost. The Group companies are not liable for any other supplementary pensions, post-retirement
health care, insurance benefits or retirement indemnities to its current or former employees, other than pay-as-you-go expenses.
34. Earnings per share
The earnings and weighted average number of ordinary shares used in calculation of earnings per share are as follows:
Profit/(loss) for the year attributable to equity holders of the Parent
Earnings/(loss) used in calculation of earnings per share
Weighted average number of shares outstanding
Basic and diluted earnings/(loss) per share (USD per share)
2016
63,835
63,835
106,256,207
0.60
2015
(119,776)
(119,776)
105,629,222
(1.13)
The Group has neither potentially dilutive ordinary shares nor other dilutive instruments; therefore, the diluted earnings per share equal
basic earnings per share.
35. Subsequent events
On 17 February 2017 the Group sold its 100% ownership interest in the Group’s companies located in Autonomous Republic of Crimea
for cash consideration of USD 77,500 thousand. The consideration consisted only of cash, there were no direct costs related to disposal.
As a result, the Group completely ceased to operate its fruit business, while poultry production capacities and meat processing
capacities decreased by 6.5 % and by 12.6 %, respectively.
36. Authorization of the consolidated financial statements
These consolidated financial statements were authorized for issue by the Board of Directors of MHP S.A. on 14 March 2017.
110
111