UkrProduct
Annual Report 2018

Plain-text annual report

5 6 10 12 16 18 24 25 30 31 32 33 34 CHAIRMAN AND CHIEF EXECUTIVE STATEMEN THE BOARD OF DIRECTORS REMUNERATION COMMITTEE REPORT CORPORATE GOVERNANCE REPORT CORPORATE SOCIAL RESPONSIBILITY REPORT DIRECTORS’ REPORT STATEMENTS OF DIRECTORS’ RESPONSIBILITIES INDEPENDENT AUDITOR’S REPORT CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME CONSOLIDATED STATEMENT OF FINANCIAL POSITION CONSOLIDATEDSTATEMENT OF CHANGES IN EQUITY CONSOLIDATED STATEMENT OF CASH FLOWS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE OF CONTENTS 2 Chairman and Chief Executive Statement TRADING During the year to 31 December 2018 (“FY 2018”), the Ukrainian economy showed moderate growth, accom- panied by wage inflation, which has helped consumer confidence. Ukrproduct Group Ltd (“Ukrproduct”, the “Company” or, together with its subsidiaries, “the Group”) continued focusing on cash generation while aiming to address opportunities in export markets, beverages and B2B, as well as expanding its dairy business. The Group reports improved revenue of approximately £36,9 million (approximately 1.3 billion UAH). Gross profit in UAH terms increased 4.3% to approximately 115 million UAH, however, in GBP terms, the negative impact of exchange rate differences resulted in a de- crease of 2.5% to approximately £3.2 million. The Group reports an operating profit of approximately £0.2 million (approximately UAH 6.2 million) in FY2018, compared with an operating profit of approximately £0.5 million (approximately UAH 16.2 million) in 2017. Overall, for FY 2018, the Company reports net profit of ap- proximately £0.1 million (approximately 2.7 million UAH) compared to a loss of approximately £1.1 million (approx- imately 40.6 million UAH) in 2017. Net profit for 2018 is lower than previously expected (as announced on 7 May 2019) as a result of increased operating expenses. Net profit for FY2018 included lower finance charges related to the outstanding debt with EBRD, although total finance expenses increased to approximately £0.5 million (ap- proximately 16.2 million UAH) from approximately £0.4 million (approximately 15.1 million UAH) in 2017. Overall, the Group reports that its sales volumes have grown by 4%, including sales of branded products in its key packaged butter and processed cheese segments. However, both export sales volumes and revenue de- creased due to the worldwide contraction of skimmed milk powder prices. Although the Company continued to capitalise on its spare dairy processing capacity by acquiring new B2B partners, Ukrproduct’s B2B gross profit slightly decreased in 2018. Whilst gross profit of branded products showed substantial growth, it was unfortunately offset by losses caused by the decline in both skimmed milk powder and butter prices. Sales of beverages significantly increased as a result of the Group’s targeted marketing initiatives and the introduction of new drinks. FINANCIAL POSITION As at 31 December 2018, Ukrproduct reports net assets of approximately £1.0 million (approximately 35.13 million UAH) and net current liabilities of ap- proximately £0.03 million (approximately 1.05 million UAH), with cash balances of approximately £0.2 mil- lion (approximately 6.4 million UAH). During FY 2018, the Group met its outstanding obligations, includ- ing the EBRD loan repayments, which were paid on schedule in the amount of €0.52 million. OUTLOOK Ukrproduct’s strategy going forward is to generate cash by improving the profitability of its key dairy prod- uct and beverage segments and to further enhance its working capital position. The Group expects to boost its sales volume and reve- nue in 2019 by launching new products in its key busi- ness areas, introducing new marketing activities and capitalising further on export opportunities. Jack Rowell Chairman Alexander Slipchuk Chief Executive Officer ANNUAL REPORT 2018 4 ANNUAL REPORT 20185 The Board of Directors The Board of Directors As of the date of the approval of the 2018 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 20 July 2017. JACK ROWELL Non-executive Chairman ALEXANDER SLIPCHUK Chief Executive Officer 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 previ- ously 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 Lu- cas Food Ingredients (also part of the Dalgety Food Group). He was educated at Oxford University and is a Chartered Accountant. Alexander Slipchuk is responsible for the Group’s over- all performance and strategy implementation and is a founder of Ukrproduct Group. He studied at Far-East- ern High Engineering Marine School in Russia and graduated as a maritime navigator in 1989. Togeth- er 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 compa- nies that later became part of Ukrproduct Group. Later in 1998, Alexander took on the executive positions at the Molochnik and the Starakonstantinovskiy Dairy plants, Ukrproduct’s two main operating assets. ANNUAL REPORT 2018 8 SERGEY EVLANCHIK Executive Director YURIY HORDIYCHUK Chief Operational Officer Sergey Evlanchik studied at Vladivostok State University of Economics & Service in the Russian Federation and at Oxford University in the UK, where he received his MBA degree. Together with Alexander Slipchuk, he established the equity trading group, Alfa-Broker in 1994 in the Far East of the Russian Federation. After the recess of the Rus- sian 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 sub- sequently 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 effi- ciency upgrade of the existing production facilities. Yuri Hordiychuk has been with the Group since 2002. Firstly, he was Director of the Provision of Raw Ma- terials 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 Compa- ny and in 2013 he has appointed Chief Operational Officer. 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”. VOLODYMYR VARDZIELOV Chief Financial Officer Volodymyr Vardzielov has been with the Group since April 2018 as Chief Financial Officer. He has a Mas- ter`s degree in Finance and possesses 24 years’ professional experience in finance roles, including 15 years in managerial positions. ANNUAL REPORT 20189 Remuneration Committee Report Remuneration Committee Report This report is prepared by the Remuneration Committee of the Board and sets out the Group’s policy on the remuner- ation of the Directors, with a description of service agree- ments and remuneration packages for each Director. REMUNERATION COMMITTEE The Remuneration Committee comprises one Non-Ex- ecutive Director, Jack Rowell. This Committee is sched- uled 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 2018. REMUNERATION POLICY Executives to achieve those targets both in the short and long-term. BASE SALARY The Committee on an annual basis reviews base sala- ries of the respective Executive Directors of the company and its subsidiaries, taking into account job responsibili- ties, 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 per- formance-related, more competitive and aligned with shareholders’ interests subject to an improving envi- ronment in Ukraine. The Group’s remuneration policy is to provide remu- neration packages which: SERVICE CONTRACTS • are designed to attract, motivate and retain high calibre Executives; • are competitive and in line with comparable busi- nesses; • 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 The appointments of the respective Executive Direc- tors 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 Group’s policy, including for individual subsidiar- ies, for compensation for loss of office is to provide compensation that reflects the Group’s or a subsidi- ary’s contractual obligations. BONUS SCHEME The Committee has established a cash bonus scheme for Executive Directors based on the overall perfor- SHARE BASED PAYMENTS As at 31 December 2018 there are no outstanding op- tions issued by Group. mance of the Group and/or respective subsidiary com- pany and attainment of the operating profit targets. No bonus awards were made for FY 2018. 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 determina- tion of the fees of the non-executive Directors, rests with the Board. The non-executive Directors may ac- cept appointments with other companies, although any such appointment is subject to the Board’s approval, terms, and conditions of Service Agreements. DIRECTORS’ REMUNERATION Details of the Directors’ cash remuneration are out- lined below: AnnualSalary/fee Bonus 2018 £ 000 2017 £ 000 2018 £ 000 2017 £ 000 Non-cash compen- sation 2018 £ 000 2017 £ 000 Total cash remu- neration 2018 £ 000 2017 £ 000 Executive Alexander Slipchuk Sergey Evlanchik Yuriy Hordiychuk Non-executive Dr Jack Rowell General manager Yuriy Hordiychuk* 45,0 35,0 15,0 95,0 45,0 35,0 15,0 95,0 22,5 23,6 13,9 18,1 - - - - - - - - - - - - - - - - 45,0 35,0 15,0 95,0 45,0 35,0 15,0 95,0 22,5 23,6 13,9 18,1 *This relates to fees paid to Yuriy Hordiychuk for gen- eral management services under a separate contract to his service contract. ANNUAL REPORT 2018 10 ANNUAL REPORT 201811 Corporate Governance Report Corporate Governance Report Corporate Governance Report CORPORATE GOVERNANCE POLICY As an AIM-quoted company, the Company is required to apply a recognised corporate governance code, demonstrating how the Group complies with such cor- porate governance code and where it departs from it. The Directors of the Company have formally made the decision to apply the QCA Corporate Governance Code (the “QCA Code”). The Board recognises the principles of the QCA Code, which focuses on the creation of medium to long-term value for sharehold- ers without stifling the entrepreneurial spirit in which small to medium sized companies, such as UPG, have been created. The Company will provide annu- al updates on its compliance with the QCA Code in its Annual Report. The key governance related matter that occurred during the financial year ended 31 December 2018 was the formal adoption of the QCA Code. THE BOARD The Board consists of three Executive Directors and one Non-Executive Chairman, being the Chairman, reflecting a blend of different experience and back- grounds. The Board considers Jack Rowell to be classified as an independent Non-Executive Director under the QCA guidelines. The Board meets four times a year. At these quarterly meetings the Board, inter alia, discusses the imple- mentation of strategy, reviews financial progress and evaluates the individual and collective accountability of the Board. The Group’s day-to-day operations are managed by the Executive Directors. All Directors have access to the Company Secretary and any Director needing in- dependent professional advice in the furtherance of their duties may obtain this advice at the expense of the Group. The Board is satisfied that it has a suitable balance be- tween independence on the one hand, and knowledge of the Company on the other, to enable it to discharge its duties and responsibilities effectively, and that all Directors have adequate time to fill their roles. Details of the current Directors, their roles and back- ground are set out on the Company’s website at http:// ukrproduct.com/en/kompaniya/management-struc- ture/. The role of the Chairman is to provide leadership of the Board and ensure its effectiveness on all aspects of its remit to maintain control of the Group. In addition, the Chairman is responsible for the implementation and practice of sound corporate governance. The Chair- man is considered independent and has adequate separation from the day-to-day running of the Group. The role of the Chief Executive Officer is for the strategic development of the Group and for commu- nicating it clearly to the Board and, once approved by the Board, for implementing it. In addition, the Chief Executive Officer is responsible for oversee- ing the management of the Group and its executive management. APPLICATION OF THE QCA CODE It is the Board’s job to ensure that the Group is man- aged for the long-term benefit of all shareholders and other stakeholders with effective and efficient deci- sion-making. Corporate governance is an important part of that job, reducing risk and adding value to the Group. The Board will continue to monitor the gover- nance framework of the Group as it grows. the individuals of appropriate ability and experience and to help in promoting the following: The Company remains committed to listening to, and communicating openly with, its shareholders to ensure that its strategy, business model and performance are clearly understood. The AGM is a forum for shareholders to engage in dialogue with the Board. The results of the AGM will be published via RNS and on the Company’s website. Regular progress reports are also made via a Regulatory Information Service. The point of contact for share- holders is Volodymyr Vardzielov, CFO – Volodymyr.Vardzielov@ukrproduct.com. The Company’s management maintains a close dia- logue with local communities and its workforce. Where issues are raised, the Board takes the matters serious- ly and, where appropriate, steps are taken to ensure that these are integrated into the Company’s strategy. Both the engagement with local communities and the performance of all activities in an environmentally and socially responsible way are closely monitored by the Board and ensure that ethical values and behaviours are recognised. CORPORATE GOVERNANCE COMMITTEES The Board has two committees comprising the follow- ing: THE AUDIT COMMITTEE The Audit Committee consists of Jack Rowell (Non-Ex- ecutive Chairman). The terms of reference of the Audit Committee are to assist all the Directors in discharging • The Group’s financial and accounting systems provide accurate and up-to-date information on its current financial position, including all significant is- sues and going concern; • The integrity of the Group’s financial statements and any formal announcements relating to the Group’s financial performance and reviewing signif- icant financial reporting judgments contained there- in are monitored; • The Group’s published financial statements rep- resent a true and fair reflection of this position; and taken as a whole are balanced and understandable, providing the information necessary for sharehold- ers to assess the Group’s performance, business model and strategy; • The external audit is conducted in an independent, objective thorough, efficient and effective manner, through discussions with management and the ex- ternal auditor; and • A recommendation is made to the Board for it to put to shareholders at a general meeting, in relation to the reappointment, appointment and removal of the external auditor and to approve the remunera- tion and terms of engagement of the external audi- tor. REMUNERATION COMMITTEE The Remuneration Committee consists of Jack Rowell (Non-Executive Chairman). The terms of reference of the Remuneration Committee are to: • recommend to the Board a framework for reward- ANNUAL REPORT 2018 14 ANNUAL REPORT 201815 Corporate Governance Report Corporate Social Responsibility Report ing senior management, including Executive Direc- tors, bearing in mind the need to attract and retain individuals of the highest calibre and with the appro- priate experience; and • ensure that the elements of the remuneration package are competitive and help in promoting the Group. NOMINATIONS COMMITTEE Given the Company’s size, the Board has not consid- ered it appropriate to have a Nominations Committee. INTERNAL CONTROL The Directors acknowledge their responsibility for the Group’s system of internal control, which is designed to ensure adherence to the Group’s policies whilst safeguarding the assets of the Group, in addition to ensuring the completeness and accuracy of the accounting records. Responsibility for implementing a system of internal financial control is delegated to Volodymyr Vardzielov, the CFO. The essential ele- ments of the Group’s internal financial control proce- dures involve: • Strategic business planning: strategic business planning is undertaken annually. This includes fi- nancial budget for the following year. • Performance review: the Directors aim to monitor the Group’s performance through the preparation of monthly management accounts and regular re- views of expenditure and projections. • The internal control system: the internal control system is further enforced by the Group’s internal audit department with the main objectives of ensur- ing the safety of the Group’s assets and the reliabil- ity of accounting records. DEPARTURE FROM THE QCA CODE In accordance with the AIM Rules for Companies, the Com- pany departs from the QCA Code in the following ways: Principle 5: “Maintain the board as a well-functioning, balanced team led by the chair.” The Company does not comply with the recommenda- tion of Principle 5 that the Board should have at least two independent non-executive directors. The Com- pany only has one Non-Executive Director, the Chair- man, who is considered independent, but has three Executive Directors. The Executive Directors have valuable industry knowledge and are integral to the running of the business. The Chairman has an exten- sive business experience at the Board level especially in the Food industry. Principle 7 – “Evaluate board performance based on clear and relevant objectives, seeking continuous im- provement.” The Board is small and extremely focussed on imple- menting the Company’s strategy. However, given the size and nature of the Company, the Board does not consider it appropriate to have a formal performance evaluation procedure in place, as described and rec- ommended in Principle 7 of the QCA Code. The Board will closely monitor the situation as it grows. Jack Rowell Chairman CORPORATE SOCIAL RESPONSIBILITY HEALTH AND SAFETY The Board is committed to developing and implementing corporate social responsibility (CSR) policies aimed at: • Promoting equality and fairness among employ- ees, partners and suppliers • Ensuring safe working conditions • Maintaining the Group’s corporate reputation and dedication to business ethics • Supporting the communities in which the Group operates • Establishing long-term and healthy relationships with the Group’s partners, customers and other af- filiated 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 op- portunities 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 con- tinuing growth and success. Management at business units within the Group are responsible for developing and maintaining the under- lying practices that provide for a safe working envi- ronment. Special attention is given to the production facilities, where the equipment, including lighting, air conditioning, workspace and other constituents, un- dergo constant reviews and improvements. Regular monitoring is carried out to ensure that the required standards are met and that employees use the pro- vided 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 con- tinue supplying the customers with high quality, afford- able products required by current market demands. The Group’s segmentation practices are aimed at segregating various customer groups in order to meet their respective needs with maximum efficiency. In addition, regular market research and surveys are conducted to ensure maximum value is consistently offered to customers. ENVIRONMENT The Group recognises the importance of good envi- ronmental practices and seeks to minimise any nega- tive impact that its operations or products might have on the production sites and surrounding areas. The Group adopted the environmental laws and regula- tions of Ukraine to reduce, control and eliminate vari- ous 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 ANNUAL REPORT 2018 16 ANNUAL REPORT 201817 Corporate Social Responsibility Report 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 develop- ment programme puts specific emphasis on acquiring and installing only the most advanced and environ- mentally friendly production and auxiliary equipment. FOOD SAFETY Food safety is one of key priorities for the Group. Ukrproduct is committed to produce high quality and safe food and ensures that high standards are main- tained within its supplier base. The certified food safe- ty management system in compliance with ISO 22000 was implemented by the Group. This system provides the possibility of fully monitoring 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 con- tributes cash donations and gifts, as well as employee time, by encouraging staff to participate as volunteers ANNUAL REPORT 2018 18 ANNUAL REPORT 201819 Director’s Report Director’s Report The Directors present their report and the audited con- solidated financial statements of Ukrproduct Group Ltd (referred to as the “Сompany” and together with its subsid- iaries, “the Group”) for the year ended 31 December 2018. PRINCIPAL ACTIVITIES AND BUSINESS REVIEW Ukrproduct is a holding company for a group of food and beverages businesses located in Ukraine. The principal activities of the Group are the production and distribution of highly branded dairy foods and bever- ages (kvass) in Ukraine and the export of milk powder. The Group is one of the leading branded food produc- ers in Ukraine with its own nationwide distribution net- work. More detailed commentary on the Group’s activ- ities 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 23 and show a net profit for the year of approx- imately £0.1 million (2017: net loss of approximately £1.1 million). The Board has decided not to recommend the pay- ment of a dividend in respect of the year ended 31 December 2018 (2017:Nil). DIRECTORS Details of members of the Board of Directors are shown on page 8. The Director’s interests in the share capital of the com- pany as at 31 December 2018 and 31 December 2017 are shown below: Shares Share options 2018 2017 2018 2017 Executive Sergey Evlanchik Alexander Slipchuk Non-executive Dr Jack Rowell 14,967,133 14,939,133 14,967,133 14,939,133 138,690 138,690 - - - - - - POWERS OF THE DIRECTORS Subject to the Company’s Memorandum and Articles of Association, Companies (Jersey) Law 1991, as amended and any directions given by special resolu- tion, the business of the company shall be managed by the Directors who may exercise all such powers of the company. The rules in relation to the appointment and replacement of Directors are set out in the Сom- pany’s Article of Association. FINANCIAL RISKS FACING THE GROUP The principal financial 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 manage- ment programme is to evaluate, monitor and manage these risks and to minimise potential adverse effects on the Group’s financial performance and share- holders. The Chief Financial Officer of the Group is in charge of risk management and introduction of all policies as approved by the Board of Directors. For further details of the Group’s risk management please see Note 5 on page 58-62. 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 as- sets 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 2018 was 852 (2017: 899). 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 sat- isfied that the goods or services have been provided in accordance with the agreed terms and conditions. GOING CONCERN These consolidated financial statements have been prepared on the assumption that the Group is able to continue its operations on a going concern basis for the foreseeable future. For the year ended 31 December 2018, net profit amount- ed to approximately £0.1 million (year ended 31 Decem- ber 2017 net loss of approximately £1.1 million). As at 31 December 2018, the Group continued to breach certain loan covenant terms of its loan with European Bank for Reconstruction and Development (“EBRD”). These conditions indicate a significant uncertainty with regard to the Group’s ability to continue its operations on a going concern basis. According to the Company’s management, the Group’s ability to continue its operations on a going concern ba- sis is permissible based on the following assumptions: 1. The Group received waivers from EBRD - in re- spect of the annual financial statements for 2018 and the first quarter of 2019 and the Board believes that EBRD will not demand accelerated repayment of the loan due to the breach of covenants; 2. The Group continues to repay the loan to EBRD according to the agreement and timely settled the last two tranches after the reporting date; 3. On 7 February 2018, the Company announced that it had entered into an agreement for a new loan facility with PJSC Creditwest Bank (“Creditwest Bank”), under which it could draw down up to UAH 65 million for re- financing purposes (to repay the OTP Bank Loan) as well as for financing working capital (“New Loan Agree- ment”). All amounts drawn down by the Group under the New Loan Agreement, together with interest accrued, is ANNUAL REPORT 2018 22 due to be repaid on 5 February 2021. The interest rate under the New Loan Agreement is fixed at 18% per an- num. Any draw down under the facility is secured on ap- propriate collateral provided by the Group (real estate, equipment etc), including non-current assets located in Zhytomyr and equipment for production of Zhiviy Kvass. On 9 February 2018, the Group announced that it had drawn down UAH 32.3 million under the terms of the New Loan Agreement in order to fully repay all amounts outstanding to OTP Bank. Accordingly, the Group extin- guished all outstanding liabilities to OTP Bank. 4. The Group is planning to raise funding in H2 2019. The Group’s current strategy is to further expand its export sales worldwide with a focus on Asia and Africa. CIS markets also remain strategically important for the Group not least Kazakhstan where the Company in- creased its export volumes. Ukrproduct is also looking to expand domestic sales in Ukraine driven in part by the introduction of new products and rebranding. The Group continues to boost its dairy processing volumes via close cooperation with local farmers and coopera- tives, thereby increasing its capacity utilisation. Annual General Meeting Ukrproduct’s AGM will be held on July 30, 2019. The Notice of AGM and agenda will be sent to shareholders no less than 21 days prior to the date of the meeting. AUDITORS Moore Stephens Audit & Assurance (Jersey) Limited was appointed as the Group’s auditors for the 2018 financial year by the resolution of the Directors held on 04 December, 2018. 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 26 June2019 ANNUAL REPORT 201823 INDEPENDENT AUDITOR’S REPORT Statements of Director’s Responsibilities 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 direc- tors to prepare financial statements for each year in accordance with Generally Accepted Accounting Principles. Under that law, the directors have elect- ed to prepare the consolidated financial statements in accordance with International Financial Report- ing Standards (IFRS) as adopted by the European Union. Under company Law, the directors must not approve the consolidated financial statements un- less 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 reason- able and prudent; • state that the financial information complies with IFRS, subject to any material departures disclosed and explained in the consolidated financial state- ments; 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. On behalf of the Directors: 26 June 2019 ANNUAL REPORT 2018 26 INDEPENDENT AUDITOR’S REPORT TO THE SHAREHOLDERS OF UKRPRODUCT GROUP LIMITED Report on the Audit of the Financial Statements The directors are also responsible for: Opinion • implementing and maintaining an efficient and reli- able 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 web- site. We have audited the consolidated financial statements of Ukrprod- uct Group Limited and its subsidiaries (the “Group”) which comprise the consolidated statement of financial position as at 31 December 2018, and the consolidated statement of comprehensive income, the consolidated statement of changes in equity, consolidated statement of cash flow and notes to the financial statements including a sum- mary of significant accounting policies. The financial reporting frame- work that has been applied in their preparation is applicable law and International Financial Reporting Standards (‘IFRS’) as adopted by the European Union. In our opinion the financial statements: • give a true and fair view of the state of the Group’s affairs as at 31 December 2018 and of its results for the year then ended; • have been properly prepared in accordance with the IFRS as adopted by the European Union; and • have been prepared in accordance with the requirements of the Companies (Jersey) Law 1991. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s respon- sibilities for the audit of the consolidated financial statements section of our report. We are independent of the Group in accordance with the ethical requirements that are relevant to our audit of the con- solidated financial statements in Jersey, including the FRC’s Ethical Standard as applied to listed entities, and we have fulfilled our ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropri- ate to provide a basis for our audit opinion. ANNUAL REPORT 201827 INDEPENDENT AUDITOR’S REPORT TO THE SHAREHOLDERS OF UKRPRODUCT GROUP LIMITED (CONTINUED) CONCLUSIONS RELATING TO GOING CONCERN We have nothing to report in respect of the following matters in which the ISAs (UK) require us to report to you where: • the directors’ use of the going concern basis of accounting in the preparation of the financial state- ments is not appropriate, or • the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the Group’s ability to continue to adopt the going concern ba- sis of accounting for a period of at least twelve months from the date when financial statements are authorised for issue. KEY AUDIT MATTERS Key audit matters are those matters that, in our profes- sional judgment, were of most significance in our audit of the consolidated financial statements of the cur- rent period and include the most significant assessed risks of material misstatement (whether due to fraud) we identified, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion these matters. Key Audit Matter Risk of fraud in revenue recognition Refer to Note 8 to the consolidated fi- nancial statements Revenue is material and an important determinant of the Group’s perfor- mance and profitability. This gives rise to inherent risk that revenue recognised is overstated in order to present more profitable results for the year. The Group generates revenue from local and export sales of milk, dairy foods and beverages amounted to £36.93 million, excluding the charge of bonuses. Given the magnitude of the amount and the inherent risk of revenue overstatement, we consider revenue recognition to be a key audit matter. How the matter was addressed in the audit Our main audit procedures over these revenues were as follows: • We obtained an understanding the policies and procedures ap- plied to revenue recognition, as well as compliance therewith, including an analysis of the effectiveness of design and imple- mentation of controls related to revenue recognition processes employed by the Group. • We performed test of details for accuracy and occurrence of sales transaction during the year. • We performed analytical procedures, including gross profit margin analysis and obtained explanations for significant variances as compared to previous year; • We performed journal entries testing for accounts related to iden- tified risks of material misstatement and verified them with sup- porting documents • We performed sales cut-off procedures for sample revenue trans- actions at year end in order to conclude on whether they were recognized at the proper period. • We reviewed the disclosures included in the notes to the accom- pany consolidated financial statements. Key Observations We did not note any material issues from the procedures in this area. OUR APPLICATION OF MATERIALITY We define materiality as the magnitude of misstate- ments in the consolidated financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality in determining the nature, timing and extent of our audit work and in eval- uating the results of that work. Materiality was deter- mined as follows: CONSOLIDATED FINANCIAL STATEMENTS AS A WHOLE: £369k which is approximately 1% of Total Revenue. This benchmark is considered the most appropriate because we believe that, this is primary measure used by the shareholders in assessing the performance of the Group. AN OVERVIEW OF THE SCOPE OF OUR AUDIT During our audit planning, we determined materiality and assessed the risks of material misstatement in the consolidated financial statements including the con- sideration of where Directors made subjective judge- ments, for example, in respect of the assumptions that underlie significant accounting estimates and their assessment of future events that are inherently uncer- tain. We tailored the scope of our audit in order to per- form sufficient work to enable us to provide an opinion on the consolidated financial statements as a whole taking into account the Group, its accounting process- es and controls and the industry in which it operates. OTHER INFORMATION The Directors are responsible for the other informa- tion. The other information comprises the information included in the annual report set out on page 3 to ANNUAL REPORT 2018 28 INDEPENDENT AUDITOR’S REPORT TO THE SHAREHOLDERS OF UKRPRODUCT GROUP LIMITED (CONTINUED) 16 other than the consolidated financial statements and our auditor’s report thereon. Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audits of the consolidated fi- nancial statements, our responsibility is to read the other information identified above when it becomes available and, in doing so, consider whether the other information is materially inconsistent with the consoli- dated financial statements or our knowledge obtained in the audits or otherwise appears to be materially mis- stated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement of the consolidated financial statements or a materi- al misstatement of other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. 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 re- quires us to report to you if, in our opinion: • adequate accounting records have not been kept, or • returns adequate for our audit have not been re- ceived 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 ex- planations we require for our audit. ANNUAL REPORT 201829 INDEPENDENT AUDITOR’S REPORT TO THE SHAREHOLDERS OF UKRPRODUCT GROUP LIMITED (CONTINUED) Responsibilities of directors for the consolidated finan- cial statements As explained more fully in the Statement of Directors’ Responsibilities on page 17, the Directors are respon- sible for the preparation of the consolidated financial statements which give a true and fair view, and for such internal control as the Directors determine is necessary to enable the preparation of consolidated financial statements that are free from material mis- statement, whether due to fraud or error. In preparing the consolidated financial statements, the Directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the di- rectors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in ac- cordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, in- dividually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated finan- cial statements. ANNUAL REPORT 2018 30 A further description of our responsibilities for the audit of the consolidated financial statements is located on the Financial Reporting Council’s website at: www.frc. org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. USE OF OUR REPORT This report is made solely to the Group’s sharehold- ers as a body, in accordance with Article 113A of the Companies (Jersey) Law 1991. Our audit work has been undertaken so that we might state to the Group’s shareholders 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 ac- cept or assume responsibility to anyone other than the Group and the Group’s shareholders as a body, for our audit work, for this report, or for the opinions we have formed. Phillip Callow For and on behalf of Moore Stephens Audit & Assur- ance (Jersey) Limited First Island House Peter Street St Helier Jersey Channel Islands JE2 4SP Dated: 26 June 2019 INDEPENDENT AUDITOR’S REPORT TO THE SHAREHOLDERS OF UKRPRODUCT GROUP LIMITED (CONTINUED) ANNUAL REPORT 201831 CONSOLIDATED STATEMENT CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) REVENUE Cost of sales GROSS PROFIT Administrative expenses Selling and distribution expenses Other operating expenses PROFIT FROM OPERATIONS Net finance expenses Foreign exchange loss, net PROFIT / (LOSS) BEFORE TAXATION Income tax expenses PROFIT / (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 Note 8 9 9 9 9 11 10 13 26 year ended 31 December 2018 £ ‘000 36 928 (33 751) 3 177 (1 061) (1 799) (131) 186 (494) 398 90 - 90 year ended 31 December 2017 £ ‘000 30 525 (27 267) 3 258 (1 031) (1 561) (156) 510 (437) (1 250) (1 177) 62 (1 115) 90 - 0,23 0,23 (8) - - (8) 82 82 - (1 115) - (2,81) (2,81) (113) - - (113) (1 228) (1 228) - CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 December 2018 (in thousand GBP, unless otherwise stated) Note As at 31 December 2018 £ ‘000 As at31 December 2017 £ ‘000 ASSETS Non-current assets Property, plant and equipment Intangible 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 17 18 19 20 21 22 23 23 23 24 16 24 25 6 420 524 6 944 3 735 3 156 349 24 181 7 445 14 389 3 967 4 562 (14 902) 3 619 3 718 964 - 964 5 208 467 274 5 949 2 455 5 008 - 13 7 476 13 425 14 389 6 288 543 6 831 2 426 2 171 271 30 496 5 394 12 225 3 967 4 562 (14 894) 3 769 3 478 882 - 882 5 716 459 262 6 437 1 318 3 565 - 23 4 906 11 343 12 225 The notes on pages 25 – 87 are an integral part of these consolidated financial statements. ANNUAL REPORT 2018 34 ANNUAL REPORT 201835 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY AS AT 31 December 2018 (in thousand GBP, unless otherwise stated) Attributable to owners of the parent Trans- Share lation premium reserve £ ‘001 Reval- uation reserve £ ‘000 Retained earnings £ ‘000 £ ‘000 Total Non-con- trolling interests Total Equity £ ‘000 £ ‘000 £ ‘000 Share capital £ ‘000 As At 1 January 2017 3 967 4 562 3 935 4 427 (14 781) 2 110 Loss for the year Other comprehensive income Currency translation differ- ences Total comprehensive income Depreciation on revalua- tion of property, plant and equipment As At 31 December 2017 Profit for the year Other comprehensive income Currency translation differ- ences Total comprehensive income Depreciation on revalua- tion of property, plant and equipment As At 31 December 2018 - - - - - - - - - - - (1 115) - (1 115) - (113) (113) (1 115) (113) (1 228) (166) 166 - - 3 967 4 562 3 769 3 478 (14 894) 882 - - - - - - - - - - - 90 - 90 - (8) (8) 90 (8) 82 (150) 150 - - 3 967 4 562 3 619 3 718 (14 902) 964 - - - - - - - - - - - 2 110 (1 115) (113) (1 228) - 882 90 (8) 82 - 964 CONSOLIDATED STATEMENT OF CASH FLOWS AS AT 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) Note year ended 31 December 2018 £ ‘000 Cash flows from operating activities Loss before taxation Adjustments for: Exchange difference Depreciation and amortisation Loss on disposal of non-current assets Write off of receivables/payables Impairment of inventories Loss from disposal of subsidiaries Interest income Interest expense on bank loans Operation cash flow before working capital changes Increase in inventories Decrease / (Increase) in trade and other receivables Increase in trade and other payables Changes in working capital Cash generated from operations Interest received Income tax paid Net cash generated by 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 in short term borrowing Repayments of long term borrowing Net cash used in financing activities 10 9 9 9 11 11 24 24 Net Increase / (decrease) in cash and cash equivalents Effect of exchange rate changes on cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year 21 90 (398) 518 4 21 72 - - 494 801 (1 380) (1 096) 1 437 (1 039) (238) 2 1 (235) (181) - 7 (174) (421) 901 (459) 21 (388) 73 496 181 year ended 31 December 2017 £ ‘000 (1 177) 1 250 553 8 (5) 82 - - 437 1 148 (653) 298 473 118 1 266 1 (31) 1 236 (93) 1 (15) (107) (378) - (259) (637) 492 (171) 175 496 The notes on pages 25 – 87 are an integral part of these consolidated financial statements. ANNUAL REPORT 2018 36 These consolidated financial statements were approved and authorised for issue by the Board of Directors on XX June 2019 and were signed on its behalf by: Alexander Slipchuk Chief Executive Officer. 2019 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) 1. GROUP AND PRINCIPAL ACTIVITIES (a) Introduction Ukrproduct Group Limited (“the Company”) is a pub- lic limited liability company 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 fa- cilities are based in Ukraine, with the HQ in Kyiv. The Group commands leading positions in the Ukrainian processed cheese and packaged butter markets and owns a range of widely recognisable trademarks in Ukraine, including “Nash Molochnik” (translated as Our Dairyman), “Narodniy Product” (People’s Prod- uct) “Molendam” and “Vershkova Dolina” (Creamy Val- ley). The average number of employees of the Group during the year ended 31 December 2018 was 852 (2017: 899). (b) Share capital Shareholders structure as at 31 December is as fol- lows: Year ended 31 Decem- ber 2018 Year ended 31 Decem- ber 2017 34,89% 34,96% 34,89% 34,96% Ukrproduct Group Slipchuk Alexander Evlanchik Sergey As at 31 December 2018, 7,34% of the Company’s issued share capital was held in treasury. (c) Ukrainian environment In 2018, there were some signals of strengthening of the Ukrainian economy. According to the National Bank of Ukraine GDP of Ukraine in 2018 grew by 3.3% (vs. growth of 2.1% in 2017; growth of 2.3% in 2016; decline of 9.9% in 2015 and decline of 6.6% in 2014). State Statistic Service of Ukraine estimated inflation in Ukraine in 2018 at 9.8% (13.7% in 2017, 12.4% in 2016, 43.3% in 2015 and 24.9% in 2014). In 2018, for the first time since 2013, the national currency (hryvnia) strengthened by 1.4% (vs. devaluation by 3.1% in 2017, 11.7% in 2016, 34.3% in 2015 and 49.3% in 2014). Banks started to expand lending to enterprises in 2018. The labor migration of Ukrainians has increased due to a visa-free regime with the European Union. The shortage of professional workers in many industries caused a visible rise in wages for the necessary personnel in Ukraine in 2018. 2018 year was the extremely favorable for late crops in Ukraine. According to the Ministry of Agrarian Policy and Food of Ukraine in 2018 Ukrainian farmers received a record harvest of grain in the history of Ukraine - 70.1 million tonnes (+14% vs. 2017), including 34.5 million tonnes of corn. In addition, record crop has been collected of some oilseeds. Sunflower harvest in 2018 amounted 13.7 million tonnes - 12% more than in 2017 (the previous record was set in 2016 - 13.6 million tonnes). Also, a record yield of soybeans was received - 4.4 million tonnes, 13% more than in 2017 (the previous record was set in 2016 - 4.2 million tonnes). According to the National Scientific Center “Institute of Agrar- ian Economics” exports of agricultural products from Ukraine in 2018 increased by 5% compared to 2017 and amounted to a record of 18.8 billion dollars. In 2018 agricultural prod- ucts accounted for 39.8% of the total exports from Ukraine, being the country’s largest export market. It is noted that according to the estimates of the Institute’s scientists, the decisive factor for the total increase in the export of agricul- The notes on pages 25 – 87 are an integral part of these consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) tural products in 2018 was the increase in supplies to the two key regions - Asia and the European Union. In partic- ular, the volume of Ukrainian exports to Asian countries in value terms increased by 4% compared to 2017 - up to 8 billion dollars. In this case, the share of Asian countries in 2018 amounted to 42.6% of exports of Ukrainian agricultural products. In addition, in 2018, exports of agricultural prod- ucts to the EU countries was also at a record level. In value terms, the export of agricultural products to the EU countries amounted to 6.3 billion dollars against 5.8 billion dollars in 2017. The EU share of total Ukrainian agricultural exports last year amounted to 33.5%. India was the largest importer of Ukrainian agricultural products for the third year in a row. The volumes of Ukrainian agricultural products delivery to In- dia in 2018 amounted to 1.8 billion dollars, with India’s share of Ukrainian agrarian exports representing 9.9%. In addition, the main consumers of Ukrainian agricultural products were China (1.1 billion dollars), the Netherlands (1.1 billion dol- lars), Spain (1 billion dollars), Egypt (889 million dollars), Turkey (801 million dollars) Italy (738 million dollars), Ger- many (667 million dollars), Poland (657 million dollars) and Saudi Arabia (589 million dollars). In 2018, these countries represented more than 50% of Ukrainian exports of agricul- tural products. It is noted that grain crops, oilseeds, seeds of oilseeds, meat and offal were the key products of Ukrainian agrarian exports in 2018, which accounted for about 81% of exports in value terms. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 2.1 Basis of preparation The consolidated financial statements have been pre- pared on a historical cost basis, except for significant items of property, plant and equipment which have been measured using revaluation model. The consol- idated financial statements are presented in British Pounds Sterling (GBP) and all values are rounded to the nearest thousand (£000) except where otherwise indicated. (a) Statement of compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards, International Accounting Stan- dards 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 account- ing 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 These consolidated financial statements have been prepared on the assumption that the Group is able to continue its operations on a going concern basis for the foreseeable future. For the year ended 31 December 2018, net profit amounted to approximately £0.1 million (year ended 31 December 2017 net loss of approximately £1.1 mil- lion). As at 31 December 2018, the Group continued to breach certain loan covenant terms of its loan with European Bank for Reconstruction and Development (“EBRD”). These conditions indicate a significant uncertainty with regard to the Group’s ability to continue its operations on a going concern basis. to the Company’s management, the According Group’s ability to continue its operations on a going concern basis is permissible based on the following assumptions: ANNUAL REPORT 2018 40 ANNUAL REPORT 201841 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) 2.1 Basis of preparation (continued) (b) Going concern (continued) 1. The Group received waivers from EBRD - in respect of the annual financial statements for 2018 and the first quarter of 2019 and the Board believes that EBRD will not demand accelerated repayment of the loan due to the breach of covenants; 2. The Group continues to repay the loan to EBRD according to the agreement and timely settled the last two tranches after the reporting date; 3. On 7 February 2018, the Company announced that it had entered into an agreement for a new loan facility with PJSC Creditwest Bank (“Creditwest Bank”), un- der which it could draw down up to UAH 65 million for refinancing purposes (to repay the OTP Bank Loan) as well as for financing working capital (“New Loan Agreement”). All amounts drawn down by the Group under the New Loan Agreement, together with interest accrued, is due to be repaid on 5 February 2021. The interest rate under the New Loan Agreement is fixed at 18% per annum. Any draw down under the facility is secured on appropriate collateral provided by the Group (real estate, equipment etc), including non-cur- rent assets located in Zhytomyr and equipment for production of Zhiviy Kvass. On 9 February 2018, the Group announced that it had drawn down UAH 32.3 million under the terms of the New Loan Agreement in order to fully repay all amounts outstanding to OTP Bank. Accordingly, the Group extinguished all out- standing liabilities to OTP Bank; and 4. The Group is planning to raise funding in H2 2019. The Group’s current strategy is to further expand its export sales worldwide with a focus on Asia and Africa. CIS markets also remain strategically important for the Group not least Kazakhstan where the Company in- creased its export volumes. Ukrproduct is also looking to expand domestic sales in Ukraine driven in part by the introduction of new products and rebranding. The Group continues to boost its dairy processing volumes via close cooperation with local farmers and coopera- tives, thereby increasing its capacity utilization. (c) Consolidation principles The consolidated financial statements comprise the financial statements of Ukrproduct Group Limited and its subsidiaries as at 31 December 2018. Subsidiaries are consolidated from the date of acqui- sition, being the date on which the Group obtains con- trol, 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 activ- ities of the investee); - Exposure, or rights, to variable returns from its in- volvement 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 vot- ing rights result in control. To support this presumption and when the Group has less than a majority of the The notes on pages 25 – 87 are an integral part of these consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) voting or similar rights of an investee, the Group con- siders all relevant facts and circumstances in assess- ing whether it has power over an investee, including: subsidiaries to bring their accounting policies into line with the Group’s accounting policies. If the Group loses control over a subsidiary, it: - The contractual arrangement with the other vote holders of the investee; - Rights arising from other contractual arrange- ments; - 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. As- sets, 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 ceas- es 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, with- out a change of control, is accounted for as an equi- ty transaction, that is, as transactions with owners in their capacity as owners. Profit or loss and each com- ponent 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 in- terests having a deficit balance. When necessary, adjustments are made to the financial statements of - Derecognises the assets (including goodwill) and liabilities of the subsidiary; - Derecognises the carrying amount of any non-con- trolling interests; - Derecognises the cumulative translation differenc- es, recorded in equity; - Recognises the fair value of the consideration re- ceived; - 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 in- come to profit or loss. The Group applies the acquisition method to account for business combinations. The consideration trans- ferred for the acquisition of a subsidiary is the fair val- ue of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity inter- ests issued by the Group. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. Acquisition-related costs are expensed as incurred. Non-controlling interests represent a portion of prof- ANNUAL REPORT 2018 42 ANNUAL REPORT 201843 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) its or losses and net assets not owned by the Group. Non-controlling interests are presented separately from parent share capital in equity in the Consolidated statement of financial position. - Rights arising from other contractual arrange- ments; - The Group’s voting rights and potential voting rights. The Group re-assesses whether or not it controls an in- vestee 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, in- come and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated finan- cial 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 trans- action, that is, as transactions with owners in their ca- pacity as owners. Profit or loss and each component of other comprehensive income are attributed to the own- ers 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: 2.1. Basis of preparation (continued) - Derecognises the assets (including goodwill) and liabilities of the subsidiary; - Derecognises the carrying amount of any non-con- trolling interests; - Derecognises the cumulative translation differenc- es, recorded in equity; - Recognises the fair value of the consideration re- ceived; - 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 in- come 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 li- abilities assumed in a business combination are measured initially at their fair values at the acquisition date. (c) Consolidation principles (continued) Consolidated financial statements of the Group include following companies: Group’s company Molochnik LLC* Starokonstantinovskiy Molochniy Zavod SC**** Krasilovsky Molochny Zavod Private Enterprise SC**** Molochaia Dolina LLC**** Zhiviy Kvas LLC**** Lider-Product LLC*** Alternatyvni investytsiyi UCVF** Ukrproduct Group LLC Country of incorporation Ukraine Ukraine Effective ownership ratio As at 31 December 2017 2018 100% 100% 100% 100% Principal activities Holder of some assets Production Ukraine 100% 100% Owner of land assets Ukraine Ukraine Ukraine Ukraine Ukraine 100% 100% - 100% 100% 100% 100% 100% 100% 100% LinkStar Limited Cyprus 100% 100% Solaero Global Alternative Fund Limited Dairy Trading Corporation Limited Ukrproduct Group LTD Cyprus 100% 100% BVI Jersey 100% 100% Owner of land assets Production 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 Parent company traded on AIM * The companies are held through Ukrproduct Group CJSC which is a 100%-owned subsidiary of the Company. Acquisition-related costs are expensed as incurred. ** Subsidiaries of Solaero Global Alternative Fund Limited, the Group’s specialised distribution companies. Non-controlling interests represent a portion of prof- its or losses and net assets not owned by the Group. Non-controlling interests are presented separately from parent share capital in equity in the Consolidated statement of financial position. *** There was a legal action of the Lider Product LLC with tax service which has ended in mid May. Currently, there is a processes of netting with the tax services. For this purpose, the company is unable to document the dissolution and incorporate changes to statute. The balance of this Company was incorporated to Starokonstantinovskiy Molochniy Zavod SC last summer. **** Subsidiaries of Alternatyvni investytsiyi UCVF. Alternatyvni investytsiyi UCVF is a limited life entity and is due to cease to exist on 5 April 2022. The notes on pages 25 – 87 are an integral part of these consolidated financial statements. ANNUAL REPORT 2018 44 ANNUAL REPORT 201845 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) 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 report- ing date. Income and expense items are translated at rates approximating to those ruling when the transactions took place; - Income and expenses for each statement of comprehensive income are translated at monthly average ex- change rates; and - All resulting exchange differences are recognised as a separate component of equity within “Translation re- serve”. 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 2018 Average exchange rate for 2018 31 December 2017 Average exchange rate for 2017 35,13 27,69 31,71 36,31 27,21 32,12 37,73 28,07 33,50 34,29 26,60 30,08 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) 2.1. Basis of preparation (continued) 2.2.1. Foreign currency transactions (d) Reorganisation (a) Functional and presentation currency During 2018 the Group have not been reorganised. (e) Accounting for acquisitions of companies un- der common control Acquisitions of controlling interests in companies that were previously under the control of the ultimate ben- eficiaries of the Company are accounted for as if the acquisition had occurred at the beginning of the ear- liest comparative period presented or, if later, at the date on which control was obtained by the ultimate beneficiaries of the Company. The assets and liabili- ties 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 compa- nies 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 con- sideration 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. 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. The Ukrainian Hryvnia is the currency of the prima- ry economic environment in which the majority of the Group companies operate. Transactions in currencies that differ from the func- tional currency are considered to be foreign currency transactions. Management has considered what would be the most appropriate 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 con- vertible 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 pre- vailing at the dates of the transactions or valuation where items are re-measured. Foreign exchange gains or losses resulting from the settlement of such transactions and from the translation at the year-end exchange rates of monetary assets and liabilities de- nominated in foreign currencies are recognised in the statement of comprehensive income, except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges. Foreign exchange gains and losses are presented in the Consolidated statement of Comprehensive Income within “Net for- eign exchange gain (loss)”. The notes on pages 25 – 87 are an integral part of these consolidated financial statements. ANNUAL REPORT 2018 46 ANNUAL REPORT 201847 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) 2.2. Significant accounting policies (continued) 2.2.2. Cash and cash equivalents Cash and cash equivalents comprise cash on hand, de- posits 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. 2.2.3. Inventories Inventories are stated at the lower of cost and net re- alisable 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 auxil- iary operating supply and materials); - work in progress (including semi finished prod- ucts); - finished goods; - other inventories (including fuel, packaging, build- ing 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 invento- ries 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 peri- odically 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 comprehen- sive income within cost of sales. 2.2.4. Property, plant and equipment (a) 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 be- cause it better reflects the value in use of such assets to the Group. All significant categories of property, plant and equip- ment are subsequently carried at fair value at the date of revaluation, less any subsequent accumulated de- preciation 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 con- solidated statement of comprehensive income (e.g. through depreciation, impairment or sale). Subsequent costs that increase future economic ben- efits of the item of property, plant and equipment also increase its carrying amount. Otherwise, the Group recognises subsequent costs as expenses of the pe- riod 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 carry- ing value of its property, plant and equipment to de- termine whether there is any evidence that the assets have lost part of their value as a result of impairment. If such evidence exists, the expected recoverable amount of such an asset is calculated to determine the amount of impairment loss, if any. In case it is not practicable to determine the expected recoverable amount of a separate asset, the Group determines the expected recoverable amount of a cash-generating unit, to which the asset belongs. When, according to estimates, the expected recover- able amount of an asset (or a cash-generating unit) is lower than its carrying value, the carrying value of an asset (or a cash generating unit) is reduced to its expected recoverable amount. Impairment losses are immediately recognised as expenses, except when the asset is carried at revalued price. In such cases, the impairment loss is considered as a decrease in the revaluation reserve. If the impairment loss is subse- quently 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 carry- ing value that could be determined in case the impair- ment 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 com- paring proceeds with the carrying amount and are includ- ed in profit and loss on disposal of non-current assets. (c) Depreciation of property, plant and equipment 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 re- moved 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 and assets under construction. The Group calculates the depre- ciation using the straight-line method to allocate their cost or revalued amounts to their residual values over their estimated useful lives. The Group has applied the production method of depreciation to all production equipment as management considered this method to be the most appropriate for the production assets. Terms of useful lives by groups of property, plant and equipment (except for those depreciated under pro- duction method) are listed below: Group of property, plant and equipment Buildings Plant and machinery Vehicles Instruments, tools and other equip- ment 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. Impact of any changes arising from estimates made in prior periods is recorded as a change in an accounting es- timate. The notes on pages 25 – 87 are an integral part of these consolidated financial statements. ANNUAL REPORT 2018 48 ANNUAL REPORT 201849 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) 2.2. Significant accounting policies (continued) 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 under construction. Upon completion, the Group assesses whether there is any indication that an asset may be impaired. If any such indication exists, the Group per- forms impairment testing as described in Note 2.2.19. Unless an indication of impairment exists, all accumu- lated 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 (a) Recognition and measurement of intangible assets Intangible assets are recognised at historical cost less accumulated amortisation and accumulated impair- ment losses. The Group recognises an item as an intangible asset if it meets the following criteria for recognition: it is prob- able that the Group will receive future economic ben- efits 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 cancel- lation or disposal is defined by the difference between net proceeds on the sale and the carrying value of in- tangible 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. (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 in- cluded within administrative expenses in the consoli- dated 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 consoli- dated statement of comprehensive income. (c) Business combinations and goodwill The consideration transferred for the acquisition of a sub- sidiary is the fair value of the assets transferred, the liabil- ities 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. The notes on pages 25 – 87 are an integral part of these consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropri- ate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This in- cludes 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 acqui- sition date. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or liability, will be recognised in accordance with IFRS 9 ‘’Financial Instruments” either in profit or loss or as change to other comprehensive income. If the con- tingent 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 amortized but is subject to testing for impairment as at the reporting date or more frequent- ly, 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. (c) Business combinations and goodwill (contin- ued) The amount of impairment is determined by assessing the recoverable amount, which may be obtained for a cash-generating asset (group of cash generating as- sets) 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. 2.2.4. Financial assets The Group classifies its financial assets in the follow- ing measurement categories: • those to be subsequently measured at fair val- ue (either through other comprehensive income (“FVOCI”), or through profit or loss (“FVPL”), and • those to be measured at amortised cost. The classification depends on the Group’s business model for managing the financial assets and the con- tractual terms of the cash flows. Three measurement categories into which the Group classifies its debt financial assets are as follows: 1) Amortised cost: assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortised cost. Interest income from these financial assets is included in finance in- come using the effective interest rate method. Any gain or loss arising on derecognition is recognised directly in profit or loss and presented in other op- erating income / (expenses). Impairment losses are presented in other operating income / (expenses) or ANNUAL REPORT 2018 50 ANNUAL REPORT 201851 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) as a separate line item in the consolidated income statement, if material. 2.2. Significant accounting policies (continued) 2.2.7 Financial assets (continued) 2) Fair value through other comprehensive income: Assets that are held for collection of contractu- al cash flows and for selling the financial assets, where the assets cash flows represent solely pay- ments of principal and interest, are measured at FVOCI. Movements in the carrying amount are taken through other comprehensive income, except for the recognition of impairment gains or losses, interest revenue and foreign exchange gains and losses which are recognised in profit or loss. Inter- est income from these financial assets is included in profit or loss using the effective interest rate meth- od. Impairment are presented in other operating in- come / (expenses) or as a separate line item in the consolidated statement of comprehensive income, if material. 3) Fair value through profit or loss: Assets that do not meet the criteria for amortised cost or FVOCI are measured at FVPL. A gain or loss on a debt in- vestment that is subsequently measured at FVPL is recognised in profit or loss and presented net within other operating income / (expenses) in the period in which it arises. (a) 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 trans- action costs. Fair value at initial recognition is best evidenced by the transaction price. A gain or loss on initial recognition is only recorded if there is a differ- ence 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 observ- able markets. All purchases and sales of financial instruments that require delivery within the time frame established by regulation or market convention (“regular way” pur- chases and sales) are recorded at trade date, which is the date that the Group commits to deliver a finan- cial 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 am- ortised cost; recognised in the consolidated statement of comprehensive income for trading investments; and recognised in equity for assets classified as assets that are held for collection of contractual cash flows and for selling the financial assets,. (b) Fair value estimation principles Fair value of financial instruments is based at their market value, established at the reporting date, less transaction costs. If market value is not available, fair value of the instrument is determined by means of pricing and discounted cash flow models. If a discounted cash flow model is applied, the de- termination of future cash flows is based on optimal management estimations and the discounting rate is market rate for similar financial instruments predomi- nated as at reporting date. If the price model is used entering figures are based on average market data predominated as at reporting date. (c) Subsequent measurement The notes on pages 25 – 87 are an integral part of these consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) After initial recognition, the Group measure a financial asset at: (a) amortised cost; (b) fair value through other comprehensive income; or (d) Derecognition Financial assets are derecognised when the rights to receive cash flows from the financial assets have ex- pired or where the Group has transferred substantially all risks and rewards of ownership. (c) fair value through profit or loss. 2.2.8 Financial liabilities Financial assets at amortised cost 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 re- lated instrument and amortised based on the effective interest rate of the instrument. The Group classifies its financial liabilities into cate- gories 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 amortized cost include the following items: (c) Impairment of financial assets The Group use a three-stage impairment model, based on whether there has been a significant increase in the credit risk of a financial asset since its initial recogni- tion. These three-stages then determine the amount of impairment to be recognised as expected credit losses (ECL) at each reporting date as well as the amount of interest revenue to be recorded in future periods: (a) Credit risk has not increased significantly since initial recognition – recognise 12 months ECL, and recognise interest on a gross basis; - Trade payables and other short-term monetary liabil- ities, 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 trans- action costs directly attributable to the issue of the instrument. Such interest bearing liabilities are sub- sequently measured at amortised cost using the ef- fective 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 consolidated statement of financial position. (b) Credit risk has increased significantly since ini- tial recognition – recognise lifetime ECL, and recog- nise interest on a gross basis; “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. (c) Financial asset is credit impaired (using the criteria currently included in IAS 39) – recognise lifetime ECL, and present interest on a net basis (i.e. on the gross carrying amount less credit al- lowance). (a) Initial recognition Financial liabilities are initially recognized at fair value, adjusted in case of borrowings for directly attributable transaction expenses. ANNUAL REPORT 2018 52 ANNUAL REPORT 201853 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) 2.2. Significant accounting policies (continued) 2.2.8. Financial liabilities (continued) (b) Subsequent measurement Trade and other accounts payable initially recognized at fair value, are subsequently accounted for at amor- tized cost at effective interest rate method. Borrowings and liabilities initially recognized at fair val- ue less transaction costs, are subsequently measured at amortized cost; any difference between the amount of received resources and the sum of repayment is represented as interest cost using the effective inter- est rate method during the period, when borrowings were received. (с) Derecognition A financial liability is derecognized 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 recognized as share premium. 2.2.10. Revenue recognition Revenue is recognized to the extent that it is proba- ble that the economic benefits will flow to the Group and the revenue can be reliably measured. Revenue is measured simultaneously with an increase in asset or decrease in liabilities, which causes the increase in shareholder’s 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. - the costs incurred or to be incurred in respect of the transaction can be measured reliably. Revenue is the amount of cash or cash equivalents re- ceived or receivable. However, in case of delay in re- ceipt of cash or cash equivalents, the fair value of the consideration may be less than received or the nom- inal amount of cash expected to be received. When the arrangement effectively constitutes a financing transaction, the fair value of the consideration is deter- mined by discounting all future receipts using an im- puted rate of interest. Revenue (proceeds) from sale of products (goods, works and services) is not correct- ed by an amount of related doubtful and uncollectible receivables. The amount of such debt is recognized 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 recognized on an accru- als basis. (a) Revenue from sale of goods (products) Revenue from the sale of goods (products) is rec- ognised when all the following conditions are satisfied: - the significant risks and rewards of ownership of the goods have passed to the buyer; - the Group is no longer involved in the manage- ment to the extent that is usually associated with ownership, and has no control over the goods sold; - the amount of revenue can be measured reliably; - it is probable that the economic benefits associat- ed with the transaction will flow to the Group; and (b) Revenue from sale 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 transac- tion is probable; - the stage of completion of the transaction at the end of the reporting period can be measured reli- ably; and - the costs incurred for the transaction and the costs to complete the transaction can be measured reliably. 2.2.11. Expenses recognition Expense are recognized in the same period as the rev- enues to which they relate. If this were not the case, expenses be recognized as incurred, which might pre- date or follow the period in which the related amount of revenue is recognized. 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 calcu- lated by allocating its value on a systematic basis over respective reporting periods. Writing off 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 “Invento- ries” 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 pre- pare 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 ser- vices to be used outside Ukraine. VAT output equals the total amount of VAT collected within a reporting period, and arises on the earlier of the date of shipping goods to a customer or the date of receiving payment from the customer. VAT input is the amount that a taxpayer is entitled to offset against their VAT liability in the reporting period. Rights to VAT input arise on the earlier of the date of payment to the supplier or the date goods are received. 2.2.14. Tax Taxation has been provided for in the financial state- ments in accordance with relevant legislation currently in force. The charge for taxation in the consolidated statement of comprehensive income for the year com- prises current tax and changes in deferred tax. The notes on pages 25 – 87 are an integral part of these consolidated financial statements. ANNUAL REPORT 2018 54 ANNUAL REPORT 201855 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) 2.2. Significant accounting policies (continued) 2.2.14. Tax (continued) Current tax is the amount of income tax payable/re- coverable in respect of taxable profit/tax loss for the period determined in accordance with rules estab- lished 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 balance sheet liability method. Deferred income taxes are pro- vided on all temporary differences arising between the tax bases of assets and liabilities and their carry- ing 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 tempo- rary differences associated with investments in subsid- iaries 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 differ- ence 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 in- come 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 consolidated statement of comprehen- sive income over the remaining vesting period. Where equity instruments are granted to persons other than employees, the consolidated statement of compre- hensive income is charged with the fair value of goods and services received. Where fair value of goods and The notes on pages 25 – 87 are an integral part of these consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) services received from persons other than employees is difficult to identify, the fair value of the instruments granted is charged to the consolidated statement of comprehensive income over the vesting period. The fair value of options to be expensed is determined on the basis of adjusted Black-Scholes model as set out in Note 28. 2.2.16. Pension costs The Group contributes to the Ukrainian mandatory state pension scheme, social insurance and employ- ment funds in respect of its employees. The Group’s pension scheme contributions are expensed as in- curred and are included in staff costs. The Group does not operate any other pension schemes. 2.2.17. 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. Qualify- ing transaction costs include the costs of preparing the prospectus, accounting, tax and legal expenses, underwriting fees and valuation fees in respect of the shares and of other assets. 2.2.18. 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 clas- sified as operating leases. (a) Group as a lessee Operating lease expenses are recognised as expens- es in the period to which they relate, on a straightline basis over the lease period. (b) Group as a lessor Operating lease income is recognised in “Other operat- ing 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 follow- ing procedures ensuring accounting for these assets at an amount, not exceeding their recoverable amount: - at each reporting date the condition of these as- sets is analyzed for impairment; - in case any impairment indicators exist, the amount of expected recovery of such asset is calculated to de- termine 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-gen- erating unit, to which the asset belongs. The amount of expected recovery is the higher of two estimates: net selling price and “value in use” of the asset. In estimating value in use of asset, estimated future cash flows are discounted to their current value using a pre-tax discount rate that reflects current mar- ket estimates of time value of money and risks related to the asset. If according to estimates the amount of expected re- covery of assets (or a cash-generating unit) is less than its book value, the book value of asset (or a cash-gen- erating unit) is reduced to the amount of expected recovery. Losses from impairment are recognised as expenses directly in the consolidated statement of comprehensive income. ANNUAL REPORT 2018 56 ANNUAL REPORT 201857 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (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-oc- currence of one or more future events, which are not under the complete control of the Group, or current ob- ligations 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 infor- mation about contingent liabilities in the notes to the financial statements except when the probability of outflow of resources required to settle the obligation, is unlikely. Contingent assets are not recognised in the consoli- dated financial statements, but disclosed in the Notes where there is a sufficient probability of future eco- nomic benefits. 2.2.21. Related parties A related party is a person or an entity that is related to the reporting entity: A person or a close member of that person’s family is related to a reporting entity if that person has control, joint control, or significant influence over the entity or is a member of its key management personnel. An entity is related to a reporting entity if, among other circumstances, it is a parent, subsidiary, fellow sub- sidiary, associate, or joint venture of the reporting en- tity, or it is controlled, jointly controlled, or significantly influenced or managed by a person who is a related party. While considering any relationship which can be de- fined 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: a) 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 com- panies, subsidiaries and fellow subsidiaries of the parent company); b) associates are companies whose activities are significantly influenced by the Group, but are nei- ther subsidiaries, nor joint ventures of the investor; c) individuals, directly or indirectly holding ordinary shares that give them a possibility to significantly influence the Group’s activities; d) key management personnel are persons having authority and responsibility for planning, managing and controlling the activities of the Group, including directors and senior officials (as well as the non-ex- ecutive director and close relatives of these individ- uals); and e) companies, large blocks of shares with voting rights of which are owned directly or indirectly by any person described in paragraphs (c) or (d), or The notes on pages 25 – 87 are an integral part of these consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) 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. 2.2.21. 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 transac- tion 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 advanta- geous 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 mea- sured or disclosed in the financial statements are cat- egorised within the fair value hierarchy, described as follows, based on the lowest level input that is signifi- cant to the fair value measurement as a whole: • Level 1: Quoted (unadjusted) market prices in ac- tive markets for identical assets or liabilities. • Level 2: Valuation techniques for which the lowest level input that is significant to the fair value mea- surement is directly or indirectly observable. • Level 3: Valuation techniques for which the lowest level input that is significant to the fair value mea- surement is unobservable. 2.2.21. Dividends Equity dividends are recognised in the consolidated fi- nancial 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 annual general meeting. 3. SIGNIFICANT ACCOUNTING JUDGE- MENTS, 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 out- comes that require a material adjustment to the car- rying amount of the asset or liability affected in future periods. In the process of applying the Group’s accounting pol- icies, management has made the following judgments, which have the most significant effect on the amounts recognised in the financial statements: (a) Estimates of fair value of property, plant and equipment based on revaluation The Group is required, periodically as determined by the directors, to conduct revaluations of its property, plant and equipment. Such revaluations are conduct- ed by independent valuers who employ the valuation ANNUAL REPORT 2018 58 ANNUAL REPORT 201859 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) methods in accordance with International Valuation Standards such as cost approach, comparative (mar- ket) approach and revenue (income) approach. (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 val- ue. Further information is contained in Notes 14 and 15. (c) Inventory The Group reviews the net realisable value of, and de- mand 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 affect estimated demand and selling prices are the timing and suc- cess of future technological innovations, competitor actions, supplier prices and economic trends. Further information is contained in Note 17. (d) 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 state- ments could have a material effect on the Group’s finan- cial 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 fac- tors 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, expe- rience on similar cases and any decision of the Group’s management as to how it will respond to the litigation, claim or assessment. (e) 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 es- timates 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 support- able, the Group believes that certain positions are likely to be challenged and may not be fully sustained upon re- view by tax authorities. The Group believes that its accru- als 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 assess- ment relies on estimates and assumptions and may in- volve 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 The notes on pages 25 – 87 are an integral part of these consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) impact income tax expense in the period in which such determination is made. Further information is contained in Notes 13 and 16. (f) Quality claims The Group supplies consumers and industrial customers in Ukraine with dairy products manufactured in accor- dance with the current laws, food safety standards and technical requirements of the relevant Ukrainian author- ities. The Group voluntarily applies non-domestic stan- dards – ISO and HASSP – to some of the Group’s opera- tions. 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 crite- ria and/or technical specifications are not met or the de- livery 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 determi- nation, be beyond management’s control. Among the factors considered in making decisions on quality claims provisions are: the nature of the claim, the quantifiable variances in quality giving rise to a claim, the potential loss from satisfying the claim and any decision of the Group’s management as to how it will respond to the claim. (g) 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 trans- fer pricing (“TP”) regulations in Ukraine. The Group exports skimmed milk powder and performs inter- company transactions, which is in the scope of the Ukrainian TP regulations. The Group has submitted the controlled transaction report for the year ended 31 December 2017 within the required deadline, and has prepared all necessary documentation on controlled transactions for the year ended 31 December 2018 as required by legislation and plans to submit report. Management believes that the Group has been in compliance with all requirements of effective tax leg- islation. 4. ADOPTION OF NEW AND REVISED IFRS 4.1. New and amended standards and interpreta- tions The Group has initially adopted IFRS 15 Revenue from contracts with customers and IFRS 9 Financial instruments from 1 January 2018. Several other amendments and interpretations apply for the first time in 2018, but do not have a significant impact on the consolidated financial statements of the Group. IFRS 9 Financial instruments IFRS 9 was issued first in November 2009 and the last revised version was issued in July 2014. IFRS 9 brings together all three aspects of the accounting for financial instruments: classification, measurement, and hedge accounting. IFRS 9 is effective for annual periods on or after 1 January 2018. ANNUAL REPORT 2018 60 ANNUAL REPORT 201861 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) 4. ADOPTION OF NEW AND REVISED IFRS (CONTINUED) IFRS 9 Financial instruments (continued) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) Trade accounts receivable less than 30 days overdue 30 to 60 days overdue 61 to 90 days overdue 91 to 120 days overdue 120 to 360 days overdue over 360 days overdue 2,70% 19,70% 21,00% 39,80% 7,50% 100% Based on an analysis of the Group’s financial instruments as at 31 December 2018 on the basis of the facts and circum- stances that exist at that date, the impact of implementation of IFRS 9 to the Group’s financial statements is follows: Expected loss rate Classification of financial instruments The following table reconciles the carrying amounts of each class of financial instrument as previously measured in accordance with IAS 39 and the amounts determined upon adoption of IFRS 9 on 1 January 2018. Balance sheet (extract) IAS 39 IFRS 9 31 December 2017 Effect of adoption 1 January 2018 Amortised cost Amortised cost Current assets Trade and other receiv- ables Cash and cash equivalents Amortised cost Amortised cost Non - current liabilities Bank loans Current liabilities Bank loans Trade and other payables Amortised cost Amortised cost Amortised cost Amortised cost Amortised cost Amortised cost 2 171 496 5 716 1 318 3 565 (65) - - - - 2 106 496 5 716 1 318 3 565 Reclassification. The following debt instruments have been classified to new categories with no changes to their measurement basis: - Trade and other receivables - previously classified as “Loans and receivables” and currently classified as mea- sured at “Amortised cost”; - Cash and cash equivalents – previously classified as “Loans and receivables” and currently classified as mea- sured at “Amortised cost”. All financial assets and financial liabilities continue to be measured at the same bases previously adopted under IAS 39. IFRS 9 requires to record expected credit losses on all of the financial assets (expected those fair valued through profit or loss). The Group applies the simplified approach to recognise lifetime expected credit losses for its trade and other receivables as permitted by IFRS 9. The following estimated reserve matrix was used to determine ex- pected credit losses for Group’s financial assets: The notes on pages 25 – 87 are an integral part of these consolidated financial statements. ANNUAL REPORT 2018 62 In general, the application of IFRS 9 doesn’t have a significant impact on the financial statements of the Group. IFRS 15 Revenue from contracts with customers IFRS 15 was issued in May 2014 and amended in April 2016. The new standard superseds all current revenue recognition requirements under IFRS and its retrospective application is required beginning on or after 1 January 2018. Early adoption is permitted. Under IFRS 15 revenue is recognised at an amount that reflects the consideration to which an entity ex- pects to be entitled in exchange for transferring goods or services to a customer. According to the new stan- dard a five-step model is established to account for revenue from contracts with customers. The Group is in the business of dairy products and beverages. Dairy products and beverages are sold on their own in separate identified contracts with custom- ers. So the sale of products is the only performance obligation in contracts with customers The contracts do not contain any variable consider- ations or warranty obligations. The presentation and disclosure requirements of IFRS 15 are more detailed than under previous IAS 18, so the notes to the financial statements were expanded. Thereafter apart from providing more extensive dis- closures on the Group’s revenue transactions, the application of IFRS 15 doesn’t have an impact on the financial statements of the Group IFRIC Interpretation 22 Foreign Currency Transac- tions and Advance Considerations The interpretation clarifies that, in determining the spot exchange rate to use on initial recognition of the re- lated asset, expense or income (or part of it) on the derecognition of a non-monetary asset or non-mone- tary liability relating to advance consideration, the date of the transaction is the date on which an entity initially recognises the non-monetary asset or non-monetary liability arising from the advance consideration. If there are multiple payments or receipts in advance, then the entity must determine the date of the transactions for each payment or receipt of advance consideration. This Interpretation does not have any impact on the Group’s consolidated financial statements. Amendments to IFRS 2 Classification and Measure- ment of Share-based Payment Transactions The IASB issued amendments to IFRS 2 Share-based payment that address three main areas: the effects of ANNUAL REPORT 201863 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) vesting conditions on the measurement of a cash-set- tled share-based payment transaction; the classifica- tion of a share-based payment transaction with net settlement features for withholding tax obligations; and accounting where a modification to the terms and conditions of a share-based payment transaction changes its classification from cash settled to equity settled. On adoption, entities are required to apply the amendments without restating prior periods, but retro- spective application is permitted. These amendments do not have any impact on the Group’s consolidated financial statements. 4. ADOPTION OF NEW AND REVISED IFRS (CONTINUED) Standards and Interpretations in issue but not effective IFRS 16 Leases IFRS 16 was issued in January 2016. The new stan- dard will supersede all current lease guidance when it becomes effective. IFRS 16 is effective for the an- nual periods beginning on or after 1 January 2019. The Group plans to adopt the new standard on the required effective date. Standards and Interpretations IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model similar to the account- ing for finance leases under IAS 17. At the commence- ment date of a lease, a lessee will recognise a liability to make lease payments and an asset representing the right to use the underlying asset during the lease term. Lessees will be required to separately recog- nise the interest expense on the lease liability and the depreciation expense on the right-of-use asset. Such approach should be applied to all leases operation ex- cept leases of low-value assets and short-term leases. The new standard also requires to make more exten- sive disclosures than under IAS 17. These amendments do not have significant impact on the Group’s consolidated financial statements. At the date of authorization of these consolidated fi- nancial statements the following interpretations and amendments to the standards, were in issue but not yet effective: Effective for annual period beginning on or after Amendments to IAS 28: Long-term Interests in Associates and Joint Ventures Amendments to IFRS 9: Prepayment Features with Negative Compensation IFRIC Interpretation 23: Uncertainty over Income Tax Treatment Annual improvements to IFRS 2015-2017 Cycle 1 January 2019 1 January 2019 1 January 2019 1 January 2019 The Board of Directors is currently analyzing the impact of the adoption of these financial reporting standards on the financial statements of the Group. The notes on pages 25 – 87 are an integral part of these consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) 5. FINANCIAL RISK MANAGEMENT (a) Principal financial instruments 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. The principal financial instruments used by the Group, from which financial instrument risk arises, are as follows: - trade and other receivables; - other financial assets; - cash and cash equivalents; - bank loans; - trade and other payables; - long-term payables. The principal financial instruments are as follows: Year ended 31 December 2018 Year ended 31 December 2017 £ ‘000 £ ‘000 Financial assets Financial assets at amortised cost - trade and other receivables (excluding non-financial assets) - cash and cash equivalents - other financial assets Financial liabilities Financial liabilities at amortised cost: - non-current bank loans - long-term payables - current bank loans - trade and other payables (excluding non-financial liabilities) - interest payable (b) General objectives, policies and processes 2 960 181 24 3 165 5 208 467 2 455 3 808 151 12 089 2 046 496 30 2 572 5 716 459 1 318 2 171 55 9 719 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. ANNUAL REPORT 2018 64 ANNUAL REPORT 201865 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) 5. FINANCIAL RISK MANAGEMENT (CONTINUED) The Board provides broad guidance and operating principles for overall risk management, as well as written policies covering specific areas, such as for- eign exchange risk, interest-rate risk, credit risk, and investing excess liquidity. The Board has overall responsibility for the determi- nation of the Group’s risk management objectives and polices and, whilst retaining ultimate responsibility for them, it has delegated the authority for designing and operating processes that ensure the effective imple- mentation of the objectives and policies to the Group’s finance function. The Board receives monthly updates from the head of internal control through which it re- views 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 re- port 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 com- petitiveness and flexibility. Further details regarding these policies are laid out below. (a) Credit risk Credit risk is the risk that a counterparty will not be able to meet its obligations in full when due. The Ukrprod- uct Group is mainly exposed to credit risk from credit sales to customers in Ukraine. The Group manages its credit risk through the Group’s risk assessment pol- icy 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, im- plemented 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 com- mercial relationship with the Group, a new customer is offered the terms that are substantially tighter than those for the existing customers and stipulate, as a rule, the cash-on-delivery payments terms and no-re- turns 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 nei- ther 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%); es- sentially all trade receivables due to the Group had been recovered. The notes on pages 25 – 87 are an integral part of these consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) In the future, the default rate on trade receivables overdue is expected to remain stable or even fall be- cause 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 col- lateral held as security or other credit enhancements. 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 worthi- ness are maintained. 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 in- dividual limits are exceeded. The Group’s procedure for recovery of the trade receivables past due includes the following steps: Maximum exposure to the cash and cash equivalents and deposits with banks and financial institutions com- ponent 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 se- curity or other credit enhancements. - identification of the date and exact amount of the receivable past due, termination of all further deliv- eries 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 repay- ment of the amount overdue and late payment fees - 2 weeks thereafter; - obtaining a court order for repayment of the amount due and collaboration with bailiff - 2 weeks thereafter. ANNUAL REPORT 2018 66 ANNUAL REPORT 201867 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) 5. FINANCIAL RISK MANAGEMENT (CONTINUED) Cash at bank and short term deposits are kept on the accounts in the following banks: Bank Year ended 31 December 2018 Year ended 31 December 2017 Year ended 31 December 2018 Year ended 31 December 2017 JSC OTP Bank Bank of Cyprus PJSC Raiffeisen Bank Aval CreditWest Other Rating uaAA B- A3.ua uaAA+ Caa3 Rating uaA+ caa1 caa2 - Caa2 £ ‘000 2 - 21 151 4 178 £ ‘000 267 - 191 - 23 481 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 2018 Rating Carrying Value Cash and cash equivalents Trade receivables Other financial assets 181 2 865 24 3 070 Year ended 31 December 2017 Rating Maximum expo- sure (unsecured) 181 2 865 24 3 083 070 Year ended 31 December 2018 £ ‘000 Carrying Value 496 1 997 30 2 523 Year ended 31 December 2017 £ ‘000 Maximum expo- sure (unsecured) 496 1 997 30 2 523 (b) 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 notes on pages 25 – 87 are an integral part of these consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) The Group’s operating divisions (plants) have different liquidity requirement profiles. As the Group’s products have short-cycled and long-cycled production, the li- quidity 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 CEO (and the Board, if requested) receives rolling quarterly cash flow projections on a monthly basis as well as information regarding the daily cash balanc- es 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 expen- ditures 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 fund- ing made available through temporary freeze to the current portion of capital spending, immediate operat- ing 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. (c) Market risk Market risk may arise from the Group’s use of interest bearing, tradable and foreign currency financial instru- ments. 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. Detailed information is contained in Note 24. 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 max- imum reasonably possible expectation of changes in interest rates) would cause a decrease in interest expense by GBP -18,500 (decrease 2017: -1%-GBP 8,560). (ii) Foreign exchange risk Regardless of the increase of sales in Ukraine, the Group’s management believes that currency risk is rather high. This risk can be expressed in the growth of currencies of dependent raw materials (vegetable fats), packaging materials, energy resources and fuel. The Group does the best to minimise this risk by replacing raw materials and other components. An increase in ex- port sales is another step taken to deal with exchange risks. All sales are made in a stable currency. Purchase of raw milk, main semi-processed products and other components of the cost price are produced in Ukraine and are represented in hryvnia. All Group’s outstanding balances of the trade accounts payable are in UAH. 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 modernising Starokonstantinovskiy Mo- lochniy Zavod SC. This debt is denominated in Euros. Therefore, the Group is exposed to the exchange rate risk that lies in the possibility of Euro (EUR) appreci- ation against Hryvna (UAH). The sensitivity analysis shows that EUR depreciation against Hryvna by 3% would lead to an exchange rate profit of 3% being GBP 169 thousand (2017 by 3%: GBP 204 thousand). ANNUAL REPORT 2018 68 ANNUAL REPORT 201869 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) and equipment – the resources that have proven their ability to withstand the competitive erosion and infla- tionary pressure. In order to maintain or adjust the capital structure, the Group may issue new shares, adjust the amount of dividends paid to shareholders, repay the debt, re- turn capital to shareholders or sell assets to improve the cash position. Historically, the first three 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 cal- culated as net debt to shareholder equity. Net debt is calculated as total debt (as shown in the statement of financial position) 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. As at 31 December 2018, the D/E ratio consists of ap- proximately 8.25. Total debt Less: Cash and cash equivalents Net debt Total equity D/E ratio Year ended 31 December 2018 Year ended 31 December 2017 £ ‘000 8 130 (181) 7 949 964 824,6% £ ‘000 7 493 (496) 6 997 882 793,3% NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) 5. FINANCIAL RISK MANAGEMENT (CONTINUED) (iii) Commodity price risk The Ukrainian economy has been characterised by high rates of inflation. This situation can result in higher NBU rates that will increase the lending rate of Ukrainian banks. The Group tends to experience inflation-driven increase in certain costs, including sal- aries and rents, fuel costs that are sensitive to rises in the general price level in Ukraine. The management of the Group believes there exists high risk of Ukrainian minimum wage growth. In this situation, due to com- petitive pressures, it may not be able to raise the pric- es 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. Minimization of risk can be achieved by means of rapid response to the market-growth rates and the timeliness of raising prices for finished products. 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 mar- ket. The profitability of SMP was adversely affected by higher raw milk prices. (d) Operational risk Operational risk is a risk arising from systems failure, human error, fraud or external events. When controls fail to work, this could have legal consequences or lead to financial losses. The Group cannot 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, per- sonnel training, and valuation procedures. 6 CAPITAL MANAGEMENT POLICIES The Group’s definition of the capital is ordinary share capital, share premium, accumulated retained earn- ings and other equity reserves. The Directors view their role as that of corporate guardians responsible for preservation and growth of the capital, as well as for generation of the adequate returns to sharehold- ers. The Group’s objectives when maintaining and growing capital are: - to safeguard the Group’s ability to continue as a go- ing 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 de- livering the products in demand by the customers at prices commensurate with the level of risk and expec- tations of shareholders. The Group sets the amount of capital it requires in pro- portion to risk. The Group manages its capital struc- ture and makes adjustments to it in the light of chang- es in economic conditions and the risk characteristics of the current trading environment. The Group’s core assets consist predominantly of the property, plant The notes on pages 25 – 87 are an integral part of these consolidated financial statements. ANNUAL REPORT 2018 70 ANNUAL REPORT 201871 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) 7. SEGMENT INFORMATION At 31 December 2018, the Group was organised inter- nationally into five main business segments: 3) Non-branded products – skimmed milk powder, other skimmed milk products 4) Distribution services and other –resale of third-par- ty goods and processing services 1) Branded products – processed cheese, hard cheese, packaged butter and spreads 5) Supplementary products – grain crops 2) Beverages – kvass, other beverages The segment results for the year ended 31 December 2018 are as follows: Branded products Beverag- es Non-brand- ed prod- ucts Distri- bution services and other Supple- mentary products Un-allo- cated Total 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 Profit 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 3 040 (747) (1 844) - 449 - - 449 - 449 8 818 - 8 818 4 169 - - 4 169 301 656 (154) (402) - 100 - - 100 - 100 1 318 - 1 318 - - - - 42 (1 417) 293 1 028 - (96) - - (96) - (96) 3 338 - 3 338 - - - - 182 671 (153) (429) - 89 - - 89 - 89 - - - 184 - - 184 - 227 (43) (152) - 32 - - 32 - 32 - - - - - - - - - (257) - (131) (388) (494) 398 (484) - (484) - 915 915 - 8 798 274 9 072 - 3 177 (1 061) (1 799) (131) 186 (494) 398 90 - 90 13 474 915 14 389 4 353 8 798 274 13 425 525 The unallocated corporate liabilities represent bank loans, overdrafts and accruals. The notes on pages 25 – 87 are an integral part of these consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) 7. SEGMENT INFORMATION (CONTINUED) The segment results for the year ended 31 December 2017 are as follows: Branded products Beverag- es Non-brand- ed products Sales Gross profit Administrative expenses Selling and distribution expenses Other operating expenses Profit from operations Finance expenses, net Income from exchange differenc- es Profit Loss before taxation Taxation Loss 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 £ ‘000 19 351 3 304 (524) (1 189) - 1 591 - - 1 591 - 1 591 7 277 - 7 277 2 364 - - 2 364 302 £ ‘000 951 456 (86) (132) (25) 213 - - 213 - 213 1 243 - 1 243 - - - - 55 £ ‘000 6 620 (1 377) (41) (62) - (1 480) - - (1 480) - (1 480) 2 803 - 2 803 147 - - 147 196 Distri- bution services and other £ ‘000 3 603 875 (93) (178) - 604 - - 604 - 604 - - - 240 - - 240 - Supple- mentary products Un-allo- cated Total £ ‘000 - - - - - - - - - - - - - - - - - - - £ ‘000 - - (287) - (131) (418) (437) (1 250) (2 105) 62 (2 043) - 902 902 - 8 330 262 8 592 - £ ‘000 30 525 3 258 (1 031) (1 561) (156) 510 (437) (1 250) (1 177) 62 (1 115) 11 323 902 12 225 2 751 8 330 262 11 343 553 ANNUAL REPORT 2018 72 ANNUAL REPORT 201873 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) 7. SEGMENT INFORMATION (CONTINUED) Secondary reporting format - geographical segments: Sales by country (consignees) Sales by country (consignees) Year ended 31 December 2018 £ ‘000 28 535 2 189 1 337 1 062 876 845 692 434 333 301 165 157156 - 3 36 928 Urkaine Azerbaijan Kazakhstan Kongeriget Danmark Mexico Holland Moldova Turkmenistan Egypt Georgia Nigeria Poland Canada Other countries Total 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. Urkaine Azerbaijan Kazakhstan Kongeriget Danmark Mexico Holland Moldova Turkmenistan Egypt Georgia Nigeria Poland Canada Other countries Total Year ended 31 December 2017 £ ‘000 17 484 1 253 2 293 693 501 2 378 1 598 245 600 689 1 492 819 229 251 30 525 8. REVENUE For the years ended 31 December 2018 and 31 December 2017, sales revenue was presented as follows: Year ended 31 December 2018 Year ended 31 December 2017 General revenue Branded (including bonuses) Beverages (including bonuses) Non-branded products Distribution services (including bonuses) Supplementary products Charge of bonuses Total revenue (excluding bonuses) £ ‘000 38 129 22 466 1 450 4 791 2 856 6 566 (1 201) 36 928 £ ‘000 31 349 19 954 1 066 6 621 3 708 - (824) 30 525 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. The notes on pages 25 – 87 are an integral part of these consolidated financial statements. ANNUAL REPORT 2018 74 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) 9. EXPENSES BY NATURE For the years ended 31 December 2018 and 31 December 2017, items of expenses were presented as follows: Cost of sales Including: Raw materials and consumables used, cost of goods sold, manufacture over- heads etc. 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. Security Lease and current repair and maintenance Bank service Communication Audit fees Taxes and compulsory payments Amortisation and depreciation IT materials, household expenses, reading materials Other Selling and distribution expenses Including: Delivery costs Promotion Wages and salaries, social security costs (Note 12) Lease and current repair and maintenance Packaging Veterinary certificates, medical examination, permits Amortisation and depreciation Impairment of inventories Other Other operating expenses Including: Impairment of trade receivables Impairment of inventories Penalties Profit / (loss) on disposal of non-current assets Amortisation and depreciation Wages and salaries, social security costs (Note 12) Other Year ended 31 De- cember 2018 £ ‘000 (33 751) Year ended 31 De- cember 2017 £ ‘000 (27 267) (31 068) (2 264) (419) (1 061) (438) (209) (90) (65) (49) (44) (38) (34) (22) (16) (56) (1 799) (517) (417) (394) (131) (82) (75) (78) (72) (33) (131) (53) (42) (19) (4) (4) (9) - (25 012) (1 814) (441) (1 031) (428) (176) (70) (69) (53) (44) (8) (22) (29) (12) (120) (1 561) (380) (308) (411) (141) (60) (58) (79) (82) (42) (156) (10) (23) (105) (8) (4) (3) (3) ANNUAL REPORT 201875 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) 10. NET FOREIGN EXCHANGE GAIN (LOSS) 12. EMPLOYEE BENEFIT EXPENSES For the years ended 31 December 2018 and 31 Decem- ber 2017 item foreign exchange loss, net consists of: For the years ended 31 December 2018 and 31 De- cember 2017, employee benefit expenses were pre- sented as follows: 12. EMPLOYEE BENEFIT EXPENSES (CONTINUED) Wages and salaries of key management personnel: 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 equiva- lents Total foreign exchange loss, net (10) 72 (5) (190) 362 (1 039) (26) (16) 398 (1 250) 11. NET FINANCE EXPENSES For the years ended 31 December 2018 and 31 De- cember 2017, financial income/(expenses) were pre- sented as follows: Year ended 31 De- cember 2018 £ ‘000 Year ended 31 De- cember 2017 £ ‘000 (494) (437) (494) (494) (437) (437) Finance expense Interest expense on bank loans Total finance expense Net finance expense rec- ognised in income state- ment Year ended 31 Decem- ber 2018 £ ‘000 (2 581) Year ended 31 Decem- ber 2017 £ ‘000 (2 217) (524) (3 105) (439) (2 656) 852 899 Year ended 31 Decem- ber 2018 £ ‘000 (2 264) Year ended 31 Decem- ber 2017 £ ‘000 (1 814) (438) (394) (9) (428) (411) (3) (3 105) (2 656) Wages and salaries (including key manage- ment personnel) Social security costs Total 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 ex- penses Total For the year ended 31 December 2018, remuneration of the Group’s key management personnel amounted to GBP 131,4 (2017: GBP 136,7). Key management personnel received only short term benefits during the years ended 31 December 2018 and 31 December 2017. 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). 13. INCOME TAX EXPENSES For the years ended 31 December 2018 and 31 December 2017, 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 2018 Year ended 31 December 2017 £ ‘000 2 6 (8) - £ ‘000 1 1 (64) (62) Differences in treatment of certain elements of financial statements by IFRS and Ukrainian statutory taxation reg- ulations give rise to temporary differences. The tax effect of the movement on these temporary differences is rec- ognised at the rate of 18% (2017: 18%). The notes on pages 25 – 87 are an integral part of these consolidated financial statements. ANNUAL REPORT 2018 76 ANNUAL REPORT 201877 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) 13. INCOME TAX EXPENSES (CONTINUED) 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. Year ended 31 December 2018 £ ‘000 Year ended 31 December 2017 £ ‘000 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 (2018: 18%, 2017: 18%) Cyprus (10%) Tax calculated at domestic tax rates applicable to net income not subject to tax and expenses not deductible for tax pur- poses Ukraine Cyprus Tax charge Ukraine Cyprus The weighted average applicable tax rate Ukraine Cyprus BVI, Jersey 0 14 76 90 - 1 1 (6) 5 (1) (6) 6 (0) 18% 8% Nil 1% 4 (149) (1 032) (1 177) 1 - 1 (64) 1 (63) (63) 1 (62) 18% Nil Nil 0% 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 interpre- tation may arise both among and within government ministries and regulatory agencies; tax compliance practice is subject to review and investigation by a num- ber of authorities with overlapping responsibilities. Generally, tax declarations remain subject to inspec- tion for an indefinite period. In practice, however, the risk of retroactive tax assessments and penalty charges decreases significantly after three years. The fact that a year has been reviewed does not preclude the Ukrainian tax service performing a subsequent inspec- tion of that year. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) - Group vehicle park used for raw material and 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 dairy prod- ucts and beverages is sensitive to the following as- sumptions: Gross profit margin – Gross profit margin is based on 2019 budget value and takes into consideration trends of value indexes for 2019-2022. 13. INCOME TAX EXPENSES (CONTINUED) The Group’s management believes that it has ade- quately provided for tax liabilities in the accompanying financial statements; however, the risk remains that those relevant authorities could take different posi- tions with regard to interpretive issues. During the period under review, the Ukrainian com- panies within the Group paid royalties and interest charges on the outstanding credits 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 Equip- ment”, the Group carries out revaluations, with suffi- cient regularity to ensure that the carrying amount does not differ materially from fair value. An inde- pendent valuation of the Group’s property, plant and equipment was undertaken by BGS Assets LLC as at 31 December 2015. As at 31 December 2018, it is the Group’s opinion that the values haven’t significantly changed. The Group is divided into two cash-generating units (CGU). Dairy production Dairy productions consists of production assets for butter, cheese, protein and skimmed dairy products: - Production assets of SE Starokostyantynivski Dairy Plant and two other units in Zhytomir and Le- tychiv; The notes on pages 25 – 87 are an integral part of these consolidated financial statements. ANNUAL REPORT 2018 78 ANNUAL REPORT 201879 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) 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 manage- ment’s forecasts including sensitivity analysis. Brand development plans include: - Extension of brand presence in distribution net- works; - Kvass in kegs sales increase; - Extension of beverage product range (production of white kvass); The given product is dependent on weather condi- tions. In so far as the directors are aware, the future cash inflow from each CGU is not expected to be below its acquisition cost and, therefore, no impairment consid- erations have been included in the valuation. 14. PROPERTY, PLANT AND EQUIPMENT (CONTINUED) Discount rate – Discount rate assumes current mar- ket estimates risks, specific for each CGU, inclusive of cash cost and individual risks and corresponding assets excluded from the cash flow valuation. Dis- count rate calculation based on specific Group circum- stances and operational segment and based on from Weighted Average Cost of Capital (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. Specific segment risks are included in usage of sep- arate facts of beta-testing. Beta factors are estimated annually using generally accessible market data. The WACC used in the model for both CGUs in 21,5%. Production value increase – is derived from published consumer price index for Ukraine or world price ten- dencies for export product groups. Increase of raw material price – forecast is obtained got from published consumer price index for Ukraine. Predicted increase data – the data are based on pub- lished industry research in Ukraine and management estimates. Assumption regarding business segment – in so far as the directors are aware, forecasts in relation to the growth rate of each business segment are based on a comparison with the forecast growth rates of the Group’s competitors. The growth of sales of branded products on the local market is related to the development of sales of the brands “Nash Molochnik” and “Narodny Product”. In 2018, the Group sales increased but exports decreased due to the lower global prices of dairy products. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) 14. PROPERTY, PLANT AND EQUIPMENT (CONTINUED) As at 31 December 2018 and 31 December 2017, property, plant and equipment were presented as follows: Assets under Construction Land and Buildings Plant and Machinery Vehicles £ ‘000 £ ‘000 £ ‘000 £ ‘000 Instruments, tools and other equipment £ ‘000 Total £ ‘000 Cost or valuation At 1 January 2017 Additions Transfers to/from AUC Disposals Exchange differences on translation to the presentation currency At 31 December 2017 Accumulated depreciation At 1 January 2017 Depreciation charge Disposals Exchange differences on translation to the presentation currency At 31 December 2017 Cost or valuation At 1 January 2018 Additions Transfers to/from AUC Disposals Exchange differences on translation to the presentation currency At 31 December 2018 Accumulated depreciation At 1 January 2018 Depreciation charge Disposals Exchange differences on translation to the presentation currency At 31 December 2018 Net book amount at 31 December 2018 Net book amount at 31 December 2017 Net book amount at 31 December 2016 250 125 (347) - (9) 2 460 - 81 - (295) 3 974 - 258 (5) (488) 19 2 246 3 739 - - - - - 19 139 (121) - 2 142 124 - (24) 242 2 246 - 32 - 167 222 197 (3) (44) 372 3 739 - 54 (3) 279 39 2 445 4 069 - - - - - 39 19 250 242 118 - 22 382 2 063 2 004 2 318 372 188 (2) 33 591 3 478 3 367 3 752 636 - 18 (9) (75) 570 112 109 (3) (23) 195 570 - 33 (3) 43 643 195 103 (1) 17 314 329 375 524 777 - (10) (17) (88) 662 110 62 (16) (17) 139 662 - 2 (17) 49 696 139 58 (23) 11 185 511 523 667 8 097 125 - (31) (955) 7 236 586 492 (22) (108) 948 7 236 139 - (23) 540 7 892 948 467 (26) 83 1 472 6 420 6 288 7 511 The notes on pages 25 – 87 are an integral part of these consolidated financial statements. ANNUAL REPORT 2018 80 ANNUAL REPORT 201881 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) 14. PROPERTY, PLANT AND EQUIPMENT (CONTINUED) As at 31 December 2018 the Group has no contractual commitments to purchase property, plant and equipment. Fixed assets with a net book value of GBP 4,872 thousand at 31 December 2018 (2017: GBP 4,829 thousand) were pledged as collateral for loans. As at 31 December 2018 any prepayments for property, plant and equipment were included within Assets under construction in the amount of GBP 16 thousand (2017: GBP 1 thousand). As at 31 December 2018 fully depreciated assets have been included within property, plant and equipment with the original cost of GBP 143 thousand (2017: GBP 78 thousand). It’s impracticable to provide information about the carrying amounts of all classes of assets, except office equip- ment, as they were measured using the cost model without undue cost and effort. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (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 2017 Additions Disposals Impairment loss Exchange differences on translation to the presentation currency At 31 December 2017 Accumulated amortisation At 1 January 2017 Amortisation charge for the year Disposals Exchange differences on translation to the presentation currency At 31 December 2017 Cost or valuation At 1 January 2018 Additions Disposals Exchange differences on translation to the presentation currency At 31 December 2018 Accumulated amortisation At 1 January 2018 Amortisation charge for the year Disposals Exchange differences on translation to the presentation currency At 31 December 2018 Net book amount At 31 December 2018 Net book amount at 31 December 2017 Net book amount at 31 December 2016 Computer software £ ‘000 Trade marks Total £ ‘000 £ ‘000 28 - - (3) 25 27 1 - (4) 24 25 11 (2) 2 36 24 - (1) 2 25 11 1 1 920 - - (79) 841 265 60 - (26) 299 841 - - 50 891 299 58 - 21 378 513 542 655 948 - - - (82) 866 292 61 - (30) 323 866 11 (2) 52 927 323 58 (1) 23 403 524 543 656 The remaining amortization periods of the intangible assets are as follows: - Computer software 1-10 years; - Trademarks 11-18 years; The notes on pages 25 – 87 are an integral part of these consolidated financial statements. ANNUAL REPORT 2018 82 ANNUAL REPORT 201883 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) 15. INTANGIBLE ASSETS (CONTINUED) The Group performed its annual impairment test in Decem- ber 2018 and 2017. 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 2018, 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 de- cline 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 within the “Dairy seg- ment” CGUs. Trademark “Zhyviy Kvas” The recoverable amount of the trade mark “Zhyviy Kvas” CGU, GBP 2 065 430 thousand as at 31 December 20187, has been determined based on a value in use calculation using cash flow projections from financial budgets ap- proved 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 24.417.2% (20176: 25.124.4%). 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 im- pairment for this CGU. Group of the trademarks within the “Dairy seg- ment” The recoverable amount of the three trademarks within the “Diairy segment” CGU, GBP 1 668 670 thousand as at 31 December 20187, 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 ser- vices. The pre-tax discount rate applied to the cash flow projections is 24.417.2% (20176: 25.124.4%). 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, man- agement did not identify an impairment for this CGU. 16. DEFERRED TAX ASSETS AND LIABILITIES For the year ended 31 December 2018, deferred tax assets and liabilities were presented as follows: As at 31 December 2018 £ ‘000 As at 31 December 2017 £ ‘000 Deferred tax assets at the beginning of the year Deferred tax liability at the beginning of the year Deferred tax liability recognised in SOCI during the year Reduction in deferred tax due to decrease in property, plant and equipment revaluation reserve because of am- ortisation 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 - - - - - - - - 262 26 (32) 18 - 274 - - - - - - 363 (25) (39) (37) - 262 The notes on pages 25 – 87 are an integral part of these consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) 17. INVENTORIES As at the reporting dates inventories were presented as follows: Finished goods Raw materials Work in progress Other inventories Total As at 31 December 2018 £ ‘000 2 379 479 282 595 3 735 As at 31 December 2017 £ ‘000 1 559 369 109 389 2 426 During 2018, GBP 22,895 thousand (2017: GBP 23,211 thousand) was recognised as an expense in cost of sales. Inventories with a net book value of GBP 2 thousand At 31 December 2018 (2017: GBP 318 thousand) were pledged as collateral for loans. 18. TRADE AND OTHER RECEIVABLES Trade receivables Other receivables Prepayments Total As at 31 December 2018 £ ‘000 2 865 95 196 3 156 As at 31 December 2017 £ ‘000 1 997 49 125 2 171 The Group’s management believes that the carrying value for trade and other receivables is a reasonable approx- imation of their fair value. The amount of overdue but unimpaired accounts receivable is insignificant and is not disclosed in this note. ANNUAL REPORT 2018 84 ANNUAL REPORT 201885 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) 18. TRADE AND OTHER RECEIVABLES (CONTINUED) 21. CASH AND CASH EQUIVALENTS (EXCLUDING BANK OVERDRAFTS) Maturity of trade receivables as at 31 December 2018 and 31 December 2017 is presented as follows: As at the reporting dates cash and cash equivalents were presented as follows: Total £ ‘000 2 865 1 997 Neither past due nor impaired £ ‘000 2 429 1 496 <30 days £ ‘000 259 257 2018 2017 Past due but not impaired 61-90 days £ ‘000 - 113 91-120 days £ ‘000 3 2 30-60 days £ ‘000 29 115 >120 days £ ‘000 145 14 Provisions were created for impaired trade and other receivables and holiday allowance. Impaired trade and other receivables 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 19. CURRENT TAXES As at 31 December 2018 £ ‘000 222 65 (314) 247 220 As at 31 December 2017 £ ‘000 287 10 (44) (31) 222 VAT receivable Current income tax prepayments Other prepaid taxes Total 20. OTHER FINANCIAL ASSETS Loans and receivables Loans issued to related parties Loans issued to third parties Loans issued to employees Total As at 31 December 2018 £ ‘000 250 94 5 349 As at 31 December 2018 £ ‘000 - 15 9 24 As at 31 December 2017 £ ‘000 175 95 1 271 As at 31 December 2017 £ ‘000 11 11 8 30 Loans issued are short term in nature, repayable on demand and are interest free. The notes on pages 25 – 87 are an integral part of these consolidated financial statements. ANNUAL REPORT 2018 86 Cash in hand - on UAH Cash in bank - on UAH Bank - in other currencies Total 22. SHARE CAPITAL As at 31 December 2018 £ ‘000 2 173 6 181 As at 31 December 2017 £ ‘000 15 226 255 496 As at the reporting dates share capital was presented as follows: Authorised As at 31 December 2018 Number ‘000 60 000 As at 31 December 2018 £ ‘000 6 000 As at 31 December 2017 Number ‘000 60 000 As at 31 December 2017 £ ‘000 6 000 Ordinary shares of 10p each Issued and fully paid at beginning and end of the year As at 31 December 2018 Number ‘000 As at 31 December 2018 £ ‘000 As at 31 December 2017 Number ‘000 As at 31 December 2017 £ ‘000 39 673 - 39 673 3 967 - 3 967 39 673 - 39 673 3 967 - 3 967 Ordinary shares of 10p each At beginning of the year Own shares acquired At end of the year (excluding shares held as treasury shares) As at 31 December 2018 Number ‘000 As at 31 December 2018 £ ‘000 As at 31 December 2017 Number ‘000 As at 31 December 2017 £ ‘000 Ordinary shares of 10p each At beginning of the year At end of the year 3 145 3 145 315 315 3 145 3 145 315 315 As at 31 December 2018 and 31 December 2017 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. ANNUAL REPORT 201887 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) 23. OTHER RESERVES At the reporting date other reserves were presented as follows: At 1 January 2017 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 2017 Depreciation on revaluation of property, plant and equipment Reduction of revaluation reserve Exchange differences on translation to the presentation currency At 31 December 2018 Share premium £ ‘000 4 562 - - - - 4 562 - - - Translation reserve £ ‘000 (14 781) - Revaluation reserve £ ‘000 3 935 (166) Total other reserves £ ‘000 (6 284) (166) - - (113) (14 894) - - (8) - - - 3 769 (150) - - - - (113) (6 563) (150) - (8) 4 562 (14 902) 3 619 (6 721) Reserve Share premium Revaluation Retained earnings Translation Description and purpose 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 In December 2017, the Group received confirmation regarding funding of the Group by the Creditwest Bank Ukraine. Funding was approved for 65m UAH (GBP£1.723m) by means of refinancing the loan of OTP Bank 32.3m UAH including additional budgeting. In February 2018, the Group met all requirements of Creditwest Bank Ukraine and signed a loan agreement. In 2018, the Group fulfilled conditions of the Creditwest Bank Ukraine and in February 2018 the first Tranche from Creditwest Bank Ukraine was received and repayment of the loan balance with OTP Bank was carried out. With the refinancing of OTP bank the pledge was transferred to Creditwest Bank Ukraine. Non-current assets located in Zhytomyr and transport were pledged as collateral for Creditwest Bank Ukraine. Also, to extent the credit line, the company has provided equipment for production of Zhiviy Kvass. The notes on pages 25 – 87 are an integral part of these consolidated financial statements. ANNUAL REPORT 2018 88 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) 24. BANK LOANS AND OVERDRAFTS (CONTINUED) As at 31 December 2018 the Group has two loans: a loan from Creditwest Bank Ukraine in the amount of 1 850 thousand GBP (in UAH 65,0 million) and EBRD in the amount of 5,813 thousand GBP (in EUR 6,439 thousand). During 2018, the Group fulfilled its obligations under the EBRD loan in accordance with the agreement. Fixed assets with a net book value of GBP 4,872 thousand at 31 December 2018 (2017: GBP 4,829 thousand) were pledged as collateral: - assets pledged as security for the EBRD loan include property and land in Starokonstantinov, equipment for dairy production and production of hard cheese, as well as TMs. Bank Currency Type Opening date Termina- tion date Interest rate Limit Loan EUR UAH UAH 30.11.2024 31.03.2011 Credit line 09.08.2011 09.02.2018 Credit line 05.02.2018 05.02.2021 EBRD OTP Bank Creditwest Bank Ukraine Total The average interest rate as At 31 December 2018 was 6,15% (2017: 5,27%). £ ‘000 5-7% 7 493 2,12% 1 139 15,89% 1 850 As At 31 December 2018 £ ‘000 5 813 - 1 850 As at 31 December 2017 £ ‘000 6 178 856 - 7 663 7 034 Maturity of financial liabilities On demand In less than 1 year In more than 1 year Total Year ended 31 December 2018 £ ‘000 - 2 455 5 208 7 663 Year ended 31 December 2017 £ ‘000 - 1 318 5 716 7 034 ANNUAL REPORT 201889 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) 24. BANK LOANS AND OVERDRAFTS (CONTINUED) Interest rate profile of financial liabilities NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) 25. TRADE AND OTHER PAYABLES At the reporting date trade and other payables were presented as follows: On demand Expiry within 1 year Expiry in more then 1 years Total Floating rate Fixed rate £ ‘000 - 605 5 208 5 813 £ ‘000 - 1 850 1 850 As at 31 December 2018 £ ‘000 - 2 455 5 208 7 663 As at 31 December 2017 £ ‘000 - 1 318 5 716 7 034 The currency profile of the Group’s financial liabilities is as follows: Floating rate liabilities Fixed rate liabilities Total as At 31 December 2018 Total as at 31 December 2017 Trade payables Other payables Prepayments received Accruals Interests payable Provisions Total As at 31 December 2018 £ ‘000 3 546 262 807 140 151 102 5 008 As at 31 December 2017 £ ‘000 1 637 534 1 114 146 55 79 3 565 UAH EUR Total £ ‘000 - 5 813 5 813 £ ‘000 1 850 - 1 850 £ ‘000 1 850 5 813 7 663 The book value and fair value of financial liabilities are as follows: £ ‘000 856 6 178 7 034 The Group’s management believes that the carrying value for trade and other payables is a reasonable approxima- tion of their fair value. For the year ended 31 December 2018, provisions were presented as follows: Bank loans Bank overdrafts Total Book value as At 31 December 2018 £ ‘000 7 663 - 7 663 Fair value as At 31 December 2018 £ ‘000 7 663 - 7 663 Book value as at 31 December 2017 £ ‘000 7 034 - 7 034 Fair value as at 31 December 2017 £ ‘000 7 034 - 7 034 Reconciliation of liabilities arising from financing activities As at 31 December 2017 £ ‘000 7 034 53 7 087 Financing cash flows Accrual of interest £ ‘000 303 (383) (80) £ ‘000 - 478 478 Foreign ex- change move- ment £ ‘000 (384) Effect from trans- lation to presenta- tion currency £ ‘000 710 As at 31 December 2018 £ ‘000 7 663 (5) (389) 8 718 151 7 814 Bearing loans and bor- rowings Interest Interest-bearing loans and borrowings The notes on pages 25 – 87 are an integral part of these consolidated financial statements. ANNUAL REPORT 2018 90 Holiday allowance at the beginning of the year Accrual / (Reversal) Use of allowances Effect of translation to presentation currency Holiday allowance at the end of the year As at 31 December 2018 £ ‘000 79 180 (164) 7 102 As at 31 December 2017 £ ‘000 52 163 (126) (10) 79 ANNUAL REPORT 201891 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) 24. EARNINGS PER SHARE 24. CURRENCY ANALYSIS 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. Currency analysis for the year ended 31 December 2018 is set out below: Net profit/loss 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 25. DIVIDENDS Year ended 31 Decem- ber 2018 £ ‘000 90 39 673 0,23 39 673 0,23 Year ended 31 Decem- ber 2017 £ ‘000 (1 115) 39 673 (2,81) 39 673 (2,81) 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 2018. 26. 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 2018 Weighted average ex- ercise price £ - - - - - - - - 2017 Weighted average ex- ercise price £ ‘000 0,100 - - - 0,100 - - - Number 130 290 - - - 130 290 - - - Number - - - - - - - - During 2018, the Group did not issue options to the third parties. Options that had been issued by Directors earlier were valid until February 2017. They were not exercised. The notes on pages 25 – 87 are an integral part of these consolidated financial statements. 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 2017 is set out below: Assets Trade and other receivables Current taxes Other financial assets Cash and cash equivalents Total assets Liabilities Bank borrowings Trade and other payable Current income tax liabilities Other taxes payable Total Liabilities UAH USD GBP EUR Total 2 778 279 24 175 3 256 1 850 3 140 - 13 5 003 144 70 - 4 218 - 695 - - 695 2 - - - 2 - 77 - - 77 37 - - 2 39 2 960 349 24 181 3 514 5 813 289 - - 6 102 7 663 4 201 - 13 11 877 UAH USD GBP EUR Total 1 919 194 30 241 2 384 856 2 146 - 23 3 025 125 77 - 251 453 - 17 - - 17 2 - - - 2 - 57 - - 57 - - - 4 4 6 178 231 - - 6 409 2 046 271 30 496 2 843 7 034 2 451 - 23 9 508 ANNUAL REPORT 2018 92 ANNUAL REPORT 201893 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) 29. CURRENCY ANALYSIS (CONTINUED) 30. RELATED PARTY TRANSACTIONS 14 % strengthening of Hryvnia rate against the following currencies as At 31 December 2018 and 2017, would in- crease /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. Increase/ decrease in rate USD EUR USD EUR 3% 18% -3% -18% Effect on income before tax in 2018 £ ‘000 (72) (1 091) 72 1 091 Effect on income before tax in 2017 £ ‘000 13 (1 153) (13) 1 153 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. Remunera- tion of key management personnel is disclosed in note 12. Sales of goods and services to related parties and purchases from related parties are summarised below. All sales and purchases were with related parties under common control of the ultimate beneficiaries of the Company. Sales Cost of sales Administrative expenses Other operational expenses Year ended 31 December 2018 £ ‘000 - 3 14 4 Year ended 31 December 2017 £ ‘000 - 27 15 - Balances due from/(to) related parties at each period end are shown below. Receivables and prepayments Other financial assets Trade and other payables As at 31 December 2018 £ ‘000 25 - 13 As at 31 December 2017 £ ‘000 24 11 63 In 2018, 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 deal- ings 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. The notes on pages 25 – 87 are an integral part of these consolidated financial statements. ANNUAL REPORT 2018 94 ANNUAL REPORT 201895 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in thousand GBP, unless otherwise stated) (d) Foreign exchange rates Post year end, the Ukrainian Hryvnia continued to depreciate against the EUR, GBP. However, the Ukrainian Hryvnia strengthened against the US dollar. In particular, according to the National Bank of Ukraine the following are key exchange rates: Currency UAH/GBP UAH/USD UAH/EUR 26 June 2019 33.17 26.16 29.73 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 De- cember 2018 and 2017 the Group had no liabilities for supplementary pensions, health care, insurance ben- efits or retirement indemnities to its current or former employees. (d) Compliance with covenants The Group is subject to certain covenants related pri- marily to its borrowings. Non-compliance with such covenants may result in negative consequences for the Group. As at 31 December 2018 and as at 31 March 2019 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: Bank Debt to EBITDA ratio. 32. SUBSEQUENT EVENTS (a) EBRD – breach of loan covenants As at 31 December 2018 the Group had been in breach of certain covenants regarding the loan with EBRD. The Group was still in breach of such cove- nants as at 31 March 2019, however EBRD provided waivers in respect of these breaches, therefore no fur- ther commitments or contingencies have arisen. The covenants included Debt service coverage ratio and Bank debt to EBITDA ratio. (b) Reorganization In the first half of 2019, the Group started the process of merging Lider Product LLC to Starokonstantinovs- kiy Molochniy Zavod SC in relation to a restructuring plan agreed with EBRD. (e) Other (c) Installment The amount of uncancellable lease commitments is insignificant. As of 31 December 2018 the Group does not possess any finance lease and hire purchase commitments, capital commitments and guarantees. In Q1 2019, the Company paid EBRD 167 500 EUR plus an interest payment of 39 644 EUR. In Q2 2019, the Company, under the terms of its agreement with EBRD, agreed to defer payment of 150 000 EUR, re- sulting in a payment of 17 500 EUR plus an interest payment of 40 116 EUR. 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 re- sult, assets and operating activity of the Group may be exposed to the risk in case if any unfavourable chang- es 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 interpre- tations 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 pen- alties for claimed or revealed violations exists in cor- responding regulatory legal acts, laws and decisions. Penalties include confiscation of amount in dispute (in case of law violation) as well as fines. These facts cre- ate tax risks, which means that the Group may be ex- posed 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 organiza- tion in accordance with the applicable laws and regu- lations of Ukraine. The Group is required to contribute a specified percentage of the payroll to the Pension The notes on pages 25 – 87 are an integral part of these consolidated financial statements. ANNUAL REPORT 2018 96 ANNUAL REPORT 201897 CORPORATE ADVISERS Group secretary Bedell Trust Company Ltd 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 Strand Hanson Limited 26 Mount Row, Mayfair, London W1K 3SQ, United Kingdom Registrars Neville Registrars Limited Neville House 18 Laurel Lane Halesowen B63 3DA Principal bankers UBS SA 40 rue du Rhône CH-1211 Geneva Switzerland SHAREHOLDER INFORMATION Registered Office PO Box 75 26 New Street St Helier Jersey JE2 3RA Registered Number 88352 (Jersey) Investor Relations Kazantsev Mykola Phone: +380-44-232-96-02 Fax: +380-44-289-16-30 Email : ir@ukrproduct.com ANNUAL REPORT 2018 98 

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