UkrProduct
Annual Report 2016

Plain-text annual report

Annual Report Ukrproduct Group Annual Report 2016 29 June 2017 1 Table of Contents Annual Report Chairman and Chief Executive Statement........................................................................................3 The Board of Directors ..................................................................................................................... 5 Remuneration Committee Report ..................................................................................................... 7 Corporate Governance Report .......................................................................................................... 9 Corporate Social Responsibility Report ......................................................................................... 11 Directors’ Report ............................................................................................................................ 13 Statement of Directors’ Responsibility .......................................................................................... 18 Independent Auditors' Report......................................................................................................... 19 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME ....................................... 21 CONSOLIDATED STATEMENT OF FINANCIAL POSITION................................................. 22 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY ................................................. 23 CONSOLIDATED STATEMENT OF CASH FLOWS ................................................................ 24 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ........................................... 25 Corporate advisers .......................................................................................................................... 67 Shareholder Information ................................................................................................................ 68 2 Annual Report Chairman and Chief Executive Statement During 2016 Ukrproduct has continued to face the headwinds induced by the political situation and the Ukrainian economy. Currency weakness continued with a contracted geographic market place and intense competition. Consumers are low in spending power and confidence. In this challenging context Ukrproduct's response is to focus on cash; ensure the product offering is competitive; focus on viable customers affording acceptable margins and thereby cash production. Ukrproduct seeks further to underpin the trading effort with cost/productivity improvements. Trading Overall revenues increased by only 3% in hryvna terms given product mix. Gross margins improved in most product lines apart from skimmed milk powder (SMP). Branded products were given more focus with key categories butter and spreads showing improved volume and margins. Margins on processed cheese were maintained on slightly lower revenues. Private label made improved gross profits on significantly reduced volumes as marginal contracts were terminated. Those retained and developed reflected the quality demanded by the retailer and commensurate margins. The kvass beverage continued to make a strong gross profit contribution. This category offers opportunities and the product offering has been extended with white kvass and healthy rosehip drinks being test marketed. The exchange rate depreciation has facilitated good overall development of the export business not least to CIS countries. Towards the end of the year, growth of domestic dairy prices in the Ukraine provided some constraint, however exports of branded products increased by one thousand tons in 2016. Skimmed milk powder has been a negative in terms of available prices being historically low across the world, particularly in the first half of the year. Spare capacity at our Starokonstantyniv facility has however afforded opportunities for profitable contract processing. In this regard in 2016 Ukrproduct maintained its approved supplier status with Danone, a major international company, confirming that the company’s products meet high international quality requirements. Finances Total revenues for year were stable at £20m. In local currency terms Hryvna revenues overall grew by 3% to UAH 693m. In difficult markets gross margins generally showed some improvement subject to SMP which given global pricing showed a shortfall of £0.6m year on year. Note however that SMP is a by-product of butter production & the net profitability of butter/SMP together is healthy. Given significant cost reductions EBITDA moved into positive territory at 1.9% (2015 minus 4%). The operating loss was sizeably reduced to £0.195m (2015 - operating loss £1.346m). 3 Annual Report Interest charges fell by £145,000 given husbandry of cash & the restructuring of EBRD debt. Though reduced, exchange differences continued to be negative at £0.743m (2015 - £1.733m). This, together with significantly reduced other operating expenses of £0.17m (2015 £1.089m), resulted in a loss for the year of £1.484m (2015 - loss £3.906m). Cash The balance of cash at 31st December 2016 stood at £175,000 (2015 - £93,000). In the challenging trading environment Ukrproduct group’s business model gives a firm focus to cash management. The Group's cash levels are currently expected to be sufficient to meet current debt levels in the short & medium term, given the deferral of the OTP Bank principal repayment announced in June. Restructuring of the EBRD loan was finalised in 2016. The revised terms require the loan to be repaid over a longer period & at more favourable interest rates and the first two capital repayments were made as scheduled after the period end. Discussions however continue with EBRD, as discussed more fully in the Going Concern section, following financial loan ratio covenant breaches and subsequent waivers. Outlook Ukrproduct will continue to work towards profitability with cash flow remaining the priority. Plans as defined above will continue to be implemented with due emphasis on growth opportunities in Beverages & Export. The new year has started encouragingly. Sales revenues & gross margins are ahead of last year at this stage and the first two tranches of capital repayments to EBRD have been made. A capital reorganisation to simplify the group structure is being implemented as required by EBRD. Jack Rowell Chairman Alexander Slipchuk Chief Executive Officer 4 Annual Report The Board of Directors As of the date of the approval of the 2016 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 25 July 2016. 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 Officer 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 Federation, and acquired initial stakes in the companies that later became part of Ukrproduct Group. Later in 1998, Alexander the the executive positions at Starakonstantinovskiy Dairy plants, Ukrproduct’s two main operating assets. the Molochnik and took on Sergey Evlanchik Executive Director 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 5 Annual Report 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 activities on business development in the industrial sector of Ukraine, particularly within 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 Economics (Russia) and earned a degree in “Logistics and Supply Chains Management”. 6 Annual Report Remuneration Committee Report 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-executive 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 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 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 2016. Remuneration Policy The Group’s remuneration policy is to provide remuneration 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 motivate 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. Consideration is also given to the cost of living and the Director’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. Incentive bonus plans and equity arrangements The Committee continues to plan 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. 7 Annual Report 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 compensation which reflects the Group’s 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 subsidiary 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 terminated 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 companies, although any such appointment is subject to the Board’s approval and terms and conditions of Service Agreements. Directors’ remuneration Details of the Directors’ cash remuneration are outlined below: Annual Salary/fee Bonus 2016 £ 000 2015 £ 000 2016 £ 000 2015 £ 000 Non-cash compensation 2015 2016 £ 000 £ 000 Total cash remuneration 2015 £ 000 2016 £ 000 40,0 40,0 15,0 95,0 52,5 67,5 9,9 129,9 23,2 33,75 - - - - - - - - - - - - - - - - 40,0 40,0 15,0 95,0 52,5 67,5 9,9 129,9 23,2 33,75 Executive Alexander Slipchuk Sergey Evlanchik Yuriy Hordiychuk Non-executive Dr Jack Rowell 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 date of this report these options were not exercised and had lapsed. The details of the options outstanding at 31 December 2016 are shown below. 8 Annual Report Directors Share Options Jack Rowell 130,290 Exercise Price, pence 10.0 Exercise Period to 05/02/2017 Corporate Governance Report 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. Under the rules of AIM, a market operated by the London 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 respects as they consider appropriate for a Group of its size and nature. The Board has a wide range of experience 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 responsibility between them. The Chairman of the Board is an independent non- executive Director. Within the scope of the corporate governance procedures, 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 2016. 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 addition to the systems of internal control and risk management, and also for ensuring the integrity of the financial information reported to the shareholders. The Audit Committee met twice during 2016. Remuneration Committee The Remuneration Committee comprises one non-executive Director, Jack Rowell. This Committee is scheduled to meet at least twice per annum to advise the Board on the Group’s 9 Annual Report remuneration strategy and to determine the terms of employment and total remuneration of the Executive Directors, including 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 2016. Relations with shareholders The Group maintains regular contact with its institutional and private shareholders, fund managers, financial analysts and brokers through a series of presentations, conference calls and meetings. All corporate materials, including annual reports, financial results statements and other information, are available on the Group’s website www.ukrproduct.com The Chief Executive Officer and other Directors holds conference calls and meetings with major shareholders 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 developments. 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 authorisation 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 procedures. 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. 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 10 Annual Report 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. Corporate Social Responsibility Report Corporate Social Responsibility The Board is committed to developing and implementing corporate social responsibility (CSR) policies aimed at:  Promoting equality and fairness among employees, 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  Establishing long-term and healthy relationships with the Group’s partners, customers and other affiliated parties. The main elements of the Group’s approach towards fulfilling the above objectives are as follows: Employees The Group is committed to ensuring equal opportunities to all its employees, both current and prospective. Each employee’s efforts are highly valued and the Board believes that a diverse mix of the workforce facilitates innovation, efficiency and teamwork. As a matter of corporate policy, regular training and development workshops are conducted for Ukrproduct’s staff. These are aimed at all employee groups, including managerial, technical and production 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 channels to further improve their surrounding working conditions. Customers Customer satisfaction is at the core of the Group’s business model. Therefore, the Board is keen to continue supplying the customers with high quality, 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 11 Annual Report The Group recognises the importance of good environmental practices and seeks to minimise any 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 eliminate 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 operations. The Group focuses on cutting water and energy 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 maintained 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 production 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. 12 Annual Report Directors’ Report 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 2016. Principal Activities and business review Ukrproduct Group Ltd (the “company” or “Ukrproduct”) is a holding company for a group of food and beverages businesses located in Ukraine. The principal 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 outlined in the Chairman and Chief Executive Statement. Results and Dividends The results of the Group for the year are set out on page 21 and show a net loss for the year of GBP 1.484 million (2015: GBP 3.906 million). The Board has decided not to recommend the payment of a dividend in respect of the year ended 31 December 2016 (2015:Nil). Directors Details of members of the Board of Directors are shown on page 5 The Directors’ interests in the share capital of the company as at 31 December 2016 and 31 December 2015 are shown below: Executive Sergey Evlanchik Alexander Slipchuk Non-executive Dr Jack Rowell Powers of the Directors Shares 2016 2015 Share options 2016 2015 14,967,133 14,939,133 14,967,133 14,939,133 - - - - 118,690 118,690 130,290 130,290 Subject to the Company’s Memorandum and Articles of Association, Companies (Jersey) Law 1991, as amended and any directions given by special resolution, 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 appointment 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. 13 Annual Report For further details of the Group’s risk management please see note 5 on page 44 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 2016 was 907 (2015: 1,132). 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 The Group incurred a loss of GBP 1,484 thousand for the year ended 31 December 2016, decreasing retained earnings at that date to GBP 4,427 thousand. In addition, due to significant devaluation of Ukrainian Hryvnia the principal amounts of loans denominated in foreign currencies has increased. As at 31 December 2016 loans, denominated in foreign currency, had the following amount outstanding: GBP 969 thousand owing to OTP bank and GBP 6,193 thousand owing to EBRD (Note 24). Interest under these loan agreements is paid according to a fixed schedule annexed to the relevant loan agreement. An amended Loan Agreement and Restatement Deed with the EBRD was signed in June 2016 and details announced on 30 June 2016 with the new terms becoming effective on 24 October 2016. As per the new terms, the principal amount is divided into two parts - Tranche A in the amount of 4,000 thousand EUR with a maturity date of 01 December 2022 and Tranche B in the amount of 3,259 thousand EUR with a maturity date of 30 November 2024. The Group gained a capital repayment holiday until 01 March 2017 with quarterly capital repayments on Tranche A commencing on that date and increasing in amount on an annual basis until 1 December 2022. The first two payments have been made in full as scheduled. Tranche B is ordinarily due for repayment in a single bullet payment on 1 December 2024 assuming no early repayment of Tranche A or events of default. Despite the repayments being made as scheduled, the Group breached financial covenants as at 31 December 2016 and 31 March 2017. The Board notified EBRD in advance of covenant breaches of the Loan and EBRD provided waivers in respect of the breached covenants dated 08 May 2017 and 24 May 2017 respectively. Due to the fact that the date of the waivers receipt was later than the reporting date, under IAS 1 Presentation of Financial Statements the Group was required to classify the EBRD loan in full as a current liability. In the consolidated statement of financial position the current liabilities exceed current assets due to the EBRD loan reclassification. 14 Annual Report The Board believes that EBRD will not demand accelerated repayment of the loan due to the breach of the covenants as at 31 December 2016 and as at 31 March 2017. Going forward if the Group anticipates a breach of the financial ratio covenants under the amended EBRD loan agreement it is expected that EBRD would grant a waiver in advance of the reporting period deadline. The Group has entered into a variation of the loan agreement with OTP Bank under which the principal loan repayment date has been extended from 9 June 2017 due to 9 Sep 2017. The principal amount outstanding under this agreement is Ukrainian Hryvnia UAH 32,300 thousand (approximately GBP 969 thousand). The consolidated financial statements have been prepared on a going concern basis, because management believes that it has employed sufficient and appropriate measures to underpin its cost cutting strategy including but not limited to: reconstruction of manufacturing facilities in Starokonstantinov operation, reducing the number of subsidiaries and streamlining business processes to minimise non-value adding activities and related costs, and by development of its export capacity. The political and economic situation has become less volatile than in 2015. The government of Ukraine is aiming at rapprochement with the European Union with many reforms being carried out in various fields. The Group's strategic goal is the development of export sales in world markets, in particular Asia and Africa. CIS markets also remain strategically important markets for the Group to develop and sales into Kazakhstan have commenced. The Group is also looking to expand our domestic sales in Ukraine driven in part by the introduction of new products and the renewal of the existing product portfolio. The Group continues to increase volumes throughput in its dairies through close cooperation with farmers and cooperatives, thereby increasing the capacity utilization. Annual General Meeting Ukrproduct’s AGM will be held on July 20, 2017. The Notice of AGM and agenda will be sent to shareholders no less than 21 days prior to the date of the meeting. Auditors Baker Tilly Isle of Man LLC was appointed as the Group’s auditors for the 2016 financial year by the resolution of the Directors held on September 08, 2016. A resolution to reappoint them will be proposed at the forthcoming 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 29 June 2017 15 Ukrproduct Group Limited Consolidated financial statements For the year ended 31 December 2016 CONTENTS Page. CHAIRMAN AND CHIEF EXECUTIVE STATEMENT THE BOARD OF DIRECTORS REMUNERATION COMMITTEE REPORT CORPORATE GOVERNANCE REPORT CORPORATE SOCIAL RESPONSIBILITY REPORT DIRECTORS REPORT STATEMENT OF DIRECTOR'S RESPONSIBILITIES INDEPENDENT AUDITOR'S REPORT CONSOLIDATED FINANCIAL STATEMENTS 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 SHAREHOLDER INFORMATION - 17 - STATEMENT OF DIRECTORS RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 The directors are responsible for the preparation of the consolidated financial statements in accordance 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 European 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; - make judgments and estimates that are reasonable and prudent; - state that the financial information complies with IFRS, subject to any material departures disclosed and explained in the consolidated financial statements; and - prepare the consolidated financial statements on the going concern basis unless it is inappropriate 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 financial 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 website. On behalf of the Directors: Alexander Slipchuk Chief Executive Officer 2017 - 18 - INDEPENDENT AUDITORS' REPORT INDEPENDENT AUDITOR‟S REPORT TO THE MEMBERS OF UKRPRODUCT GROUP LIMITED We have audited the 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 2016 which comprise the Consolidated Statement of Financial Position, Consolidated Statement of Comprehensive Income, Consolidated Statement of Changes in Equity, Consolidated Statement of Cash Flows and related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards as adopted by the EU. This report is made solely to the group‟s members in accordance with the terms of our engagement letter dated 20th September 2016, and also in accordance with Article 113A of the Companies (Jersey) Law 1991, as amended. Our audit work has been undertaken so that we might state to the group‟s members those matters we are required to state to them in an auditor‟s 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 group and the group‟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 Directors‟ Responsibilities Statement set out on page 18 the directors are responsible for the preparation of the 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 financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board‟s (APB‟s) Ethical Standards for Auditors. Scope of the audit of the consolidated financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the 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 company‟s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the trustees; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or Opinion on consolidated financial statements 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 2016, and of its loss for the year then ended; have been properly prepared in accordance with IFRSs as adopted by the European Union; and have been prepared in accordance with the requirements of the Companies (Jersey) Law, 1991 as amended. - 19 - INDEPENDENT AUDITOR‟S REPORT TO THE MEMBERS OF UKRPRODUCT GROUP LIMITED (Continued) 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 As described in Note 2.1(b) to the consolidated financial statements, the Group incurred a loss of £1,484k for the year ended 31 December 2016. 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. 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 included any adjustments that would result if the Group was unable to continue as a going concern. European Bank for Reconstruction and Development We also draw attention to Note 2.1(b) and to Note 24 of the consolidated financial statements which refer to the non-observance during the year, and post year end, by the Group of the terms of the loan agreement with the European Bank for Reconstruction and Development (“EBRD”). OTP Bank financing We also draw attention to Note 2.1(b) and Note 24 of the consolidated financial statements which refer to the maturity of external financing arrangements with OTP Bank on 9 September 2017. We understand management are seeking to revise the terms of this agreement prior to this date. Matters on which we are required to report by exception 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 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. Robert Kirkham For and on behalf of Baker Tilly Isle of Man LLC Chartered Accountants PO Box 95 2a Lord Street Douglas Isle of Man 29 June 2017 - 20 - Ukrproduct Group CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) Note 31 December 2016 31 December 2015 year ended year ended £ „000 £ „000 # 8 9 9 9 9 11 10 13 26 Revenue Cost of sales GROSS PROFIT Administrative expenses Selling and distribution expenses Other operating expenses LOSS FROM OPERATIONS Net finance expenses Foreign exchange loss, net LOSS BEFORE TAXATION Income tax expenses LOSS FOR THE YEAR Attributable to: Owners of the Parent Non-controlling interests Earnings per share: Basic Diluted OTHER COMPREHENSIVE INCOME: Items that may be subsequently reclassified to profit or loss Currency translation differences Items that will not be reclassified to profit or loss Gain on revaluation of property, plant and equipment Income tax in respect of revaluation reserve OTHER COMPREHENSIVE INCOME, NET OF TAX TOTAL COMPREHENSIVE INCOME FOR THE YEAR Attributable to: Owners of the Parent Non-controlling interests 20 190 (18 071) 2 119 (930) (1 367) (17) (195) (623) (743) (1 561) 77 (1 484) (1 484) - (3,74) (3,74) 513 - - 513 (971) (971) - 20 158 (17 844) 2 314 (1 109) (1 462) (1 089) (1 346) (768) (1 733) (3 847) (59) (3 906) (3 906) - 9,85 9,91 (1 526) 1 113 (200) (613) (4 519) (4 519) - The notes on pages 27 - 76 are an integral part of these consolidated financial statements. - 21 - Ukrproduct Group CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 December 2016 (in thousand GBP, unless otherwise stated) As at As at Note 31 December 2016 31 December 2015 £ „000 £ „000 ASSETS Non-current assets Property, plant and equipment Intangible assets Deferred tax assets Current assets Inventories Trade and other receivables Current taxes Other financial assets Cash and cash equivalents TOTAL ASSETS EQUITY AND LIABILITIES Equity attributable to owners of the parent Share capital Share premium Translation reserve Revaluation reserve Retained earnings Non-controlling interests TOTAL EQUITY Non-Current Liabilities Bank loans Long-term payables Deferred tax liabilities Current liabilities Bank loans Trade and other payables Current income tax liabilities Other taxes payable TOTAL LIABILITIES TOTAL EQUITY AND LIABILITIES 14 15 16 17 18 19 20 21 22 23 23 23 24 16 24 25 7 511 656 - 8 167 1 855 2 507 230 18 175 4 785 12 952 3 967 4 562 (14 781) 3 935 4 427 2 110 - 2 110 - 441 363 804 7 162 2 854 10 12 10 038 10 842 12 952 7 417 596 46 8 059 1 496 1 486 348 11 93 3 434 11 493 3 967 4 562 (15 294) 4 192 5 655 3 082 - 3 082 3 206 - 466 3 672 3 121 1 586 18 14 4 739 8 411 11 493 The notes on pages 27 - 76 are an integral part of these consolidated financial statements. - 22 - Ukrproduct Group CONSOLIDATED STATEMENT OF CHANGES IN EQUITY AS AT 31 December 2016 (in thousand GBP, unless otherwise stated) Attributable to owners of the parent Share capital Share premium Revaluation reserve £ „000 £ „000 £ „000 Retained earnings £ „000 Translation reserve £ „001 Total £ „000 Non-controlling interests Total Equity £ „000 £ „000 As At 1 January 2015 3 967 4 562 3 453 9 358 (13 768) 7 572 - 7 572 Loss for the year Other comprehensive income Gain on revaluation of property, plant and equipment Currency translation differences Total comprehensive income Depreciation on revaluation of property, plant and equipment Reduction of revaluation reserve As At 31 December 2015 Loss for the year Other comprehensive income Currency translation differences Total comprehensive income - - - (3 906) - (3 906) - (3 906) - - 913 - - 913 - - - - (1 526) (1 526) - - 913 (3 906) (1 526) (4 519) - 913 - (1 526) - (4 519) - - - 86 - - (86) - 28 - - (88) 116 3 967 4 562 4 192 5 654 (15 294) 3 081 - 28 - 3 081 - - - - (1 484) - (1 484) - (1 484) - - - - 513 513 - - - (1 484) 513 (971) - 513 - (971) Depreciation on revaluation of property, plant and equipment Reduction of revaluation reserve As At 31 December 2016 - - (248) 248 - - (9) 9 3 967 4 562 3 935 4 427 (14 781) 2 110 - - - - - - - - - 2 110 The notes on pages 27 - 76 are an integral part of these consolidated financial statements. - 23 - Ukrproduct Group CONSOLIDATED STATEMENT OF CASH FLOWS AS AT 31 December 2016 (in thousand GBP, unless otherwise stated) Cash flows from operating activities Loss before taxation Adjustments for: Exchange difference Depreciation and amortisation Loss/(Profit) 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) in inventories (Increase) / decrease in trade and other receivables Increase / (decrease) in trade and other payables Changes in working capital Cash generated from operations Interest received Income tax paid Net cash generated by / (used in) operating activities Cash flows from investing activities Purchases of 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 Interest paid (Decrease) / increase in short 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 year ended year ended Note 31 December 2016 31 December 2015 £ „000 £ „000 (1 561) (3 847) 10 9 9 9 11 11 21 743 589 25 32 120 (3) (1) 624 568 (472) (933) 1 122 (283) 285 1 (32) 254 (217) 17 (11) (211) (372) (63) (435) (392) 474 93 175 1 733 537 (4) 857 78 (3) (1) 769 119 (127) 890 (404) 359 478 1 169 648 (259) 18 66 (175) (607) (76) (683) (210) 88 215 93 These consolidated financial statements were approved and authorised for issue by the Board of Directors on 29 June 2017 and were signed on its behalf by: The notes on pages 27 - 76 are an integral part of these consolidated financial statements. Alexander Slipchuk Chief Executive Officer 2017 - 24 - Ukrproduct Group NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) 1. GROUP AND PRINCIPAL ACTIVITIES (a) Introduction The Company is a public limited liability entity registered in Jersey with a registered office at 26 New Street, St Helier, Jersey, JE2 3RA, Channel Islands. The Group's overall management and production facilities 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 Product) “Molendam” and “Vershkova Dolina” (Creamy Valley). The average number of employees of the Group during the year ended 31 December 2016 was 918 (2015: 1,132). (b) Ukrainian environment The Group conducts its operations mainly in Ukraine. The Ukrainian economy while deemed to be of market 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 2016 and up to 31 December 2016, the Ukrainian Hryvnia (the “UAH”) depreciated against major foreign currencies (by approximately 10% calculated based on the National Bank of Ukraine (the “NBU”) exchange rate of UAH to EUR, by approximately 13 % calculated based on the National Bank of Ukraine (the “NBU”) exchange rate of UAH to USD, by approximately -5% calculated based on the National Bank of Ukraine (the “NBU”) exchange rate of UAH to GBP). From 31 December 2016 to the date of the issuance of these financial statements, the UAH depreciated against EUR by 3%, against USD by 0% and GBP by 4%.The NBU eased restrictions on purchase of foreign currencies, cross border settlements (including repayment of dividends), and reduced the percentage conversion of foreign currency proceeds into UAH. The known and estimated 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 committed 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 governance, 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 international 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. 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. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 2.1. Basis of preparation The consolidated financial statements have been prepared on a historical cost basis, except for property, plant and equipment 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 (а) Statement of compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards, International Accounting Standards and Interpretations issued by the International 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 accounting 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 Group incurred a loss of GBP 1,484 thousand for the year ended 31 December 2016, decreasing retained earnings at that date to GBP 4,427 thousand. In addition, due to significant devaluation of Ukrainian Hryvnia the principal amounts of loans denominated in foreign currencies has increased. As at 31 December 2016 loans, denominated in foreign currency, had the following amount outstanding: GBP 969 thousand, GBP 6,193 thousand (Note 24). Interest under these loan agreements is paid according to a fixed schedule annexed to the relevant loan agreement. An amended Loan Agreement and Restatement Deed with the EBRD was signed in June 2016 and details announced on 30 June 2016 with the new terms becoming effective on 24 October 2016. As per the new terms, the principal amount is divided into two parts - Tranche A in the amount of 4,000 thousand EUR with a maturity date of 01 December 2022 and Tranche B in the amount of 3,259 thousand EUR with a maturity date of 30 November 2024. The Group gained a capital repayment holiday until 01 March 2017 with quarterly capital repayments on Tranche A commencing on that date and increasing in amount on an annual basis until 1 December 2022. The first two payments have been made in full as scheduled. Tranche B is ordinarily due for repayment in a single bullet payment on 1 December 2024 assuming no early repayment of Tranche A or events of default. Despite the repayments being made as scheduled, the Group breached financial covenants as at 31 December 2016 and 31 March 2017. The Board notified EBRD in advance of covenant breaches of the Loan and EBRD provided waivers in respect of the breached covenants dated 08 May 2017 and 24 May 2017 respectively. Due to the fact that the date of the waivers receipt was later than the reporting date, under IAS 1 Presentation of Financial Statements the Group was required to classify the EBRD loan in full as a current liability. In the consolidated statement of financial position the current liabilities exceed current assets due to the EBRD loan reclassification. The Board believes that EBRD will not demand accelerated repayment of the loan due to the breach of the covenants as at 31 December 2016 and as at 31 March 2017. Going forward if the Group anticipates a breach of the financial ratio covenants under the amended EBRD loan agreement it is expected that EBRD would grant a waiver in advance of the reporting period deadline. The Group has entered into a variation of the loan agreement with OTP Bank under which the principal loan repayment date has been extended from 9 June 2017 to 9 September 2017. The principal amount outstanding under this agreement is Ukrainian Hryvnia UAH 32,300 thousand (approximately GBP 969 thousand). The consolidated financial statements have been prepared on a going concern basis, because management believes that it has employed sufficient aappropriate measures to underpin its cost cutting strategy including but not limited to: reconstruction of manufacturing facilities in Starokonstantinov operation, reducing he number of subsidiaries and streamlining business processes to minimise non-value adding activities and related costs, and by development of its export capacity. The political and economic situation has become less volatile than in 2015. The government of Ukraine is aiming at rapprochement with the European Union with many reforms being carried out in various fields. The Group's strategic goal of development of export sales in world markets, in particular Asia and Africa. CIS markets also remain strategically important arkets for the company to develop and sales into Kazakhstan have commenced. The Group is also looking to expand our domestic sales in Ukraine driven in part by the introduction of new products and the renewal of the existing product portfolio. The Group continues to increase volumes throughput in its dairies through close cooperation with farmers and cooperatives, thereby increasing the capacity utilization.  The Group incurred a loss of GBP 1,484 thousand for the year ended 31 December 2016, decreasing retained earnings at that date to GBP 4,427 thousand. In addition, due to significant devaluation of Ukrainian Hryvnia the principal amounts of loans denominated in foreign currencies has increased. As at 31 December 2016 loans, denominated in foreign currency, had the following amount outstanding: GBP 969 thousand, GBP 6,193 thousand (Note 24). Interest under these loan agreements is paid according to a fixed schedule annexed to the relevant loan agreement. An amended Loan Agreement and Restatement Deed with the EBRD was signed in June 2016 and details announced on 30 June 2016 with the new terms becoming effective on 24 October 2016. As per the new terms, the principal amount is divided into two parts - Tranche A in the amount of 4,000 thousand EUR with a maturity date of 01 December 2022 and Tranche B in the amount of 3,259 thousand EUR with a maturity date of 30 November 2024. The Group gained a capital repayment holiday until 01 March 2017 with quarterly capital repayments on Tranche A commencing on that date and increasing in amount on an annual basis until 1 December 2022. The first two payments have been made in full as scheduled. Tranche B is ordinarily due for repayment in a single bullet payment on 1 December 2024 assuming no early repayment of Tranche A or events of default. Despite the repayments being made as scheduled, the Group breached financial covenants as at 31 December 2016 and 31 March 2017. The Board notified EBRD in advance of covenant breaches of the Loan and EBRD provided waivers in respect of the breached covenants dated 08 May 2017 and 24 May 2017 respectively. Due to the fact that the date of the waivers receipt was later than the reporting date, under IAS 1 Presentation of Financial Statements the Group was required to classify the EBRD loan in full as a current liability. In the consolidated statement of financial position the current liabilities exceed current assets due to the EBRD loan reclassification. The Board believes that EBRD will not demand accelerated repayment of the loan due to the breach of the covenants as at 31 December 2016 and as at 31 March 2017. Going forward if the Group anticipates a breach of the financial ratio covenants under the amended EBRD loan agreement it is expected that EBRD would grant a waiver in advance of the reporting period deadline. The Group has entered into a variation of the loan agreement with OTP Bank under which the principal loan repayment date has been extended from 9 June 2017 to 9 September 2017. The principal amount outstanding under this agreement is Ukrainian Hryvnia UAH 32,300 thousand (approximately GBP 969 thousand). The consolidated financial statements have been prepared on a going concern basis, because management believes that it has employed sufficient aappropriate measures to underpin its cost cutting strategy including but not limited to: reconstruction of manufacturing facilities in Starokonstantinov operation, reducing he number of subsidiaries and streamlining business processes to minimise non-value adding activities and related costs, and by development of its export capacity. The political and economic situation has become less volatile than in 2015. The government of Ukraine is aiming at rapprochement with the European Union with many reforms being carried out in various fields. The Group's strategic goal of development of export sales in world markets, in particular Asia and Africa. CIS markets also remain strategically important arkets for the company to develop and sales into Kazakhstan have commenced. The Group is also looking to expand our domestic sales in Ukraine driven in part by the introduction of new products and the renewal of the existing product portfolio. The Group continues to increase volumes throughput in its dairies through close cooperation with farmers and cooperatives, thereby increasing the capacity utilization. - 25 - Ukrproduct Group NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) 2.1. Basis of preparation (continued) (c) Consolidation principles The consolidated financial statements comprise the financial statements of Ukrproduct Group Limited and its subsidiaries as at 31 December 2016. Subsidiaries are consolidated from the date of acquisition, 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. Specifically, the Group controls an investee if, and only if, the Group has: - Power over the investee (i.e., existing rights that give it the current ability to direct the relevant activities of the investee) - Exposure, or rights, to variable returns from its involvement with the investee - The ability to use its power over the investee to affect its returns Generally, there is a presumption that a majority of voting rights 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 circumstances in assessing whether it has power over an investee, including: - The contractual arrangement with the other vote holders of the investee - Rights arising from other contractual arrangements - The Group‟s voting rights and potential voting rights The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated financial statements from the date the Group gains control until the date the Group ceases to control the subsidiary. All intra-group balances, income and expenses and unrealised gains and losses resulting from intra-group transactions are eliminated in full on 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 comprehensive 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. If the Group loses control over a subsidiary, it: - Derecognises the assets (including goodwill) and liabilities of the subsidiary - Derecognises the carrying amount of any non-controlling interests - Derecognises the cumulative translation differences, recorded in equity - Recognises the fair value of the consideration received - Recognises any investment retained in the former subsidiary at its fair value at the date when control is lost - Recognises any surplus or deficit in profit or loss - Reclassifies the parent‟s share of components previously recognised in other comprehensive income to profit or loss. The Group applies the acquisition method to account for business combinations. The consideration transferred 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 profits or losses and net assets not owned by the Group. Non-controlling interests are presented separately from parent share capital in equity in the Consolidated statement of financial position. Consolidated financial statements of the Group include following companies: Group's company Country of incorporation Molochnik LLC* Starokonstantinovskiy Molochniy Zavod SC****** Starkon-Moloko LLC****** Ukraine Ukraine Ukraine Effective ownership ratio As at 31 December 2016 100% 100% 100% 2015 100% 100% 100% Principal activities Holder of some assets Production Owner of property & equipment - 26 - Ukrproduct Group NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) 2.1. Basis of preparation (continued) (c) Consolidation principles (continued) Group's company Country of incorporation Krasilovsky Molochny Zavod Private Enterprise SC****** Molochaia Dolina LLC****** Zhiviy Kvas LLC****** Milk Investments Private Enterprise SC****** Invest Garantiya Private Enterprise****** Business Invest Management LLC****** Favorit-Konsulting Private Enterprise****** Avtopark Starokonstantinov LLC****** ATP Centr LLC****** Ukrprodexport Private Enterprise SC****** Lider-Product LLC**** Premierproduct-Jitomir Private Enterprise SC** Alternatyvni investytsiyi UCVF*** Ukrproduct Group CJSC LinkStar Limited Solaero Global Alternative Fund Limited Dairy Trading Corporation Limited Reliable Logistics Services LTD St. Invest Holding LTD Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Cyprus Cyprus BVI BVI BVI Ukrproduct Group LTD Jersey Effective ownership ratio As at 31 December 2016 100% 100% 100% 100% 100% 100% 100% 100% 100% - 100% - 100% 100% 100% 100% 100% 100% 100% 2015 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Principal activities Owner of land assets Owner of land assets Production Owner of equipment Owner of equipment Owner of equipment Owner of equipment Owner of fleet of vehicles Owner of fleet of vehicles Export operations Sales & Distribution Sales & Distribution Asset management Holder of some assets and operating companies Holder of Group's trademarks and assets Holder of Group's trademarks and assets Export operations Holder of distribution network Holder of distribution network Parent company traded on AIM - 27 - Ukrproduct Group NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) 2.1. Basis of preparation (continued) (c) Consolidation principles (continued) * 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 (d) Reorganisation In order to reduce costs, the Group continues to actively restructure the group with the following being noted: 1) Premierproduct-Jitomir was withdrawn from the Group by selling to a 3rd party, the loss on disposal was GBP 3,000. Net liabilities of the company at the time of sale amounted to GBP -35,610. 2) Also in 2016, Ukrprodexport Private Enterprise SC merged with Starokonstantinovskiy Molochniy Zavod SC with all assets and liabilities as a result of the restructuring of the Group. There was no impact on the financial result. In 2016 the restructuring plan was approved by EBRD and secured in the agreement. In the first half of 2017 the following entities have been or are planned to be mergered with Starokonstantinovskiy Molochniy Zavod SC: Avtopark Starokonstantinov LLC, Milk Investments Private Enterprise SC, Starkon-Moloko LLC, Invest Garantiya Private Enterprise, Favorit-Konsulting Private Enterprise, ATP Centr LLC, Business Invest Management LLC and Reliable Logistics Services LTD. (e) Accounting for acquisitions of companies under common control 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 within Group equity except that any share capital of the acquired companies is recorded as a part of merger reserve. The cash consideration for such acquisitions is recognised as a liability to or a reduction of receivables from related parties, with a corresponding 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. - 28 - Ukrproduct Group NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) 2.2. Significant accounting policies Significant accounting policies given below have been consistently applied by the Group in the preparation of these financial statements, unless otherwise stated. 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 functional currency are considered to be foreign currency transactions. Management has considered what would be the most appropriate presentation currency for consolidated IFRS financial statements and has concluded that the Group should use British Pounds Sterling (hereinafter “GBP” or £) as the Group‟s presentation 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 predominantly in the UK. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing 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 denominated 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 statement within "Foreign exchange loss, net ". The financial results and financial position of the Group's companies are translated into the presentation 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 separate component of equity; Income and expenses for each income statement are translated at monthly average exchange rates; and All resulting exchange differences are recognised as a separate component of equity within "Translation reserve". The principal UAH exchange rates used in the preparation of Consolidated financial statements are as follows: Currency UAH/GBP UAH/USD UAH/EUR 31 December 2016 Average exchange rate for 2016 31 December 2015 Average exchange rate for 2015 33,32 27,19 28,42 34,62 25,59 28,31 35,53 24,00 26,22 33,34 21,81 24,19 - 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. 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 maturities of three months or less. Bank overdrafts are included in current liabilities in the Consolidated Statement of Financial Position. - 29 - Ukrproduct Group NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) 2.2. Significant accounting policies (continued) 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 products); 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 products comprises raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity) but excludes borrowing 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 inventories to determine whether they are damaged, obsolete or slow-moving or whether their net realisable value has declined. The net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. The Group periodically checks inventories to determine whether they are damaged, obsolete or slow-moving 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 Statement of Comprehensive Income within Cost of sales. - 30 - Ukrproduct Group NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) 2.2. Significant accounting policies (continued) 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 information 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 accumulated depreciation and subsequent accumulated impairment losses. Changes in fair value are recognised in equity (the "Revaluation reserve"). An appropriate transfer is made from the revaluation reserve to the retained earnings when assets are expensed through the income statement (e.g. through depreciation, impairment or sale). Subsequent costs that increase future economic benefits of the item of property, plant and equipment also increase its carrying amount. Otherwise, the Group recognises subsequent costs as expenses of the period 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 recoverable 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 immediately recognised as income. Gains and losses on disposals are determined by comparing proceeds with the carrying amount and are included in profit and loss on disposal of non-current assets. (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 disposal, 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 1 January 2011 the Group applied the production method of depreciation to all production equipment as management considered this method to be the most appropriate for the production assets. - 31 - Ukrproduct Group NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) 2.2. Significant accounting policies (continued) 2.2.4. Property, plant and equipment (continued) (c) Depreciation and useful life (continued) Terms of useful lives by groups of property, plant and equipment (except for those depreciated under production method) are listed below: Group of property, plant and equipment Buildings Plant and machinery Vehicles Instruments, tools and other equipment Useful life 7 - 62 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. As at 31 December 2016 the management of the Group has changed useful life for buildings from 10-50 years to 7-62 years. Impact of any changes arising from estimates made in prior periods is recorded as a change in an accounting estimate. 2.2.5. Assets under construction 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. Unless an indication of impairment exists, 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. 2.2.6. Intangible assets (а) Recognition and measurement of intangible assets Intangible assets are recognised at historical cost less accumulated amortisation and accumulated impairment losses. 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. 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. 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 exchanged for a similar asset, the value of the acquired asset is equal to the value of the disposed asset. - 32 - Ukrproduct Group NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) 2.2. Significant accounting policies (continued) 2.2.6. Intangible assets (continued) (b) Amortisation and useful life 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 Statement of Comprehensive Income. 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 (11-18 years). The amortisation expense is included within Selling and Distribution expenses in the Consolidated Statement of Comprehensive Income. (c) Business combinations and goodwill The consideration transferred 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. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related costs are expensed as incurred. When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate 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. If the business combination is achieved in stages, the acquisition date fair value of the acquirer‟s previously held equity interest in the acquiree is remeasured to fair value as at the acquisition date through profit and loss. Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition 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. Goodwill is not amortised but is subject to testing for impairment as at the reporting date or more frequently, if events or changes in circumstances indicate 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 consolidation. 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. 2.2.7. Financial assets 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 recognition and re-evaluates this designation at every reporting date. - 33 - Ukrproduct Group NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) 2.2. Significant accounting policies (continued) 2.2.7. Financial assets (continued) (і) Financial assets at fair value through profit or loss This category comprises only “in-the-money” derivatives. They are carried at the reporting date at fair value 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 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. (iii) Financial assets held to maturity 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. (а) Initial recognition 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 transaction 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. 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 deliver 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 determination of future cash flows is based on optimal management estimations and the discounting rate is market rate for similar financial instruments predominated as at reporting date. If the price model is used entering figures are based on average market data predominated as at reporting date. - 34 - Ukrproduct Group NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) 2.2. Significant accounting policies (continued) 2.2.7. Financial assets (continued) (c) Subsequent measurement Subsequent to initial recognition all financial assets at fair value through profit or loss and all available-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 transaction 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 difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy 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 substantially all risks and rewards of ownership. 2.2.8. Financial liabilities The Group classifies its financial liabilities into categories depending on the purpose for which the liability was acquired. The Group has not classified any of its liabilities at fair value through profit and loss. Financial liabilities held at amortised cost include the following items: Trade payables and other short-term monetary liabilities, which are recognised at amortised cost. 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 carried 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. - 35 - Ukrproduct Group NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) 2.2. Significant accounting policies (continued) 2.2.8. Financial liabilities (continued) (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 amortised cost at effective interest rate method. 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. (c) Derecognition A financial liability is derecognised when the obligation under the liability is discharged, cancelled or expires. 2.2.9. Share capital The ordinary shares are classified as share capital. The difference between the fair value of consideration 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 probable 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 increase 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. When the arrangement effectively constitutes a financing transaction, the fair value of the consideration 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 recognised 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 management 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 associated 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. - 36 - Ukrproduct Group NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) 2.2. Significant accounting policies (continued) 2.2.10. Revenue recognition (continued) (b) Revenue from rendering of services The revenue from rendering of services is recognised when all the following conditions are satisfied: - - - - the amount of revenue can be reliably measured; inflow of economic benefits related to the transaction 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 measured reliably. 2.2.11. Expenses recognition Expenses are recognised by the Group when the following conditions are met: the amount of expenses 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 calculated 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 period but relate to production of semi-finished products 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-progress", included within "Inventories" in the Consolidated Statement of Financial Position. 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 domestic 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. - 37 - Ukrproduct Group NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) 2.2. Significant accounting policies (continued) 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 Consolidated Income Statement for the year comprises current tax and changes in deferred tax. 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. 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 accounting 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 assumes 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 provisions of the legislation enacted, or declared (and practically adopted) at that date. Deferred income taxes are recognised for all temporary 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 Consolidated Statement of Comprehensive Income 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 income 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. - 38 - Ukrproduct Group NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) 2.2. Significant accounting policies (continued) 2.2.16. Pension costs The Group contributes to the Ukrainian mandatory state pension scheme, social insurance and employment funds in respect of its employees. The Group's pension scheme contributions are expensed as incurred and are included in staff costs. The Group does not operate any other pension schemes. 2.2.17. 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. Qualifying 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. 2.2.18. 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 classified 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. (b) Group as a lessor Operating lease income is recognised in "Other operating income" as income in the period to which it relates, over the lease term on a systematic and rational basis. 2.2.19. Impairment of assets In respect of all assets, the Group conducts 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. 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 separate 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 market 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 of expected recovery. Losses from impairment are recognised as expenses directly in the Consolidated Statement of Comprehensive Income. - 39 - Ukrproduct Group NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) 2.2. Significant accounting policies (continued) 2.2.20. Contingent liabilities and assets 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- occurrence 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 recognised 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. The Group does not recognise contingent liabilities in the financial statements. The Group discloses information 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 consolidated financial statements, but disclosed in the Notes where there is a sufficient probability of future economic benefits. 2.2.21. 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". 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) b) c) d) e) 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); associates are companies whose activities are significantly influenced by the Group, but are neither subsidiaries, nor joint ventures of the investor; individuals, directly or indirectly holding ordinary shares that give them a possibility to significantly influence the Group's activities; key management personnel are persons having authority and responsibility for planning, managing 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 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. 2.2.22. Fair value measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either in the principal market for the asset or liability, or in the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible to 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 measured 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. - 40 - Ukrproduct Group NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) 2.2. Significant accounting policies (continued) 2.2.23. Dividends Equity dividends are recognised in the consolidated 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 judgments, 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, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future periods. In the process of applying the Group's accounting policies, management has made the following judgments, 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 conducted by independent valuers who employ the valuation methods in accordance with International Valuation Standards such as cost method, comparison (market) method and revenue (income) method. (b) Useful lives of intangible assets and property, plant and equipment Intangible assets and property, plant and equipment 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 continued 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. (d) Inventory The Group reviews the net realisable value of, and demand for, its inventory on a quarterly basis to ensure 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 and success of future technological innovations, competitor actions, supplier prices and economic trends. Further information is contained in note 17. - 41 - Ukrproduct Group NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) 3. SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS (CONTINUED) (e) Legal proceedings In accordance with IFRS the Group only recognises 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 financial 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 jurisdictions 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 ultimate 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 positions 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 adequate for all open audit years based on its assessment of many factors including past experience and interpretations of tax law. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact income tax expense in the period in which such determination is made. Further information is contained in notes 13 and 16. (g) Quality claims The Group supplies consumers and industrial customers 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 liability may be disclosed in the notes to the financial 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 determination, 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. (e) Transfer pricing Starting from 1 September 2013 the Tax Code of Ukraine introduced new, based on the OECD transfer pricing guidelines, rules for determining and applying fair market prices, which significantly changed transfer pricing (“TP”) regulations in Ukraine. The Group exports Skimmed milk powder and performs intercompany transactions, which may potentially be in the scope of the new Ukrainian TP regulations. The Group has submitted the controlled transaction report for the year ended 31 December 2015 within the required deadline, and has prepared all necessary documentation on controlled transactions for the year ended 31 December 2016 as required by legislation and plans to submit report. Management believes that the Group has been in compliance with all requirements of effective tax legislation and currently is assessing the possible impact of the introduced amendments. - 42 - Ukrproduct Group NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) 4. ADOPTION OF NEW AND REVISED IFRS 4.1. New and amended standards and interpretations Adoption of new and revised IFRSs During the current year the Company adopted all the new and revised International Financial Reporting Standards (IFRS) that are relevant to its operations and are effective for accounting periods beginning on 1 January 2016. International Financial Reporting Standards (IFRS) IFRS 5 Non-current Assets Held for Sale and Discontinued Operations Amendments resulting from September 2014 Annual Improvements to IFRSs IFRS 7 Financial Instruments: Disclosures Amendments resulting from September 2014 Annual Improvements to IFRSs IFRS 11 Joint Arrangements Amendments regarding the accounting for acquisitions of an interest in a joint operation IFRS 12 Disclosure of Interests in Other Entities Amendments regarding the application of the consolidation exception IFRS 14 Regulatory Deferral Accounts Original issue International Accounting Standards (IASs) IAS 1 Presentation of Financial Statements Amendments resulting from the disclosure initiative IAS 16 Property, Plant and Equipment Amendments regarding the clarification of acceptable methods of depreciation and amortisation Amendments bringing bearer plants into the scope IAS 16 IAS 19 Employee Benefits Amendments resulting from September 2014 Annual Improvements to IFRSs IAS 27 Separate Financial Statements (as amended in 2011) Amendments reinstating the equity method as an accounting option for investments in in subsidiaries, joint ventures and associates in an entity's separate financial statements IAS 28 Investments in Associates and Joint Ventures Amendments regarding the application of the consolidation exception IAS 34 Interim Financial Reporting Amendments resulting from September 2014 Annual Improvements to IFRSs IAS 38 Intangible Assets Amendments regarding the clarification of acceptable methods of depreciation and amortisation September 2014 Annual periods beginning on or after 1 January 2016 September 2014 Annual periods beginning on or after 1 January 2016 May 2014 Annual periods beginning on or after 1 January 2016 December 2014 Annual periods beginning on or after 1 January 2016 January 2014 Annual periods beginning on or after 1 January 2016 December 2014 Annual periods beginning on or after 1 January 2016 May 2014 Annual periods beginning on or after 1 January 2016 June 2014 Annual periods beginning on or after 1 January 2016 September 2014 Annual periods beginning on or after 1 January 2016 August 2014 Annual periods beginning on or after 1 January 2016 December 2014 Annual periods beginning on or after 1 January 2016 September 2014 Annual periods beginning on or after 1 January 2016 May 2014 Annual periods beginning on or after 1 January 2016 At the date of approval of these financial statements a number of new standards, amendments to standards and interpretations that are effective for annual periods beginning after 1 January 2017, and have not been applied in preparing these financial statements are listed below: International Financial Reporting Standards (IFRS) IFRS 2 Share-based Payment Amendments to clarify the classification and measurement of share-based payment transactions IFRS 4 Insurance Contracts Amendments regarding the interaction of IFRS 4 and IFRS 9 IFRS 9 Financial Instruments Finalised version, incorporating requirements for classification and measurement, impairment, general hedge accounting and derecognition. June 2016 Annual periods beginning on or after 1 January 2018 September 2016 An entity choosing to apply the overlay approach retrospectively to qualifying financial assets does so when it first applies IFRS 9. An entity choosing to apply the deferral approach does so for annual periods beginning on or after 1 January 2018. July 2014 Effective for annual periods beginning on or after 1 January 2018 Amendments regarding the interaction of IFRS 4 and IFRS 9 IFRS 12 Disclosure of Interests in Other Entities See under IFRS 4 Amendments resulting from Annual Improvements 2014–2016 Cycle (clarifying IFRS 15 Revenue from Contracts with Customers Original issue Amendments to defer the effective date to 1 January 2018 Clarifications to IFRS 15 International Accounting Standards (IASs) IAS 7 Statement of Cash Flows Amendments as result of the Disclosure initiative IAS 12 Income Taxes Amendments regarding the recognition of deferred tax assets for unrealised losses IAS 28 Investments in Associates and Joint Ventures Amendments resulting from Annual Improvements 2014-2016 cycle (clarifying certain fair value measurements) IAS 40 Investment Property Amendments to clarify transfers or property to, or from, investment property December 2016 Annual periods beginning on or after 1 January 2017 May 2014 Applies to an entity's first annual IFRS financial statements for a period beginning on or after 1 January 2018 (see below) September 2015 Annual periods beginning on or after 1 January 2018 Annual periods beginning on or after 1 January 2018 April 2016 January 2016 Annual periods beginning on or after 1 January 2017 January 2016 Annual periods beginning on or after 1 January 2017 December 2016 Annual periods beginning on or after 1 January 2018 December 2016 Annual periods beginning on or after 1 January 2018 - 43 - Ukrproduct Group NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) 5. FINANCIAL RISK MANAGEMENT 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 introduction of all policies as approved by the Board of Directors. (а) Principal financial instruments The principal financial instruments used by the Group, from which financial instrument risk arises, are as follows: - - - - - 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: Financial assets Loans and receivables: - trade and other receivables (excluding non-financial assets) - cash and cash equivalents - other financial assets Financial liabilities Held at amortised cost: - non-current bank loans - long-term payables - current bank loans - overdrafts - trade and other payables (excluding non-financial liabilities) - interest payable (b) General objectives, policies and processes Year ended 31 December 2016 £ „000 Year ended 31 December 2015 £ „000 2 390 175 18 2 583 - 441 7 162 - 2 594 23 10 220 1 322 93 11 1 426 3 206 - 3 060 61 1 239 180 7 746 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 determination 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 implementation 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. - 44 - Ukrproduct Group NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) 5. FINANCIAL RISK MANAGEMENT (CONTINUED) (c) Credit risk Credit risk is the risk that a counterparty will not be able to meet its obligations in full when due. Ukrproduct 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 their own balance sheet being the main indicators of creditworthiness. While starting the commercial 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 5%); 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 increasingly with the modern-format retailers whose creditworthiness 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 enhancements. 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 individual 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 representative of the commercial credit control department to the customer premises- 2 weeks thereafter filing a claim to the commercial court for repayment 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 instruments 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 worthiness 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. Cash at bank and short term deposits are kept on the accounts in the following banks: Bank Year ended 31 December 2016 Year ended 31 December 2015 JSC OTP Bank Bank of Cyprus PJSC Raiffeisen Bank Aval Other Rating Baa1 Caa2 Ca Caa3 Rating Baa1 Caa2 Caa3 Caa3 Year ended 31 December 2016 £ „000 Year ended 31 December 2015 £ „000 56 2 83 20 161 52 29 6 4 91 - 45 - Ukrproduct Group NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) 5. FINANCIAL RISK MANAGEMENT (CONTINUED) (c) Credit risk (continued) 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 assessment policy. The Group‟s exposure to credit risk, where the carrying value of financial assets is unsecured, is as shown below: Year ended 31 December 2016 £ „000 Carrying Value Year ended 31 December 2016 £ „000 Maximum exposure (unsecured) Year ended 31 December 2015 £ „000 Carrying Value Year ended 31 December 2015 £ „000 Maximum exposure (unsecured) 175 2 390 18 2 583 175 2 390 18 2 583 93 1 313 11 1 417 93 1 313 11 1 417 Cash and cash equivalents Trade receivables Other financial assets (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 different liquidity requirement profiles. As the Group‟s 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 budgets 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 overdraft 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 ongoing continuity of the business. (e) Market risk Market risk may arise from the Group‟s use of interest bearing, tradable and foreign currency financial instruments. Market risk comprises fair value interest rate risk, foreign exchange risk and commodity price risk and is further assessed below: (i) Interest-rate risk The Group's interest-rate risk arises only from short-term credits, and is considered to be insignificant. The Group analyses the interest rate exposure on a year basis. A sensitivity analysis is performed by applying various interest rate scenarios to the borrowings. A change of interest rate by 1 percentage points (being the maximum reasonably possible expectation of changes in interest rates) would cause decrease in interest expense by GBP -9,700 ( increase 2015: 7%-GBP 75,624). - 46 - Ukrproduct Group NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) 5. FINANCIAL RISK MANAGEMENT (CONTINUED) (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 primary 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 shipments 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 balances 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 exchange rate risk that lies in the possibility of Euro (EUR) appreciation against Hryvna (UAH). The sensitivity analysis shows that EUR appreciation against Hryvna by 4% would cause exchange rate loss 4% of GBP 240 thousand (2015 by 20%: GBP 1,142 thousand). (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 domestic 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 13% change in the SMP prices would lead to the change in Gross Profit of GBP 437 thousand in 2017. The first stage of the modernisation project of Starokonstantinovskiy 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 financial losses. The Group can not expect that all operational 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 earnings 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 growing capital are: - 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 customers 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 characteristics 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. - 47 - Ukrproduct Group NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) 6. CAPITAL MANAGEMENT POLICIES (CONTINUED) 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, return capital to shareholders or sell assets to improve the cash position. Historically, the first three methods 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, 2016 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 3.52. In management's opinion this excessive D/E ratio is the result of force-majeur circumstances. The D/E ratios at 31 December 2016 and At 31 December 2015 were as follows: Total debt Less: Cash and cash equivalents Net debt Total equity D/E ratio Year ended 31 December 2016 £ „000 Year ended 31 December 2015 £ „000 7 603 (175) 7 428 2 110 352,0% 6 327 (93) 6 234 3 081 202,3% - 48 - Ukrproduct Group NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) 7. SEGMENT INFORMATION At 31 December 2016, the Group was organised internationally into four main business segments: 1) 2) 3) 4) Branded products – processed cheese, hard cheese, packaged butter and spreads Beverages – kvass, other beverages Non-branded products – skimmed milk powder, other skimmed milk products Distribution services and other – resale of third-party goods and processing services. The segment results for the year ended 31 December 2016 are as follows: Sales Gross profit Administrative expenses Selling and distribution expenses Other operating expenses Profit from operations Finance expenses, net Loss from exchange differences Profit before taxation Taxation Loss for the year Segment assets Unallocated corporate assets Consolidated total assets Segment liabilities Unallocated corporate liabilities Unallocated deferred tax Consolidated total liabilities Depreciation and amortisation Branded products Beverages Non-branded products Distribution services and other Un-allocated Total £ „000 £ „000 £ „000 £ „000 £ „000 £ „000 13 947 1 901 (584) (1 123) - 194 - - 194 - 194 8 047 - 8 047 2 641 - - 2 641 322 890 440 (109) (231) (3) 97 - - 97 - 97 1 361 - 1 361 - - - - 56 4 828 (338) 75 123 (21) (161) - - (161) - (161) 3 063 - 3 063 - - - - 211 525 116 (36) (48) - 32 - - 32 - 32 - - - - - - - - - - (276) (88) 7 (357) (623) (743) (1 723) 77 (1 646) - 481 481 - 7 838 363 8 201 - 20 190 2 119 (930) (1 367) (17) (195) (623) (743) (1 561) 77 (1 484) 12 471 481 12 952 2 641 7 838 363 10 842 589 The unallocated corporate liabilities represent bank loans, overdrafts and accruals. - 49 - Ukrproduct Group NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) 7. SEGMENT INFORMATION (CONTINUED) The segment results for the year ended 31 December 2015 are as follows: Sales Gross profit Administrative expenses Selling and distribution expenses Other operating expenses Profit from operations Finance expenses, net Income from exchange differences Profit before taxation Taxation Loss for the year Segment assets Unallocated corporate assets Unallocated deferred tax Consolidated total assets Segment liabilities Unallocated corporate liabilities Unallocated deferred tax Consolidated total liabilities Depreciation and amortisation Branded products Beverages Non-branded products Distribution services and other Un-allocated Total 13 329 1 442 (507) (1 085) - (150) - - (150) - (150) 5 854 - - 5 854 988 - - 988 287 868 400 (75) (190) (4) 131 - - 131 - 131 1 104 - - 1 104 - - - - 50 5 502 440 (87) (165) (9) 179 - - 179 - 179 2 893 - - 2 893 - - - - 200 459 32 (9) (19) - 4 4 4 4 4 - - - - - - - - - - - - (431) (3) (1 076) (1 510) (768) (1 733) (4 011) (59) (4 070) - 1 592 45 1 637 - 6 958 466 7 424 - 20 158 2 314 (1 109) (1 462) (1 089) (1 346) (768) (1 733) (3 847) (59) (3 906) 9 855 1 592 45 11 492 988 6 958 466 8 412 537 Secondary reporting format - geographical segments: Sales by country (consignees) Year ended 31 December 2016 £ „000 Sales by country (consignees) Ukraine Moldova Georgia Nigeria Malaysia Egypt Netherlands Azerbaijan Kazakhstan Other countries Total 14 044 1 179 1 001 885 579 545 567 528 177 685 20 190 Ukraine Netherlands Moldova Nigeria Azerbaijan Georgia Mexico Turkey Turkmenistan Other countries Total Year ended 31 December 2015 £ „000 16 286 1 030 797 554 449 314 261 204 154 109 20 158 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. - 50 - Ukrproduct Group NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) REVENUE 8. For the years ended 31 December 2016 and 31 December 2015, 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 December 2016 £ „000 Year ended 31 December 2015 £ „000 20 783 14 422 960 4 828 573 (593) 20 190 20 859 13 930 943 5 502 484 (701) (20 158) 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. EXPENSES BY NATURE 9. For the years ended 31 December 2016 and 31 December 2015, items of expenses were presented as follows: Year ended 31 December 2016 Cost of sales Including: £ „000 (18 071) Year ended 31 December 2015 £ „000 (17 844) Raw materials and consumables used, cost of goods sold, manufacture overheads etc. (16 262) (16 059) Wages and salaries, social security costs (Note 12) Depreciation 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 Taxes and compulsory payments IT materials, household expenses, reading materials Audit fees Amortisation and depreciation Other Selling and distribution expenses Including: Wages and salaries, social security costs (Note 12) Delivery costs Promotion Lease and current repair and maintenance Impairment of inventories Amortisation and depreciation Veterinary certificates, medical examination, permits Packaging Other Other operating expenses Including: Impairment of trade receivables Impairment of inventories Impairment of non-current assets Profit / (loss) on disposal of non-current assets Amortisation and depreciation Wages and salaries, social security costs (Note 12) Other* Including: other operating incomes other operating expenses net operations (1 381) (404) (1 109) (559) (176) (58) (52) (40) (36) (22) (18) (14) (25) (109) (1 462) (448) (414) (179) (93) (78) (104) (43) (52) (51) (1 089) (805) (28) (179) (4) (4) (2) (67) (1 311) (498) (930) (383) (192) (74) (48) (41) (39) (21) (15) (14) (10) (93) (1 367) (333) (285) (212) (174) (120) (79) (62) (57) (45) (17) (40) (28) - (25) (2) (1) 79 1 596 (1 584) 12 Expense item Other* in the category of expenses Other operating expenses consists of net on operations GBP 12,000, which were classified as income from other operating activities, as these are export sales of the attracted products, which is not the main activity of the company. 10. FOREIGN EXCHANGE LOSS, NET For the years ended 31 December 2016 and 31 December 2015 item foreign exchange loss, net consists of:  exchange difference in trade and other receivables exchange difference in trade and other payables exchange difference in short and long credits effect of exchange rate changes and restatements on cash and cash equivalents Total foreign exchange loss, net (15) (320) (461) 53 (743) (81) (56) (1 536) (60) (1 733) - 51 - Ukrproduct Group NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) 11. NET FINANCE COSTS For the years ended 31 December 2016 and 31 December 2015, financial income/(expenses) were presented as follows: Finance income Interest income Total interest income Finance expense Interest expense on bank loans Total finance expense Net finance expense recognised in income statement 12. EMPLOYEE BENEFIT EXPENSES Year ended 31 December 2016 £ „000 Year ended 31 December 2015 £ „000 1 1 (624) (624) (623) 1 1 (769) (769) (768) For the years ended 31 December 2016 and 31 December 2015, 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 Wages and salaries of key management personnel: Year ended 31 December 2016 £ „000 Year ended 31 December 2015 £ „000 (1 690) (340) (2 030) 918 (1 825) (565) (2 390) 1 132 Year ended 31 December 2016 £ „000 Year ended 31 December 2015 £ „000 (1 311) (385) (333) (1) (2 030) (1 381) (559) (448) (2) (2 390) For the year ended 31 December 2016, remuneration of the Group's key management personnel amounted to GBP 118,218 (2015: GBP 235,000). Key management personnel received only short term benefits during the years ended 31 December 2016 and 31 December 2015. 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). - 52 - Ukrproduct Group NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) 13. INCOME TAX EXPENSES For the years ended 31 December 2016 and 31 December 2015, income tax expenses were presented as follows: Current tax charge - Ukraine Current tax charge - non-Ukraine Deferred tax relating to the origination and reversal of temporary differences Total income tax expenses Year ended 31 December 2016 £ „000 Year ended 31 December 2015 £ „000 (41) 1 (37) (77) 52 - 7 59 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% (2015: 18%). The numerical reconciliation between tax charge and the product of accounting profit multiplied by the applicable tax rate(s) is provided in the following table. Profit before tax: Ukraine Cyprus Other (BVI, Jersey) Profit before tax, total Tax calculated at domestic tax rates applicable to profits in the relevant countries Ukraine (2016: 18%, 2015: 18%) Cyprus (10%) Tax calculated at domestic tax rates applicable to net income not subject to tax and expenses not deductible for tax purposes Ukraine Cyprus Tax charge Ukraine Cyprus The weighted average applicable tax rate Ukraine Cyprus BVI, Jersey Year ended 31 December 2016 £ „000 Year ended 31 December 2015 £ „000 223 (413) (1 371) (1 561) 40 - 40 (118) 1 (117) (78) 1 (77) 18% Nil Nil -3% 146 13 (4 005) (3 846) 26 1 27 33 (1) 32 59 - 59 18% 8% Nil -1% 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 practice 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 inspection for an indefinite period. In practice, however, the risk of retroactive tax assessments and penalty charges decreases significantly after three years. The fact that a year has been reviewed does not preclude the Ukrainian tax service performing a subsequent inspection of that year. The Group's management believes that it has adequately provided for tax liabilities in the accompanying financial statements; however, the risk remains that those relevant authorities could take different positions with regard to interpretive issues. - 53 - Ukrproduct Group NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) 13. INCOME TAX EXPENSES (CONTINUED) During the period under review, the Ukrainian companies within the Group paid royalties and interest charges on the outstanding credits to another Group company – Solaero Global Alternative 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, with sufficient regularity to ensure that the carrying amount does not differ materially from fair value. An independent valuation of the Group's property, plant and equipment was undertaken by BGS Assets LLC as at 31 December 2015 . As at 31 December 2016, it is the Group's opinion that the values appraised in the prior year remain appropriate. 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 and 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. 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 2017 budget value and takes into consideration trends of value indexes for 2018-2021 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 specific 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 calculated on the basis of predicted return on investment of group investors. Cost of loan capital is based on attracted funds to which interest Group undertakes to process is carried. Specific segment risks are included in usage of separate facts of beta-testing. Beta factors are estimated annualy using generally accessible market data. WACC is used in the model for both CGU in 22,6%. Production value increase – is derived from published consumer price index for Ukraine or world price tendencies for export product groups. Increase of law material price – Forecast is got from published index for Ukraine. Predicted increase data – The data are based on published industry research in Ukraine and management estimates. Assumption regarding business segment – Using the data on industry for increase factors these assumptions are important as management estimates the changability of the unit position in comparison with competitors in the period forcasted. Gain in sales in categories of butter and processed cheese by means of segment growth mainly in domestic market and increase of export amount by developing of brands "Nash Molochnik", "Narodny Product". Hard cheese produced by the Group will be exported to Asian and East African markets. Industry forecast is not used for kvass (beverage) sales forecasting, as the Group produces the unique product "Zhyviy Kvass" that has no competitors in Ukraine by its nature. The model is based on own dynamic forecast of the management. Brand developement plans include: - Extension of brand presence in distribution networks; - Kvass in kegs sales increase; - Extension of beverage product range (production of white kvass) As for estimated value from using both CGU, management considers 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. - 54 - Ukrproduct Group NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) 14. PROPERTY, PLANT AND EQUIPMENT (CONTINUED) As at 31 December 2016 and 31 December 2015, property, plant and equipment were presented as follows: 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 At 31 December 2015 Accumulated depreciation At 1 January 2015 Depreciation charge Elimination of depreciation Disposals Exchange differences on translation to the presentation At 31 December 2015 Cost or valuation At 1 January 2016 Additions Transfers to/from AUC Disposals Exchange differences on translation to the presentation At 31 December 2016 Accumulated depreciation At 1 January 2016 Depreciation charge Disposals Exchange differences on translation to the presentation At 31 December 2016 Net book amount At 31 December 2016 Net book amount at 31 December 2015 Net book amount at 31 December 2014 r e d n u s t e s s A n o i t c u r t s n o C £ „000 d n a d n a L s g n i d l i u B £ „000 y r e n i h c a M d n a t n a l P £ „000 s e l c i h e V £ „000 r e h t o d n a s l o o t , s t n e m u r t s n I t n e m p i u q e £ „000 l a t o T £ „000 47 221 (56) (21) - (5) (24) 162 29 1 (21) - (9) - 162 205 (131) - 14 250 - - - - - 250 162 18 6 414 - (58) (2 245) 40 - (1 845) 2 306 2 876 130 (2 245) - (760) 1 2 306 - 5 (3) 152 2 460 1 134 - 7 142 2 318 2 305 3 538 8 760 - (76) (2 981) 543 (1) (2 543) 3 702 3 759 253 (2 981) (2) (1 029) - 3 702 - 32 (7) 247 3 974 - 215 (1) 8 222 3 752 3 702 5 001 2 497 - (112) (1 420) 361 (32) (677) 617 1 891 48 (1 420) (19) (500) - 617 - 23 (44) 40 636 - 112 (4) 4 112 524 617 606 947 - 303 (365) 99 (16) (286) 682 518 56 (365) (12) (146) 51 682 - 71 (23) 47 777 51 75 (21) 5 110 667 631 429 18 665 221 1 (7 032) 1 043 (54) (5 375) 7 469 9 073 488 (7 032) (33) (2 444) 52 7 469 205 - (77) 500 8 097 52 536 (26) 24 586 7 511 7 417 9 592 As at 31 December 2016 the Group has no contractual commitments on purchase of property, plant and equipment. Fixed assets with a net book value of GBP 5,366 thousand At 31 December 2016 (2015: GBP 5,125 thousand) were pledged as collateral for loans. As at 31 December 2016 any prepayments for property, plant and equipment were included within Assets under construction in the amount of GBP 62 thousand (2015: GBP 5 thousand) As at 31 December 2016 fully depreciated assets included within property, plant and equipment with the original cost of GBP 32 thousand (2015: GBP 214 thousand) It‟s impracticable to provide information about the carrying amounts of all classes of assets, except office equipment if they were measured using the cost model without undue cost and efforts. - 55 - Ukrproduct Group NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) 15. INTANGIBLE ASSETS As at the reporting dates intangible assets were presented as follows: 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 Cost or valuation At 1 January 2016 Additions Disposals Exchange differences on translation to the presentation currency At 31 December 2016 Accumulated amortisation At 1 January 2016 Amortisation charge for the year Disposals Exchange differences on translation to the presentation currency At 31 December 2016 Net book amount At 31 December 2016 Net book amount at 31 December 2015 Net book amount at 31 December 2014 The remaining amortization periods of the intangible assets are as follows: - - Computer software 1-10 years; Trademarks 11-18 years; Computer software £ „000 Trade marks Customer list £ „000 £ „000 Total £ „000 46 1 (2) (16) 29 12 11 (1) 4 26 29 - (3) 2 28 26 1 (3) 3 27 1 3 34 725 - - 36 761 113 30 - 25 168 761 - - 159 920 168 52 - 45 265 655 593 612 503 - - (503) - - 320 8 (312) - (16) - - - - - - - - - - - - - 183 1 274 1 (2) (503) 20 790 445 49 (312) (1) 13 194 790 - (3) 161 948 194 53 (3) 48 292 656 596 829 - 56 - Ukrproduct Group NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) 15. INTANGIBLE ASSETS (CONTINUED) The Group performed its annual impairment test in December 2016 and 2015. 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 2016, the market capitalisation of the Group was below the book value of its equity, indicating a potential impairment 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 trademark “Zhyviy Kvas” and Group of the trademarks “Diary segment” CGUs. Trademark “Zhyviy Kvas” The recoverable amount of the trade mark “Zhyviy Kvas” CGU, GBP 3 156 thousand as at 31 December 2016, 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 recovering demand for products and services. The discount rate applied to cash flow projections is 25.1% (2015: 25.8%). The growth rate used to extrapolate the cash flows of the unit beyond the five-year period is 0 %. As a result of the analysis, management did not identify an impairment for this CGU. Group of the trademarks “Diary segment” The recoverable amount of the three trademarks “Diary segment” CGU, GBP 3 618 thousand as at 31 December 2016, 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 recovering for products and services. The pre-tax discount rate applied to the cash flow projections is 25.1% (2015: 25.8%). The growth rate used to extrapolate the cash flows of the unit beyond the five-year period is 0 %. As a result of the analysis, management did not identify an impairment for this CGU. 16. DEFERRED TAX ASSETS AND LIABILITIES For the year ended 31 December 2016, deferred tax assets and liabilities were presented as follows: 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 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: As at 31 December 2016 £ „000 (46) - - - 46 - - - - - 466 - (28) (55) - (20) - 363 As at 31 December 2015 £ „000 (2) - (12) - - 62 (2) (46) - - 302 - 39 (20) 255 (110) - 466 Finished goods Raw materials Work in progress Other inventories As at As at 31 December 2016 31 December 2015 £ „000 £ „000 1 006 312 107 430 1 855 677 307 158 354 1 496 During 2016, GBP 15,261 thousand (2015: GBP 14,411 thousand) was recognised as an expense in cost of sales. Inventories with a net book value of GBP 360 thousand At 31 December 2016 (2015:GBP 901 thousand) were pledged as collateral for loans. - 57 - Ukrproduct Group NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) 18. TRADE AND OTHER RECEIVABLES As at the reporting dates receivables were presented as follows: Trade receivables Other receivables Prepayments As at As at 31 December 2016 31 December 2015 £ „000 £ „000 2 390 - 117 2 507 1 313 9 164 1 486 The Group‟s management believes that the carrying value for trade and other receivables is a reasonable approximation 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 2016 and 31 December 2015 is presented as follows: Total £ „000 2 390 1 313 Neither past due nor impaired £ „000 1 366 1 194 <30 days £ „000 109 24 Past due but not impaired 61-90 days £ „000 91-120 days £ „000 30-60 days £ „000 23 63 588 18 291 - >120 days £ „000 13 14 2016 2015 Provisions were created for impaired trade and other receivables and holiday allowance. For the year ended 31 December 2016, provisions were presented as follows: Impaired trade and other receivables at the beginning of the year Holiday allowance at the beginning of the year Accrual / (Reversal) Use of allowances Effect of translation to presentation currency Impaired trade and other receivables at the end of the year Holiday allowance at the end of the year 19. CURRENT TAXES As at the reporting dates current taxes were presented as follows: VAT receivable Current income tax prepayments Other prepaid taxes 20. OTHER FINANCIAL ASSETS Loans and receivables Loans issued to related parties Loans issued to third parties Loans issued to employees As at 31 December 2016 £ „000 As at 31 December 2015 £ „000 947 - (696) - 36 287 - - 49 50 (86) 39 - 52 220 - 836 (7) (102) 947 - - 42 52 (137) 92 - 49 As at As at 31 December 2016 31 December 2015 £ „000 £ „000 138 89 3 230 268 66 14 348 As at As at 31 December 2016 31 December 2015 £ „000 £ „000 8 6 4 18 - 3 8 11 Loans issued are short term in nature, repayable on demand and are interest free. - 58 - Ukrproduct Group NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) 21. CASH AND CASH EQUIVALENTS (EXCLUDING BANK OVERDRAFTS) As at the reporting dates cash and cash equivalents were presented as follows: Cash in hand - on UAH Cash in bank - on UAH Bank - in other currencies 22. SHARE CAPITAL As at the reporting dates share capital was presented as follows: As at As at 31 December 2016 31 December 2015 £ „000 £ „000 14 98 63 175 1 11 81 93 Ordinary shares of 10p each 60 000 6 000 60 000 6 000 As at As at As at As at 31 December 2016 31 December 2016 31 December 2015 31 December 2015 Number '000 £ „000 Number '000 £ „000 Authorised 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 At end of the year Issued and fully paid at beginning and end of the year As at As at As at As at 31 December 2016 31 December 2016 31 December 2015 31 December 2015 Number '000 £ „000 Number '000 £ „000 39 673 - 39 673 3 967 - 3 967 39 673 - 39 673 3 967 - 3 967 Held as treasury shares As at As at As at As at 31 December 2016 31 December 2016 31 December 2015 31 December 2015 Number '000 £ „000 Number '000 £ „000 3 145 3 145 315 315 3 145 3 145 315 315 As at 31 December 2016 and 31 December 2015 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 Subsequent events is disclosed in note 32. - 59 - Ukrproduct Group NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) 23. OTHER RESERVES At the reporting date other reserves were presented as follows: At 1 January 2015 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 At 31 December 2015 Depreciation on revaluation of property, plant and equipment Reduction of revaluation reserve Exchange differences on translation to the presentation currency At 31 December 2016 Share premium Translation reserve Revaluation reserve Total other reserves £ '000 £ '000 £ '000 £ '000 4 562 - - - - 4 562 - - - 4 562 (13 768) - - - (1 526) (15 294) - - 513 (14 781) 3 453 (86) 913 (88) - 4 192 (248) (9) - 3 935 (5 753) (86) 913 (88) (1 526) (6 540) (248) (9) 513 (6 284) The following describes the nature and purpose of each reserve within owners‟ equity. Reserve Description and purpose Share premium Revaluation Retained earnings Translation Amount subscribed for share capital in excess of nominal value. Gains arising on the revaluation of the Group‟s property. The balance on this reserve is wholly undistributable. 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 2016 the Group has two loans: a loan from OTP Bank in the amount of 969 thousand GBP with a maturity date of 09 September 2017 and EBRD in the amount of 6,193 thousand GBP ( in EUR 7,259 thousand) . As at 31 December 2016, the Group has restructured the loan with 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. An amended Loan Agreement and Restatement Deed with the EBRD was signed in June 2016 and details announced on 30 June 2016 with the new terms becoming effective on 24 October 2016. As per the new terms, the principal amount is divided into two parts - Tranche A in the amount of 4,000 thousand EUR with a maturity date of 01 December 2022 and Tranche B in the amount of 3,259 thousand EUR with a maturity date of 30 November 2024. The Group gained a capital repayment holiday until 01 March 2017 with quarterly capital repayments on Tranche A commencing on that date and increasing in amount on an annual basis until 1 December 2022. The first two payments have been made in full as scheduled. Tranche B is ordinarily due for repayment in a single bullet payment on 1 December 2024 assuming no early repayment of Tranche A or events of default. Despite the repayments being made as scheduled, the Group breached financial covenants as at 31 December 2016 and 31 March 2017. The Board notified EBRD in advance of covenant breaches of the Loan and EBRD provided waivers in respect of the breached covenants dated 08 May 2017 and 24 May 2017 respectively. Due to the fact that the date of the waivers receipt was later than the reporting date, under IAS 1 Presentation of Financial Statements the Group was required to classify the EBRD loan in full as a current liability. In the consolidated statement of financial position the current liabilities exceed current assets due to the EBRD loan reclassification. The Board believes that EBRD will not demand accelerated repayment of the loan due to the breach of the covenants as at 31 December 2016 and as at 31 March 2017. Going forward if the Group anticipates a breach of the financial ratio covenants under the amended EBRD loan agreement it is expected that EBRD would grant a waiver in advance of the reporting period deadline. The Group has entered into a variation of the loan agreement with OTP Bank under which the principal loan repayment date has been extended from 9 June 2017 to 9 September 2017. The principal amount outstanding under this agreement is Ukrainian Hryvnia UAH 32,300 thousand (approximately GBP 969 thousand). Guarantees, corporate rights in pledge under EBRD facility agreement are the enterprises of the Group that are jointly and severally responsible together with the borrower: Molochnik LLC; Milk Investments Private Enterprise SC; Starkon-Moloko LLC; Ukrproduct Group CJSC; Zhiviy Kvas LLC. 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 Enterprise; Krasilovsky Molochny Zavod Private Enterprise SC; ATP Centr LLC; Ukrproduct Group CJSC - 60 - Ukrproduct Group NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) 24. BANK LOANS AND OVERDRAFTS (CONTINUED) Bank Currency Type Opening date Termination date Interest rate EBRD EUR Loan 31.03.2011 10.12.2018 5-7% OTP Bank UAH Credit line 30.05.2011 09.09.2017* 26,84% Aval Bank UAH Overdraft 31.05.2013 29.02.2016 22,0% Additional agreement will be signed with the loan repayment date of 9 September 2017. The average interest rate as At 31 December 2016 was 6,57% (2015: 10,42%). Limit £ „000 7 080 1 200 141 As At 31 December 2016 As at 31 December 2015 £ „000 £ „000 6 193 969 - 7 162 5 357 909 61 6 327 Maturity of financial liabilities On demand In less than 1 year In more than 1 year Interest rate profile of financial liabilities On demand Expiry within 1 year Expiry in more then 1 years The currency profile of the Group's financial liabilities is as follows: UAH EUR The book value and fair value of financial liabilities are as follows: Bank loans Bank overdrafts Year ended 31 December 2016 £ „000 Year ended 31 December 2015 £ „000 - 7 162 - 7 162 61 3 060 3 206 6 327 Floating rate £ '000 Fixed rate £ '000 As at As at 31 December 2016 31 December 2015 £ „000 £ „000 - 969 - 969 - 6 193 - 6 193 - 7 162 - 7 162 61 3 060 3 206 6 327 Floating rate liabilities Fixed rate liabilities £ '000 £ '000 Total as At 31 December 2016 £ '000 Total as at 31 December 2015 £ '000 969 - 969 - 6 193 6 193 969 6 193 7 162 970 5 357 6 327 Book value as At 31 December 2016 Fair value as At 31 December 2016 Book value as at 31 December 2015 Fair value as at 31 December 2015 £ '000 £ '000 £ '000 £ '000 7 162 - 7 162 7 162 - 7 162 6 266 61 6 327 6 266 61 6 327 - 61 - Ukrproduct Group NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) TRADE AND OTHER PAYABLES 25. At the reporting date trade and other payables were presented as follows: Trade payables Other payables Prepayments received Accruals Interests payable Provisions As at As at 31 December 2016 31 December 2015 £ „000 £ „000 2 364 230 85 100 23 52 2 854 979 260 9 109 180 49 1 586 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 Weighted number of ordinary shares in issue Basic earnings per share, pence Diluted average number of shares Diluted earnings per share, pence Year ended 31 December 2016 £ „000 Year ended 31 December 2015 £ „000 (1 484) 39 673 049 (3,74) 39 629 619 (3,74) (3 905) 39 673 049 (9,85) 39 402 447 (9,91) - 62 - Ukrproduct Group NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) 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 2016. 28. SHARE-BASED PAYMENTS The Company operates an equity-settled share based remuneration scheme for employees. Outstanding at beginning of the year 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 2016 Weighted average exercise price 2015 Weighted average exercise price £ Number £ Number 0,100 - - - - - 0,100 0,100 130 290 - - - - - 130 290 130 290 0,100 - - - - - 0,100 0,100 130 290 - - - - - 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 2016. 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. - 63 - Ukrproduct Group NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) 29. CURRENCY ANALYSIS Currency analysis for the year ended 31 December 2016 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 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 1 502 230 18 112 1 862 969 2 539 10 12 3 530 996 - - 55 1 051 - 26 - - 26 - - - 3 3 - 65 - - 65 - - 6 8 14 6 193 224 - - 6 417 2 507 230 18 175 2 930 7 162 2 854 10 12 10 038 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 - - 5 677 1 486 348 11 93 1 938 6 327 1 586 18 15 7 946 14 % strengthening of Hryvnia rate against the following currencies as At 31 December 2016 and 2015, would increase /decrease the amount of profits /or losses for the period by the amounts mentioned below. This analysis was conducted based on the assumption that all other variables, in particular, interest 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. USD EUR USD EUR 30. RELATED PARTY TRANSACTIONS Increase/ decrease in rate Effect on income before tax in 2016 Effect on income before tax in 2015 £ „000 £ „000 14% 11% -14% -11% 144 (704) (144) 704 33 (1 532) (33) 1 532 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 related party relationship, attention is directed to the substance of the relationship, not merely the legal form. Transactions and balances between the Group companies and other related parties are set out below. Remuneration of key management personnel is disclosed in note 12. - 64 - Ukrproduct Group NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) 30. RELATED PARTY TRANSACTIONS (CONTINUED) 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 beneficiaries of the Company. Sales Cost of sales Administrative expenses Other operational expenses Balances due from/(to) related parties at each period end are shown below. Receivables and prepayments Other financial assets Trade and other payables Year ended 31 December 2016 £ „000 Year ended 31 December 2015 £ „000 1 4 14 1 - - 25 - As at As at 31 December 2016 31 December 2015 £ „000 £ „000 26 8 2 23 - 9 In 2016, 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 unfavourable changes take place in political and economic 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, local and national tax legislation are constantly changing. Provisions of various legislative and regulatory legal acts are not always clearly-worded, and their interpretations depend on the opinion of tax authority 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 violations 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 salaries. As At 31 December 2016 and 2015 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. As at 31 December 2016 and as at 31 March 2017 the Group had been in breach of certain covenants regarding the loan with EBRD. But EBRD have provided waivers in respect of these breaches and therefore no further commitments /contingencies have arisen. The covenants breached included: Debt Service Coverage Ratio and Bank Debt to EBITDA ratio. The effective date of the waivers are 8 May 2017 in respect of 31 December 2016 and 24 May 2017 in respect of 31 March 2017. (e) Other The amount of uncancellable lease commitments is insignificant. As of 31 December 2016 the Group does not possess any finance lease and hire purchase commitments, capital commitments and guarantees. - 65 - Ukrproduct Group NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (in thousand GBP, unless otherwise stated) 32. SUBSEQUENT EVENTS (a) EBRD - breach of loan covenants As at 31 December 2016 the Group had been in breach of certain covenants regarding the loan with EBRD, the Group was still in breach of these convenants as at 31 March 2017 however EBRD have provided waivers in respect of these breaches on 8 and 24 May 2017 and therefore no further commitments/contingencies have arisen. The covenants breached included Debt Service Coverage Ratio and Bank Debt to EBITDA ratio. (b) Reorganisation In the first half of 2017 the following entities have been or are planned to be merged with Starokonstantinovskiy Molochniy Zavod SC: Avtopark Starokonstantinov LLC, Milk Investments Private Enterprise SC, Starkon-Moloko LLC, Invest Garantiya Private Enterprise, Favorit-Konsulting Private Enterprise, ATP Centr LLC, Business Invest Management LLC and Reliable Logistics Services LTD. (c) Foreign exchange rates Post year end, the Ukrainian Hryvnia continued to devalue against the EUR, GBP. As for USD Ukrainian Hryvnia strengthened. In particular, according to the National Bank of Ukraine the following are key exchange rates: Currency UAH/GBP UAH/USD UAH/EUR 29 June 2017 33,28 26,08 29,41 - 66 - Corporate advisers Group secretary Bedell Secretaries Limited PO Box 75 26 New Street St Helier Jersey JE2 3RA Jersey legal advisers Bedell Cristin PO Box 75 26 New Street St Helier Jersey JE2 3RA Nominated adviser and broker Principal bankers ZAI Corporate Finance Ltd UBS SA New Liverpool House 4th Floor 15 – 17 Eldon Street London EC2M 7LD 40 rue du Rhône CH-1211 Geneva Switzerland Independent auditors Registrars Baker Tilly Isle of Man LLC Neville Registrars Limited PO Box 95 2a Lord Street Douglas Isle of Man, IM99 1HP UK legal advisers Gowlings WLG 4 More London London SE1 2AU United Kingdom Neville House 18 Laurel Lane Halesowen B63 3DA 67 Annual Report Shareholder Information Registered Office PO Box 75 26 New Street St Helier Jersey JE2 3RA Registered Number 88352 (Jersey) Financial Calendar 31 December 2016 Financial year end 29 June 2017 Announcement of full year 2016 results 20July 2017 Annual General Meeting Analysis of shareholding – at 31 December 2016 Size of shareholdings Number of holders % of total Total holdings, shares % of total Up to 5,000 shares 5,001 to 50,000 shares 50,001 to 200,000 shares Over 200,000 shares Total 34 30 23 13 100 34 30 23 13 100,00% 61,599 566,719 2,458,714 39,730,817 42,817,849 0,14 1,32 5,74 92,79 100.00 As at December 31, 2016 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, Halesowen, B63 3DA. The registrar will assist with enquiries 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 68 

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