UkrProduct
Annual Report 2015

Plain-text annual report

TABLE OF CONTENTS Chairman and Chief Executive Statement The Board of Directors Remuneration Committee Report Corporate Governance Report Corporate Social Responsibility Report Directors’ Report Statement of Directors’ Responsibility Independent Auditors’ Report 3 7 11 15 19 23 27 29 Consolidated income statement Consolidated statement of comprehensive income Consolidated statement of financial position Consolidated statement of cash flows Consolidated statement of changes in equity Notes to the consolidated financial statements Corporate advisers Shareholder Information 33 33 36 38 42 44 111 113 2 Annual Report 2015 CHAIRMAN AND CHIEF EXECUTIVE STATEMENT Annual Report 2015 3 During 2015 Ukrproduct faced significant headwinds. The Ukrainian economy was under pres- sure accentuated by the smoking conflict in the East of the country and the weakening of the Ukrainian economy overall. This is reflected in the devaluation of the local currency — hryvna, deterioration of consumer confidence and geographic contraction of the available market. Fur- thermore the complete closure of the Russian market caused the oversupply of dairy products on the Ukrainian market and further intensified local competition. The Company sought to defy the increasing challenges of the business environment by revising the regional sales focus, enhancing its sales and operating efficiency as well as adjusting the sales mix in view of changing consumer prefer- ences. This programme was designed to resist pres- sure on profit margins and overall to create cash. It has been implemented in consultation with the European Bank of Reconstruction and Development. In dairy domestic market demand shrunk across the Company’s key product categories leading to fierce competition. At the same time, average raw milk prices showed a year-on-year increase of circa 16 % prompted by stronger competition for supply on the back of even higher price increases for imported dairy ingredients. BRANDED DAIRY PRODUCTS Volumes fell overall given focus on reliable custom- ers only, lack of business in the East and desperate competition. Turnover reduced by 1% compared with 2014. Butter gained marginally as consumers moved from Spreads that contracted. Processed cheese in particular suffered a decline given the competition, as did hard cheese which was impacted by the ban on Ukrainian exports to Russia. 4 Annual Report 2015 On a positive note the devaluing hryvnia provided Ukrproduct group with an opportunity to increase its export volumes across the range of its dairy prod- ucts. This helped to mitigate the pressures of the domestic market However, overall gross profits faced a significant decline. Wages in real terms fell making it difficult to increase consumer prices in order to fully offset the sharp rise in input costs namely energy and dairy ingredients, not least raw milk. As a result, gross profit of branded dairy products decreased by 41% in hryvna terms mostly owing to the packaged butter and processed cheese categories. BEVERAGES. KVASS. The sales of kvass showed only a 1% decrease in 2015 in sales denominated in Ukrainian Hryvna com- pared to the same period last year due to the strict control over debtors. FINANCES Total revenues for the year decreased by 36.8% to £20.158m (2014: £31.876m). In local currency terms, Hryvna revenues overall grew by 8%. Gross profit margins fell to 11.48% (2014: 20.24%) and despite a significant 30.5% reduction in op- erating expenses to £3.66m, we are reporting an operating loss of £1.346m (2014: operating profit £1.185m). This was accentuated by negative ex- change rate differences amounting to £1.733m (2014: charge £3.857m) resulting in a loss before taxation for the year of £3.847m (2014: £3.433m). from 2018 to 2024 and an additional grace period for 2016. The Board believes that these terms provide confidence and are favourable for the Group dis- charging immediate pressure on cash flows whilst ensuring that the loan will be repaid in full over a longer period of time. The Group has finalised doc- umentation on restructuring of the loan with EBRD and signed the revised Loan Agreement. Exports at £3.872m accounted for approximately 19.2% (2014: 17.5%) of sales, with domestic sales broken down between regional distributors, national retail chains and wholesale suppliers to other pro- ducers (such as Danone and Mondelez). CASH Balances of cash at 31 December 2015 stood at £0.093m (2014: £0.215m).There has been a focus to reduce overdue receivables in order to improve cash generation and to decrease financial costs. New operating procedures and incentives have been in- troduced across the sales and marketing and finance function resulting in average cash collection period falling from 45 to 39 days, thus releasing cash for operations. The Group’s cash levels are sufficient to meet current debt interest obligations in the short and medium term. As the cost of EBRD euro denominated loan was inflated by the devaluation of hryvnya, the bank undertook a thorough business review as a part of the loan restructuring negotiations. That resulted in the agreement with EBRD to restructure the terms including extension of the maturity date of the loan The revaluation of assets added £0.9m to the Balance Sheet as at 31st December 2015. TRADING OUTLOOK The Company is adapting to this most challenging business environment and is working to restore prof- itability according to its improvement programme. Sales and marketing activities are concentrated on the non-occupied regions of Ukraine and ex-Soviet countries with a major focus on cash generation instead of revenue. Productivity improvements and cost efficiencies were introduced in warehousing and marketing as well as delivery of material optimization of Zhitomir subsidiary overheads with more to come. In this volatile trading environment working capital is subject to everyday close control to generate more cash as a result of all these initiatives. In 2015 the Company introduced new beverages — a rosehip-based product and Uzvar — Ukrainian tradi- tional drink brewed from dried fruits. Like kvass new products are positioned as natural drinks for active people practicing a healthy lifestyle. Natural-based beverages are traditionally popular in Ukraine and the Company expects growth in new beverage sales. Jack Rowell Chairman Alexander Slipchuk Chief Executive Officer Annual Report 2015 5 6 Annual Report 2015 THE BOARD OF DIRECTORS Annual Report 2015 7 As of the date of the approval of the 2015 Annual Report, the Board members are as follows: Name Jack Rowell Sergey Evlanchik Alexander Slipchuk Yuriy Hordiychuk Position Non-executive Chairman Executive Officer Chief Executive Director Chief Operational Officer Date appointed November 2004 April 2008 November 2004 January 2013 All directors were re-elected at Annual General Meeting (AGM) on 24 July 2015. JACK ROWELL NON-EXECUTIVE CHAIRMAN Dr. Rowell has acted as Chairman of a number of companies in the public and private sector, mainly within the food production industry. He was previously an executive director on the board of Dalgety plc responsible for the consumer foods division. Jack also served as Chairman of Celsis plc. He has also been Manager of Bath Rugby, then the Champions of England and the English national team. Prior to this, Dr. Rowell was CEO of Golden Wonder Ltd. and Lucas Food Ingredients (also part of the Dalgety Food Group). He was educated at Oxford University and is a Chartered Accountant. ALEXANDER SLIPCHUK CHIEF EXECUTIVE DIRECTOR Alexander Slipchuk is responsible for the Group’s overall performance and strategy implementation and is a founder of Ukrproduct Group. He studied at Far-Eastern High Engineering Marine School in Russia and graduated as a maritime navigator in 1989. Together with Sergey Evlanchik, Alexander established the securities house Alfa-Broker in 1994, developed the equity trading business in the far east of the Russian Federa- tion, and acquired initial stakes in the companies that later became part of Ukrproduct Group. Later in 1998, Alexander took on the executive positions at the Molochnik and the Starakonstantinovskiy Dairy plants, Ukrproduct’s two main operating assets. 8 Annual Report 2015 SERGEY EVLANCHIK EXECUTIVE OFFICER Sergey Evlanchik studied at Vladivostok State University of Economics & Service in the Russian Federation and at Oxford University in the UK, where he received his MBA degree. Together with Alexander Slipchuk, he established the equity trading group, Alfa-Broker in 1994 in the Far East of the Russian Federation. After the recess of the Russian and Ukrainian equity markets in 1998, Mr Evlanchik refocused his ac- tivities on business development in the industrial sector of Ukraine, particularly with- in the dairy industry, where he joined the companies that would subsequently form Ukrproduct Group in 2004. Sergey then led the Group to its successful listing on the AIM market of the London Stock Exchange in 2005. In 2011 under the leadership of Sergey Evlanchik the Group secured debt finance with EBRD focused on energy and production efficiency upgrade of the existing production facilities. YURIY HORDIYCHUK CHIEF OPERATIONAL OFFICER Yuri Hordiychuk has been with the Group since 2002. Firstly, he was Director of the Provision of Raw Materials at the company, and in 2005 was promoted to Director of Production. The next significant step in the career of Mr. Hordiychuk was taken in 2008, when he was promoted to General Director of the Company. Yuri has more than ten years of experience of administrative activity and a degree in “Production Organization Management”. In 2006, Mr. Hordiychuk graduated with MBA from the School of Eco- nomics (Russia) and earned a degree in “Logistics and Supply Chains Management”. Annual Report 2015 9 10 Annual Report 2015 REMUNERATION COMMITTEE REPORT Annual Report 2015 11 This report is prepared by the Remuneration Committee of the Board and sets out the Group’s policy on the remuneration of the Directors, with a description of service agreements and remuneration packages for each Director. REMUNERATION COMMITTEE The Remuneration Committee comprises one non-ex- ecutive Director, Jack Rowell. This Committee is scheduled to meet at least twice per annum to advise the Board on the Group’s remuneration strategy and to determine the terms of employment and total remuner- ation of the respective Executive Directors of the Group and of its subsidiary companies, including the granting of share options. Among others, the objective of this Committee is to attract, retain and motivate Execu- tives capable of delivering the Group’s objectives. The Remuneration Committee is also responsible for the evaluation of the performance of Executive Directors. The Remuneration Committee held two meetings during 2015. REMUNERATION POLICY The Group’s remuneration policy is to provide remu- neration packages which: • are designed to attract, motivate and retain high calibre Executives; • • • • are competitive and in line with comparable businesses; are rooted in practices exercised in countries where the Group operates; intend to align the interests of the Executives with those of the shareholders by means of fixed and performance related remuneration; and set challenging performance targets and moti- vate Executives to achieve those targets both in the short and long-term. BASE SALARY The Committee on an annual basis reviews base salaries of the respective Executive Directors of the company and its subsidiaries, taking into account job responsibilities, competitive market rates and the performance of the Executive concerned. Considera- tion is also given to the cost of living and the Direc- tor’s professional experience. While determining the base salaries, the Committee also considers general aspects of the employment terms and conditions of employees elsewhere in the Group. 12 Annual Report 2015 INCENTIVE BONUS PLANS AND EQUITY ARRANGEMENTS The Committee plans to introduce long-term equity incentive arrangements to make the overall Executive Remuneration structure more performance-related, more competitive and aligned with shareholders’ interests subject to an improving environment in Ukraine. SERVICE CONTRACTS The appointments of the respective Executive Directors of the company and its subsidiaries are valid for an indefinite period and may be terminated with three months notice given by either party at any time. The company or subsidiary’s policy for compensation for loss of office is to provide com- pensation which reflects the Group or that subsidiary company’s contractual obligations. BONUS SCHEME The Committee has established a cash bonus scheme for Executive Directors based on the overall performance of the Group and/or respective subsid- iary company and attainment of the operating profit targets. NON-EXECUTIVE DIRECTORS The appointments of non-executive Directors are valid for an indefinite period and may be terminat- ed with three months notice given by either party at any time. The decision to re-appoint, as well as the determination of the fees of the non-executive Directors, rests with the Board. The non-executive Directors may accept appointments with other com- panies, although any such appointment is subject to the Board’s approval and terms and conditions of Service Agreements. Annual Report 2015 13 DIRECTORS’ REMUNERATION Details of the Directors’ cash remuneration are outlined below: Annual Salary/fee 2015 2014 £’000 £’000 Bonus 2015 2014 £’000 £’000 Non-cash compensation 2015 2014 £’000 £’000 Total cash remuneration 2015 2014 £’000 £’000 Executive* Alexander Slipchuk Sergey Evlanchik Yuriy Hordiychuk Non-executive** 52.5 67.5 9.9 35 45 30 — — — — — — — — — — — — Dr Jack Rowell 33.75 33.75 — — — — 52.5 67.5 9.9 35 45 30 129.9 110.0 33.75 33.75 SHARE BASED PAYMENTS In 2009 the company granted share options to Jack Rowell. In February 2013 given the decline of market share price the exercise price for these options was reset to 10 pence and the exercise period extended until 2017. As at the year end these options were not exercised. The details of the options outstanding at 31 De- cember 2015 are shown below. Directors Jack Rowell Share Options Exercise Price, pence Exercise Period 130,290 10.0 to 05/02/2017 14 Annual Report 2015 CORPORATE GOVERNANCE REPORT Annual Report 2015 15 CORPORATE GOVERNANCE POLICY Effective corporate governance is a priority of the Board and outlined below are details of how the Company has applied the principles set out in The UK Corporate Governance Code (the “Code”) revised in April 2016 by the Financial Reporting Council. Un- der the rules of AIM, a market operated by the Lon- don Stock Exchange, the company is not required to comply with the Code and the Board considered that the size of the Group does not warrant compliance with all of the Code’s requirements. The Board fully supports the principles on which the Code is based and seeks to comply with best practice in such re- spects as they consider appropriate for a Group of its size and nature. The Board has a wide range of expe- rience directly relevant to the Group and its activities and its structure ensures that no one individual or group dominates the decision making process. THE BOARD The Board consists of one non-executive and three Executive Directors. The roles of the Chairman of the Board and the Chief Executive of the Group are held separately with a clear division of responsibil- ity between them. The Chairman of the Board is an independent non-executive Director. Within the scope of the corporate governance pro- cedures, the Board meets regularly to consider the financial results, budgets, and major items of capital expenditure of all the Group’s companies. This body is also responsible for formulating, reviewing and approving the Group’s strategy and the phases of its development. The Board met four times during 2015. BOARD COMMITTEES The Board is assisted by the Audit and Remuneration Committees. AUDIT COMMITTEE The Audit Committee consists of one non-executive Director, Jack Rowell. The member of the Audit Committee has relevant financial experience. This Committee, inter alia, is responsible for reviewing the Annual and Interim financial statements, in addi- tion to the systems of internal control and risk man- agement, and also for ensuring the integrity of the financial information reported to the shareholders. The Audit Committee met twice during 2015. REMUNERATION COMMITTEE The Remuneration Committee comprises one non-ex- ecutive Director, Jack Rowell. This Committee is scheduled to meet at least twice per annum to advise the Board on the Group’s remuneration strategy and to determine the terms of employment and total remuneration of the Executive Directors, including 16 Annual Report 2015 the granting of share options. Among others, the objective of this Committee is to attract, retain and motivate Executives capable of delivering the Group’s objectives. The Remuneration Committee is also responsible for the evaluation of the performance of Executive Directors. The Remuneration Committee held two meetings during 2015. RELATIONS WITH SHAREHOLDERS The Group maintains regular contact with its insti- tutional and private shareholders, fund managers, financial analysts and brokers through a series of presentations, conference calls and meetings. All cor- porate materials, including annual reports, financial results statements and other information, are availa- ble on the Group’s website www.ukrproduct.com The Chief Executive Officer and other Directors holds conference calls and meetings with major share- holders on a regular basis. The Board believes that it is essential to discuss with its major shareholders and keep them updated with regards to the Group’s financial performance, strategy and business devel- opments. The Chairman is also accessible to major shareholders, if such meetings are required. The Board invites all shareholders to attend the company’s Annual General Meeting and encourages them to exercise their voting right and participate with questions. INTERNAL CONTROL The Group adheres to comprehensive and strictly regulated budgeting and reporting procedures that are aimed at more efficient internal control and risk management. The Board is responsible for the Group’s system of internal control and for reviewing its effectiveness, however, it is recognised that any control system can only provide reasonable and not absolute assurance against material misstatement or loss. The principal elements of the internal control system are as follows: • • • • documented policies, procedures and authorisa- tion levels; clearly defined lines of responsibility in the organisational structure of the Group; a management structure which facilitates ease of communication both vertically and horizontally; annual budgeting and monthly reporting proce- dures. The annual budgets consist of monthly budgets, which are updated each month once actual figures become available. Due to the dynamic development of the macroeconomic environment of the country the Group operates in, variances in actual figures for sales, prices and other underlying assumptions from those forecasted may occur. Hence, the budget is flexed to better reflect the future of the Group. Such variances by each company within the Group are discovered and recommendations for further actions are formulated. Annual Report 2015 17 The internal control system is further enforced by the Group’s internal audit department. The main objectives of the internal audit function are to ensure the safety of the Group’s assets and the reliability of accounting records. The internal audit department is responsible for auditing the financial statements and accounting procedures of the companies within the Group, as well as for disclosing and reducing various types of risks related to Group operations. The Group’s controlling and risks analysis department is responsible for identifying the possible issues in the Group’s processes, the ongoing optimization of operations and risk management. 18 Annual Report 2015 CORPORATE SOCIAL RESPONSIBILITY REPORT Annual Report 2015 19 CORPORATE SOCIAL RESPONSIBILITY The Board is committed to developing and im- plementing corporate social responsibility (CSR) policies aimed at: • Promoting equality and fairness among employ- ees, partners and suppliers • Ensuring safe working conditions • Maintaining the Group’s corporate reputation and dedication to business ethics • Supporting the communities in which the Group operates personnel. The training programmes encourage staff to progress up the career ladder and are central to the Group’s continuing growth and success. HEALTH AND SAFETY Management at business units within the Group are responsible for developing and maintaining the underlying practices that provide for a safe working environment. Special attention is given to the production facilities, where the equipment, including lighting, air conditioning, workspace and other constituents, undergo constant reviews and improvements. Regular monitoring is carried out to ensure that the required standards are met and that employees use the provided communication chan- nels to further improve their surrounding working conditions. • Establishing long-term and healthy relationships with the Group’s partners, customers and other affiliated parties. CUSTOMERS The main elements of the Group’s approach towards fulfilling the above objectives are as follows: EMPLOYEES The Group is committed to ensuring equal opportu- nities to all its employees, both current and prospec- tive. Each employee’s efforts are highly valued and the Board believes that a diverse mix of the work- force facilitates innovation, efficiency and teamwork. As a matter of corporate policy, regular training and development workshops are conducted for Ukrprod- uct’s staff. These are aimed at all employee groups, including managerial, technical and production Customer satisfaction is at the core of the Group’s business model. Therefore, the Board is keen to continue supplying the customers with high quali- ty, affordable products required by current market demands. The Group’s segmentation practices are aimed at segregating various customer groups in order to meet their respective needs with maximum efficiency. In addition, regular market research and surveys are conducted to ensure maximum value is consistently offered to customers. ENVIRONMENT The Group recognises the importance of good environmental practices and seeks to minimise any 20 Annual Report 2015 negative impact that its operations or products might have on the production sites and surrounding areas. The Group adopted the environmental laws and regulations of Ukraine to reduce, control and elimi- nate various types of pollution and to protect natural resources. Ukrproduct monitors and controls all its production facilities regularly in order to ensure that air quality is not adversely impacted by its oper- ations. The Group focuses on cutting water and ener- gy consumption, as well as reducing the volumes of waste. Collection and processing of waste have been organised through the local waste collection plants. The Group’s development programme puts specific emphasis on acquiring and installing only the most advanced and environmentally-friendly production and auxiliary equipment. FOOD SAFETY Food safety is one of key priorities for the Group. Ukrproduct is committed to produce high quality and safe food and ensures that high standards are main- tained within its supplier base. The certified food safety management system in compliance with ISO 22000 was implemented by the Group. This system provides the possibility to fully monitor all produc- tion stages — from forage control and sound health of the cattle to the final product distribution. COMMUNITY SUPPORT The Group is keen to further enhance and maintain its partnership with local communities by supporting their initiatives and charitable events. The Group contributes cash donations and gifts, as well as employee time, by encouraging staff to participate as volunteers. Annual Report 2015 21 22 Annual Report 2015 DIRECTORS’ REPORT Annual Report 2015 23 The Directors present their report and the audited consolidated financial statements of Ukrproduct Group Ltd (referred to as the company and together with its subsidiaries as “the Group”) for the year ended 31 December 2015. PRINCIPAL ACTIVITIES AND BUSINESS REVIEW Ukrproduct Group Ltd (the “company” or “Ukrprod- uct”) is a holding company for a group of food and beverages businesses located in Ukraine. The princi- pal activities of Ukrproduct Group are the production and distribution of highly branded dairy foods and beverages (kvass) in Ukraine and the export of milk powder. The Group is one of the leading branded food producers in Ukraine with its own nationwide distribution network. More detailed commentary on the Group’s activities during the year, its financial performance, future plans, and prospects are out- lined in the Chairman and Chief Executive Statement. RESULTS AND DIVIDENDS The results of the Group for the year are set out on page 35 and show a net loss for the period of GBP 3.906 million (2014: GBP 3.478 million). The Board has decided not to recommend the pay- ment of a dividend in respect of the year ended 31 December 2015(2014:Nil). DIRECTORS Details of members of the Board of Directors are shown on page 8. The Directors’ interests in the share capital of the company as at 31 December 2015 and 31 December 2014 are shown below: Shares 2015 2014 Share options 2015 2014 Executive Sergey Evlanchik Alexander Slipchuk Non-executive Dr Jack Rowell 24 Annual Report 2015 14,967,133 14,967,133 14,939,133 14,939,133 — — — — 118,690 118,690 130,290 130,290 POWERS OF THE DIRECTORS Subject to the Company’s Memorandum and Articles of Association, Companies (Jersey) Law 1991, as amended and any directions given by special resolu- tion, the business of the company shall be managed by the Directors who may exercise all such powers of the company. The rules in relation to the appoint- ment and replacement of Directors are set out in the company’s Article’s of Association. FINANCIAL RISKS FACING THE GROUP The principal risks of the business are credit risk, liquidity risk and market risk, including fair value or cash flow interest-rate risk and foreign exchange risk. The main purpose of the Group’s risk management programme is to evaluate, monitor and manage these risks and to minimise potential adverse effects on the Group’s financial performance and shareholders. The Chief Financial Officer of the Group is in charge of risk management and introduction of all policies as approved by the Board of Directors. For further details of the Group’s risk management please see note 5 on page 68. EMPLOYEES The Group is committed to ensuring provision of equal opportunities for all employees, which is reflected by its selection, recruitment and training policies. The Group considers its employees to be one of its most valuable assets and rewards high performance through competitive remuneration and incentive schemes. The Directors also consider it a priority to give employees the opportunity to communicate their ideas and opinions to all levels of management, both directly and through various surveys. The average number of employees of the Group during the year ended 31 December 2015 was 1,132 (2014: 1,423). PAYMENT POLICY The Group has a general set of guidelines for paying its suppliers based on specific criteria. However, it is normal practice to agree payment terms with a specific supplier when entering into a purchase contract. The Group seeks to abide by the payment terms agreed whenever it is satisfied that the goods or services have been provided in accordance with the agreed terms and conditions. GOING CONCERN As described in Note 2(b) of the consolidated finan- cial statement the Group incurred a loss of £3.906k for the year ended 31 December 2015. This is primarily due to the volatile political and economic situation in Ukraine. This has resulted in a number of challenges to the Group, including but not limited to the significant devaluation of the local currency and the increase in raw milk prices. The new Loan Agreement with the European Bank for Reconstruc- tion and Development was signed on 24 June 2016. The terms include extension of the maturity date from 10 December 2018 to 1 December 2024. The Com- pany has also been provided with a capital repayment holiday until 1 March 2017, at which point quarterly Annual Report 2015 25 capital repayments commence, increasing in amount on an annual basis until 1 December 2022, followed by a final bullet repayment on 1 December 2024. AUDITORS Meanwhile following a review of the Group’s finan- cial position and its budgets and plans, the directors have concluded that the Group has sufficient financial resources to meet working capital requirements for a period of up to 12 months from the date of these financial statements. ANNUAL GENERAL MEETING Ukrproduct’s AGM will be held on 25 July, 2016. The Notice of AGM and agenda will be sent to share- holders no less than 21 days prior to the date of the meeting. Baker Tilly Channel Islands Limited was re-appointed as the Group’s auditors for the 2015 financial year by the resolution of the Annual General Meeting (AGM) of Shareholders held on July 24, 2015. A resolution to re-appoint them shall be proposed at the forth- coming AGM. STATEMENT AS TO DISCLOSURE OF INFORMATION TO THE AUDITOR All of the current Directors have taken the necessary steps to make themselves aware of any information needed by the Group’s auditors for the purposes of their audit and to establish that the auditors are aware of that information. The directors are not aware of any relevant audit information of which the auditors are unaware. Jack Rowell Chairman 30 June 2016 26 Annual Report 2015 STATEMENT OF DIRECTORS RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 Annual Report 2015 27 The directors are responsible for the preparation of the consolidated financial statements in ac- cordance with applicable Jersey law and other regulations and enactments in force at the time. The Companies (Jersey) Law 1991, as amended requires the directors to prepare financial statements for each year in accordance with Generally Accepted Accounting Principles. Under that law, the directors have elected to prepare the consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the Euro- pean Union. Under company law, the directors must not approve the consolidated financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and of its profit or loss for the period ended. In preparing these consolidated financial statements, the directors are required to: — select suitable accounting policies and then apply them consistently; — prepare the consolidated financial statements on the going concern basis unless it is inappropri- ate to presume that the Group will continue in business. The board of directors confirms that the Group has complied with the above mentioned requirements in preparing its consolidated financial statements. The directors are also responsible for: — implementing and maintaining an efficient and reliable system of internal controls in the Group; — keeping proper accounting records that disclose with reasonable accuracy at any time the finan- cial position of the Group; — taking reasonable steps to safeguard the assets of the Group and to prevent and detect fraud and other irregularities; and — the maintenance and integrity of the Group’s — make judgments and estimates that are reasona- website. ble and prudent; — state that the financial information complies with IFRS, subject to any material departures dis- closed and explained in the consolidated finan- cial statements; and On behalf of the Directors: Alexander Slipchuk Chief Executive Officer 28 Annual Report 2015 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF UKRPRODUCT GROUP LIMITED Annual Report 2015 29 REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS We have audited the accompanying consolidated financial statements of Ukrproduct Group Limited (“the company” and together with its subsidiaries is referred to as “the Group”), for the year ended 31 December 2015, which comprise the consolidat- ed statements of income, comprehensive income, consolidated statement of financial position, consol- idated statement of changes in equity, the consoli- dated cash flow statement and the related notes 1 to 32. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRS) as adopted by the European Union. This report is made solely to the company’s mem- bers, as a body, in accordance with Article 113A of the Companies (Jersey) Law 1991, as amended. Our audit work is undertaken so that we might state to the company’s members those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the compa- ny’s members as a body, for our audit work, for this report, or for the opinions we have formed. RESPECTIVE RESPONSIBILITIES OF THE DIRECTORS AND AUDITORS As explained more fully in the Statement of Direc- tors’ Responsibilities, the Directors are responsible for the preparation of the consolidated financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the consolidated financial statements in accord- ance with applicable law and International Stand- ards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APBs) Ethical Standards for Auditors. Scope of the audit of the consolidated financial state- ments An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the con- solidated financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s circumstanc- es and have been consistently applied and ade- quately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. Our responsibilities do not extend to any other informa- tion. 30 Annual Report 2015 OPINION ON CONSOLIDATED FINANCIAL STATEMENTS The above matters indicate the existence of material uncertainties which may cast significant doubt about the Group’s abilities to continue as a going concern. The consolidated financial statements do not include any adjustments that would result if the Group was unable to continue as a going concern. In our opinion the consolidated financial statements: — give a true and fair view of the state of the Group’s affairs as At 31 December 2015 and of Group’s loss for the year then ended; — have been properly prepared in accordance with IFRS as adopted by the European Union; and — have been prepared in accordance with the re- quirements of the Companies (Jersey) Law, 1991 as amended. EMPHASIS OF MATTER In forming our opinion on the consolidated financial statements, which is not qualified, we draw your attention to the following matters: a) Going concern EUROPEAN BANK FOR RECONSTRUCTION AND DEVELOPMENT We also draw attention to Note 2(b) and to Note 24 to the consolidated financial statements which refer to the non-observance during the year by the Group of the terms of the loan agreement with the European Bank for Reconstruction and Development (“EBRD”) and the subsequent restructuring of those borrowing arrangements after the year end MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION As described in Note 2(b) to the consolidated finan- cial statements. The Group incurred a loss of £3,905k for the year ended 31 December 2015. This was primarily due to the volatile political and economic situation in Ukraine which resulted in a number of challenges to the Group, including but not limited to the significant devaluation of the local currency and high rates of inflation We have nothing to report in respect of the following matters where the Companies (Jersey) Law 1991 requires us to report to you if, in our opinion: — proper accounting records have not been kept; or — proper returns adequate for our audit have not been received from branches not visited by us; or Annual Report 2015 31 — the financial statements are not in agreement with the accounting records and returns; or — we have not received all the information and explanations which to the best of our knowledge and belief are necessary for the purposes of our audit. David Hopkins For and on behalf of Baker Tilly Channel Islands Limited Chartered Accountants St Helier, Jersey 30 June 2016 32 Annual Report 2015 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED INCOME STATEMENT CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME CONSOLIDATED STATEMENT OF FINANCIAL POSITION CONSOLIDATED STATEMENT OF CHANGES IN EQUITY CONSOLIDATED STATEMENT OF CASH FLOWS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Annual Report 2015 33 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2015 (in thousand GBP, unless otherwise stated) Revenue Cost of sales GROSS PROFIT Administrative expenses Selling and distribution expenses Other operating expenses PROFIT FROM OPERATIONS Net finance expenses Effect of foreign currency translation LOSS BEFORE TAXATION Income tax expenses LOSS FOR THE YEAR Attributable to: Owners of the Parent Non-controlling interests Earnings/Loss per share: Basic Diluted 34 Annual Report 2015 Note 8 9 9 9 9 10 13 26 year ended 31.12.2015 £’000 20 158 (17 844) year ended 31.12.2014 £’000 31 876 (25 423) 2 314 (1 109) (1 462) (1 089) (1 346) (768) (1 733) (3 847) (59) 6 453 (1 963) (2 797) (508) 1 185 (761) (3 857) (3 433) (45) (3 906) (3 478) (3 906) — (9,85) (9,91) (3 478) — (8,77) (8,78) Note year ended 31.12.2015 £’000 year ended 31.12.2014 £’000 OTHER COMPREHENSIVE INCOME: Items that may be subsequently reclassified to profit or loss Currency translation differences (1 526) (7 000) Items that will not be reclassified to profit or loss Reduction of revaluation reserve Gain on revaluation of property, plant and equipment Income tax in respest of revaluation reserve OTHER COMPREHENSIVE INCOME, NET OF TAX — 1 113 (200) (613) (21) — — (7 021) TOTAL COMPREHENSIVE INCOME FOR THE YEAR (4 519) (10 499) Attributable to: Owners of the Parent Non-controlling interests (4 519) — (10 499) — Annual Report 2015 35 CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2015 (in thousand GBP, unless otherwise stated) ASSETS Non-current assets Property, plant and equipment Intangible assets Long-term receivables Deferred tax assets Current assets Inventories Trade and other receivables Current taxes Other financial assets Cash and cash equivalents Note As at 31.12.2015 £’000 As at 31.12.2014 £’000 14 15 16 17 18 19 20 21 7 416 596 — 46 8 058 1 496 1 486 348 11 93 3 434 9 562 829 — 2 10 423 2 085 3 674 1 177 108 215 7 259 TOTAL ASSETS 11 492 17 682 36 Annual Report 2015 EQUITY AND LIABILITIES Equity attributable to owners of the parent Share capital Other reserves Retained earnings Non-controlling interests TOTAL EQUITY Non-Current Liabilities Bank loans and overdrafts Deferred tax liabilities Current liabilities Bank loans and overdrafts Trade and other payables Current income tax liabilities Other taxes payable TOTAL LIABILITIES TOTAL EQUITY AND LIABILITIES Note As at 31.12.2015 £’000 As at 31.12.2014 £’000 22 23 24 16 24 25 3 967 (6 540) 5 654 3 081 — 3 967 (5 753) 9 358 7 572 — 3 081 7 572 3 206 466 3 672 3 121 1 586 18 15 4 728 302 5 030 2 454 2 583 14 29 4 740 5 080 8 412 11 492 10 110 17 682 Annual Report 2015 37 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY AS AT 31 DECEMBER 2015 (in thousand GBP, unless otherwise stated) Attributable to owners of the parent Share capital Share premium £’000 3 967 £’000 4 562 Revaluation reserve £’000 3 636 — — — — — — — — — — — — — — — 3 967 — 4 562 — — — — — — (162) (21) 3 453 Translation Total Non-controlling Total Equity Retained earnings £’000 12 672 (3 478) — — (3 478) — — 162 2 9 358 reserve £’000 (6 768) — — (7 000) (7 000) — — — — (13 768) £’000 18 069 (3 478) — (7 000) (10 478) — — — (19) 7 572 interests £’000 — — — — — — — — — — £’000 18 069 (3 478) — (7 000) (10 478) — — — (19) 7 572 As at 1 January 2014 Loss for the year Other comprehensive income Income from changes of tax rates Currency translation differences Total comprehensive income Transactions with owners Dividends paid (Note 27) Total transactions with owners Depreciation on revaluation of property, plant and equipment Reduction of revaluation reserve As at December 2014 38 Annual Report 2015 Attributable to owners of the parent Share capital Share premium Revaluation £’000 3 967 £’000 4 562 As at 1 January 2014 Loss for the year Other comprehensive income Income from changes of tax rates Currency translation differences Total comprehensive income Transactions with owners Dividends paid (Note 27) Total transactions with owners Depreciation on revaluation of property, plant and equipment Reduction of revaluation reserve As at December 2014 — — — — — — — — — — — — — — — 3 967 — 4 562 reserve £’000 3 636 — — — — — — (162) (21) 3 453 Retained earnings £’000 12 672 (3 478) — — (3 478) — — 162 2 9 358 Translation reserve £’000 (6 768) — — (7 000) (7 000) — — — — (13 768) Total £’000 18 069 (3 478) — (7 000) (10 478) — — — (19) 7 572 Non-controlling interests £’000 — — — — — — — — — — Total Equity £’000 18 069 (3 478) — (7 000) (10 478) — — — (19) 7 572 Annual Report 2015 39 Attributable to owners of the parent Share capital Share premium As at December 2014 Loss for the year Other comprehensive income £’000 3 967 — Gain on revaluation of property, plant and equipment — Currency translation differences Total comprehensive income Transactions with owners Dividends paid (Note 27) Total transactions with owners Depreciation on revaluation of property, plant and equipment Reduction of revaluation reserve Acquiring of shares As at 31 December 2015 — — — — — — — 3 967 £’000 4 562 — — — — — — — — — 4 562 Revaluation reserve £’000 3 453 — 913 — 913 — — (86) (88) — 4 192 Non-controlling Total Equity interests £’000 Retained earnings £’000 9 358 (3 906) — — (3 906) — — 86 116 — 5 654 Translation reserve £’000 (13 768) — — (1 526) (1 526) — — — — — (15 294) Total £’000 7 572 (3 906) 913 (1 526) (4 519) — — — 28 — 3 081 — — — — — — — — — — — £’000 7 572 (3 906) 913 (1 526) (4 519) — — — 28 — 3 081 40 Annual Report 2015 Gain on revaluation of property, plant and equipment — As at December 2014 Loss for the year Other comprehensive income Currency translation differences Total comprehensive income Transactions with owners Dividends paid (Note 27) Total transactions with owners Depreciation on revaluation of property, plant and equipment Reduction of revaluation reserve Acquiring of shares As at 31 December 2015 Attributable to owners of the parent Share capital Share premium Revaluation £’000 3 967 — — — — — — — — 3 967 £’000 4 562 — — — — — — — — — 4 562 reserve £’000 3 453 — 913 — 913 — — (86) (88) — 4 192 Retained earnings £’000 9 358 (3 906) — — (3 906) — — 86 116 — 5 654 Translation reserve £’000 (13 768) — — (1 526) (1 526) — — — — — (15 294) Total £’000 7 572 (3 906) 913 (1 526) (4 519) — — — 28 — 3 081 Non-controlling interests £’000 — — — — — — — — — — — Total Equity £’000 7 572 (3 906) 913 (1 526) (4 519) — — — 28 — 3 081 Annual Report 2015 41 CONSOLIDATED STATEMENT OF CASH FLOWS AS AT 31 DECEMBER 2015 (in thousand GBP, unless otherwise stated) CASH FLOWS FROM OPERATING ACTIVITIES Profit before taxation Adjustments for: Exchange difference Depreciation and amortisation (Profit)/loss on disposal of non-current assets Write off of receivables/payables Impairment of inventories Loss from disposal of subsidiaries Interest income Interest expense on bank loans Operation cash flow before working capital changes (Increase) / decrease in inventories Decrease in trade and other receivables Increase / (decrease) in trade and other payables 11 10 10 Changes in working capital Cash generated from operations Interest received Income tax paid Net cash generated by / (used in) operating activities 42 Annual Report 2015 Note Year ended 31.12.2015 £’000 Year ended 31.12.2014 £’000 (3 847) (3 433) 1 733 537 (4) 857 78 (4) (1) 769 119 (127) 890 (404) 359 478 1 169 648 3 857 866 74 279 76 6 (4) 765 2 486 (661) 195 979 513 2 999 4 (45) 2 958 Note Year ended 31.12.2015 £’000 Year ended 31.12.2014 £’000 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, plant and equipment property, plant and equipment and intangible assets Proceeds from sale of property, plant and equipment Repayments of loans issued Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Acquiring of shares Interest paid (Decrease) / increase in short term borrowing Increase in long term borrowing Repayments of long term borrowing Net cash generated by financing activities Net decrease in cash and cash equivalents Effect of exchange rate changes on cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year 21 (259) 18 66 (175) — (607) (76) — — (683) (210) 88 215 93 (486) 19 (15) (482) — (765) (1 575) — (541) (2 881) (405) (386) 1 006 215 These consolidated financial statements were approved and authorised for issue by the Board of Directors on 30 June 2016 and were signed on its behalf by: Alexander Slipchuk Chief Executive Officer 2016 Annual Report 2015 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 (in thousand GBP, unless otherwise stated) 1.GROUP AND PRINCIPAL ACTIVITIES (a) Introduction The Company is a public limited liability entity reg- istered in Jersey with a registered office at 26 New Street, St Helier, Jersey, JE2 3RA, Channel Islands. The Group’s overall management and production fa- cilities are based in Ukraine, with the HQ in Kyiv. The Group commands leading positions in the Ukrainian processed cheese and packaged butter markets and owns a range of widely recognisable trademarks in Ukraine, including “Nash Molochnik” (translated as Our Dairyman), “Narodniy Product” (People’s Prod- uct) “Molendam” and “Vershkova Dolina” (Creamy Valley). The average number of employees of the Group during the year ended 31 December 2015 was 1,132 (2014: 1,423). (b) Ukrainian environment The Group conducts its operations mainly in Ukraine. The Ukrainian economy while deemed to be of mar- ket status continues to display certain characteristics consistent with that of an economy in transition. These characteristics include, but are not limited to, low levels of liquidity in the capital markets, high inflation, and significant imbalances in the public finance and foreign trade. From 1 January 2015 and up to 31 December 2015, the Ukrainian Hryvnia (the “UAH”) depreciated against major foreign curren- cies (by approximately 36% calculated based on the National Bank of Ukraine (the “NBU”) exchange rate 44 Annual Report 2015 of UAH to EUR, by approximately 52 % calculated based on the National Bank of Ukraine (the “NBU”) exchange rate of UAH to USD, by approximately 45% calculated based on the National Bank of Ukraine (the “NBU”) exchange rate of UAH to GBP). From 31 December 2015 to the date of the issuance of these financial statements, the UAH depreciated against EUR by 11%, against USD by 6% and GBP by 6%.The NBU imposed certain restrictions on purchase of foreign currencies, cross border settle- ments (including repayment of dividends), and also mandated obligatory conversion of foreign currency proceeds into UAH. The known and estimable effects of the above events on the financial position and performance of the Group in the reporting period have been taken into account in preparing these financial statements. The Government has commit- ted to direct its policy towards the association with the European Union, to implement a set of reforms aiming at the removal of the existing imbalances in the economy, public finance and public gov- ernance, and the improvement of the investment climate. Stabilisation of the Ukrainian economy in the foreseeable future depends on the success of the actions undertaken by the Government and securing continued financial support of Ukraine by interna- tional donors and international financial institutions. Management is monitoring the developments in the current environment and taking actions, where appropriate, to minimize any negative effects to the extent possible. Further adverse developments in the political, macroeconomic and/or international trade conditions may further adversely affect the Group’s financial position and performance in a manner not currently determinable. 2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 2.1.BASIS OF PREPARATION The consolidated financial statements have been pre- pared on a historical cost basis, except for property, plant and equipment and an intangible asset (cus- tomer list) which have been measured at fair value. The consolidated financial statements are presented in British Pounds Sterling (GBP) and all values are rounded to the nearest thousand (£000) except where otherwise indicated. (а) Statement of compliance These consolidated financial statements have been prepared in accordance with International Finan- cial Reporting Standards, International Accounting Standards and Interpretations issued by the Inter- national Accounting Standards Board (IASB), as adopted by the European Union (collectively “IFRS”). The preparation of financial statements in conformity with IFRS requires the use of certain critical ac- counting estimates. It also requires management to exercise its judgment in the process of applying the Group’s accounting policies. Further information is provided in note 3. (b) Going concern The final resolution and the effects of the political and economic crisis are difficult to predict but may have further severe effects on the Ukrainian economy. The Group incurred a loss of GBP 3,906 thousand for the year ended 31 December 2015, decreasing the retained earnings at that date to GBP 5,712 thousand. Annual Report 2015 45 In addition, due to significant devaluation of Ukrainian Hryvnia the burden of loans denominated in foreign currencies has increased. As at 31 December 2015 the loans, denominated in foreign currency, was the following: UAH 970 thousand, EUR 5,357 thousand (Note 24). Interest under these loan agreements is paid according to a fixed schedule annexed to the Treaty. Moreover, the Group did not make the principal amount payment of EUR 1 230 thousand during 2015 and EUR 762 thousand during 2016 (363 thousand GBP on 10 March 2016 and 399 thousand GBP on 10 June 2016) under the terms of its Loan Agreement with the European Bank for Reconstruc- tion and Development (the “”EBRD””) dated March 31, 2011. Such breach of the provisions relating to the loan repayment gives the bank a formal right to demand early repayment of loans. The Board notified the EBRD in advance about all breaches of terms of the Loan Agreement and expected to obtain a waiver on the date of signing these consolidated financial statements. However, the EBRD did not provide waiver in respect of breach of the repayment sched- ule in 2015 as new Loan Agreement was signed 24 June 2016. This new Loan Agreement was discussed during 2015 and first half of the 2016 in respect of new terms of its Loan Agreement. Terms suggest new repayment schedule up to 1 December 2024. Company gained grace period till 01/03/2017. Be- ginning with 01/03/2017 Company will pay tranches according to the new agreement. priate measures to underpin its cost cutting strategy including but not limited to: reconstruction of man- ufacturing facilities in Starokonstantinov location, decrease in the number of subsidiaries and stream- lining its business processes aimed to minimise non-value adding activities and related costs, export capacity development. In 2015 Company obtained a license for export to China, in 2016 Company obtained a license for export to Kazakhstan. This license is used for sales of hard cheese and cheese product. In processed cheese category Company plans to gain market share in Ukraine by launch- ing new branded products. In beverages category Company plans development and gain in sales of keg kvass. Also in beverages category launch and sales development of new products are planned. Company works on energy usage reducing as well. (c) Consolidation principles The consolidated financial statements comprise the financial statements of Ukrproduct Group Limited and its subsidiaries as at 31 December 2015. Subsidiaries are consolidated from the date of ac- quisition, being the date on which the Group obtains control, and continue to be consolidated until the date that such control ceases. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specif- ically, the Group controls an investee if, and only if, the Group has: Based on the existence of these conditions, the con- solidated financial statements have been prepared on a going concern basis, because management believes that it has employed sufficient and appro- — Power over the investee (i.e., existing rights that give it the current ability to direct the relevant activities of the investee). 46 Annual Report 2015 — Exposure, or rights, to variable returns from its involvement with the investee. — The ability to use its power over the investee to affect its returns. Generally, there is a presumption that a majority of voting rights result in control. To support this presumption and when the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circum- stances in assessing whether it has power over an investee, including: consolidation. A change in the ownership interest of a subsidiary, without a change of control, is accounted for as an equity transaction, that is, as transactions with owners in their capacity as owners. Profit or loss and each component of other com- prehensive income are attributed to the owners of the parent and to the non-controlling interests. Total comprehensive income is attributed to the owners of the parent and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group’s accounting policies. — The contractual arrangement with the other vote holders of the investee. If the Group loses control over a subsidiary, it: — Rights arising from other contractual arrange- — Derecognises the assets (including goodwill) and ments. liabilities of the subsidiary. — The Group’s voting rights and potential voting — Derecognises the carrying amount of any rights. non-controlling interests. The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses con- trol of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated financial statements from the date the Group gains control until the date the Group ceases to control the subsidiary. — Derecognises the cumulative translation differ- ences, recorded in equity. — Recognises the fair value of the consideration received. — Recognises any investment retained in the for- mer subsidiary at its fair value at the date when control is lost. — Recognises any surplus or deficit in profit or loss. All intra-group balances, income and expenses and unrealised gains and losses resulting from intra-group transactions are eliminated in full on — Reclassifies the parent’s share of components previously recognised in other comprehensive income to profit or loss. Annual Report 2015 47 The Group applies the acquisition method to account for business combinations. The consideration trans- ferred for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. Acquisition-related costs are expensed as incurred. Non-controlling interests represent a portion of prof- its or losses and net assets not owned by the Group. Non-controlling interests are presented separately from parent share capital in equity in the Consolidat- ed statement of financial position. Consolidated financial statements of the Group include following companies: Group’s company Effective Country of incorpo- ownership ratio ration As at 31 December 2015 2014 Principal activities Consolidation method Molochnik LLC* Ukraine 100% 100% Holder of some assets Acquisition Starokonstantinovskiy Molochniy Zavod SC****** Ukraine 100% 100% Production Starkon-Moloko LLC* Ukraine 100% 100% Owner of property & equipment Acquisition Acquisition Krasilovsky Molochny Zavod Private Enterprise SC****** Ukraine 100% 100% Owner of land assets Acquisition Molochaia Dolina LLC****** Ukraine 100% 100% Owner of land assets Zhiviy Kvas LLC****** Ukraine 100% 100% Production Acquisition Acquisition Milk investments Private Enterprise SC* Invest Garantiya Private Enterprise****** Business Invest Management LLS* Favorit-Konsulting Private Enterprise*** Avtopark Starokonstantinov LLS*** 48 Annual Report 2015 Ukraine 100% 100% Owner of equipment Acquisition Ukraine 100% 100% Owner of equipment Acquisition Ukraine 100% 100% Owner of equipment Acquisition Ukraine 100% 100% Owner of equipment Acquisition Ukraine 100% 100% Owner of fleet of vehicles Acquisition Group’s company Effective Country of incorpo- ownership ratio ration As at 31 December 2014 2013 Principal activities Consolidation method ATP Centr LLC*** Ukraine 100% 100% Owner of fleet of vehicles Acquisition Ukrprodexport Private Enterprise SC* Ukraine 100% 100% Export operations Acquisition Ukrproduct-Logistic LLC * Ukraine — 100% Logistics Acquisition Gollandska Sirovarnya MolendamLLC*** Ukraine — 100% Sales & Distribution Acquisition Lider-Product LLC**** Ukraine 100% 100% Sales & Distribution Acquisition Premierproduct-Dnipro Private Enterprise SC***** Premierproduct-Jitomir Private Enterprise SC** Ukraine — 100% To be constructed Acquisition Ukraine 100% 100% Sales & Distribution Acquisition Alternatyvni investytsiyi UCVF*** Ukraine 100% 100% Asset management Acquisition Ukrproduct Group CJSC Ukraine 100% 100% LinkStar Limited Cyprus 100% 100% Solaero Global Alternative Fund Limited Dairy Trading Corporation Limited Cyprus 100% 100% Holder of some assets and operating companies Holder of Group’s trademarks and assets Holder of Group’s trademarks and assets Acquisition Acquisition Acquisition BVI 100% 100% Export operations Acquisition Reliable Logistics Services ltd BVI 100% 100% St. Invest Holding LTD BVI 100% 100% Holder of distribution network Holder of distribution network Acquisition Acquisition Ukrproduct Group LTD Jersey Listed on LSE Parent * The companies are held through Ukrproduct Group CJSC which is a 100%-owned subsidiary of the Company ** The companies are held through LinkStar Limited which is a 100%-owned subsidiary of the Company *** Subsidiaries of Solaero Global Alternative Fund Limited, the Group’s specialised distribution companies. **** Subsidiaries of Krasilovsky Molochny Zavod Private Enterprise SC. ***** Subsidiaries of Molochnik LLC, the Group’s specialised distribution companies. ****** Subsidiaries of Alternatyvni investytsiyi UCVF. Alternatyvni investytsiyi UCVF is a limited life entity and is due to cease to exist on 5 April 2022. In 2015, Premierproduct-Dnipro Private Enterprise SC was withdrawn from Group. Loss from operation is insignificant,it does not require disclosure. Annual Report 2015 49 (d) Reorganisation A reorganisation of the Group continued in 2015 and resulted in the withdrawal of Gollandska Sirovarnya MolendamLLC and Ukrproduct-Logistic LLC via a merger with Starokonstantinovskiy Molochniy Zavod SC for the purpose of improving the administration and reporting processes. Operating segments are reported in a manner con- sistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the board of directors. 2.2. SIGNIFICANT ACCOUNTING POLICIES (e) Accounting for acquisitions of companies under common control Significant accounting policies given below have been consistently applied by the Group in the preparation of these financial statements, unless otherwise stated. Acquisitions of controlling interests in companies that were previously under the control of the ultimate beneficiaries of the Company are accounted for as if the acquisition had occurred at the beginning of the earliest comparative period presented or, if later, at the date on which control was obtained by the ultimate beneficiaries of the Company. The assets and liabilities acquired are recognised at their book values. The components of equity of the acquired companies are added to the same components with- in Group equity except that any share capital of the acquired companies is recorded as a part of merger reserve. The cash consideration for such acquisi- tions is recognised as a liability to or a reduction of receivables from related parties, with a correspond- ing reduction in equity, from the date the acquired company is included in these consolidated financial statements until the cash consideration is paid. No goodwill is recognised where the Group acquires additional interests in the acquired companies from the ultimate controlling shareholders. The difference between the share of net assets acquired and the cost of investment is recognised directly in equity. (f) Segment reporting 2.2.1. FOREIGN CURRENCY TRANSACTIONS (а) Functional and presentation currency The Ukrainian Hryvnia is the currency of the primary economic environment in which the majority of the Group companies operate. Transactions in currencies that differ from the func- tional currency are considered to be foreign currency transactions. Management has considered what would be the most appropriate presentational currency for consol- idated IFRS financial statements and has concluded that the Group should use British Pounds Sterling (hereinafter “GBP” or £) as the Group’s presentation- al currency. This is because the Ukrainian Hryvnia is not a major convertible or recognisable currency outside of Ukraine, and also because the Group’s public shareholder base is located mostly in the UK. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates pre- 50 Annual Report 2015 vailing at the dates of the transactions or valuation where items are re-measured. Foreign exchange gains or losses resulting from the settlement of such transactions and from the translation at the year-end exchange rates of monetary assets and liabilities de- nominated in foreign currencies are recognised in the statement of comprehensive income, except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges. Foreign exchange gains and losses are presented in the income state- ment within “Effect of foreign currency translation“. The financial results and financial position of the Group’s companies are translated into the presenta- tion currency as follows: — For current year, all assets and liabilities are translated at the rate effective at the reporting date. Income and expense items are translated at rates approximating to those ruling when the transactions took place; — Equity items are translated into the presentation currency using the historical rate; — For comparative figures, all assets and liabilities are translated at the closing rate existing at the relevant reporting date. Income and expense items are translated at rates approximating to those ruling when the transactions took place; — All exchange differences resulting from the application of the translation methods described above are recognised directly in equity as a sep- arate component of equity; — Income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and — All resulting exchange differences are recognised as a separate component of equity within “Trans- lation reserve”. The principal UAH exchange rates used in the preparation of Consolidated financial statements are as follows: Currency 31 December 2015 Average exchange rate for 2015 31 December 2014 Average exchange rate for 2014 GBP/UAH USD/UAH EUR/UAH 35,53 24,00 26,22 33,34 21,81 24,19 24,53 15,77 19,23 19,50 11,87 15,68 — Foreign currency can be freely converted within Ukraine at a rate close to the rate of the National Bank of Ukraine. At present, the UAH is not a freely convertible currency outside Ukraine. Annual Report 2015 51 2.2.2. CASH AND CASH EQUIVALENTS Cash and cash equivalents comprise cash on hand, deposits held on call with banks and other short- term highly liquid investments with original matur- ities of three months or less. Bank overdrafts are included in current liabilities in the Statement of Financial Position. 2.2.3. INVENTORIES Inventories are stated at the lower of cost and net realisable value. Cost is determined using the weighted average method. Net realisable value is the estimated selling price in the ordinary course of business less applicable variable selling expenses. The Group identifies the following types of inventories: — raw and other materials (including main and auxiliary operating supply and materials); — work in progress (including semi finished prod- ucts); — finished goods; — other inventories (including fuel, packaging, building materials, spare parts, other materials, goods of little value and high wear goods). The cost of finished goods and semi finished prod- ucts comprises raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity) but excludes bor- rowing costs. The cost of raw materials and other inventories comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. At each reporting date the Group analyses invento- ries to determine whether they are damaged, obso- lete or slow-moving or whether their net realisable value has declined. The net realisable value is the es- timated selling price in the ordinary course of busi- ness, less applicable variable selling expenses. The Group periodically checks inventories to determine whether they are damaged, obsolete or slow-mov- ing or if their net realisable value has declined for any other reason and reduces accordingly the value of inventory to properly reflect in the Consolidated Income Statement within Cost of sales. 2.2.4. PROPERTY, PLANT AND EQUIPMENT (а) Recognition and measurement of property, plant and equipment The cost of an item of property, plant and equipment is recognised as an asset only if: it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably and the entity expects to use the items during more than one period (more than 12 months). The Group adopts the revaluation model (as defined in IAS 16: Property, Plant and Equipment) for all classes of assets, except office equipment which is carried at cost. Management believes that this policy provides more reliable and relevant financial infor- mation because it better reflects the value in use of such assets to the Group. All significant categories of property, plant and equipment are subsequently carried at fair value at the date of revaluation, less any subsequent accu- mulated depreciation and subsequent accumulated impairment losses. Changes in fair value are rec- 52 Annual Report 2015 ognised in equity (the “Revaluation reserve”). An appropriate transfer is made from the revaluation reserve to the retained earnings when assets are ex- pensed through the income statement (e.g. through depreciation, impairment or sale). Subsequent costs that increase future economic ben- efits of the item of property, plant and equipment also increase its carrying amount. Otherwise, the Group recognises subsequent costs as expenses of the peri- od in which they were incurred. The Group classifies costs, associated with property, plant and equipment, for the following categories: repairs and maintenance; capital repairs, including modernisation. (b) Impairment of property, plant and equipment At each reporting date the Group assesses the carrying value of its property, plant and equipment to determine whether there is any evidence that the assets have lost part of their value as a result of impairment. If such evidence exists, the expected recoverable amount of such an asset is calculated to determine the amount of impairment loss, if any. In case it is not practicable to determine the expected recoverable amount of a separate asset, the Group determines the expected recoverable amount of a cash generating unit, to which the asset belongs. When, according to estimates, the expected recover- able amount of an asset (or a cash generating unit) is lower than its carrying value, the carrying value of an asset (or a cash generating unit) is reduced to its expected recoverable amount. Impairment losses are immediately recognised as expenses, except when the asset is carried at revalued price. In such cases, the impairment loss is considered as a decrease in the revaluation reserve. If the impairment loss is subsequently reversed, the asset’s carrying value (or a cash generating unit) is increased to the revised estimate of its expected recoverable amount. In such a case, the increased carrying value should not exceed the carrying value that could be determined in case the impairment loss for an asset (or a cash generating unit) was not recognised in previous years. The reversal of the impairment loss is imme- diately recognised as income. Gains and losses on disposals are determined by comparing proceeds with the carrying amount and are included in operating profit. (c) Depreciation and useful life Depreciation of an asset begins when it becomes available for use. Depreciation of an asset terminates with the termination of its recognition. Depreciation does not terminate when an asset is idle or if it is removed from active use and is intended for dispos- al, unless it is already fully depreciated. Depreciation is applied to all items of property, plant and equipment with the exception of land. The Group calculates the depreciation using the straight line method to allocate their cost or revalued amounts to their residual values over their estimated useful lives. As of January 1, 2011 the Group applied the produc- tion method of depreciation to all production equip- ment as management considered this method to be the most appropriate for the production assets. Annual Report 2015 53 Terms of useful lives by groups of property, plant and equipment (except for those depreciated under produc- tion method) are listed below: Group of property, plant and equipment Buildings Plant and machinery Vehicles Instruments, tools and other equipment Useful life 10–50 years 2–20 years 5–12 years 2–20 years The assets’ residual values, useful lives and methods of depreciation are reviewed at each financial year end and adjusted prospectively, if appropriate. 2.2.5. ASSETS UNDER CONSTRUCTION is initially carried at fair value and subsequently amortised. Assets under construction are reported at their cost of construction including costs charged by third parties and the capitalisation of the Group’s material costs incurred. No depreciation is charged on assets during construction. Upon the completion, the Group assesses whether there is any indication that an asset may be impaired. If any such indication exists, the Group performs impairment testing as described in note 2.2.20. In case no indication exists that the asset may be impaired, all accumulated costs of the asset are transferred to the relevant fixed asset category and depreciated at applicable rates from the time the asset is completed and ready for use. The Group recognises an item as an intangible asset, if it meets the following criteria for recognition: it is probable that the Group will receive future economic benefits associated with the asset and costs of the asset can be reasonably estimated. The Group identifies the following types of intangible assets: — Computer software licenses; — Trademarks; 2.2.6. INTANGIBLE ASSETS — The customer list. (а) Recognition and measurement of intangible assets Intangible assets are recognised at historical cost less accumulated amortisation and accumulated im- pairment losses, except for the customer list which Acquired computer software licenses are capitalised on the basis of the costs incurred to acquire and bring to use the specialised software. Trademarks are shown at historical cost. 54 Annual Report 2015 The customer list was initially measured at fair value at the date of revaluation obtained by using the esti- mates of the independent valuers. An intangible asset is derecognised at disposal, or when the Group no longer expects receipt from this asset of any economic benefits. The profit from cancellation or disposal is defined by the difference between net proceeds on the sale and the carrying value of intangible assets. If the intangible asset is ex- changed for a similar asset, the value of the acquired asset is equal to the value of the disposed asset. (b) Amortisation and useful life ferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the group. The consideration transferred includes the fair value of any asset or liability resulting from a contin- gent consideration arrangement. Acquisition-related costs are expensed as incurred. When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropri- ate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree. Costs of computer software licenses are amortised over their estimated useful lives using the straight- line method (1-10 years). The amortisation expense is included within Administrative expenses in the Consolidated Income Statement. If the business combination is achieved in stages, the acquisition date fair value of the acquirer’s previ- ously held equity interest in the acquiree is remeas- ured to fair value as at the acquisition date through profit and loss. Trademarks have finite useful lives and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method to allocate the cost of trademarks over their estimated useful lives (12-20 years). The amortisation expense is included within Selling and Distribution expenses in the Consolidated Income Statement. Amortisation is calculated using the straight-line method to allocate the cost of the customer list over its estimated useful life (20 years). The amortisation expense is included in Other operating expenses in the Consolidated Income Statement. (c) Business combinations and goodwill The consideration transferred for the acquisition of a subsidiary is the fair value of the assets trans- Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acqui- sition date. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or liability, will be recognised in accordance with IAS 39 ‘’Financial Instruments: Recognition and Measurement” either in profit or loss or as change to other comprehensive income. If the contingent consideration is classified as equity, it shall not be remeasured until it is finally settled within equity. Goodwill is initially measured at cost being the excess of the consideration transferred over the Group’s net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognised in profit or loss. Annual Report 2015 55 Goodwill is not amortised but is subject to testing for impairment as at the reporting date or more fre- quently, if events or changes in circumstances indi- cate the possibility of reducing its usefulness. At the acquisition date, goodwill is allocated to each asset or group of assets that generate cash, and benefits from which are expected to be received upon con- solidation. The amount of impairment is determined by assessing the recoverable amount, which may be obtained for a cash generating asset (group of cash generating assets) to which goodwill relates. Where the recoverable amount is less than the book value of cash generating asset (group of cash generating assets), impairment is recognised. in an active market. They arise principally through the provision of goods and services to customers (trade receivables), but also incorporate other types of contractual monetary asset. They are carried at amortised cost using the effective interest method less any impairment. From time to time, the Group may renegotiate the terms of trade receivables due from customers with which it has previously had a good trading history. Such renegotiations will lead to changes in the timing of payments rather than changes to the amounts owed and, in consequence, the new expected cash flows are discounted at the original effective interest rate. 2.2.7. FINANCIAL ASSETS (iii) Financial assets held to maturity The Group classifies its financial assets as: financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, available for-sale financial assets. Management determines the classification of financial assets at initial rec- ognition and re-evaluates this designation at every reporting date. The Group has not classified any of its financial assets as held to maturity. (iiii) Available-for-sale (AFS) financial assets The Group has not classified any of its financial assets as AFS. (і) Financial assets at fair value through profit or loss (а) Initial recognition This category comprises only “in-the-money” deriva- tives. They are carried at the reporting date at fair val- ue with changes in fair value recognised in the income statement. The Group does not have any assets held for trading nor does it voluntarily classify any financial assets as being at fair value through profit or loss. (іі) Loans and receivables These assets are non-derivative financial assets with fixed or determinable payments that are not quoted Financial assets at fair value through profit and loss are initially recorded at fair value. All other financial assets are initially recorded at fair value plus trans- action costs. Fair value at initial recognition is best evidenced by the transaction price. A gain or loss on initial recognition is only recorded if there is a difference between fair value and transaction price which can be evidenced by other observable current market transactions in the same instrument or by a valuation technique whose inputs include only data from observable markets. 56 Annual Report 2015 All purchases and sales of financial instruments that require delivery within the time frame established by regulation or market convention (“regular way” purchases and sales) are recorded at trade date, which is the date that the Group commits to deliv- er a financial instrument. All other purchases and sales are recognised on the settlement date with the change in value between the commitment date and settlement date not recognised for assets carried at cost or amortised cost; recognised in the income statement for trading investments; and recognised in equity for assets classified as available-for-sale. (b) Fair value estimation principles Fair value of financial instruments is based at their market value, established at the reporting date, less transaction costs. If market value is not available, fair value of the instrument is determined by means of pricing and discounted cash flow models. If a discounted cash flow model is applied, the de- termination of future cash flows is based on optimal management estimations and the discounting rate is market rate for similar financial instruments predom- inated as at reporting date. If the price model is used entering figures are based on average market data predominated as at reporting date. (c) Subsequent measurement Subsequent to initial recognition all financial assets at fair value through profit or loss and all availa- ble-for-sale instruments are measured at fair value, except that any instrument that does not have a quoted market price in an active market and whose fair value cannot be reliably measured is stated at cost, including transaction costs, less impairment losses. Loans and receivables are measured at amortised cost less impairment losses. amortised cost is calculated using the effective interest rate method. Premiums and discounts, including initial transac- tion costs, are included in the carrying amount of the related instrument and amortised based on the effective interest rate of the instrument. (d) Impairment of financial assets The Group assesses at each reporting date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred ‘loss event’) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial diffi- culty, default or delinquency in interest or principal payments, the probability that they will enter bank- ruptcy or other financial reorganisation and where observable data indicates that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. (e) Derecognition Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where the Group has transferred substan- tially all risks and rewards of ownership. Annual Report 2015 57 2.2.8. FINANCIAL LIABILITIES The Group classifies its financial liabilities into cate- gories depending on the purpose for which the liabil- ity was acquired. The Group has not classified any of its liabilities at fair value through profit and loss. Borrowings and liabilities initially recognised at fair value less transaction costs, are subsequently measured at amortised cost; any difference between the amount of received resources and the sum of repayment is represented as interest cost using the effective interest rate method during the period, when borrowings were received. Financial liabilities held at amortised cost include the following items: (c) Derecognition Trade payables and other short-term monetary liabil- ities, which are recognised at amortised cost. A financial liability is derecognised when the obli- gation under the liability is discharged, cancelled or expires. Bank borrowings, overdrafts, promissory notes and bonds issued by the Group are initially carried at fair value, being the amount advanced net of any transaction costs directly attributable to the issue of the instrument. Such interest bearing liabilities are subsequently measured at amortised cost using the effective interest rate method, which ensures that any interest expense over the period to repayment is at a constant rate on the balance of the liability car- ried in the balance sheet. “Interest expense” in this context includes initial transaction costs and interest payable on redemption, as well as any interest or coupon payable while the liability is outstanding. (а) Initial recognition Financial liabilities are initially recognised at fair value, adjusted in case of borrowings for directly attributable transaction expenses. (b) Subsequent measurement Trade and other accounts payable initially recognised at fair value, are subsequently accounted for at am- ortised cost at effective interest rate method. 2.2.9. SHARE CAPITAL The ordinary shares are classified as share capital. The difference between the fair value of considera- tion received and the nominal value of issued share capital is recognised as share premium. 2.2.10. REVENUE RECOGNITION Revenue is recognised to the extent that it is proba- ble that the economic benefits will flow to the Group and the revenue can be reliably measured. Revenue is measured simultaneously with an increase in asset or decrease in liabilities, which causes the increase in shareholders’ equity (excluding the capital in- crease through contributions from members of the enterprise), provided that the amount of income can be reasonably estimated. Revenue is reflected in the amount of the fair value of assets received. Revenue is the amount of cash or cash equivalents received or receivable. However, in case of delay in receipt of cash or cash equivalents, the fair value of the consideration may be less than received or the nominal amount of cash expected to be received. 58 Annual Report 2015 When the arrangement effectively constitutes a financing transaction, the fair value of the con- sideration is determined by discounting all future receipts using an imputed rate of interest. Revenue (proceeds) from sale of products (goods, works and services) is not corrected by an amount of related doubtful and uncollectible receivables. The amount of such debt is recognised as expenses of the Group. Revenue comprises the invoiced value of sales of goods and services net of value added tax, rebates and discounts after eliminating sales within the Group. Revenues and expenses are recognised on an accruals basis. (а) Revenue from sale of goods (products) Revenue from the sale of goods (products) is recog- nised when all the following conditions are satisfied: — the significant risks and rewards of ownership of the goods have passed to the buyer; — the Group is no longer involved in the manage- ment to the extent that is usually associated with ownership, and has no control over the goods sold; — the amount of revenue can be measured reliably; — it is probable that the economic benefits associ- ated with the transaction will flow to the Group; and — the costs incurred or to be incurred in respect of the transaction can be measured reliably. (b) Revenue from rendering of services The revenue from rendering of services is recog- nised when all the following conditions are satisfied: — the amount of revenue can be reliably measured; — inflow of economic benefits related to the trans- action is probable; — the stage of completion of the transaction at the end of the reporting period can be measured reliably; and — the costs incurred for the transaction and the costs to complete the transaction can be meas- ured reliably. 2.2.11. EXPENSES RECOGNITION Expenses are recognised by the Group when the following conditions are met: the amount of expens- es can be reliably measured, it is probable that future economic, outflow will occur. Expenses which can not be related directly to a gain in a certain period, are shown as a part of expenses of the period they were incurred in. If an asset provides economic benefits receivable during several reporting periods, expenses are cal- culated by allocating its value on a systematic basis over respective reporting periods. Writing off of deferred expenses is made on a straight-line basis within the periods to which they relate, during which the receipt of economic benefits is expected. Expenses which were incurred in the reporting peri- od but relate to production of semi-finished products Annual Report 2015 59 which will be further processed to finished goods and sold in future reporting periods, are accounted for in the current period in the item “Work-in-pro- gress”, included within “Inventories” in the Consoli- dated Statement of Financial Position. Current tax is the amount of income tax payable/ recoverable in respect of taxable profit/tax loss for the period determined in accordance with rules established by the tax authorities in respect of which income tax shall be paid/refundable. 2.2.12. FINANCIAL EXPENSES Interest expenses and other costs on borrowings to finance construction or production of qualifying assets are capitalized during the period of time that is required to complete and prepare the asset for its intended use. All other borrowing costs are expensed. Net financial expenses are recorded in the Consolidated Statement of Comprehensive Income. 2.2.13. VALUE ADDED TAX VAT is levied at two rates: 20% on Ukrainian domes- tic sales and imports of goods, works and services and, 0% on export of goods and provision of works or services to be used outside Ukraine. VAT output equals the total amount of VAT collected within a reporting period, and arises on the earlier of the date of shipping goods to a customer or the date of receiving payment from the customer. VAT input is the amount that a taxpayer is entitled to offset against their VAT liability in the reporting period. Rights to VAT input arise on the earlier of the date of payment to the supplier or the date goods are received. 2.2.14. TAX Taxation has been provided for in the financial statements in accordance with relevant legislation currently in force. The charge for taxation in the Con- solidated Income Statement for the year comprises current tax and changes in deferred tax. Current tax liabilities and assets are measured at the amount expected to be paid to or recovered from the taxation authorities, using the tax rates and laws that have been enacted, or substantively enacted, by the reporting date. Deferred tax assets and liabilities are calculated in respect of temporary differences using the liability method. Deferred income taxes are provided on all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes, except in situations where the deferred tax arising on initial recognition of goodwill or of an asset or liability in a transaction that is not a deal to merge companies and which, at the time of its commission, has no effect on ac- counting or taxable profit or loss. Assessment of deferred tax liabilities and deferred tax assets reflects the tax consequences that would arise depending on the ways in which the Group as- sumes the reporting date of realisation or settlement of the carrying value of its assets or liabilities. A deferred tax asset is recognised only to the extent to which there is a substantial probability that future taxable profit, which may be reduced by the amount of deductible temporary differences, will be received. Deferred tax assets and liabilities are measured at tax rates, the use of which is expected in the period of the asset or liability is settled, based on the pro- visions of the legislation enacted, or declared (and practically adopted) at that date. 60 Annual Report 2015 Deferred income taxes are recognised for all tem- porary differences associated with investments in subsidiaries and associated companies and joint activities, except in cases where the Group controls the timing of the reversal of temporary differences, and where there is a significant probability that the temporary difference will not will be reduced in the foreseeable future. The Group reviews the carrying amount of deferred tax assets at each reporting date and reduces it to the extent to which there is no longer the probability that there will be sufficient taxable profits, which allow to realise the benefits of part or all of this deferred tax asset. Any such reduction is restored to the extent to which there is the likelihood that sufficient taxable profit is accrued. Deferred tax assets and liabilities are not discounted. 2.2.15. SHARE-BASED PAYMENTS Where share options are awarded to employees, the fair value of the options at the date of grant is charged to the income statement over the vesting period. Where the terms and conditions of options are modified before they vest, the increase in the fair value of the options, measured immediately before and after the modification, is also charged to the income statement over the remaining vesting period. Where equity instruments are granted to persons other than employees, the income statement is charged with the fair value of goods and services received. Where fair value of goods and services received from persons other than employees is difficult to identify, the fair value of the instruments granted is charged to the in- come statement over the vesting period. The fair value of options to be expensed is determined on the basis of adjusted Black-Scholes model as set out in note 28. 2.16. SHORT-TERM EMPLOYEE BENEFITS Short-term employee benefits are recognised in the pe- riod in which an employee has rendered service to the Group. The Group recognises the undiscounted amount of short-term employee benefits a liability (accrued expense), after deducting any amount already paid. 2.2.17. PENSION COSTS The Group contributes to the Ukrainian mandatory state pension scheme, social insurance and employ- ment funds in respect of its employees. The Group’s pension scheme contributions are expensed as in- curred and are included in staff costs. The Group does not operate any other pension schemes. 2.2.18. SHARE ISSUE COSTS All qualifying transaction costs in respect of the issue of shares are accounted for as a deduction from share premium, net of any related tax deduction. Qualify- ing transaction costs include the costs of preparing the prospectus, accounting, tax and legal expenses, underwriting fees and valuation fees in respect of the shares and of other assets. 2.2.19. LEASES A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership. Leases other than finance leases are clas- sified as operating leases. (а) Group as a lessee Operating lease expenses are recognised as expenses in the period to which they relate, on a straight-line basis over the lease period. Annual Report 2015 61 (b) Group as a lessor Operating lease income is recognised in “Revenue” as income in the period to which it relates, over the lease term on a systematic and rational basis. of expected recovery. Losses from impairment are recognised as expenses directly in the Consolidated Statement of Comprehensive Income. 2.2.21. CONTINGENT LIABILITIES AND ASSETS 2.2.20. IMPAIRMENT OF ASSETS In respect of all assets, except for inventories, as- sets resulting from advances to employees, financial assets, and assets held for trading, the Group con- ducts the following procedures ensuring accounting for these assets at an amount, not exceeding their recoverable amount: — at each reporting date the condition of these assets is analyzed for impairment. Contingent liabilities are potential liabilities of the Group arising from past events the existence of which will be confirmed only by the occurrence or non-oc- currence of one or more future events, which are not under the complete control of the Group, or current obligations resulting from past events are not recog- nised in the financial reporting in connection with the fact that the Group does not consider an outflow of resources embodying economic benefits, and required to settle liabilities as probable, or the value of liabilities can not be reliably determined. — in case any impairment indicators exist, the amount of expected recovery of such asset is calculated to determine the amount of losses from impairment, if any. If it is impossible to determine the amount of losses from impairment of a sep- arate asset, the Group determines the amount of estimated impairment of the cash-generating unit, to which the asset belongs. The amount of expected recovery is the higher of two estimates: net selling price and “value in use” of the asset. In estimating value in use of asset, estimated future cash flows are discounted to their current value using a pre-tax discount rate that reflects current mar- ket estimates of time value of money and risks related to the asset. If according to estimates the amount of expected recovery of assets (or a cash-generating unit) is less than its book value, the book value of asset (or a cash-generating unit) is reduced to the amount The Group does not recognise contingent liabilities in the financial statements. The Group discloses infor- mation about contingent liabilities in the notes to the financial statements except when the probability of outflow of resources required to settle the obligation, is unlikely. Contingent assets are not recognised in the consoli- dated financial statements, but disclosed in the Notes where there is a sufficient probability of future eco- nomic benefits. 2.2.22. RELATED PARTIES Parties are considered to be related if one of the parties has a possibility to control or considerably influence the operational and financial decisions of another company, which is defined in IAS 24 “Related Party Disclosures”. 62 Annual Report 2015 While considering any relationship which can be defined as a related party transaction, the Group takes into consideration the substance of the transaction not just its legal form. The Group classifies the related parties according to existing criteria in the following categories: а) companies that directly or indirectly, through one or more intermediaries, exercise control over the Group, are controlled by it, or together with it are under common control (this includes holding companies, subsidiaries and fellow subsidiaries of the parent company); b) associates are companies whose activities are sig- nificantly influenced by the Group, but are neither subsidiaries, nor joint ventures of the investor; c) individuals, directly or indirectly holding ordinary shares that give them a possibility to significantly influence the Group’s activities; d) key management personnel are persons having authority and responsibility for planning, man- aging and controlling the activities of the Group, including directors and senior officials (as well as the non-executive director and close relatives of these individuals); and e) companies, large blocks of shares with voting rights of which are owned directly or indirectly by any person described in paragraphs (c) or (d), or a person influenced significantly by such persons. This includes enterprises owned by directors or major shareholders of the Group, and companies which have a common key management member with the Group. 2.2.23. FAIR VALUE MEASUREMENT Fair value is the price that would be received to sell an asset or paid to transfer a liability in an order- ly 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 advanta- geous market for the asset or liability. The principal or the most advantageous market must be accessible to the Group. 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. All assets and liabilities for which fair value is meas- ured or disclosed in the financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: • Level 1: Quoted (unadjusted) market prices in active markets for identical assets or liabilities. • Level 2: Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable. • Level 3: Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable. Annual Report 2015 63 2.2.24. DIVIDENDS Equity dividends are recognised in the consolidat- ed financial statements when they become legally payable. Interim dividends are recognised when they are paid. In the case of final dividends, this is when approved by the shareholders at the AGM. 3.SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS The preparation of the Group’s consolidated financial statements requires management to make judg- ments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the end of the reporting period. However, uncer- tainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affect- ed in future periods. In the process of applying the Group’s accounting policies, management has made the following judg- ments, which have the most significant effect on the amounts recognised in the financial statements: (а) Estimates of fair value of property, plant and equipment based on revaluation The Group is required, periodically as determined by the directors, to conduct revaluations of its property, plant and equipment. Such revaluations are conduct- ed by independent valuers who employ the valuation methods in accordance with International Valuation Standards such as cost method, comparison (mar- ket) method and revenue (income) method. (b) Useful lives of intangible assets and property, plant and equipment Intangible assets and property, plant and equip- ment are amortised or depreciated over their useful lives. Useful lives are based on the management’s estimates of the period that the assets will generate revenue, which are periodically reviewed for contin- ued appropriateness. Due to the long life of certain assets, changes to the estimates used can result in significant variations in the carrying value. Further information is contained in notes 14 and 15. (c) Impairment of goodwill The Group is required to test, on an annual basis, whether goodwill has suffered any impairment. The recoverable amount is determined based on value in use calculations. The use of this method requires the estimation of future cash flows and the choice of a discount rate in order to calculate the present value of the cash flows. Actual outcomes may vary. Further information is contained in note 15. (d) Inventory The Group reviews the net realisable value of, and demand for, its inventory on a quarterly basis to en- sure recorded inventory is stated at the lower of cost or net realisable value. Factors that could impact estimated demand and selling prices are the timing 64 Annual Report 2015 and success of future technological innovations, competitor actions, supplier prices and economic trends. Further information is contained in note 17. (e) Legal proceedings In accordance with IFRS the Group only recognis- es a provision where there is a present obligation from a past event, a transfer of economic benefits is probable and the amount of costs of the transfer can be estimated reliably. In instances where the criteria are not met, a contingent liability may be disclosed in the notes to the financial statements. Realisation of any contingent liabilities not currently recognised or disclosed in the financial statements could have a material effect on the Group’s financial position. Application of these accounting principles to legal cases requires the Group’s management to make determinations about various factual and legal matters beyond its control. The Group reviews outstanding legal cases following developments in the legal proceedings and at each reporting date, in order to assess the need for provisions in its finan- cial statements. Among the factors considered in making decisions on provisions are the nature of litigation, claim or assessment, the legal process and potential level of damages in the jurisdiction in which the litigation, claim or assessment has been brought, the progress of the case (including the progress after the date of the financial statements but before those statements are issued), the opinions or views of legal advisers, experience on similar cases and any decision of the Group’s management as to how it will respond to the litigation, claim or assessment. (f) Income taxes The Group is subject to income tax in several ju- risdictions and significant judgment is required in determining the provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ulti- mate tax determination is uncertain. As a result, the Group recognises tax liabilities based on estimates of whether additional taxes and interest will be due. These tax liabilities are recognised when, despite the Group’s belief that its tax return positions are supportable, the Group believes that certain posi- tions are likely to be challenged and may not be fully sustained upon review by tax authorities. The Group believes that its accruals for tax liabilities are ade- quate for all open audit years based on its assess- ment of many factors including past experience and interpretations of tax law. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differenc- es will impact income tax expense in the period in which such determination is made. Further informa- tion is contained in notes 13 and 16. (g) Quality claims The Group supplies consumers and industrial cus- tomers in Ukraine with dairy products manufactured in accordance with the current laws, food safety standards and technical requirements of the relevant Ukrainian authorities. The Group voluntarily applies non-domestic standards – ISO and HASSP – to some of the Group’s operations. For the industrial customers both domestically and outside of Ukraine, the food products are manufactured to the technical specifications agreed with the buyers in advance of the sale. In instances where the quality criteria and/ or technical specifications are not met or the delivery of products are made close to expiry date, a quality claim may arise and the corresponding contingent Annual Report 2015 65 liability may be disclosed in the notes to the finan- cial statements. Realisation of any such contingent liabilities not currently recognised or disclosed in the financial statements could have a material effect on the Group’s financial position. Application of these accounting principles to quality claims requires the Group’s management to make determinations about the future matters that may, at the time of determi- nation, be beyond management’s control. Among the factors considered in making decisions on quality claims provisions are: the nature of the claim, the quantifiable variances in quality giving rise to a claim, the potential loss from satisfying the claim and any decision of the Group’s management as to how it will respond to the claim. 4.ADOPTION OF NEW AND REVISED IFRS 4.1. NEW AND AMENDED STANDARDS AND INTERPRETATIONS The accounting policies adopted are consistent with those of the previous financial year, except for the following new and amended IFRS effective as of 1 January 2015: Adoption of new and revised International Financial Reporting Standards The following standards were adopted by the Group on 1 January 2015: — Amendments to IFRSs — “Annual Improve- ments to IFRSs 2010–2012 Cycle” — Amendments to IFRSs — “Annual Improvements to IFRSs 2011–2013 Cycle” The adoption of new or revised standards did not have any effect on the consolidated financial position or performance of the Group and any disclosures in the Group’s consolidated financial statements. 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 Stand- ards were in issue but not yet effective: Standards and Interpretations. Effective for annual period beginning on or after. 66 Annual Report 2015 IFRS 9 “Financial Instruments” Not yet adopted in the EU IFRS 15 “Revenue from contracts with customers” including amendments to IFRS 15: Effective date of IFRS 15 Not yet adopted in the EU IFRS 14 “Regulatory Deferral Accounts” IFRS 16 “Leases” Not yet adopted in the EU Not yet adopted in the EU Amendment to IFRS 10, IFRS 12 and IAS 28: Investment Entities: Applying the consolidation exception Not yet adopted in the EU Amendments to IFRS 10 and IAS 28: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture Not yet adopted in the EU Amendments to IAS 12: Recognition of Deferred Tax Assets for Unrealised Losses Not yet adopted in the EU Amendments to IAS 7: Disclosure Initiative Not yet adopted in the EU Amendments to IAS 27: Equity Method in Separate Financial Statements Not yet adopted in the EU Amendments to IAS 1: Disclosure Initiative Not yet adopted in the EU Amendments to IAS 16 and IAS 38: Clarification of Acceptable Methods of Depreciation and Amortisation Not yet adopted in the EU Amendments to IFRS 11: Accounting for acquisitions of Interests in Joint Ventures Not yet adopted in the EU Amendments to IAS 16 and IAS 41: Bearer plants Not yet adopted in the EU Amendments to IFRSs — “Annual Improvements to IFRSs 2012–2014 Cycle” Not yet adopted in the EU Management is currently evaluating the impact of the adoption of IFRS 9 “Financial Instruments” and IFRS 16 “Leases”. For other Standards and Interpretations management anticipates that their adoption in future peri- ods will not have a material effect on the consolidated financial statements of the Group in future period. Annual Report 2015 67 5. FINANCIAL RISK MANAGEMENT a) Principal financial instruments The principal financial instruments used by the Group, from which financial instrument risk arises, are as follows: The principal risks facing the Group’s business are credit risk, liquidity risk and market risk, including fair value or cash flow interest-rate risk and foreign exchange risk. The main purpose of the Group’s risk management programme is to evaluate, monitor and manage these risks and to minimise potential adverse effects on the Group’s financial performance and shareholders. The Chief Executive Officer of the Group is in charge of risk management and intro- duction of all policies as approved by the Board of Directors. • • • • • trade and other receivables; loans issued; cash and cash equivalents; bank loans and overdrafts; trade and other payables. The principal financial instruments are as follows: year ended 31.12.2015 £’000 year ended 31.12.2014 £’000 FINANCIAL ASSETS Loans and receivables: — trade and other receivables (excluding non-financial assets) 1 322 — cash and cash equivalents — other financial assets FINANCIAL LIABILITIES Held at amortised cost: — non-current bank loans — current bank loans — overdrafts — trade and other payables (excluding non-financial liabilities) 68 Annual Report 2015 93 11 1 426 3 206 3 060 61 1 239 7 566 3 080 215 108 3 403 4 728 2 110 344 2 311 9 493 (b) General objectives, policies and processes The Group’s overall risk management programme recognises the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance. Risk management is carried out by the Group Chief Executive Officer (CEO) under policies approved by the Board of Directors (the “Board”). The Group CEO identifies and evaluates financial risks in close co-operation with the Group’s operating units. The Board provides broad guidance and operating principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest-rate risk, credit risk, and investing excess liquidity. The Board has overall responsibility for the determi- nation of the Group’s risk management objectives and polices and, whilst retaining ultimate responsibility for them, it has delegated the authority for designing and operating processes that ensure the effective imple- mentation of the objectives and policies to the group’s finance function. The Board receives monthly updates from Head of Internal Audit through which it reviews the effectiveness of the processes put in place and the appropriateness of the objectives and policies it sets. The Group’s internal operating auditors review the risk management policies and processes and report their findings to CEO and the Audit Committee, if and when necessary. The overall objective of the Board is to set polices that seek to reduce risk as far as possible without unduly affecting the Group’s competitiveness and flexibility. Further details regarding these policies are laid out below. (c) Credit risk Credit risk is the risk that a counterparty will not be able to meet its obligations in full when due. Ukrprod- uct Group is mainly exposed to credit risk from credit sales to customers in Ukraine. The Group manages its credit risk through the Group’s risk assessment policy by evaluating each new customer before signing a contract using the following criteria: trading history and the strength of own balance sheet. The Group attempts to reduce credit risk by conducting periodic reviews which includes obtaining external ratings and in certain cases bank references. According to the Group’s risk assessment policy, implemented locally, every new customer is appraised before entering contracts; trading history and the strength of the own balance sheet being the main indicators of creditworthiness. While starting the com- mercial relationship with the Group, a new customer is offered the terms that are substantially tighter than those for the existing customers and stipulate, as a rule, the cash-on-delivery payments terms and no-returns policy (quality-related claims exempted). If the relationship progresses successfully, the terms are gradually relaxed to fall in line with the Group’s normal business practices and local specifics as required by the market. The Group’s periodic review includes external ratings, when available, and in some cases bank references. Purchase limits are established for each customer, which represents the maximum open amount without requiring approval from the CEO. These limits are reviewed quarterly. Customers that fail to meet the Group’s benchmark creditworthiness may transact with the Group on a prepayment basis only. Quantitative disclosures of the credit risk exposure in relation to Trade and other receivables, which are neither past due nor impaired, are made in note 18. The Group does not rate trade receivables by category or recoverability as the Group’s historical default rates have been negligible in the past (less than 0.01%); Annual Report 2015 69 essentially all trade receivables due to the Group had been recovered. In the future, the default rate on trade receivables overdue is expected to remain stable or even fall because in Ukraine the Group deals increas- ingly with the modern-format retailers whose cred- itworthiness is conducive to the payment discipline required by the Group. Maximum exposure to the Trade and other receivables component of credit risk at the reporting date is the fair value of Trade and other receivables. There is no collateral held as security or other credit enhance- ments. The Group’s credit controllers monitor the utilisation of the credit limits on a daily basis by customer and apply the delivery stop orders immediately if the indi- vidual limits are exceeded. The Group’s procedure for recovery of the trade receivables past due includes the following steps: — identification of the date and exact amount of the receivable past due, termination of all further deliveries and forwarding to the customer of the details of the amount due and the notice of the failure to pay — 3 days after the past due date; — delivery to the customer of the formal claim for the amount overdue and the visit of the represent- ative of the commercial credit control department to the customer premises — 2 weeks thereafter; — filing a claim to the commercial court for repay- ment of the amount overdue and late payment fees — 2 weeks thereafter; — obtaining a court order for repayment of the amount due and collaboration with bailiff — 2 weeks thereafter. As a result of the credit control and risk assessment procedures, the Group does not expect any significant losses from non-performance by the counterparties at the reporting date from any of the financial instru- ments currently employed in the business. Credit risk also arises from cash and cash equivalents and deposits with banks and financial institutions. The Group reviews the banks and financial institutions it deals with to ensure that standards of credit worthi- ness are maintained. Maximum exposure to the cash and cash equivalents and deposits with banks and financial institutions component of credit risk at the reporting date is the fair value of the cash balances due from such banks and financial institutions. There is no collateral held as security or other credit enhancements. 70 Annual Report 2015 Cash at bank and short term deposits are kept on the accounts in the following banks: Bank JSC OTP Bank Bank of Cyprus PJSC Raiffeisen Bank Aval Other UBS AG year ended 31.12.2015 Rating Baa1 Caa2 Caa3 Caa3 year ended 31.12.2014 Rating A2 Caa3 Caa3 Caa2 year ended 31.12.2015 £’000 52 29 6 4 — 91 year ended 31.12.2014 £’000 116 88 — 3 4 211 The Group uses Moody’s ratings. The Group does not enter into derivatives to manage credit risk, although in certain isolated cases may take steps to mitigate such risks if it is sufficiently concentrated. The Group is also exposed to a credit risk with regard to loans issued to third parties, related parties and employees. This risk is considered to be low and is managed according to the Group’s risk assess- ment policy. The Group’s exposure to credit risk, where the carrying value of financial assets is unsecured, is as shown below: Year ended 31.12.2015, £’000 Carrying Value Year ended 31.12.2015, £’000 Maximum exposure (unsecured) Year ended 31.12.2014, £’000 31.12.2014, £’000 Carrying Value Year ended Maximum exposure (unsecured) Trade receivables 1 313 Loans issued 11 1 324 1 313 11 1 324 3 039 108 3 147 3 039 108 3 147 (d) Liquidity risk Liquidity risk is a function of the possible difficulty to be encountered in raising funds to meet financial obligations. The Group’s policy is to ensure that it will always have sufficient cash to enable it to meet its obligations as they fall due by maintaining the minimum cash balances and agreed overdraft facilities. The Group also seeks to reduce liquidity risk by fixing interest rates and hence cash flows on substantially all of its borrowings. The Group’s operating divisions (plants) have dif- ferent liquidity requirement profiles. As the Group’s Annual Report 2015 71 products have short- and long-cycled production, the liquidity risk of each plant is monitored and managed centrally by the Group Treasury function. Each plant has a cash facility based on cash budg- ets with the Group Treasury. The cash budgets are set locally and agreed by the CEO in advance. The main element of the Group’s liquidity management is to reduce liquidity risk by fixing interest rates and hence cash flows on substantially all of its long-term borrowings. The CEO (and the Board, if requested) receives rolling quarterly cash flow projections on a monthly basis as well as information regarding the daily cash balances at each plant and overall. In the ordinary course of business, the Group relies on a combination of the available overdraft facilities and cash balances to fund the on-going liquidity needs. Capital expenditures are usually funded through longer-term bank loans. In case of the inadequate cash balances and the over- draft facilities close to the agreed ceilings, the Group is expected to revert to the emergency funding made available through temporary freeze to the current portion of capital spending, immediate operating cost reductions, postponement of payments to the third parties, and expansion of the overdraft ceilings. Although undesirable and never occurring in the past, such emergency funding is the last resort on which the Group may have to draw while ensuring the ongo- ing continuity of the business. Maturities of the Group’s financial instruments are disclosed further in the notes 18, 25 of these finan- cial statements. (e) Market risk Market risk may arise from the Group’s use of inter- est bearing, tradable and foreign currency financial instruments. Market risk comprises fair value inter- est rate risk, foreign exchange risk and commodity price risk and is further assessed below: (i) Cash flow and fair value interest-rate risk As the Group has no significant interest-bearing assets, the Group’s income and operating cash flows are substantially independent of changes in market interest rates. The Group’s interest-rate risk arises only from overdrafts, and is considered to be insig- nificant. The Group analyses the interest rate expo- sure on a monthly basis. A sensitivity analysis is performed by applying various interest rate scenarios to the borrowings. A change of interest rate by 7 percentage points (being the maximum reasonably possible expectation of changes in interest rates) would cause a change in interest expense by GBP 75,624 (2014: GBP 505,610). (ii) Foreign exchange risk All of the Group’s production facilities are located in Ukraine and the Board believes that the foreign exchange risk is minimal in this regard. The Group’s international operations consist primarily of the export of skimmed milk powder, bulk and spreads to the various markets around the world. The pri- mary currency for export sales is the US Dollar. The Group’s established corporate policy towards minimising the potential foreign exchange risk is to require the customers to pay for the export ship- ments of the skimmed milk powders in full and in advance. The Group’s purchases of the raw milk, semi-processed materials and other components of the manufacturing cost are made in Ukraine and are entirely Hryvnia-denominated. All outstanding bal- 72 Annual Report 2015 ances of trade payables by the Group are in Hryvnias. Currency analysis is provided in Note 29. The Group has a long-term loan from European Bank of Reconstruction and Development (“EBRD”) for the purpose of modernization of Starokonstantinovskiy Molochniy Zavod SC. This debt is denominated in Euro. Therefore, the Group is exposed to the ex- change rate risk that lies in the possibility of Euro (EUR) appreciation against Hryvna (UAH). The sen- sitivity analysis shows that EUR appreciation against Hryvna by 20% would cause exchange rate loss of GBP 1,141,824 (2014 by 5%: GBP 294,000). (iii) Commodity price risk The Ukraine economy has been characterized by high rates of inflation. The Group tends to experience inflation-driven increase in certain costs, including salaries and rents, fuel costs which are sensitive to rises in the general price level in Ukraine. In this situation, due to competitive pressures, it may not be able to raise the prices charged for products and services sufficiently to preserve operating margins. Accordingly, high rates of inflation in Ukraine could increase the Group’s cost and decrease its operating margins. The Group controls the prices for branded products through timely changes of sales prices according to the market development and competition. The Group is also exposed to commodity price risk for skimmed milk powder (“SMP”). The price for this product is determined by the world and domes- tic market. The profitability of SMP was adversely affected by higher raw milk prices and excess stock of SMP in Ukraine, which resulted in an unexpected price decrease on the domestic market. A 10% change in the SMP prices would lead to the change in Gross Profit of GBP 459,596 in 2016. The first stage of the modernisation project of Starokon- stantinovskiy Molochniy Zavod SC financed by the European Bank of Reconstruction and Development (“EBRD”) was completed and it is expected that it will allow greater utilisation and efficiency of its production process, reducing any impact of changes in skimmed milk products. (f) Operational risk Operational risk is a risk arising from systems failure, human error, fraud or external events. When controls fail to work, operational risks can damage goodwill, have legal consequences or lead to finan- cial losses. The Group can not expect that all oper- ational risks have been eliminated, but with the help of control system and by monitoring the reaction to potential risks, the Group may manage such risks. The control system provides an effective separation of duties, access rights, approval and verification, personnel training, and valuation procedures. 6.CAPITAL MANAGEMENT POLICIES The Group’s definition of the capital is ordinary share capital, share premium, accumulated retained earn- ings and other equity reserves. The Directors view their role as that of corporate guardians responsible for preservation and growth of the capital, as well as for generation of the adequate returns to shareholders. The Group’s objectives when maintaining and grow- ing capital are: Annual Report 2015 73 — to safeguard the Group’s ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders, — to identify the appropriate mix of debt, equity and partner sharing opportunities in order to balance the highest returns to shareholders overall with the most advantageous timing of investment flows, — to provide an adequate return to shareholders by delivering the products in demand by the cus- tomers at prices commensurate with the level of risk and expectations of shareholders. The Group sets the amount of capital it requires in proportion to risk. The Group manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk char- acteristics of the current trading environment. The Group’s core assets consist predominantly of the property, plant and equipment – the resources that have proven their ability to withstand the competitive erosion and inflationary pressure. In order to maintain or adjust the capital structure, the Group may issue new shares, adjust the amount of dividends paid to shareholders, repay the debt, re- turn capital to shareholders or sell assets to improve the cash position. Historically, the first three meth- ods were used to achieve and support the desired capital structure. The Group monitors capital on the basis of the net debt to equity ratio (D/E ratio). This ratio is calculated as net debt to shareholder equity. Net debt is calculated as total debt (as shown in the balance sheet) less cash and cash equivalents. Traditionally, the Group’s conservative strategy was to maintain the D/E ratio at 0.6 (60%) maximum. The Directors believe that for the Group, as an operating company and a public entity, the maintenance of the prudent debt policy is crucial in preserving the capital of the business. However as at December 31, 2015 despite the fact that the Company did not increase the amount of its borrowings the amount of debt increased as result of the Hryvnia devaluation leading to the D/E ratio at 1.83. In management’s opinion this excessive D/E ratio is the result of force-majeur circumstances. The D/E ratios at 31 December 2015 and At 31 December 2015 were as follows: Total debt Less: Cash and cash equivalents Net debt Total equity D/E ratio 74 Annual Report 2015 year ended 31.12.2015 £’000 year ended 31.12.2014 £’000 6 327 (93) 6 234 3 081 202,3% 7 182 (215) 6 967 7 572 92,0% 7. SEGMENT INFORMATION At 31 December 2015, the Group was organised internationally into four main business segments: 1) Branded products — processed cheese, hard cheese, packaged butter and spreads. 2) Beverages — kvass. 3) Non-branded products — skimmed milk powder, other skimmed milk products. 4) Distribution services and other — resale of third-party goods and processing services and processing services. Annual Report 2015 75 The segment results for the year ended 31 December 2015 are as follows: Branded Beverages Non-branded Distribution Un-allo- Total products £’000 products £’000 services £’000 cated £’000 £’000 £’000 SALES Gross profit Administrative expenses 13 329 1 442 (507) 868 400 (75) Selling and distribution expenses (1 085) (190) Other operating expenses — (4) PROFIT FROM OPERATIONS Finance expenses, net (150) — Loss from exchange differences — PROFIT BEFORE TAXATION Taxation (150) — 131 — — 131 — 5 502 440 (87) (165) (9) 179 — — 179 — PROFIT FOR THE YEAR (150) 131 179 Segment assets 5 854 1 104 2 893 Unallocated corporate assets Unallocated deferred tax — — — — — — CONSOLIDATED TOTAL ASSETS 5 854 1 104 2 893 Segment liabilities Unallocated corporate liabilities Unallocated deferred tax 988 — — — — — CONSOLIDATED TOTAL LIABILITIES 988 — Other segment information: Depreciation and amortisation Capital expenditure — 287 — — 50 — — — — — — 200 — 459 32 (9) (19) — 4 — — 4 — 4 4 — — 4 — — — — — — — — — 20 158 2 314 (431) (1 109) (3) (1 462) (1 076) (1 089) (1 510) (1 346) (768) (768) (1 733) (1 733) (4 011) (3 847) (59) (59) (4 070) (3 906) — 9 855 1 592 1 592 45 45 1 637 11 492 — 988 6 958 6 958 466 466 7 424 8 412 — — — 537 — The unallocated corporate liabilities represent bank loans, overdrafts and accruals. 76 Annual Report 2015 The segment results for the year ended 31 December 2014 are as follows: Branded Beverages Non-branded Distribution Un-allo- Total products £’000 products £’000 services £’000 cated £’000 £’000 £’000 SALES Gross profit Administrative expenses 20 948 1 497 3 985 (947) 644 (183) Selling and distribution expenses (1 837) (409) Other operating expenses — — PROFIT FROM OPERATIONS 1 201 52 Finance expenses, net — Income from exchange differences — — — PROFIT BEFORE TAXATION 1 201 52 Taxation — — PROFIT FOR THE YEAR 1 201 52 Segment assets Unallocated corporate assets Unallocated deferred tax 9 196 1 345 — — — — 7 969 1 550 (301) (506) — 743 — — 743 — 743 4 341 — — CONSOLIDATED TOTAL ASSETS 9 196 1 345 4 341 Segment liabilities Unallocated corporate liabilities Unallocated deferred tax 1 985 — — — — — — — — CONSOLIDATED TOTAL LIABILITIES 1 985 — — Other segment information: Depreciation and amortisation Capital expenditure 426 244 119 3 321 162 1 462 274 (38) (41) — 195 — — 195 — 195 52 — — 52 — — — — — — — — 31 876 6 453 (494) (1 963) (4) (2 797) (508) (508) (1 006) 1 185 (761) (761) (3 857) (3 857) (5 624) (3 433) (45) (45) (5 669) (3 478) — 14 934 2 746 2 746 2 2 2 748 17 682 — 1 985 7 823 7 823 302 302 8 125 10 110 — 79 866 488 Annual Report 2015 77 Secondary reporting format — geographical segments: Sales by country (consignees) Ukraine Netherlands Moldova Nigeria Azerbaijan Georgia Mexico Turkey Turkmenistan Other countries Total year ended 31.12.2015 £’000 16 286 1 030 797 554 449 314 261 204 154 109 year ended 31.12.2014 £’000 26 297 2 049 1 170 644 408 382 378 204 — 344 20 158 31 876 The majority of the Group’s assets and liabilities are in Ukraine. Sales to the countries in Europe represent sales to international traders of milk powders located in Europe. These traders consequently resell the milk powders to other countries worldwide. The Group has no customers volume of sales to which exceeds 10% from the total amount. 78 Annual Report 2015 8. REVENUE For the years ended 31 December 2015 and 31 December 2014, sales revenue was presented as follows: GENERAL REVENUE Branded (including bonuses) Beverages (including bonuses) Non-branded products Distribution services (including bonuses) Charge of bonuses Total revenue (excluding bonuses) year ended 31.12.2015 £’000 year ended 31.12.2014 £’000 20 859 13 930 943 5 502 484 (701) 20 158 33 201 22 055 1 687 7 970 1 489 (1 325) 31 876 Bonuses are compensation granted to the Group’s main customers within its distribution network. Bonuses are accounted for based on a fixed percentage of the product sold by customers who comprise retail networks and distributors. Cash compensation is paid on a periodic basis during the year. Annual Report 2015 79 9. EXPENSES BY NATURE For the years ended 31 December 2015 and 31 December 2014, items of expenses were presented as follows: Cost of sales Including: year ended 31.12.2015 £’000 (17 844) year ended 31.12.2014 £’000 (25 423) Raw materials and consumables used, cost of goods sold, manufacture overheads etc. (16 059) Wages and salaries, social security cost (Note 12) (1 381) Depreciation (Note 11) Administrative expenses Including: Wages and salaries, social security costs (Note 12) PR, nominated broker, secretary, legal services etc. Lease and current repair and maintenance Security Communication Bank service Amortisation and depreciation (Note 11) Taxes and compulsory payments (404) (1 109) (559) (176) (58) (52) (40) (36) (25) (22) IT materials, household expenses, reading materials (18) Audit fees Other (14) (109) (22 504) (2 193) (726) (1 963) (1 077) (283) (101) (92) (58) (73) (46) (43) (22) (40) (128) 80 Annual Report 2015 year ended 31.12.2015 £’000 (1 462) year ended 31.12.2014 £’000 (2 797) Selling and distribution expenses Including: Wages and salaries, social security costs (Note 12) Delivery costs Promotion Amortisation and depreciation (Note 11) Lease and current repair and maintenance Impairment of inventories Packaging Veterinary certificates, medical examination, permits Other (448) (414) (179) (104) (93) (78) (52) (43) (51) Other operating expenses (1 089) Including: Impairment of trade receivables Profit / (loss) on disposal of non-current assets Impairment of non-current asset Impairment of inventories Amortisation and depreciation (Note 11) Wages and salaries, social security costs (Note 12) Other (805) (19) (179) (28) (4) (2) (52) (966) (787) (578) (85) (140) (76) (53) (68) (44) (508) (73) (17) — (284) (9) (1) (124) Annual Report 2015 81 10. NET FINANCE COSTS For the years ended 31 December 2015 and 31 December 2014, financial income/(expenses) were presented as follows: Finance income Interest income Total interest income Finance expense Interest expense on bank loans Total finance expense year ended 31.12.2015 £’000 1 1 (769) (769) Net finance expense recognised in income statement (768) 11. DEPRECIATION AND AMORTISATION For the years ended 31 December 2015 and 31 December 2014, amortization and depreciation were presented as follows: year ended 31.12.2015 £’000 (404) (25) (104) (4) (537) Cost of sales Administrative expenses Selling and distribution expenses Other operating expenses Total depreciation and amortization 82 Annual Report 2015 year ended 31.12.2014 £’000 4 4 (765) (765) (761) year ended 31.12.2014 £’000 (726) (46) (85) (9) (866) 12. EMPLOYEE BENEFIT EXPENSES For the years ended 31 December 2015 and 31 December 2014, employee benefit expenses were presented as follows: Wages and salaries (including key management personnel) Social security costs Average number of employees Wages and salaries of operating personnel Wages and salaries of administrative personnel Wages and salaries of distribution personnel Wages and salaries of personnel related to other operating expenses year ended 31.12.2015 £’000 (1 825) (565) (2 390) 1 132 year ended 31.12.2015 £’000 (1 381) (559) (448) (2) (2 390) year ended 31.12.2014 £’000 (3 251) (986) (4 237) 1 423 year ended 31.12.2014 £’000 (2 193) (1 077) (966) (1) (4 237) Wages and salaries of key management personnel: For the year ended 31 December 2015, remuneration of the Group’s key management personnel amounted to GBP 235,000 (2014: GBP 235,000). Key management personnel received only short term benefits during the years ended 31 December 2015 and 31 December 2014. The key management personnel are those persons remunerated by the Group who are members of the Board of Directors of the Company (Ukrproduct Group Ltd). Annual Report 2015 83 13. INCOME TAX EXPENSES For the years ended 31 December 2015 and 31 December 2014, income tax expenses were presented as follows: 31 December 2015 £’000 31 December 2014 £’000 Current tax charge — Ukraine Current tax charge — non-Ukraine Deferred tax relating to the origination and reversal of temporary differences Total income tax expenses 52 — 7 59 53 — (8) 45 Differences in treatment of certain elements of financial statements by IFRS and Ukrainian statutory taxation regulations give rise to temporary differences. The tax effect of the movement on these temporary differences is recognised at the rate of 18% (2014: 18%). The numerical reconciliation between tax charge and the product of accounting profit multiplied by the appli- cable tax rate(s) is provided in the following table. Profit before tax: Ukraine Cyprus Other (BVI, Jersey, loss before tax in Ukraine) Profit before tax, total year ended 31.12.2015 £’000 146 13 (4 006) (3 847) year ended 31.12.2014 £’000 795 (26) (4 202) (3 433) 84 Annual Report 2015 Tax calculated at domestic tax rates applicable to profits in the relevant countries Ukraine (2015: 18%, 2014: 18%) Cyprus (10%) BVI, Jersey (0%) year ended 31.12.2015 £’000 26 1 — 27 Tax calculated at domestic tax rates applicable to net income not subject to tax and expenses not deductible for tax purposes Ukraine Cyprus BVI, Jersey 33 (1) — 32 Tax charge Ukraine Cyprus BVI, Jersey The weighted average applicable tax rate Ukraine Cyprus BVI, Jersey 59 — — 59 18% 8% Nil -1% year ended 31.12.2014 £’000 — 143 — 143 (98) — — (98) 45 — — 45 18% 0% Nil -4% There are a number of laws related to various taxes imposed by both central and regional governmental authorities. Although laws related to these taxes have not been in force for significant periods, the prac- tice of taxation and implementation of regulations are well established, documented with a sufficient degree of clarity and adhered to by the taxpayers. Nevertheless, there remain certain risks in relation to the Ukrainian tax system: few court precedents with regard to tax related issues exist; different opinions regarding legal interpretation may arise both among and within government ministries and regulatory agencies; tax compliance practice is subject to review and investigation by a number of authorities with overlapping responsibilities. Generally, tax declarations remain subject to inspec- tion for an indefinite period. In practice, however, the risk of retroactive tax assessments and penalty charges decreases significantly after three years. The Annual Report 2015 85 fact that a year has been reviewed does not preclude the Ukrainian tax service performing a subsequent inspection of that year. with sufficient regularity to ensure that the carrying amount does not differ materially from fair value. The Group has accomplished assets revaluation in 2015 for the effective evaluation date 31 December 2015. The revaluation was carried by an independent evaluator “BGS-aktyvy” Ltd (Ukraine) using Net As- sets Value method and Market method. Discounted Cash Flow Method was used for test for reasonable assets profitability. The revaluation was accom- plished for the assets used in process of production. Office equipment was not revaluated The revaluation led to assets value increase for 17% The fair value of land, property, plant and equipment as at 31.15.15 was determined by independent ap- praiser in accordance with IFRS and IVS. The Valuer used the following methods for the calculation of fair values: comparative, income and cost approaches. The Group’s management believes that it has ade- quately provided for tax liabilities in the accompany- ing financial statements; however, the risk remains that those relevant authorities could take different positions with regard to interpretive issues. During the period under review, the Ukrainian com- panies within the Group paid royalties and interest charges on the outstanding credits and bonds to another Group company — Solaero Global Alterna- tive Fund Limited (Cyprus). These payments were not taxable in Ukraine due to the existing Double Taxation Treaty between Ukraine and Cyprus. 14. PROPERTY, PLANT AND EQUIPMENT In accordance with IAS 16 “Property, Plant and Equipment”, the Group carries out revaluations, The hierarchy of inputs used in determining the fair value of the assets of the Group as at 31 December 2015 were as follows: Hierarchy of inputs Fair value (revaluation result), thousand GBP Land Buildings Plant and machinery Vehicles Other PPE Total 86 Annual Report 2015 Level 2 Level 3 Level 3 Level 2 Level 2 148 2 157 3 701 616 598 7 220 When performing the valuation using these meth- ods, the key assumptions and judgment applied by the independent valuer were as follows: in 2016 to 22.4% in 2020 was used, for the beverage segment in the range from 28.1% in 2016 to 22.3% in 2020. — Choice of information sources for construction cost analysis (actual costs recently incurred by the Group, specialised reference materials, estimates for cost of various equipment ect. — Determination of comparatives for replacement cost of certain equipment, as well as corre- sponding adjustments required to take into account difference in technical characteristics and condition of new and existing equipment. — Selection of market data when determining market value where it is available (land plots, vehicles). — Determination of applicable cumulative price indices or changes in foreign exchange rates which would most reliably reflect the change in fair value of assets revaluated using indexation of carrying amounts. The fair values obtained using Depreciated Replaced Cost method (DRC) are validated using DCF models and are adjusted if the values obtained using income approach are lower than those obtained using DRC or indexation carrying amount (i.e. there is economic obsolescence). The recoverable amount of the cash-generating unit was determined on the basis of value-in use. The amount of value in use for the cash generating unit was determined on the basis of the most recent budget estimates prepared by management and application of the income approach of valuation. For the diary segment discount rate in range from 23.8% The main factors that formed Group assets value were the following — economic recession in 2014-2015 characterized by triple devaluation of national currency, econo- my shrank 35-40%, loss of territory (involuntary sales closing in Donetsk, Lugansk districts and Crimean Peninsula as a result), price conjuncture aggravation in the world market. — company management does not expect signif- icant increase of diary market and is guided by predicted Asian and East African market in- crease. — There is no aging of equipment. The Group is divided into two cash-generating units (CGU) Diary production Diary productions consists of production assets for butter, cheese, protein and skimmed diary products: — Production assets of SE Starokostyantynivski Diary Plant abd two other units in Zhytomir and Letychiv; — Group vehicle park used for raw materiak and end product transportation; ”Nash Molochnik”, ”Vershkova Dolyna” and — “Narodny product” trade marks. Annual Report 2015 87 Increase of law material price – Forecast is obtained from published index for Ukraine. Predicted increase data – The data are based on published industry research in Ukraine. Assumption regarding business segment – Using the data on industry for increase factors these as- sumptions are important as management estimates the changability of the unit position in comparison with competitors in the period forcasted. Industry forecast is not used for kvass (beverage) sales forecasting, as the Group produces the unique product “Live Kvass” that has no competitors in Ukraine by its nature. the model is based on own dinamic forecast of the management. Brand devel- opement plans include: — Extension of brand presence in distribution net- works; — Kvass in kegs sales increase; — Exstension of beverage product range (produc- tion of white kvass, several kinds of Uzvar) As for estimated value from usinf both CGU, man- agement consieders any possible changes in any of key positions mentioned above cannot lead to significant excess of unit aquisition cost compared to the amount of its expected compensation. Beverage production Beverage production combines the production assets of Live kvass “Arseniivsky”. It consists of: — Production assets of “Zhyvyi Kvass” LTD and, — “Arseniivsky” Trade mark. Main assumptions used in utility value calculation Utility value calculation for production both diary products and bweverages is sensitive to he following assumptions: Gross profit margin — Gross profit margin is based on 2015 budget value and takes into consideration trends of value indexes for 2016-2020 Discount rate — Discount rate posturizes current market estimated risks, specific for each CGU, inclusive of cash cost and individual risks and corresponding assets excluded from the cash flow valuation. Discount rate calculation based on spe- cific Group circumstances and operational segment and is issued from Weighted Average Capital Cost (WACC). WACC takes into account both loan and owned capital. The value of owned capital is calculat- ed on the basis of predicted return on investment of group investors. Specific segment risks are included in usage of separate facts of beta-testing. Beta fac- tors are estimated annualy using generally accessible market data. WACC is used in the model for both CGU in amount mentioned above. Production value increase — is derived from pub- lished consumer price index for Ukraine or world price tendencies for export product groups. 88 Annual Report 2015 As at 31 December 2015 and 31 December 2014, property, plant and equipment were presented as follows: r e d n u s t e s s A n o i t c u r t s n o C d n a d n a L s g n d i l i u B i y r e n h c a M d n a t n a P l s e l c i h e V , s t n e m u r t s n I i - p u q e d n a s l o o t r e h t o t n e m l a t o T COST OR VALUATION At 1 January 2014 Additions Transfers to/from AUC Disposals Exchange differences on translation to the presentation currency £’000 £’000 £’000 £’000 £’000 £’000 1 653 9 692 12 869 3560 1 254 29 028 593 (1 716) (11) (472) — 384 (12) — 859 (28) (3 650) (4 940) — 18 (124) (957) 38 455 (60) 631 — (235) (740) (10 759) At 31 December 2014 47 6 414 8 760 2 497 947 18 665 Accumulated depreciation At 1 January 2014 Depreciation charge Disposals Exchange differences on translation to the presentation currency 29 5 (5) — 3 534 4 220 2 356 223 (7) 353 (6) 85 (62) 704 124 (54) 10 843 790 (134) (874) (808) (488) (256) (2 426) At 31 December 2014 29 2 876 3 759 1 891 518 9 073 Cost or valuation At 1 January 2015 Additions Transfers to/from AUC Elimination of depreciation Gain on revaluation Disposals Exchange differences on translation to the presentation currency 47 221 (56) (21) — (5) (23) 6 414 8 760 — (58) — (76) 2 497 — (112) 947 — 303 18 665 221 1 (2 245) (2 981) (1 420) (365) (7 032) 40 — 543 (1) 361 (32) 99 (16) 1 043 (54) (1 845) (2 543) (677) (286) (5 374) At 31 December 2015 162 2 306 3 702 617 682 7 469 Annual Report 2015 89 r e d n u s t e s s A n o i t c u r t s n o C d n a d n a L s g n d i l i u B i y r e n h c a M d n a t n a P l s e l c i h e V , s t n e m u r t s n I i - p u q e d n a s l o o t r e h t o t n e m l a t o T £’000 162 £’000 2 306 £’000 3 702 £’000 617 £’000 682 £’000 7 469 At 31 December 2015 Accumulated depreciation At 1 January 2015 Depreciation charge Elimination of depreciation Disposals Exchange differences on translation to the presentation currency At 31 December 2015 29 1 (21) — (9) 0 Net book amount at 31 December 2015 162 Net book amount at 31 December 2014 18 Net book amount at 31 December 2013 1 624 2 876 3 759 1 891 130 253 48 518 56 9 073 488 (2 245) (2 981) (1 420) (365) (7 032) — (2) (19) (12) (33) (760) (1 029) (500) (146) (2 444) 1 2 305 3 538 6 158 — 3 702 5 001 8 649 — 617 606 1 204 51 631 429 550 52 7 416 9 592 18 185 As a result of the revaluation fixed assets consists of loss at the P&L for the amount of GBP 70 thousand and Gain on revaluation at the Other Comprechensive income GBP 1,113 thousand . Total Gain on revalua- tion GBP 1,043 thousand. As at December 31, 2015 the Group has no contrac- tual commitments on purchase of property, plant and equipment. Fixed assets with a net book value of GBP 5,125 thousand At 31 December 2015 (2014: GBP 8,446 thousand) were pledged as collateral for loans. Borrowing costs for the tranches from EBRD for the second stage of reconstruction of SE Starokostian- tynivskyi Molochnyi Zavod was capitalised during March-December of 2014. They amounted to GBP 32 thousand (2013: 34 thousand). Average rate for EBRD loan 7,094% used to determine the amount of borrowing costs eligible for capitalisation. During the 2015, interest on the loan was not capitalized, because all the equipment was put into operation at the end of 2014. As at December 31, 2015 any prepayments for property, plant and equipment were included within 90 Annual Report 2015 Assets under construction in the amount of GBP 5 thousand (2014: GBP 8 thousand) As at December 31, 2015 fully depreciated assets included within property, plant and equipment with the original cost of GBP 214 thousand (2013: GBP 565 thousand) It’s impracticable to provide information about the carrying amounts of all classes of assets, except of- fice equipment if they were measured using the cost model without undue cost and efforts. 15. INTANGIBLE ASSETS As at the reporting dates intangible assets were presented as follows: Computer software £’000 Trade marks Customer list Goodwill Total £’000 £’000 £’000 £’000 COST OR VALUATION At 1 January 2014 Additions Disposals Exchange differences on translation to the presentation currency At 31 December 2014 ACCUMULATED AMORTISATION At 1 January 2014 Amortisation charge for the year Disposals Exchange differences on translation to the presentation currency 31 41 (5) (21) 46 28 3 — (19) 862 — — 692 — — (137) (189) 725 503 239 47 — (173) 286 26 — 8 104 — (104) — — — — — — 1 689 41 (109) (347) 1 274 553 76 — (184) At 31 December 2014 12 113 320 — 445 Annual Report 2015 91 Computer software £’000 Trade marks Customer list Goodwill Total £’000 £’000 £’000 £’000 COST OR VALUATION At 1 January 2015 Additions Disposals Impairment loss Exchange differences on translation to the presentation currency At 31 December 2015 ACCUMULATED AMORTISATION At 1 January 2015 Amortisation charge for the year Impairment loss Disposals Exchange differences on translation to the presentation currency At 31 December 2015 46 1 (2) 16 29 12 11 (1) 4 26 Net book amount At 31 December 2015 3 Net book amount at 31 December 2014 34 Net book amount at 31 December 2013 3 725 — — (36) 761 113 30 — 25 168 593 612 623 503 — — (503) — — 320 8 (312) — (16) — — 183 406 — — — — — — — — — — — — 1 274 1 (2) (503) (20) 791 445 49 (312) (1) 13 194 596 829 104 1 136 The remaining amortization periods of the intangible assets are as follows: Acquired intangible assets — Computer software 1–10 years; — Trademarks 11–18 years; — Customer list 0 years. The intangible asset “Customer list” represents the captive individual suppliers of raw milk. In Ukraine, where about 80% of the entire milk comes from in- dividual producers, the existing supplier base is very 92 Annual Report 2015 important for the dairy producers and thus is valua- ble. The acquired asset “Customer list” was recog- nised in the accounts on the basis of the Purchase Price Allocation (PPA) exercise conducted within the 12-month period following the acquisitions of two plants. The asset was valued by an independent valuer Uvecon using the sales comparison method and depreciated replacement cost (DRC) methods (for tangible assets) and income and cost advan- tage methods (intangible assets). An impairment of customer list as of 31 December 2015 was caused by Group’s transition to more favorable terms of raw materials purchases outside the region, in which customer list is located. The Group performed its annual impairment test in December 2015 and 2014. The Group considers the relationship between its market capitalisation and its book value, among other factors, when reviewing for indicators of impairment. As at 31 December 2015, the market capitalisation of the Group was below the book value of its equity, indicating a potential impair- ment of goodwill and impairment of the assets of the operating segment. In addition, the overall decline in construction and development activities around the world, as well as the ongoing economic uncertainty, have led to a decreased demand in both the trade- mark “Zhyviy Kvas” and Group of the trademarks “Diary segment” CGUs. Trademark “Zhyviy Kvas” The recoverable amount of the trade mark “Zhyviy Kvas” CGU, GBP 346 thousand as at 31 December 2015, has been determined based on a value in use calculation using cash flow projections from financial budgets approved by senior management covering a five-year period. The projected cash flows have been updated to reflect the decreased demand for prod- ucts and services. The discount rate applied to cash flow projections is 25.8% (2014: 29.7%). The growth rate used to extrapolate the cash flows of the unit beyond the five-year period is 5%. It was concluded that the fair value exceeded costs of disposal did not exceed the value in use. Group of the trademarks “Diary segment” The recoverable amount of the fire trademarks “Diary segment” CGU, GBP 235 thousand as at 31 December 2015, is also determined based on a value in use calculation using cash flow projections from financial budgets approved by senior management covering a five-year period. The projected cash flows have been updated to reflect the decreased demand for products and services. The pre-tax discount rate applied to the cash flow projections is 25.8% (2014: 29.7%). The growth rate used to extrapolate the cash flows of the unit beyond the five-year period is 2-7%. The impairment coefficient is 8.27. As a result of the analysis, management did not identify an impairment for this CGU. Annual Report 2015 93 16. DEFERRED TAX ASSETS AND LIABILITIES For the year ended 31 December 2015, deferred tax assets and liabilities were presented as follows: As at 31.12.2015 £’000 (2) — (12) — 302 — As at 31.12.2014 £’000 (66) — 636 — 42 — — 39 — (15) — (20) — (36) 62 255 — — — (2) (46) — — (110) — 466 — — 22 (283) (2) — 302 — Deferred tax assets at the beginning of the year Deferred tax liability at the beginning of the year Deferred tax asset recognised in income statement during the year Deferred tax liability recognised in income statement during the year Reduction in deferred tax due to decrease in property, plant and equipment revaluation reserve because of amortisation Increase in deferred tax due to increase in property, plant and equipment revaluation reserve Exclusion from Group Exchange differences on translation to the presentation currency Deferred tax assets at the end of the year Deferred tax liability at the end of the year 17. INVENTORIES As at the reporting dates inventories were presented as follows: Finished goods Raw materials Work in progress Other inventories 94 Annual Report 2015 As at 31.12.2015 £’000 As at 31.12.2014 £’000 677 307 158 354 1 496 942 571 31 541 2 085 During 2015, GBP 14,411 thousand (2014: GBP 19,752 thousand) was recognised as an expense in cost of sales. Inventories with a net book value of GBP 901 thousand At 31 December 2015 (2014:GBP 840 thousand) were pledged as collateral for loans. 18. TRADE AND OTHER RECEIVABLES As at the reporting dates receivables were presented as follows: Long-term receivables — As at 31.12.2015 £’000 Trade receivables Other receivables Prepayments 1 313 9 164 1 486 As at 31.12.2014 £’000 — 3 039 93 542 3 674 The Group’s management believes that the carrying value for trade and other receivables is a reasonable ap- proximation of their fair value. The amount of overdue but unimpaired accounts receivable is insignificant and is not disclosed in this note. Maturity of trade receivables as at 31 December 2015 and 31 December 2014 is presented as follows: Total £’000 1 313 3 039 Neither past due nor impaired £’000 1 194 2 277 <30 days £’000 24 162 Past due but not impaired 61-90 30-60 days days £’000 £’000 18 63 107 179 91-120 days £’000 — 202 >120 days £’000 14 112 2015 2014 Provisions were created for impaired trade and other receivables and holiday allowance. Annual Report 2015 95 For the year ended 31 December 2015, deferred tax assets and liabilities were presented as follows: Impaired trade and other receivables at the beginning of the year As at 31.12.2015 £’000 220 — Holiday allowance at the beginning of the year — Accrual Use of allowances Effect of translation to presentation currency Impaired trade and other receivables at the end of the year 836 (7) (102) 947 Holiday allowance at the end of the year — 42 52 (137) 92 — 49 19. CURRENT TAXES As at the reporting dates current taxes were presented as follows: VAT receivable Current income tax prepayments Other prepaid taxes As at 31.12.2015 £’000 268 66 14 348 As at 31.12.2014 £’000 123 — — 40 239 878 (14) (827) (128) (49) 220 — — 42 As at 31.12.2014 £’000 1 081 80 16 1 177 96 Annual Report 2015 20. OTHER FINANCIAL ASSETS Loans and receivables As at 31.12.2015 £’000 Loans issued to related parties — Loans issued to third parties Loans issued to employees 3 8 11 As at 31.12.2014 £’000 — 86 22 108 Loans issued are short term in nature, repayable on demand and are interest free. 21. CASH AND CASH EQUIVALENTS (EXCLUDING BANK OVERDRAFTS) As at the reporting dates current taxes were presented as follows: Cash — in UAH Bank — in UAH Bank — in other currencies As at 31.12.2015 £’000 1 11 81 93 As at 31.12.2014 £’000 4 27 184 215 Annual Report 2015 97 22. SHARE CAPITAL As at the reporting dates share capital was presented as follows: AUTHORISED As at 31.12.2015 Number ’000 As at 31.12.2015 £’000 As at 31.12.2014 Number ’000 As at 31.12.2014 £’000 Ordinary shares of 10p each 60 000 6 000 60 000 6 000 ISSUED AND FULLY PAID AT BEGINNING AND END OF THE YEAR As at 31.12.2015 Number ’000 As at 31.12.2015 £’000 As at 31.12.2014 Number ’000 As at 31.12.2014 £’000 39 673 — 39 673 3 967 — 3 967 39 673 — 39 673 3 967 — 3 967 HELD AS TREASURY SHARES As at 31.12.2015 Number ’000 As at 31.12.2015 £’000 As at 31.12.2014 Number ’000 As at 31.12.2014 £’000 3 145 — 3 145 315 — 315 3 145 — 3 145 315 — 315 Ordinary shares of 10p each At beginning of the year Own shares acquired At end of the year (excluding shares held as treasury shares) Ordinary shares of 10p each At beginning of the year Own shares acquired At end of the year As at 31 December 2015 and 31 December 2014 the Company held a total of 3 144 800 Ordinary Shares as treasury shares and the total number of Ordinary Shares in issue (excluding shares held as treasury shares) was 39 673 049. On February 2, 2015 Ukrproduct Group’s shares were admitted to trading on the Ukrainian stock market. No new ordinary shares have been issued and ac- cordingly the total number of shares in issue remains unchanged. Management expects that the listing on the Ukrainian Stock Exchange will allow better access to the local investors and will contribute to improving the liquidity of Company’s shares. 98 Annual Report 2015 23. OTHER RESERVES At the reporting date other reserves were presented as follows: Share premium £’000 Translation Revaluation reserve £’000 reserve other reserves £’000 £’000 Total At 1 January 2014 4 562 (6 768) 3 636 Own shares acquisition — — — Depreciation on revaluation of property, — plant and equipment — (162) Impact of the change in tax rate Reduction of revaluation reserve Group restructuring completion (Note 2.1 (c)) Exchange differences on translation to the presentation currency — — — — — — — (21) — At 31 December 2014 4 562 (13 768) 3 453 — (86) Depreciation on revaluation of property, — plant and equipment Gain on revaluation of property, plant and equipment Reduction of revaluation reserve — — Exchange differences on translation — to the presentation currency — 913 913 — (88) (1 526) — (88) (1 526) 1 430 — (162) — (21) — (5 753) (86) — (7 000) — (7 000) At 31 December 2015 4 562 (15 294) 4 192 (6 540) Annual Report 2015 99 The following describes the nature and purpose of each reserve within owners’ equity. RESERVE DESCRIPTION AND PURPOSE Share premium Amount subscribed for share capital in excess of nominal value. Revaluation Merger Retained earnings Translation Gains arising on the revaluation of the Group’s property. The balance on this reserve is wholly undistributable. Losses arising on the application of the pooling of interests method of consolidation used to account for the merger of Ukrproduct Group Ltd and its subsidiaries. Cumulative net gains and losses recognised in the consolidated income statement. Amount of all foreign exchange differences arising from the translation of the financial information of foreign subsidiaries. 24. BANK LOANS AND OVERDRAFTS As at 31, December 2015, the Group had received EUR 8.3 mln of an EUR 11 mln credit line facility from the European Bank for Reconstruction and Development (EBRD) for the financing of a project to increase energy efficiency and productivity of the Starokonstantinovskiy Molochniy Zavod SC plant. By 31 December 2015 Group broke the covenants and during 2015 was in breach of repayments of the EBRD loans. According to the agreement terms the bank had the right to demand repayment of the loans in full or partly. Nevertheless beginning with 2015 Group had been negotiating about the new terms of the repayment and in December 2015 The Bank’s Operations Committee has approved the terms of the proposed restructuring (the “Restructuring”), including extension of the Maturity Date to 1 Decem- ber 2024 amd 12 month capital repayment holiday, but by 31 December 2015 the process of restructur- ation was not complete. Group requested a waiver about not application of penalties for covenant violation, but it was not received as the process of restructuration proceeded successfully and the loan- er bank found no grounds for providing it. On this basis Group reflected EBRD loan as a long-term loan, excluding the part of the loan to be paid in 2015 and 2016. By the date of approval of the accounts the agreement had been signed, operating and long-term parts of the loan will be corrected by 30 June 2016. Guarantees under EBRD facility agreement are the enterprises of the Group that are jointly and severally responsible together with the borrower: Moloch- nik LLC; Milk investments Private Enterprise SC; Starkon-Moloko LLC; Ukrproduct Group CJSC; Zhiviy Kvas LLC. 100 Annual Report 2015 Guarantees under OTP bank facility agreement are the enterprises of the Group that are jointly and severally responsible together with the borrower: Avtopark Starokonstantinov LLS; Favorit-Konsulting Private Enterprise; Invest Garantiya Private Enter- prise; Krasilovsky Molochny Zavod Private Enter- prise SC; ATP Centr LLC; Ukrproduct Group CJSC. Bank Currency Type Opening date Termination date Interest rate Limit £’000 As at As at 31.12.2015 31.12.2014 £’000 £’000 EBRD OTP Bank EUR UAH OTP Bank USD Loan Credit line Credit line 31.03.2011 10.12.2018 ≈ 7,03% 8 118 5 357 30.05.2011 09.06.2017 26,15% 30.05.2011 09.06.2017 12,42% 1 126 909 — Aval Bank UAH Overdraft 31.05.2013 29.02.2016 22,0% 141 61 5 693 1 001 144 344 6 327 7 182 The average interest rate as at 31 December 2015 was 10.42% (2014: 9.34%). Maturity of financial liabilities On demand In less than 1 year* In more than 1 year* year ended 31.12.2015 £’000 year ended 31.12.2014 £’000 61 3 060 3 206 6 327 344 2 110 4 728 7 182 Annual Report 2015 101 Interest rate profile of financial liabilities On demand Expiry within 1 year Expiry in more then 1 years Floating rate Fixed rate £’000 — 3 060 3 206 6 266 £’000 61 — — 61 As at 31.12.2015 £’000 As at 31.12.2014 £’000 61 3 060 3 206 6 327 344 2 110 4 728 7 182 The currency profile of the Group’s financial liabilities is as follows: UAH USD EUR Floating rate liabilities £’000 Fixed rate liabilities £’000 Total as at 31.12.2015 £’000 Total as at 31.12.2014 £’000 909 5 357 6 266 61 — — 61 970 — 5 357 6 327 1 345 144 5 693 7 182 The book value and fair value of financial liabilities are as follows: Book value as at 31.12.2015 £’000 Fair value as at 31.12.2015 £’000 Book value as at 31.12.2014 £’000 Fair value as at 31.12.2014 £’000 Bank loans Bank overdrafts 6 266 61 6 327 6 266 61 6 327 6 838 344 7 182 6 838 344 7 182 *extendable according to 3-year agreement with bank. 102 Annual Report 2015 25. TRADE AND OTHER PAYABLES At the reporting date trade and other payables were presented as follows: Trade payables Other payables Prepayments received Accruals Interests payable Provisions 31.12.2015 £’000 979 260 9 109 180 49 31.12.2014 £’000 1 942 371 42 158 29 41 1 586 2 583 The Group’s management believes that the carrying value for trade and other payables is a reasonable approximation of their fair value. 26. EARNINGS PER SHARE Basic earnings per share have been calculated by dividing net profit attributable to the ordinary shareholders by the weighted average number of shares in issue. Net profit attributable to ordinary shareholders Year ended 31.12.2015 £’000 (3 906) Year ended 31.12.2014 £’000 (3 478) Weighted number of ordinary shares in issue 39 673 049 39 673 049 Basic earnings per share, pence Diluted average number of shares Diluted earnings per share, pence (9,85) (8,77) 39 402 447 39 629 619 (9,91) (8,78) Annual Report 2015 103 27. DIVIDENDS Due to the business circumstances dictating prudence and cash conservation, the Board has decided not to pay a final dividend in respect of the year ended 31 December 2015. 28. SHARE-BASED PAYMENTS The Company operates an equity-settled share based remuneration scheme for employees. 2015 Weighted average exercise price Number 2014 Weighted average exercise price Number Outstanding at beginning of the year 0,100 130 290 0,100 130 290 Granted during the year Forfeited during the year Exercised during the year Lapsed during the year Change in option terms Outstanding at the end of the year Exercisable at the end of the year — — — — — 0,100 0,100 — — — — — — — — — — — — — — — 130 290 0,100 130 290 0,100 130 290 130 290 During the period under review the Company did not grant options to any parties. All options granted to the Directors are exercisable over a period of four years. As at the year end these options were not exercised. Taking into account the fair value estimate of options granted at the grant date, no remuneration charge was recognised in the Consolidated Statement of Comprehensive Income in 2015. 104 Annual Report 2015 The fair value of options granted in 2009 was calculated based on the following data. Item Option pricing model used Weighted average share price at the grant date Exercise price Weighted-average contractual life, years Expected volatility Expected dividend yield Expected dividend growth rate Weighted-average risk-free interest rate 2009 Adjusted Black-Scholes 0,1275 0,1280 4,0 25% 5% 0% 1,92% 29. CURRENCY ANALYSIS Currency analysis for the year ended 31 December 2015 is set out below: ASSETS Trade and other receivables Current taxes Other financial assets Cash and cash equivalents Total assets LIABILITIES Bank borrowings Trade and other payable Current income tax liabilities Other taxes payable Total Liabilities UAH USD GBP EUR Total 1 460 348 11 12 1 831 970 1 258 18 15 2 261 24 — — 81 105 — 8 — — 8 — — — — — — — — — — 2 — — — 2 5 357 320 — — 1 486 348 11 93 1 938 6 327 1 586 18 15 5 677 7 946 Annual Report 2015 105 Currency analysis for the year ended 31 December 2014 is set out below: ASSETS Trade and other receivables Current taxes Other financial assets Cash and cash equivalents Total assets LIABILITIES Bank borrowings Trade and other payable Current income tax liabilities Other taxes payable Total Liabilities UAH USD GBP EUR Total 2 909 1 177 108 31 4 225 1 345 2 346 14 29 3 734 763 — — 184 947 144 47 — — 191 — — — — — — — — — — 2 — — — 2 5 693 190 — — 3 674 1 177 108 215 5 174 7 182 2 583 14 29 5 883 9 808 34 % strengthening of Hryvnia rate against the following currencies as At 31 December 2015 and 2014, would increase /decrease the amount of profits /or losses for the period by the amounts mentioned below. This analysis was conducted based on the as- sumption that all other variables, in particular, inter- est rates, remained unchanged. The change of GBP exchange rate does not have impact on the result as all the balances in GBP are attributable to the Group’s companies where GBP is a functional currency. Increase/ decrease in rate Effect on income before tax in 2015 £’000 Effect on income before tax in 2014 £’000 34% 27% -34% -27% 33 (1 532) (33) 1 532 378 (2 941) (378) 2 941 USD EUR USD EUR 106 Annual Report 2015 30. RELATED PARTY TRANSACTIONS Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions as defined by IAS 24 “Related Party Disclosures”. In considering each possible relat- ed party relationship, attention is directed to the sub- stance of the relationship, not merely the legal form. Transactions and balances between the Group com- panies and other related parties are set out below. Remuneration of key management personnel is disclosed in note 12. Sales of goods and services to related parties and purchases from related parties are summarised below. All sales and purchases were with related parties under common control of the ultimate benefi- ciaries of the Company. Sales Administrative expences Other operational incomes Other operational expences Year ended 31.12.2015 £’000 Year ended 31.12.2014 £’000 — 25 — 683 38 — 27 Balances due from/(to) related parties at each period end are shown below. Receivables and prepayments Loans issued Trade and other payables As at 31.12.2015 £’000 As at 31.12.2014 £’000 23 — 9 64 — (73) Annual Report 2015 107 In 2015, the Group’s commercial relationships with the related parties comprised sales, purchases, provision. The terms and conditions for the contracts with the related parties were similar to the terms and conditions applied in dealings with unrelated parties. There were no guarantees given to or provided by from the Group to related parties and vice versa. The ultimate controlling owners and beneficiaries of the related parties were Messrs Alexander Slipchuk and Sergey Evlanchik. 31.COMMITMENTS AND CONTINGENCIES (a) Economic environment The Group carries out most of its operations in Ukraine. Laws and other regulatory acts affecting the activities of Ukrainian enterprises may be subject to changes and amendments within a short period of time. As a result, assets and operating activity of the Group may be exposed to the risk in case if any unfa- vourable changes take place in political and econom- ic environment. (b) Taxation As a result of the unstable economic environment in Ukraine, the Ukrainian tax authorities pay increasing attention to business communities. In this regard, lo- cal and national tax legislation are constantly chang- ing. Provisions of various legislative and regulatory legal acts are not always clearly-worded, and their interpretations depend on the opinion of tax authori- ty officers and the Ministry of Finance. It is common practice for disagreements between local, regional and republican taxation authorities to arise. A system of fines and penalties for claimed or revealed viola- tions exists in corresponding regulatory legal acts, laws and decisions. Penalties include confiscation of amount in dispute (in case of law violation) as well as fines. These facts create tax risks, which means that the Group may be exposed to the risk of additional tax liabilities, fines and penalties. These risks far exceed risks in countries with advanced tax systems. (c) Retirement and other liabilities Employees of the Group receive pension benefits from the Pension Fund, a Ukrainian Government organization in accordance with the applicable laws and regulations of Ukraine. The Group is required to contribute a specified percentage of the payroll to the Pension Fund to finance the benefits. The only obligation of the Group with respect to this pension plan is to make the specified contributions from sala- ries. As At 31 December 2015 and 2014 the Group had no liabilities for supplementary pensions, health care, insurance benefits or retirement indemnities to its current or former employees. (d) Compliance with covenants The Group is subject to certain covenants related primarily to its borrowings. Non-compliance with such covenants may result in negative consequences for the Group. Group’s management is confident that as At 31 December 2015 the Group is not in breach of its loan agreements. The amount of uncancellable lease commitments is insignificant. 108 Annual Report 2015 As of December 31, 2015 the Group does not pos- sess any finance lease and hire purchase commit- ments, capital commitments and guarantees. (a) EBRD — breach of loan covenants The Loan Agreement was signed 24 June 2016. This new Loan Agreement was discussed during 2015 and first half of the 2016 in respect of new terms of its Loan Agreement. Terms suggest new repay- ment schedule up to 1 December 2024. Company gained grace period till 01/03/2017. Beginning with 01/03/2017 Company will pay tranches according to the new agreement. The Board believes that the EBRD will not demand accelerated repayment of the loans due to the breach of the repayment schedule in 2015. (b) Foreign exchange rates Post year end, the Ukrainian Hryvnia continued to devalue against the US Dollar. In particular according is the National Bank to Ukraine the following are key exchange rates: Currency UAH/GBP UAH/USD UAH/EUR 19 June 2016 33,39 24,85 27,56 Annual Report 2015 109 110 Annual Report 2015 CORPORATE ADVISERS Annual Report 2015 111 GROUP SECRETARY UK LEGAL ADVISERS Bedell Secretaries Limited PO Box 75 26 New Street St Helier Jersey JE2 3RA NOMINATED ADVISER AND BROKER ZAI Corporate Finance Ltd Staple Court, 11 Staple Inn, London WC1V 7QH INDEPENDENT AUDITORS Baker Tilly Channel Islands Limited PO Box 437, 1st Floor, 1st Floor, Kensington Chambers 46/50 Kensington Place St Helier, Jersey JE4 0ZE Gowlings WLG 4 More London London SE1 2AU United Kingdom JERSEY LEGAL ADVISERS Bedell Cristin PO Box 75 26 New Street St Helier Jersey JE2 3RA PRINCIPAL BANKERS UBS SA 40 rue du Rhone CH-1211 Geneva Switzerland REGISTRARS Neville Registrars Limited Neville House 18 Laurel Lane Halesowen B63 3DA 112 Annual Report 2015 SHAREHOLDER INFORMATION Annual Report 2015 113 REGISTERED OFFICE PO BOX 75 26 NEW STREET ST HELIER JERSEY JE2 3RA REGISTERED NUMBER 88352 IN JERSEY FINANCIAL CALENDAR 31 December 2015 Financial year end 30 June 2016 Announcement of full year 2015 results 25 July 2016 Annual General Meeting ANALYSIS OF SHAREHOLDING AT 31 DECEMBER 2015 Size of shareholdings Up to 5,000 shares 5,001 to 50,000 shares 50,001 to 200,000 shares Over 200,000 shares TOTAL Number of holders % of total Total holdings, shares % of total 34 29 24 14 101 34 29 24 14 100,00% 61,505 638,175 2,901,521 39,216,648 42,817,849 0,14 1,49 6,78 91,59 100.00 114 Annual Report 2015 As at December 31, 2015 the founding shareholders Messrs Sergey Evlanchik and Alexander Slipchuk held 14,967,133 (34.96%) and 14,939,133 (34.89%) respectively; 3,144,800 or approximately 7.34% were held as treasury shares and 9,766,783 shares or approximately 22.81% were in the free float. ADMINISTRATIVE ENQUIRIES All enquiries relating to individual shareholder matters should be made to the registrar at: Neville Registrars, Neville House, 18 Laurel Lane, Halesow- en, B63 3DA. The registrar will assist with enquir- ies regarding any change of circumstances (e.g. name, address, bank account details, bereavement, lost certificates, dividend payment and transfer of shares). All correspondence should be clearly marked “Ukrproduct Group Ltd” and quote the full name and address of the registered holder of the shares. INVESTOR RELATIONS Sergiy Shpak Phone: +380-44-232-96-02 Fax: +380-44-289-16-30 Email : sergiy.shpak@ukrproduct.com Annual Report 2015 115 

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