2 TABLE OF CONTENTS 4 6 10 12 17 20 26 34 35 36 37 38 CHAIRMAN AND CHIEF EXECUTIVE STATEMENT THE BOARD OF DIRECTORS REMUNERATION COMMITTEE REPORT CORPORATE GOVERNANCE REPORT CORPORATE SOCIAL RESPONSIBILITY REPORT DIRECTORS’ REPORT STATEMENTS OF DIRECTORS’ RESPONSIBILITIES CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME CONSOLIDATED STATEMENT OF FINANCIAL POSITION CONSOLIDATED STATEMENT OF CHANGES IN EQUITY CONSOLIDATED STATEMENT OF CASH FLOWS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ANNUAL RЕPORT 2019 4 CHAIRMAN AND CHIEF EXECUTIVE STATEMENT 5 Trading Ukrproduct Group Ltd (“Ukrproduct”, the “Com- pany” or, together with its subsidiaries, the “Group”) is one of the leading Ukrainian produc- ers and distributors of branded dairy foods and beverages (kvass). The Ukrainian economy performed robust- ly during the year ended 31 December 2019 (“FY 2019”), reporting GDP growth of over 2% for the year, which included growth in excess of 4% in Q4. Whilst the strengthening of the hryvnia (UAH) during 2019 had a noticeable negative impact on Ukrainian exports, it in- creased the purchasing power of the popula- tion. Due to the growth of consumer incomes, retail sales increased significantly, with Q3 and Q4 showing greater than 10% year on year growth. As a result, the Group`s operat- ing performance exceeded expectations, as announced on 19 March 2020. In FY 2019, the Group reports improved reve- nues by 35% up to approximately £50.0 million (approximately UAH 1.6 billion) compared with revenues of £36.9 million (approximately UAH 1.3 billion) in FY 2018. Gross profit increased by 50% up to £4.73 million (approximately UAH 156 million) compared with gross profit of £3.18 million (approximately UAH 105 million) in FY 2018, with dairy products and beverages showing strong performances in particular. Operating profit increased by 684% to approx- imately £1.49 million (approximately UAH 49 million) in FY 2019, compared with an oper- ating profit of approximately £0.19 million (approximately UAH 6.2 million) in FY 2018. Overall, for FY 2019, the Company reports net profit of approximately £2.0 million (approx- imately UAH 66.9 million) compared to a net profit of approximately £0.1 million (approxi- mately UAH 2.7 million) in FY 2018, which in- cludes a net foreign exchange gain of £1.08 million (approximately UAH 37 million), com- pared to £0.4 million (approximately UAH 15.1 million) in FY 2018. Gross margins improved as a result of high- er prices for skimmed milk powder and the Group’s ongoing pursuit of cost efficien- cies. Such cost efficiencies helped offset inflationary wage pressures. Financial Position As at 31 December 2019, Ukrproduct re- ports net assets of approximately £3.2 million (approximately UAH 105,4 million) compared to approximately £1.0 million (approximately UAH 35.13 million) as at 31 December 2018, including cash balances of approximately £0.23 million (approximate- ly UAH 8 million) compared to £0.2 million (approximately UAH 6.4 million). During FY 2019, the Group continued to breach a loan covenant in relation to the EBRD debt. However, the Company continued to settle cer- tain amounts to EBRD according to an agreed schedule. The Directors are confident that EBRD will not demand accelerated repayment of the loan due to breach of covenants. Outlook Whilst the Company plans to consolidate and build on the progress achieved in FY 2019 with regard to profitability, with trading in Q1 2020 in line with the Board’s expecta- tions, the negative impact that COVID-19 is likely to have on consumer spending and the Group’s performance is difficult to quantify and predict at this stage. The Company will provide any necessary updates via regulato- ry announcements as and when appropriate. Jack Rowell Non-Executive Chairman 26 June 2020 Alexander Slipchuk Chief Executive Officer 26 June 2020 ANNUAL RЕPORT 2019ANNUAL RЕPORT 2019 6 2019 THE BOARD OF DIRECTORS ANNUAL RЕPORT 2019 8 9 THE BOARD OF DIRECTORS NAME Jack Rowell POSITION DATE APPOINTED Non-Executive Chairman November 2004 Sergey Evlanchik Executive Director April 2008 Alexander Slipchuk Chief Executive Officer November 2004 Yuriy Hordiychuk Chief Operational Officer January 2013 As of the date of the approval of the 2019 Annual Report, the Board members are as follows: Jack Rowell Non-Executive Chairman Alexander Slipchuk Chief Executive Officer Dr. Rowell has acted as Chairman of a num- ber of companies in the public and private sector, mainly within the food production industry. He was previously an executive di- rector on the board of Dalgety plc respon- sible for the consumer foods division. Jack also served as Chairman of Celsis plc. He has also been Manager of Bath Rugby, then the Champions of England and the English national team. Prior to this, Dr. Rowell was CEO of Golden Wonder Ltd. and Lucas Food Ingredients (also part of the Dalgety Food Group). He was educated at Oxford Univer- sity and is a Chartered Accountant. Alexander Slipchuk is responsible for the Group’s overall performance and strategy im- plementation and is a founder of Ukrproduct. He studied at Far-Eastern High Engineering Ma- rine School in Russia and graduated as a mar- itime navigator in 1989. Together with Sergey Evlanchik, Alexander established the securities house Alfa-Broker in 1994, developed the equi- ty trading business in the far east of the Rus- sian Federation, and acquired initial stakes in the companies that later became part of the Group. In 1998, Alexander took on the execu- tive positions at the Molochnik and the Stara- konstantinovskiy Dairy plants, Ukrproduct’s two main operating assets. All directors were re-elected at Annual General Meeting (AGM) on 30 July 2019. Sergey Evlanchik Executive Director Yuriy Hordiychuk Chief Operational Officer Sergey Evlanchik studied at Vladivostok State Uni- versity of Economics & Service in the Russian Fed- eration and at Oxford University in the UK, where he received his MBA degree. Together with Alexander Slipchuk, he established the equity-trading group, Alfa-Broker in 1994 in the Far East of the Russian Federation. After the recess of the Russian and Ukrainian equity markets in 1998, Mr Evlanchik re- focused his activities on business development in the industrial sector of Ukraine, particularly within the dairy industry, where he joined the companies that would subsequently form the Ukrproduct group in 2004. Sergey then led the Group to its successful listing on the AIM market of the Lon- don Stock Exchange in 2005. Yuriy Hordiychuk has been with the Group since 2002. Firstly, he was Director of the Pro- vision of Raw Materials then in 2005, he was promoted to Director of Production, before, in 2008, being promoted to General Director of the Company and, ultimately, in 2013, being appointed as Chief Operational Officer. Yuriy has more than ten years of experience of administrative activity and a degree in “Production Organization Management”. In 2006, Mr. Hordiychuk graduated with an MBA from the School of Economics (Russia) and earned a degree in “Logistics and Supply Chains Management”. SENIOR MANAGEMENT Volodymyr Vardzielov Chief Financial Officer Volodymyr Vardzielov has been with the Group since April 2018 as Chief Financial Officer. He has a Master’s degree in Finance and possesses 24 years’ professional experience in finance roles, in- cluding 15 years in managerial positions. ANNUAL RЕPORT 2019ANNUAL RЕPORT 2019 10 11 REMUNERATION COMMITTEE REPORT This report is prepared by the Remunera- tion Committee of the Board and sets out the Group’s policy on the remuneration of the Direc- tors, with a description of service agreements and remuneration packages for each Director. Remuneration Committee • intend to align the interests of the Exec- utives with those of the shareholders by means of fixed and performance related remuneration; and • set challenging performance targets and motivate Executives to achieve those targets both in the short and long-term. 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 sub- sidiaries, for compensation for loss of office is to provide compensation that reflects the Group’s or a subsidiary’s contractual obligations. Bonus Scheme The Committee has established a cash bonus scheme for Executive Directors based on the overall performance of the Group and/or re- spective subsidiary company and attainment of the operating profit targets. No bonus awards were made for FY 2019. Non-Executive Directors The appointments of non-executive Directors are valid for an indefinite period and may be terminat- ed with three months notice given by either party at any time. The decision to re-appoint, as well as the determination of the fees of the non-executive Directors, rests with the Board. The non-executive Directors may accept appointments with other companies, although any such appointment is subject to the Board’s approval, terms, and condi- tions of Service Agreements. Directors’ remuneration Details of the Directors’ cash remuneration are outlined below: The Remuneration Committee comprises one Non-Executive Director, Jack Rowell. This Committee is scheduled to meet at least twice per annum to advise the Board on the Group’s remuneration strategy and to determine the terms of employment and total remuneration of the respective Executive Directors of the Group and of its subsidiary companies, in- cluding the granting of share options. Among others, the objective of this Committee is to attract, retain and motivate Executives capa- ble of delivering the Group’s objectives. The Remuneration Committee is also responsible for the evaluation of the performance of Exec- utive Directors. The Remuneration Committee held three meet- ings during 2019. Remuneration Policy The Group’s remuneration policy is to provide remuneration packages which: • are designed to attract, motivate and retain high calibre Executives; • are competitive and in line with comparable businesses; • are rooted in practices exercised in coun- tries where the Group operates; Base salary The Committee on an annual basis reviews base salaries of the respective Executive Di- rectors of the Company and its subsidiaries, taking into account job responsibilities, com- petitive market rates and the performance of the Executive concerned. Consideration is also given to the cost of living and the Di- rector’s professional experience. While deter- mining the base salaries, the Committee also considers general aspects of the employment terms and conditions of employees elsewhere in the Group. Executive Alexander Slipchuk Sergey Evlanchik Yuriy Hordiychuk Non-Executive Dr Jack Rowell General manager Yuriy Hordiychuk* Annual Sala- ry/fee Bonus Non-cash compensa- tion Total cash remunera- tion 2019 2018 2019 2018 2019 2018 2019 2018 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 £ 000 45.0 35.0 15.0 95.0 22.8 45.0 35.0 15.0 95.0 22.5 14.5 13.9 - - - - - - - - - - - - - - - - - - - - - - - - 45.0 35.0 15.0 95.0 22.8 45.0 35.0 15.0 95.0 22.5 14.5 13.9 Incentive Bonus Plans and Equity Arrange- ments *This relates to fees paid to Yuriy Hordiychuk for general management services under a separate contract to his service contract. The Committee continues to plan to intro- duce long-term equity incentive arrangements to make the overall Executive Remuneration structure more performance-related, more competitive and aligned with shareholders’ in- terests subject to an improving environment in Ukraine. Service contracts The appointments of the respective Executive Directors of the Company and its subsidiaries Share based payments As at 31 December 2019 there are no outstand- ing options issued by Group. ANNUAL RЕPORT 2019ANNUAL RЕPORT 2019 2019 CORPORATE GOVERNANCE REPORT 14 15 CORPORATE GOVERNANCE REPORT Corporate Governance Policy As an AIM-quoted company, the Company is required to apply a recognised corporate gov- ernance code, demonstrating how the Group complies with such corporate 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 shareholders without sti- fling the entrepreneurial spirit in which small to medium sized companies, such as Ukrproduct, have been created. The Company will provide annual updates on its compliance with the QCA Code in its Annual Report. The Board The Board consists of three Executive Direc- tors and one Non-Executive Director, being the Chairman, reflecting a blend of different expe- rience and backgrounds. The Board considers Jack Rowell to be classified as an independent Non-Executive Director under the QCA guide- lines. The Board met three times during 2019. At these meetings, the Board, inter alia, discusses the implementation of strategy, reviews finan- cial progress and evaluates the individual and collective accountability of the Board. The Group’s day-to-day operations are man- aged by the Executive Directors. All Directors have access to the Company Secretary and any Director needing independent professional ad- vice in the furtherance of their duties may ob- tain this advice at the expense of the Group. The Board is satisfied that it has a suitable bal- ance between independence on the one hand, and knowledge of the Company on the other, to enable it to discharge its duties and respon- sibilities effectively, and that all Directors have adequate time to fill their roles. Details of the current Directors, their roles and background are set out on the Company’s website at http://ukrproduct.com/en/kompani- ya/management-structure/. The role of the Chairman is to provide leader- ship of the Board and ensure its effectiveness on all aspects of its remit to maintain control of the Group. In addition, the Chairman is re- sponsible for the implementation and practice of sound corporate governance. The Chairman 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 communicating it clearly to the Board and, once approved by the Board, for implementing it. In addition, the Chief Executive Officer is re- sponsible for overseeing 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 managed for the long-term benefit of all share- holders and other stakeholders with effective and efficient decision-making. Corporate gov- ernance is an important part of that job, re- ducing risk and adding value to the Group. The Board will continue to monitor the governance framework of the Group as it grows. The Company remains committed to listening to, and communicating openly with, its share- holders to ensure that its strategy, business model and performance are clearly under- stood. 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 re- ports are also made via a Regulatory Informa- tion Service. The point of contact for sharehold- ers is Volodymyr Vardzielov, CFO – Volodymyr. Vardzielov@ukrproduct.com. The Company’s management maintains a close dialogue with local communities and its workforce. Where issues are raised, the Board takes the matters seriously and, where appro- priate, 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 en- vironmentally 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 following: The Audit Committee The Audit Committee consists of Jack Rowell (Non-Executive Chairman). The terms of refer- ence of the Audit Committee are to assist all the Directors in discharging the individuals of appropriate ability and experience and to help in promoting the following: • The Group’s financial and accounting systems provide accurate and up-to-date information on its current financial position, including all sig- nificant issues and going concern; • The integrity of the Group’s financial state- ments and any formal announcements relat- ing to the Group’s financial performance and reviewing significant financial reporting judg- ments contained therein are monitored; • The Group’s published financial statements represent a true and fair reflection of this po- sition; and taken as a whole are balanced and understandable, providing the information nec- essary for shareholders to assess the Group’s performance, business model and strategy; • The external audit is conducted in an indepen- dent, objective thorough, efficient and effective manner, through discussions with manage- ment and the external 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 remuneration and terms of engagement of the external auditor. 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 rewarding senior management, including Ex- ecutive Directors, bearing in mind the need to attract and retain individuals of the highest cal- ibre and with the appropriate 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 considered it appropriate to have a Nomina- tions Committee. Internal control The Directors acknowledge their responsibil- ity for the Group’s system of internal control, which is designed to ensure adherence to the Group’s policies whilst safeguarding the as- sets of the Group, in addition to ensuring the completeness and accuracy of the accounting records. Responsibility for implementing a sys- ANNUAL RЕPORT 2019ANNUAL RЕPORT 2019 16 17 tem of internal financial control is delegated to Volodymyr Vardzielov, the CFO. The essential elements of the Group’s internal financial control procedures involve: • Strategic business planning: strategic business planning is undertaken annually. This includes financial budget for the following year. • Performance review: the Directors aim to monitor the Group’s perfor- mance through the preparation of monthly management accounts and regular reviews of expenditure and projections. • The internal control system: the internal control system is further en- forced by the Group’s internal audit department with the main objectives of ensuring the safety of the Group’s assets and the reliability of ac- counting records. Departure from the QCA Code In accordance with the AIM Rules for Companies, the Company 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 recommendation of Principle 5 that the Board should have at least two independent non-executive directors. The Company 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 in- tegral to the running of the business. The Chairman has an extensive business experience at the Board level especially in the Food industry. Principle 7 – “Evaluate board performance based on clear and relevant objectives, seeking continuous improvement.” The Board is small and extremely focussed on implementing the Com- pany’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 recommended in Prin- ciple 7 of the QCA Code. The Board will closely monitor the situation as it grows. Jack Rowell Chairman CORPORATE SOCIAL RESPONSIBILITY REPORT Corporate Social Responsibility The Board is committed to developing and implementing cor- porate social responsibility (CSR) policies aimed at: • Promoting equality and fairness among employees, partners and suppliers • Ensuring safe working conditions • Maintaining the Group’s corporate reputation and dedication to business ethics • Supporting the communities in which the Group operates • Establishing long-term and healthy relationships with the Group’s partners, customers and other affiliated parties. The main elements of the Group’s approach towards fulfilling the above objectives are as follows: Employees The Group is committed to ensuring equal opportunities to all its employees, both current and prospective. Each employee’s efforts are highly valued and the Board believes that a diverse mix of the workforce facilitates innovation, efficiency and team- work. As a matter of corporate policy, regular training and de- velopment workshops are conducted for Ukrproduct’s staff. These are aimed at all employee groups, including managerial, technical and production personnel. The training programmes encourage staff to progress up the career ladder and are central to the Group’s continuing growth and success. ANNUAL RЕPORT 2019ANNUAL RЕPORT 2019 18 Health and safety Management at business units within the Group are responsible for developing and main- taining the underlying practices that provide for a safe working environment. Special attention is given to the production facilities, where the equipment, including lighting, air conditioning, workspace and other constituents, undergo constant reviews and improvements. Regular monitoring is carried out to ensure that the re- quired standards are met and that employees use the provided communication channels to further improve their surrounding working con- ditions. environmental laws and regulations of Ukraine to reduce, control and eliminate various types of pollution and to protect natural resources. Ukrproduct monitors and controls all its pro- duction facilities regularly in order to ensure that air quality is not adversely impacted by its operations. The Group focuses on cutting wa- ter and energy consumption, as well as reduc- ing the volumes of waste. Collection and pro- cessing of waste have been organised through the local waste collection plants. The Group’s development programme puts specific empha- sis on acquiring and installing only the most advanced and environmentally friendly produc- tion and auxiliary equipment. Customers Food safety Customer satisfaction is at the core of the Group’s business model. Therefore, the Board is keen to continue supplying the customers with high quality, affordable products required by current market demands. The Group’s seg- mentation 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. Food safety is one of key priorities for the Group. Ukrproduct is committed to produce high quality and safe food and ensures that high standards are maintained within its suppli- er base. The certified food safety management system in compliance with ISO 22000 was im- plemented 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 Environment The Group recognises the importance of good environmental practices and seeks to mini- mise any negative impact that its operations or products might have on the production sites and surrounding areas. The Group adopted the The Group is keen to further enhance and main- tain its partnership with local communities by supporting their initiatives and charitable events. The Group contributes cash donations and gifts, as well as employee time, by encour- aging staff to participate as volunteers. ANNUAL RЕPORT 2019 2019 DIRECTORS’ REPORT 22 23 DIRECTORS’ REPORT The Directors present their report and the au- dited consolidated financial statements of Ukrproduct Group Ltd (referred to as the “Сom- pany” and together with its subsidiaries, the “Group”) for the year ended 31 December 2019. 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 brand- ed dairy foods and beverages (kvass) in Ukraine and the export of milk powder. The Group is one of the leading branded food producers in Ukraine with its own nationwide distribution network. More detailed commentary on the Group’s 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 approximately £2.0 million (2018: net profit of approximately £0.1 million). The Board has decided not to recommend the payment of a dividend in respect of the year ended 31 December 2019 (2018:Nil). Directors Details of members of the Board of Directors are shown on page 5. The Directors’ interests in the share capital of the company as at 31 December 2019 and 31 December 2018 are shown below: Powers of the Directors Subject to the Company’s Memorandum and Articles of Association, Companies (Jersey) Law 1991, as amended and any directions giv- en by special resolution, the business of the company shall be managed by the Directors who may exercise all such powers of the com- pany. The rules in relation to the appointment and replacement of Directors are set out in the Сompany’s Article of Association. Financial Risks Facing the Group The principal financial risks of the business are credit risk, liquidity risk and market risk, includ- ing 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 sharehold- ers. The Chief Financial Officer of the Group is in charge of risk management and introduction of all policies as approved by the Board of Di- rectors. For further details of the Group’s risk manage- ment please see Note 5 on page 60-65. 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 em- ployees to be one of its most valuable assets and rewards high performance through com- petitive remuneration and incentive schemes. Executive Sergey Evlanchik Alexander Slipchuk Non-executive Dr Jack Rowell Shares 2019 14,967,133 14,939,133 138,690 2018 14,967,133 14,939,133 138,690 Share options 2019 2018 - - - - - - The Directors also consider it a priority to give employees the opportunity to communicate their ideas and opinions to all levels of man- agement, both directly and through various surveys. The average number of employees of the Group during the year ended 31 December 2019 was 844 (2018: 852). Payment Policy The Group has a general set of guidelines for paying its suppliers based on specific criteria. However, it is normal practice to agree payment terms with a specific supplier when entering into a purchase contract. The Group seeks to abide by the payment terms agreed whenever it is satisfied that the goods or services have been provided in accordance with the agreed terms and conditions. Going concern 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 2019, net profit amounted to approximately £2.0 million (year ended 31 December 2018 net profit of ap- proximately £0.1 million). As at 31 December 2019, the Group continued to breach certain loan covenant terms of its loan with Europe- an Bank for Reconstruction and Development (“EBRD”). The bank has not issued a waiver for the breach. As a consequence, the loan is re- classified as a Current Liability (for the impact of such reclassification on the financial state- ments, please see page 84). There has been no demand for repayment of the loan. The Compa- ny continues to communicate with EBRD and loan repayments are being met as they fall due. Should the Group be required to raise additional working capital, the Directors expect this would be raised from local banks. Ukrproduct is also looking to expand domestic sales 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 utilisa- tion. 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 increased its export volumes by signing new agreements. For the Group’s update with regard to the im- pact of COVID-19 on its operations, please see page 92. Annual General Meeting (AGM) Ukrproduct’s AGM will be held on July 30, 2020. The Notice of AGM 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 2019 financial year by the resolution of the Directors held on 30 July 2019. A resolution to reappoint them will be proposed at the forth- coming AGM. Statement as to disclosure of information to the auditor All of the current Directors have taken the nec- essary 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 in- formation of which the auditors are unaware. Jack Rowell Chairman 26 June 2020 ANNUAL RЕPORT 2019ANNUAL RЕPORT 2019 2019 INDEPENDENT AUDITOR’S REPORT 26 27 STATEMENTS OF DIRECTORS’ 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 directors to prepare financial statements for each year in accordance with Generally Accepted Accounting Principles. Under that law, the directors have elected to prepare the consolidated financial statements in accordance with Inter- national Financial Reporting Standards (IFRS) as adopted by the European Union. Under company Law, the directors must not approve the consolidated financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and of its profit or loss for the period ended. In preparing these consolidated financial statements, the directors are re- quired to: • select suitable accounting policies and then apply them consistently; • make judgments and estimates that are reasonable and prudent; • state that the financial information complies with IFRS, subject to any material departures disclosed and explained in the consolidated financial statements; and • prepare the consolidated financial statements on the going concern basis unless it is inappropriate to presume that the Group will continue in busi- ness. The board of directors confirms that the Group has complied with the above mentioned requirements in preparing its consolidated financial statements. The directors are also responsible for: • implementing and maintaining an efficient and reliable system of internal controls in the Group; • keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Group; • taking reasonable steps to safeguard the assets of the Group and to prevent and detect fraud and other irregularities; and • the maintenance and integrity of the Group’s website. On behalf of the Directors: 26 June 2020 Independent auditor’s report to the shareholders of UKRPRODUCT GROUP LIMITED Report on the Audit of the Financial Statements Opinion We have audited the consolidated financial statements of Ukrproduct Group Lim- ited and its subsidiaries (the “Group”) which comprise the consolidated statement of comprehensive income, the consolidated statement of financial position as at 31 December 2019, the consolidated statement of changes in equity, consolidated statement of cash flows and notes to the finan- cial statements including a summary of significant accounting policies. The fi- nancial reporting framework that has been applied in their preparation is appli- cable 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 2019 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 Audit- ing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those stan- dards are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report. We are independent of the Group in accordance with the ethical requirements that are relevant to our audit of the consolidated 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 appropriate to pro- vide a basis for our audit opinion. ANNUAL RЕPORT 2019ANNUAL RЕPORT 2019 28 29 Conclusions relating to going concern Key Audit Matters Our application of materiality We have nothing to report in respect of the fol- lowing 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 statements is not appropriate, or • the directors have not disclosed in the finan- cial statements any identified material uncer- tainties that may cast significant doubt about the Group’s ability to continue to adopt the go- ing concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue. Key audit matters are those matters that, in our professional judgment, were of most signifi- cance in our audit of the consolidated financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) we identified, including those which had the great- est effect on: the overall audit strategy; the al- location of resources in the audit; and direct- ing 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 Revenue is material and an important determinant of the Group’s performance and profitability. This gives rise to inherent risk that revenue recognised is overstated in or- der to present more profitable results for the year. The Group generates reve- nue from local and export sales of milk, dairy foods and beverages amounted to £49.96 million, excluding the charge of bonuses. Given the magnitude of the amount and the inherent risk of revenue overstatement, we con- sider revenue recognition to be a key audit matter. How the matter was addressed in the audit Our main audit procedures in respect of revenue recog- nition were as follows: We obtained an understanding of the policies and pro- cedures applied to revenue recognition, as well as com- pliance therewith, including an analysis of the effec- tiveness of the design and implementation of controls related to revenue recognition processes employed by the Group. We performed tests of details for accuracy and occur- rence of sales transaction during the year. We performed analytical procedures, including gross profit margin analysis and obtained explanations for sig- nificant variances as compared to previous year; We performed journal entries testing for accounts relat- ed to identified risks of material misstatement and veri- fied them to supporting documentations; We performed sales cut-off procedures for a sample of revenue transactions at year end in order to conclude on whether they were recognized in the correct accounting period. We reviewed the disclosures included in the notes to the consolidated financial statements. Key Observations We did not note any material issues arising from the procedures performed in this area. We define materiality as the magnitude of mis- statements in the consolidated financial state- ments that makes it probable that the econom- ic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the results of that work. Materiality was determined as fol- lows: Consolidated financial statements as a whole: Materiality was calculated at £500k which is approximately 1% of Total Revenue. This benchmark is considered the most appropriate because, based on our professional judgement, we considered that this is primary measure used by the users of the consolidated financial statements in assessing the performance of the Group. An overview of the scope of our audit During our audit planning, we determined ma- teriality and assessed the risks of material mis- statement in the consolidated financial state- ments including the consideration of where Directors made subjective judgements, for example, in respect of the assumptions that underlie significant accounting estimates and their assessment of future events that are in- herently uncertain. We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the consol- idated financial statements as a whole taking into account the Group, its accounting process- es and controls and the industry in which it op- erates. Other information port 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 consolidat- ed financial statements, our responsibility is to read the other information identified above when it becomes available and, in doing so, con- sider whether the other information is material- ly inconsistent with the consolidated financial statements or our knowledge obtained in the audits or otherwise appears to be materially misstated. If we identify such material incon- sistencies or apparent material misstatements, we are required to determine whether there is a material misstatement of the consolidated fi- nancial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other informa- tion, 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 fol- lowing matters where the Companies (Jersey) Law 1991 requires 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 received from branches not visited by us; or • the financial statements are not in agreement with the accounting records and returns; or • we have not received all the information and explanations we require for our audit. Responsibilities of directors for the consoli- dated financial statements The Directors are responsible for the other in- formation. The other information comprises the information included in the annual report set out on page 3 to 17 other than the consoli- dated financial statements and our auditor’s re- As explained more fully in the Statement of Di- rectors’ Responsibilities on page 17, the Direc- tors are responsible for the preparation of the consolidated financial statements which give a true and fair view, and for such internal control ANNUAL RЕPORT 2019ANNUAL RЕPORT 2019 30 31 as the Directors determine is necessary to en- able the preparation of consolidated financial statements that are free from material mis- statement, whether due to fraud or error. In preparing the consolidated financial state- ments, the Directors are responsible for as- sessing the Group’s ability to continue as a go- ing concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the direc- tors either intend to liquidate the Group or to cease operations, or have no realistic alterna- tive but to do so. Auditor’s responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assur- ance 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 as- surance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidat- ed financial statements. A further description of our responsibilities for the audit of the consolidated financial state- ments is located on the Financial Reporting Council’s website at: www.frc.org.uk/audi- torsresponsibilities. This description forms part of our auditor’s report. Use of our report This report is made solely to the Group’s share- holders 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 accept or assume responsibility to anyone oth- er 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 & Assurance (Jersey) Limited First Island House Peter Street St Helier Jersey Channel Islands JE2 4SP ANNUAL RЕPORT 2019ANNUAL RЕPORT 2019 32 2019 CONSOLIDATED STATEMENT ANNUAL RЕPORT 2019 34 35 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2019 (in thou- sand GBP, unless other- wise stated) CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2019 (in thousand GBP, unless otherwise stated) Note As at 31 December 2019 £ ‘000 As at 31 December 2018 £ ‘000 Revenue Cost of sales GROSS PROFIT Administrative expenses Selling and distribution expenses Other operating expenses PROFIT FROM OPERATIONS Net finance expenses Net foreign exchange gain (loss) PROFIT / (LOSS) BEFORE TAXATION Income tax expense PROFIT / (LOSS) FOR THE YEAR Attributable to: Owners of the Parent Non-controlling interests 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 equip- ment 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 Earnings per share from continuing and total op- erations: Basic (pence) Diluted (pence) Note 8 9 9 9 9 11 10 13 Year ended 31 December 2019 £ ‘000 49 961 (45 233) 4 728 (1 137) (2 175) 74 1 490 (578) 1 081 1 993 38 2 031 Year ended 31 December 2018 £ ‘000 36 928 (33 751) 3 177 (1 061) (1 799) (131) 186 (494) 398 90 - 90 2 031 - 165 - 165 2 196 2 196 - 5,12 5,12 90 - (8) - - (8) 82 82 - 0,23 0,23 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 Liabilities of rent assets Deferred tax liabilities Current liabilities Bank loans 24 7 213 2 455 Short-term payables Trade and other payables Other taxes payable 14 15 17 18 19 20 21 22 23 23 23 24 16 25 6 994 493 7 487 5 071 7 257 310 31 231 12 900 20 387 3 967 4 562 (14 737) 3 437 5 931 3 160 - 3 160 - - 68 242 310 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 5 949 441 9 245 18 16 917 17 227 20 387 - 5 008 13 7 476 13 425 14 389 Alexander Slipchuk Chief Executive Officer 2020 TOTAL LIABILITIES TOTAL EQUITY AND LIABILITIES These consolidated financial statements were approved and authorised for issue by the Board of Directors on 26 June 2020 and were signed on its behalf by: ANNUAL RЕPORT 2019ANNUAL RЕPORT 2019 36 37 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2019 (in thousand GBP, unless otherwise stated) CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2019 (in thou- sand GBP, unless otherwise stated) Attributable to owners of the parent e r a h S l a t i p a c - e r p e r a h S m u m i - l a v e R n o i t a u e v r e s e r i d e n a t e R i s g n n r a e - s n a r T n o i t a l e v r e s e r l a t o T - n o c - n o N - r e t n i g n i l l o r t s t s e y t i u q E l a t o T £ ‘000 3 967 - £ ‘000 4 562 - £ ‘000 3 769 - £ ‘000 882 90 £ ‘000 - - £ ‘000 882 90 £ ‘000 £ ‘000 3 478 (14 894) 90 - 90 - (8) (8) (8) 82 - - (150) 150 - - - - - - - - - - - - - - - - - (8) 82 - 964 2 031 165 2 196 - 3 160 3 967 4 562 3 619 3 718 (14 902) 964 - - - - - - - - - - - 2 031 - 2 031 - 165 165 2 031 165 2 196 (182) 182 - - 3 967 4 562 3 437 5 931 (14 737) 3 160 As At 1 January 2018 Profit for the year Other comprehensive income Currency translation differences Total comprehensive income Depreciation on re- valuation of property, plant and equipment As At 31 December 2018 Profit for the year Other comprehensive income Currency translation differences Total comprehensive income Depreciation on re- valuation of property, plant and equipment As At 31 December 2019 Cash flows from operating activities Gain before taxation Adjustments for: Exchange difference Depreciation and amortisation Loss on disposal of non-current assets Write off of receivables/payables Impairment of inventories Interest income Interest expense on bank loans Operation cash flow before working capital changes Increase in inventories Increase in trade and other receivables Increase in trade and other payables Changes in working capital Cash generated from/(used in) operating activities Interest received Income tax paid Net cash generated from/(used in) operating activities Cash flows from investing activities Purchases of property, plant and equipment and intangi- ble 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 generated from/(used in) financing activities 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 Note Year ended 31 Decem- ber 2019 £ ‘000 Year ended 31 Decem- ber 2018 £ ‘000 1 993 90 10 9 9 9 9 11 11 24 24 21 (1 081) 636 7 (118) (28) (1) 579 1 987 (1 309) (3 973) 4 210 (1 072) 915 1 2 918 (398) 523 4 21 72 - 494 806 (1 380) (1 096) 1 437 (1 039) (233) 2 1 (230) (297) (181) 28 (3) (272) (530) (21) (347) (898) (252) 302 181 231 7 (174) (421) 901 (459) 21 (383) 68 496 181 The notes on pages 27 – 94 are an integral part of these consolidated financial statements. The notes on pages 27 – 94 are an integral part of these consolidated financial statements. ANNUAL RЕPORT 2019ANNUAL RЕPORT 2019 38 2019 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ANNUAL RЕPORT 2019 40 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2019 (in thousand GBP, unless otherwise stated) 1. GROUP AND PRINCIPAL ACTIVITIES (c) Ukrainian environment (a) Introduction Ukrproduct Group Limited (“the Company”) is a public 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 produc- tion facilities are based in Ukraine, with the HQ in Kyiv. The Group commands leading positions in the Ukrainian processed cheese and packaged butter markets and owns a range of widely recognisable trademarks in Ukraine, including “Nash Molochnik” (translated as Our Dairy- man), “Narodniy Product” (People’s Product) “Molendam” and “Vershkova Dolina” (Creamy Valley). The average number of employees of the Group during the year ended 31 December 2019 was 844 (2018: 852). (b) Share capital Significant shareholders of the Company as at 31 December are as follows: Year ended 31 December 2019 Year ended 31 December 2018 Ukrproduct Group Slipchuk Alexander Evlanchik Sergey 34,89% 34,96% 34,89% 34,96% In 2019, there were some signals of strength- ening of the Ukrainian economy. According to the National Bank of Ukraine GDP of Ukraine in 2019 grew by 3.2% (vs. growth of 3.3% in 2018; 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 2019 at 8.74% (9.8% in 2018, 13.7% in 2017, 12.4% in 2016, 43.3% in 2015 and 24.9% in 2014). In 2019, the national currency (hryvnia) strength- ened by 14,5% against USD (vs. strengthening by 1.4% in 2018, devaluation by 3.1% in 2017, 11.7% in 2016, 34.3% in 2015 and 49.3% in 2014). 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 2019. In 2019, Ukraine had good economic develop- ment figures. According to the State Statistics Service, GDP growth in 2019 exceeded 3.5% in annual terms. This means that economic growth over the whole year is likely to outrun the figure of 2018 at a little over 3%, being the highest over the past eight years. As at 31 December 2019, 7,34% of the Compa- ny’s issued share capital was held in treasury. The structure of the Ukrainian economy con- tinues to transform. Industrial output in Janu- ary-December dropped by 1.2%. At the same time, Ukrainian farmers in MY 2018-2019 ex- ported the record volume of grain in the his- tory of independent Ukraine – almost 50 mil- lion tonnes – and boasted record-high crops. Ukrainian developers are not far behind: over the twelve months they have increased the vol- ume of their operations by more than 20%. Foreign trade remains scarce – for ten months, imports of goods to Ukraine exceeded exports by $8.5 billion. But the deficit was fully com- pensated by substantial financial inflows com- ing from labor migrants, which for the indicated period amounted to almost $ 10 billion. According to the report of National Bank of Ukraine ,in the real sector, companies’ labor costs have been growing considerably fast- er than revenues. This trend is continuing for the third consecutive year. The two ma- jor drivers of the labor costs growth remain a shortage of labor caused by labor migration, and qualification imbalances on the labor market. Competing for personnel, employers are forced to raise wages. The average wage at industrial companies increased by 24.4% yoy in H1 2019. The most significant wage increases were seen in mining, coke produc- tion and metallurgy. Businesses expect wage growth to continue. A growing number of factors indicate at a grad- ual increase in the demand for and supply of bank loans. The share of companies planning to borrow has been on the rise over the past 12 months. It was mainly driven by lower inter- est rates and positive business expectations after the elections. The banks are optimistic as well. More than 70% of financial institu- tions expect an increase in their corporate loan portfolio over the next 12 months. Real sector companies, particularly state-owned monopo- lies, have been actively raising funding on for- eign capital markets since the start of the year. Among other things, this was driven by a re- duction in Ukraine’s sovereign risks thanks to a stable macroeconomic environment. From the beginning of 2019, gross Eurobond placement amounted to USD 4.2 billion in gross terms. The segmentation of borrowing sources will continue. Large and best-quality companies will raise significant amounts of long-term funding on the foreign capital markets. Smaller companies will bor- row from Ukrainian banks. The potential for new loans growth is evident from the large share of companies without bank loans. These companies generate two thirds of real sector revenues. Therefore, the level of debt burden allows an increase in financial leverage. At the same time, the opaque ownership structure and reported poor financial performance of such borrowers is often an obstacle to lending. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 2.1. Basis of preparation The consolidated financial statements have been prepared on a historical cost basis, ex- cept for significant items of property, plant and equipment which have been measured using revaluation model. The consolidated financial statements are presented in British Pounds Sterling (GBP) and all values are rounded to the nearest thousand (£000) except where other- wise indicated. (a) Statement of compliance These consolidated financial statements have been prepared in accordance with Internation- al Financial Reporting Standards, Internation- al Accounting Standards and Interpretations issued by the International Accounting Stan- dards Board (IASB), as adopted by the Europe- an Union (collectively “IFRS”). The preparation of financial statements in con- formity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group’s accounting pol- icies. Further information is provided in Note 3. ANNUAL RЕPORT 2019ANNUAL RЕPORT 2019 42 43 2.1.Basis of preparation (continued) (b) Going concern For the year ended 31 December 2019, net prof- it amounted to approximately £2.0 million (year ended 31 December 2018 net profit of approxi- mately £0.1 million). As at 31 December 2019, the Group continued to breach certain loan covenant terms of its loan with European Bank for Reconstruction and Development (“EBRD”). The bank has not issued a waiver for the breach. As a consequence the loan has been reclassified as a current liability (for the impact of such reclassification on the financial state- ments please see page 84). There has been no demand for repayment of the loan. The compa- ny continues to communicate with EBRD and loan repayments are being met with as they fall due. Should the Group be required to raise addi- tional working capital, the Directors expect this would be raised from local banks. Ukrproduct is also looking to expand domestic sales 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 utilisa- tion. 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 increased its export volumes by signing new agreements. For the Group’s update with regard to the im- pact of COVID-19 on its operations, please see page 92. (с) Consolidation principles The consolidated financial statements com- prise the financial statements of Ukrproduct Group Limited and its subsidiaries as at 31 De- cember 2019. Subsidiaries are consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidat- ed until the date that such control ceases. Control is achieved when the Group is exposed, or has rights, to variable returns from its in- volvement 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 rel- evant activities of the investee); - Exposure, or rights, to variable returns from its involvement with the investee; - The ability to use its power over the investee to affect its returns. Generally, there is a presumption that a major- ity of voting rights result in control. To support this presumption and when the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including: - The contractual arrangement with the other vote holders of the investee; - Rights arising from other contractual ar- rangements; - The Group’s voting rights and potential vot- ing rights. The Group re-assesses whether or not it con- trols 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 sub- sidiary acquired or disposed of during the year are included in the consolidated financial state- ments 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 in- terest of a subsidiary, without a change of con- trol, is accounted for as an equity transaction, that is, as transactions with owners in their ca- pacity as owners. Profit or loss and each com- ponent of other comprehensive income are at- tributed to the owners of the parent and to the non-controlling interests. Total comprehensive income is attributed to the owners of the parent and to the non-controlling interests even if this results in the non- controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsid- iaries to bring their accounting policies into line with the Group’s accounting policies. If the Group loses control over a subsidiary, it: - Derecognises the assets (including good- will) and liabilities of the subsidiary; - Derecognises the carrying amount of any non-controlling interests; - Derecognises the cumulative translation differences, recorded in equity; - Recognises the fair value of the consider- ation received; - Recognises any investment retained in the former subsidiary at its fair value at the date when control is lost; - Recognises any surplus or deficit in profit or loss; - Reclassifies the parent’s share of compo- nents previously recognised in other compre- hensive income to profit or loss. The Group applies the acquisition method to account for business combinations. The con- sideration transferred for the acquisition of a subsidiary is the fair value of the assets trans- ferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group. Identifiable assets ac- quired and liabilities and contingent liabilities assumed in a business combination are mea- sured initially at their fair values at the acquisi- tion date. Acquisition-related costs are expensed as in- curred. ANNUAL RЕPORT 2019ANNUAL RЕPORT 2019 44 45 2.1.Basis of preparation (continued) (c) Consolidation principles (continued) 2.1. Basis of preparation (continued) (a) Functional and presentation currency Consolidated financial statements of the Group include following companies: (d) Reorganisation During 2019 the Group has not been reorgan- ised. The Ukrainian Hryvnia is the currency of the pri- mary economic environment in which the ma- jority of the Group companies operate. Non-controlling interests represent a portion of profits or losses and net assets not owned by the Group. Non-controlling interests are presented separately from parent share capital in equity in the Consolidated statement of financial position. Group’s company Molochnik LLC* Starokonstantinovskiy Mo- lochniy 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 Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Effective ownership ratio As at 31 December 2018 2019 100% 100% 100% 100% 100% 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 100% 100% Jersey Principal activ- ities Holder of some assets Production Owner of land assets Owner of land as- sets Production Owner of land as- sets Production Sales & Distribu- tion Asset manage- ment Holder of some assets and oper- ating companies Holder of Group’s trademarks and assets Holder of Group’s trademarks and assets Export opera- tions Parent company traded on AIM * The companies are held through Ukrproduct Group LLC which is a 100%-owned subsidiary of the Company. ** Subsidiaries of Solaero Global Alternative Fund Limited, the Group’s holder of trademarks and assets. *** There was a legal action against Lider Product LLC by the Ukrainian tax services, which was concluded in May 2019. Currently, there is a process of merging it to Starokonstantinovskiy Mo- lochniy Zavod SC. For this purpose, the company is unable to document the dissolution and in- corporate changes to statute. The balance of this company was incorporated to Starokonstanti- novskiy Molochniy Zavod SC in 2018. **** Subsidiaries of Alternatyvni investytsiyi UCVF. Alternatyvni investytsiyi UCVF is a limited life entity and is due to cease to exist on 5 April 2022. (e) Accounting for acquisitions of companies under common control Transactions in currencies that differ from the functional currency are considered to be for- eign currency transactions. Acquisitions of controlling interests in com- panies that were previously under the control of the ultimate beneficiaries of the Company are accounted for as if the acquisition had occurred at the beginning of the earliest com- parative period presented or, if later, at the date on which control was obtained by the ul- timate beneficiaries of the Company. The as- sets and liabilities acquired are recognised at their book values. The components of equity of the acquired companies are added to the same components within Group equity except that any share capital of the acquired 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 corre- sponding reduction in equity, from the date the acquired company is included in these consol- idated 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 share- holders. 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. 2.2.1. Foreign currency translations and trans- actions Management has considered what would be the most appropriate presentation currency for consolidated IFRS financial statements and has concluded that the Group should use British Pounds Sterling (hereinafter “GBP” or £) as the Group’s presentation currency. This is because the Ukrainian Hryvnia is not a major convertible or recognisable currency outside of Ukraine, and also because the Group’s public shareholder base is located predominantly in the UK. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are re-measured. For- eign 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 denominat- ed 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 present- ed in the Consolidated Statement of Compre- hensive Income within “Net foreign exchange gain (loss)”. 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 ANNUAL RЕPORT 2019ANNUAL RЕPORT 2019 46 47 transactions took place; - Equity items are translated into the presen- tation currency using the historical rate; - For comparative figures, all assets and lia- bilities are translated at the closing rate ex- isting at the relevant reporting date. Income and expense items are translated at rates ap- proximating to those ruling when the trans- actions took place; - Income and expenses for each statement of comprehensive income are translated at monthly average exchange rates; and - All resulting exchange differences are rec- ognised as a separate component of equity within “Translation reserve”. The principal UAH exchange rates used in the preparation of Consolidated financial state- ments are as follows: nary course of business less applicable vari- able selling expenses. The Group identifies the following types of in- ventories: - raw and other materials (including main and auxiliary operating supply and materials); - work in progress (including semi finished products); - finished goods; - other inventories (including fuel, packaging, building materials, spare parts, other ma- terials, goods of little value and high wear goods). The cost of finished goods and semi finished products comprises raw materials, direct la- bour, other direct costs and related production overheads (based on normal operating capac- Currency UAH/GBP UAH/USD UAH/EUR 31 December 2019 31,02 23,69 26,42 Average ex- change rate for 2019 32,96 25,82 28,92 31 December 2018 35,13 27,69 31,71 Average ex- change rate for 2018 36,31 27,21 32,12 Foreign currency can be freely converted within Ukraine at a rate close to the rate of the Nation- al Bank of Ukraine. At present, the UAH is not a freely convertible currency outside Ukraine. 2.2.2. Cash and cash equivalents Cash and cash equivalents comprise cash on hand, deposits held on call with banks and oth- er short-term highly liquid investments with original maturities of three months or less. Bank overdrafts are included in current liabili- ties in the consolidated statement of financial position. 2.2.3. Inventories Inventories are stated at the lower of cost and net realisable value. Cost is determined using the weighted average method. Net realisable value is the estimated selling price in the ordi- ity) 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 in- ventories to determine whether they are dam- aged, obsolete or slow-moving or whether their net realisable value has declined. The net real- isable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. The Group periodi- cally 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 con- solidated statement of comprehensive 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 associ- ated 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 de- fined in IAS 16: Property, Plant and Equipment) for all classes of assets, except office equip- ment which is carried at cost. Management believes that this policy provides more reliable and relevant financial information because it better reflects the value in use of such assets to the Group. All significant categories of property, plant and equipment are subsequently carried at fair value at the date of revaluation, less any subsequent accumulated depreciation and subsequent ac- cumulated 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 consol- idated statement of comprehensive income (e.g. through depreciation, impairment or sale). Subsequent costs that increase future econom- ic benefits of the item of property, plant and equipment also increase its carrying amount. Otherwise, the Group recognises subsequent costs as expenses of the period in which they were incurred. The Group classifies costs, as- sociated with property, plant and equipment, for the following categories: repairs and main- tenance; capital repairs, including modernisa- tion. (b) Impairment of property, plant and equip- ment At each reporting date the Group assesses the carrying value of its property, plant and equipment to determine whether there is any evidence that the assets have lost part of their value as a result of impairment. If such evi- dence 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 re- coverable amount of an asset (or a cash-generat- ing unit) is lower than its carrying value, the carry- ing 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 impair- ment loss is considered as a decrease in the revaluation reserve. If the impairment loss is subsequently reversed, the asset’s carrying value (or a cash generating unit) is increased to the revised estimate of its expected recover- able amount. I n such a case, the increased carrying value should not exceed the carrying value that could be determined in case the impairment loss for an asset (or a cash-generating unit) was not recognised in previous years. The reversal of the impairment loss is immediately recognised as income. Gains and losses on disposals are determined by comparing proceeds with the carrying amount and are included in profit and loss on disposal of non-current assets. (c) Depreciation of property, plant and equip- ment Depreciation of an asset begins when it becomes available for use. Depreciation of an asset termi- nates with the termination of its recognition. ANNUAL RЕPORT 2019ANNUAL RЕPORT 2019 48 49 2.2. Significant accounting policies (continued) Depreciation does not terminate when an asset is idle or if it is removed from active use and is intended for disposal, unless it is already fully depreciated. Depreciation is applied to all items of property, plant and equipment with the exception of land and assets under construction. The Group calcu- lates the depreciation using the straight-line meth- od to allocate their cost or revalued amounts to their residual values over their estimated useful lives. The Group has applied the production meth- od 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 depre- ciated under production method) are listed be- low: Group of property, plant and equipment Buildings Plant and machinery Vehicles Instruments, tools and oth- er equipment Useful life 7 - 62 years 2 - 20 years 5 - 12 years 2 - 20 years The assets’ residual values, useful lives and methods of depreciation are reviewed at each financial year- end and adjusted prospectively, if appropriate. Impact of any changes arising from estimates made in prior periods is record- ed as a change in an accounting estimate. 2.2.5. Assets under construction Assets under construction are reported at their cost of construction including costs charged by third parties and the capitalisa- tion of the Group’s material costs incurred. No depreciation is charged on assets under construction. Upon completion, the Group as- sesses whether there is any indication that an asset may be impaired. If any such indica- tion exists, the Group performs impairment testing as described in Note 2.2.19. Unless an indication of impairment exists, all accu- mulated costs of the asset are transferred to the relevant fixed asset category and depre- ciated at applicable rates from the time the asset is completed and ready for use. 2.2.6. Intangible assets (a) Recognition and measurement of intangi- ble assets Intangible assets are recognised at historical cost less accumulated amortisation and accu- mulated impairment losses. The Group recognises an item as an intangible asset if it meets the following criteria for recog- nition: it is probable that the Group will receive future economic benefits associated with the asset and costs of the asset can be reasonably estimated. The Group identifies the following types of in- tangible assets: • Computer software licenses; • Trademarks. Acquired computer software licenses are capi- talised on the basis of the costs incurred to ac- quire and bring to use the specialised software. Trademarks are shown at historical cost. An intangible asset is derecognised at dispos- al, or when the Group no longer expects receipt from this asset of any economic benefits. The profit from cancellation or disposal is defined by the difference between net proceeds on the sale and the carrying value of intangible as- sets. 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 am- ortised over their estimated useful lives using the straight- line method (1-10 years). The am- ortisation expense is included within adminis- trative expenses in the consolidated statement of comprehensive income. (b) Amortisation and useful life (continued) Trademarks have finite useful lives and are carried at cost less accumulated amortisa- tion. 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 ex- penses in the consolidated statement of comprehensive income. (c) Business combinations and goodwill The consideration transferred for the acquisi- tion of a subsidiary is the fair value of the as- sets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the group. The consider- ation transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-relat- ed costs are expensed as incurred. When the Group acquires a business, it assess- es the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, eco- nomic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree. If the business combination is achieved in stages, the acquisition date fair value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value as at the acquisition date through profit and loss. Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or liability, will be rec- ognised in accordance with IFRS 9 ‘’Financial In- struments” either in profit or loss or as change to other comprehensive income. If the contingent consideration is classified as equity, it shall not be remeasured until it is finally settled within equity. Goodwill is initially measured at cost being the excess of the consideration transferred over the Group’s net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is rec- ognised in profit or loss. Goodwill is not amortized but is subject to testing for impairment as at the reporting date or more frequently, if events or chang- es 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 ben- efits from which are expected to be received upon consolidation. The amount of impairment is determined by as- sessing the recoverable amount, which may be obtained for a cash-generating asset (group of cash generating assets) to which goodwill relates. Where the recoverable amount is less than the book value of cash generating asset (group of cash generating assets), impairment is recognised. 2.2.7. Financial assets The Group classifies its financial assets in the following 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 busi- ness model for managing the financial assets and the contractual terms of the cash flows. Three measurement categories into which the Group classifies its debt financial assets are as follows: ANNUAL RЕPORT 2019ANNUAL RЕPORT 2019 50 51 2.2. Significant accounting policies (contin- ued) (a) Initial recognition 2.2.7 Financial assets (continued) 1) Amortised cost: assets that are held for col- lection of contractual cash flows where those cash flows represent solely payments of prin- cipal and interest are measured at amortised cost. Interest income from these financial as- sets is included in finance income using the ef- fective interest rate method. Any gain or loss arising on derecognition is recognised directly in profit or loss and presented in other operat- ing income / (expenses). Impairment losses are presented in other operating income / (ex- penses) or as a separate line item in the con- solidated income statement, if material. 2) Fair value through other comprehensive income: Assets that are held for collection of contractual cash flows and for selling the fi- nancial assets, where the assets cash flows represent solely payments 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. Interest income from these financial assets is included in profit or loss using the effective interest rate method. Impairment are presented in other operating income / (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 investment that is subsequently mea- sured at FVPL is recognised in profit or loss and presented net within other operating income / (expenses) in the period in which it arises. 4) All of the Group’s financial assets are desig- nated at amortised costs. Financial assets at fair value through profit and loss are initially recorded at fair value. All other financial assets are initially recorded at fair value plus transaction costs. Fair value at initial recogni- tion is best evidenced by the transaction price. A gain or loss on initial recognition is only recorded if there is a difference between fair value and trans- action price which can be evidenced by other ob- servable current market transactions in the same instrument or by a valuation technique whose in- puts include only data from observable markets. All purchases and sales of financial instru- ments that require delivery within the time frame established by regulation or market con- vention (“regular way” purchases and sales) are recorded at trade date, which is the date that the Group commits to deliver a financial instrument. All other purchases and sales are recognised on the settlement date with the change in value between the commitment date and settlement date not recognised for assets carried at cost or amortised cost; recognised in the consolidated statement of comprehen- sive income for trading investments; and rec- ognised in equity for assets classified as as- sets 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 de- termined by means of pricing and discounted cash flow models. If a discounted cash flow model is applied, the determination of future cash flows is based on optimal management estimations and the dis- counting rate is market rate for similar finan- cial instruments predominated as at reporting date. If the price model is used entering figures are based on average market data predominat- ed as at reporting date. (c) Subsequent measurement After initial recognition, the Group measure a financial asset at: (a) amortised cost; (b) fair value through other comprehensive income; or (c) fair value through profit or loss. Financial assets at amortised cost are mea- sured at amortised cost less impairment loss- es. Amortised cost is calculated using the ef- fective 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. (d) 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 recognition. 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 in- terest revenue to be recorded in future periods: (a) redit risk has not increased significant- ly since initial recognition – recognise 12 months ECL, and recognise interest on a gross basis; (b) Credit risk has increased significantly since initial recognition – recognise lifetime ECL, and recognise interest on a gross basis; (c) Financial asset is credit impaired (using the criteria currently included in IFRS 9) – rec- ognise lifetime ECL, and present interest on a net basis (i.e. on the gross carrying amount less credit allowance). (e) Derecognition Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where the Group has transferred substantially all risks and rewards of ownership. 2.2.8. Financial liabilities The Group classifies its financial liabilities into categories depending on the purpose for which the liability was acquired. The Group has not classified any of its liabilities at fair value through profit and loss. Financial liabilities held at amortized cost in- clude the following items: - Trade payables and other short-term mone- tary liabilities, which are recognised at amor- tised cost. - Bank borrowings, overdrafts, promissory notes and bonds issued by the Group are ini- tially carried at fair value, being the amount advanced net of any transaction costs direct- ly attributable to the issue of the instrument. Such interest bearing liabilities are subse- quently measured at amortised cost using the effective interest rate method, which en- sures that any interest expense over the peri- od to repayment is at a constant rate on the balance of the liability carried in the consoli- dated statement of financial position. “Interest expense” in this context includes ini- tial transaction costs and interest payable on redemption, as well as any interest or coupon payable while the liability is outstanding. (a) Initial recognition Financial liabilities are initially recognized at fair value, adjusted in case of borrowings for directly attributable transaction expenses. (b) Subsequent measurement Trade and other accounts payable initially recognized at fair value, are subsequently ac- counted for at amortized cost at effective inter- est rate method. ANNUAL RЕPORT 2019ANNUAL RЕPORT 2019 52 53 the new standard a five-step model is estab- lished to account for revenue from contracts with customers. - the costs incurred for the transaction and the costs to complete the transaction can be measured reliably. Borrowings and liabilities initially recognized at fair value less transaction costs, are subse- quently measured at amortized cost; any differ- ence between the amount of received resourc- es and the sum of repayment is represented as interest cost using the effective interest rate method during the period, when borrowings were received. (с) Derecognition The Group is in the business of dairy products and beverages. Dairy products and beverages are sold on their own in separate identified con- tracts with customers. So the sale of products is the only performance obligation in contracts with customers A financial liability is derecognized when the obligation under the liability is discharged, can- celled or expires. The contracts do not contain any variable con- siderations or warranty obligations. 2.2.9. Share capital The ordinary shares are classified as share capital. The difference between the fair val- ue of consideration received and the nominal value of issued share capital is recognized as share premium. 2.2.10. Treasury shares The price paid for treasury shares is deducted from Companies’ shareholders’ equity until the shares are cancelled or reissued. When trea- sury shares are sold or reissued, the amount received is recognized as an increase in equi- ty. Treasury stock is held at cost until retired or reissued. Legal, brokerage, and other costs to acquire shares are not included in the cost of treasury stock. When treasury stock is reis- sued, any gains are included as part of addi- tional paid-in capital. Losses upon reissuance reduce additional paid-in capital to the extent that previous net gains from the same class of stock have been recognized and any losses above that are recognized as part of retained earnings. 2.2.11. Revenue recognition Revenue is recognised at an amount that re- flects the consideration to which an entity ex- pects to be entitled in exchange for transferring goods or services to a customer. According to (a) Revenue from sale of goods (products) Revenue from the sale of goods (products) is recognised when all the following conditions are satisfied: - the significant risks and rewards of owner- ship of the goods have passed to the buyer; - the Group is no longer involved in the man- agement to the extent that is usually associ- ated with ownership, and has no control over the goods sold; - the amount of revenue can be measured re- liably; - it is probable that the economic benefits as- sociated with the transaction will flow to the Group; and - the costs incurred or to be incurred in re- spect of the transaction can be measured reliably. (b) Revenue from sale of services The revenue from rendering of services is rec- ognised when all the following conditions are satisfied: - the amount of revenue can be reliably mea- sured; - inflow of economic benefits related to the transaction is probable; - the stage of completion of the transaction at the end of the reporting period can be measured reliably; and 2.2.12. Expenses recognition Expense are recognized in the same period as the revenues to which they relate. If this were not the case, expenses be recognized as in- curred, which might predate or follow the pe- riod 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 receiv- able during several reporting periods, expenses are calculated by allocating its value on a sys- tematic 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 econom- ic benefits is expected. 2.2.13. Financial expenses 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 pe- riods, are accounted for in the current period in the item “Work-in-progress”, included within “Inventories” in the consolidated statement of financial position. 2.2.14. Value added tax Interest expenses and other costs on borrow- ings to finance construction or production of qualifying assets are capitalized during the period of time that is required to complete and prepare the asset for its intended use. All oth- er borrowing costs are expensed. Net financial expenses are recorded in the consolidated statement of comprehensive income. VAT is levied at two rates: 20% on Ukrainian do- mestic sales and imports of goods, works and services and 0% on export of goods and pro- vision of works or services to be used outside Ukraine. VAT output equals the total amount of VAT col- lected 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 in- put arise on the earlier of the date of payment to the supplier or the date goods are received. 2.2.15. Tax Taxation has been provided for in the financial statements in accordance with relevant legisla- tion currently in force. The charge for taxation in the consolidated statement of comprehen- sive income for the year comprises current tax and changes in deferred tax. Current tax is the amount of income tax pay- able/recoverable in respect of taxable profit/ tax loss for the period determined in accor- dance with rules established by the tax author- ities 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 recov- ered from the taxation authorities, using the tax rates and laws that have been enacted, or sub- stantively enacted, by the reporting date. Deferred tax assets and liabilities are calculat- ed in respect of temporary differences using the balance sheet liability method. Deferred in- come taxes are provided on all temporary dif- ferences arising between the tax bases of as- sets and liabilities and their carrying amounts for financial reporting purposes, except in situ- ations where the deferred tax arising on initial recognition of goodwill or of an asset or liabil- ity in a transaction that is not a deal to merge companies and which, at the time of its com- ANNUAL RЕPORT 2019ANNUAL RЕPORT 2019 54 55 2.2. Significant accounting policies (continued) 2.2.15. Tax (continued) mission, has no effect on accounting or taxable profit or loss. Assessment of deferred tax liabilities and de- ferred tax assets reflects the tax consequenc- es 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 probabil- ity that future taxable profit, which may be re- duced by the amount of deductible temporary differences, will be received. Deferred tax as- sets 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 de- clared (and practically adopted) at that date. Deferred income taxes are recognised for all temporary differences associated with invest- ments in subsidiaries and associated compa- nies and joint activities, except in cases where the Group controls the timing of the reversal of temporary differences, and where there is a sig- nificant probability that the temporary difference will not will be reduced in the foreseeable future. The Group reviews the carrying amount of de- ferred tax assets at each reporting date and reduces it to the extent to which there is no longer the probability that there will be suffi- cient 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 tax- able profit is accrued. Deferred tax assets and liabilities are not discounted. date of grant is charged to the consolidated statement of comprehensive income over the vesting period. Where the terms and conditions of options are modified before they vest, the increase in the fair value of the options, measured immediately before and after the modification, is also charged to the consolidated statement of comprehen- sive income over the remaining vesting pe- riod. Where equity instruments are granted to persons other than employees, the con- solidated statement of comprehensive in- come is charged with the fair value of goods and services received. Where fair value of goods and services received from persons other than employees is difficult to identi- fy, 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 ex- pensed is determined on the basis of adjust- ed Black-Scholes model. 2.2.17. Pension costs The Group contributes to the Ukrainian man- datory state pension scheme, social insurance and employment funds in respect of its em- ployees. The Group’s pension scheme contribu- tions are expensed as incurred and are includ- ed in staff costs. The Group does not operate any other pension schemes. 2.2.18. Share issue costs All qualifying transaction costs in respect of the issue of shares are accounted for as a deduc- tion from share premium, net of any related tax deduction. Qualifying transaction costs include the costs of preparing the prospectus, account- ing, tax and legal expenses, underwriting fees and valuation fees in respect of the shares and of other assets. 2.2.16. Share-based payments 2.2.19. Leases Where share options are awarded to em- ployees, the fair value of the options at the Group as a lessee. The Group as a lessee var- ious warehouses and vehicles. The Group recognizes a lease liability and a correspond- ing right-of-use asset at the commencement date of a lease. A lease is a contract — or part of a contract — that conveys a right to control the use of an identified asset for a period of time in ex- change for consideration. In general, Group splits the contractual consideration into a lease and a non-lease component based on their relative stand-alone prices. For vehicle leases, however, Group applies the practical expedient not to make this split but rather ac- counts for the fixed consideration as a single lease component. In addition, payments re- lated to short-term leases (leases with a term shorter than 12 months) are recognized on a straight-line basis in profit or loss. Right-of-use assets are measured at cost com- prising the following: • the amount of the initial measurement of lease liability • any lease payments made at or before the commencement date less any lease incen- tives received • any initial direct costs, and • restoration costs. Right-of-use assets are generally depreciated over the shorter of the asset’s useful life and the lease term on a straight-line basis. If the group is reasonably certain to exercise a pur- chase option, the right-of-use asset is depreci- ated over the underlying asset’s useful life. Payments associated with short-term leases and of low-value assets are recognised on a straight-line basis as an expense in profit or loss. respect of the relevant leases. Lease income from operating leases where the group is a lessor is recognised in income on a straight- line basis over the lease term. Initial direct costs incurred in obtaining an operating lease are added to the carrying amount of the underlying asset and rec- ognised as expense over the lease term on the same basis as lease income. The respec- tive leased assets are included in the balance sheet based on their nature. 2.2.20. Impairment of assets In respect of all assets, the Group conducts the following procedures ensuring accounting for these assets at an amount, not exceeding their recoverable amount: - at each reporting date the condition of these assets is analyzed for impairment; - in case any impairment indicators ex- ist, the amount of expected recovery of such asset is calculated to determine the amount of losses from impairment, if any. If it is impossible to determine the amount of losses from impairment of a separate asset, the Group determines the amount of estimated impairment of the cash-generat- ing 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 an asset, estimated future cash flows are discounted to their current value using a pre-tax discount rate that re- flects current market estimates of time val- ue of money and risks related to the asset. Group as a lessor Amounts due from lessees under finance leases are recorded as receivables at the amount of the Group’s investment in the rel- evant leases. Income from finance leases is allocated to accounting periods so as to reflect a constant periodic rate of return on the Group’s net investment outstanding in If according to estimates the amount of ex- pected recovery of assets (or a cash-gen- erating unit) is less than its book value, the book value of asset (or a cash-generating unit) is reduced to the amount of expected recovery. Losses from impairment are rec- ognised as expenses directly in profit or loss. ANNUAL RЕPORT 2019ANNUAL RЕPORT 2019 56 57 2.2.21. Provisions, contingent liabilities and assets liabilities are potential liabilities Contingent of the Group arising from past events the ex- istence of which will be confirmed only by the occurrence or non-occurrence of one or more future events, which are not under the complete control of the Group, or current obligations re- sulting from past events are not recognised in the financial statements 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 liabil- ities in the financial statements. The Group dis- closes information about contingent liabilities in the notes to the financial statements except when the probability of outflow of resources re- quired to settle the obligation, is unlikely. Contingent assets are not recognised in the con- solidated financial statements, but disclosed in the Notes where there is a sufficient probability of future economic benefits. Provisions are rec- ognized when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embody- ing economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. 2.2.22. 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 per- son has control, joint control, or significant influ- ence 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 subsidiary, associate, or joint venture of the reporting entity, or it is controlled, jointly con- trolled, or significantly influenced or managed by a person who is a related party. While considering any relationship which can be defined as a related party transaction, the Group takes into consideration the substance of the transaction not just its legal form. The Group classifies the related parties according to exist- ing 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 togeth- er with it are under common control (this in- cludes holding companies, subsidiaries and fellow subsidiaries of the parent company); b) associates are companies whose activities are significantly influenced by the Group, but are neither subsidiaries, nor joint ventures of the investor; c) individuals, directly or indirectly holding or- dinary shares that give them a possibility to significantly influence the Group’s activities; d) key management personnel are persons having authority and responsibility for plan- ning, managing and controlling the activities of the Group, including directors and senior officials (as well as the non- executive director and close relatives of these individuals); and e) companies, large blocks of shares with vot- ing rights of which are owned directly or indi- rectly by any person described in paragraphs (c) or (d), or a person influenced significantly by such persons. This includes enterprises owned by directors or major shareholders of the Group, and companies which have a com- mon key management member with the Group. f) The entity, or any member of a group of which it is a part, provides key management personnel services to the reporting entity or to the parent of the reporting entity. 2.2.23. Fair value measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value mea- surement is based on the presumption that the transaction to sell the asset or transfer the lia- bility takes place either in the principal market for the asset or liability, or in the absence of a principal market, in the most advantageous mar- ket for the asset or liability. The principal or the most advantageous market must be accessible to the Group. A fair value measurement of a non-financial as- set takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. All assets and liabilities for which fair value is measured or disclosed in the financial state- ments are categorised within the fair value hi- erarchy, described as follows, based on the low- est level input that is significant to the fair value measurement as a whole: • Level 1: Quoted (unadjusted) market prices in active markets for identical assets or liabil- ities. • Level 2: Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly ob- servable. • Level 3: Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable. 2.2.24. Dividends Equity dividends are recognised in the consoli- dated financial statements when they become legally payable. Interim dividends are recognised when they are paid. In the case of final dividends, this is when approved by the shareholders at the annual general meeting. 3. SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS The preparation of the Group’s consolidated fi- nancial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclo- sure of contingent liabilities, at the end of the reporting period. However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future periods. In the process of applying the Group’s account- ing policies, management has made the follow- ing judgments, which have the most significant effect on the amounts recognised in the finan- cial statements: (a) Estimates of fair value of property, plant and equipment based on revaluation The Group is required, periodically as deter- mined by the directors, to conduct revaluations of its property, plant and equipment. Such reval- uations are conducted by independent valuers who employ the valuation methods in accor- dance with International Valuation Standards such as cost approach, comparative (market) approach and revenue (income) approach. (b) Useful lives of intangible assets and prop- erty, plant and equipment Intangible assets and property, plant and equip- ment are amortised or depreciated over their useful lives. Useful lives are based on the man- agement’s estimates of the period that the as- sets will generate revenue, which are periodical- ly reviewed for continued appropriateness. Due to the long life of certain assets, changes to the estimates used can result in significant varia- tions in the carrying value. Further information is contained in Notes 14 and 15. ANNUAL RЕPORT 2019ANNUAL RЕPORT 2019 58 (c) Inventory The Group reviews the net realisable value of, and demand for, its inventory on a quarterly ba- sis to ensure recorded inventory is stated at the lower of cost or net realisable value. Factors that could affect estimated demand and sell- ing prices are the timing and success of future technological innovations, competitor actions, supplier prices and economic trends. Further in- formation is contained in Note 17. (d) Legal proceedings In accordance with IFRS the Group only recognis- es a provision where there is a present obligation from a past event, a transfer of economic benefits is probable and the amount of costs of the transfer can be estimated reliably. In instances where the criteria are not met, a contingent liability may be disclosed in the notes to the financial statements. Realisation of any contingent liabilities not current- ly recognised or disclosed in the financial state- ments could have a material effect on the Group’s financial position. Application of these accounting principles to legal cases requires the Group’s man- agement 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 pro- visions 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, experience 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 quired 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 un- certain. As a result, the Group recognises tax liabilities based on estimates of whether ad- ditional taxes and interest will be due. These tax liabilities are recognised when, despite the Group’s belief that its tax return positions are supportable, the Group believes that certain positions are likely to be challenged and may not be fully sustained upon review by tax au- thorities. The Group believes that its accruals for tax liabilities are adequate for all open audit years based on its assessment of many factors including past experience and interpretations of tax law. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. To the extent that the final tax outcome of these matters is different than the amounts record- ed, such differences will impact income tax expense in the period in which such determina- tion 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 man- ufactured in accordance with the current laws, food safety standards and technical require- ments of the relevant Ukrainian authorities. The Group voluntarily applies non-domestic standards – ISO and HASSP – to some of the Group’s operations. For the industrial customers both domestically and outside of Ukraine, the food products are manufactured to the techni- cal specifications agreed with the buyers in ad- vance of the sale. In instances where the quality criteria and/or technical specifications are not met or the delivery of products are made close to expiry date, a quality claim may arise and the corresponding contingent liability may be dis- closed in the notes to the financial statements. The Group is subject to income tax in several jurisdictions and significant judgment is re- Realisation of any such contingent liabilities not currently recognised or disclosed in the financial 59 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 determina- tions about the future matters that may, at the time of determination, be beyond management’s control. Among the factors considered in mak- ing decisions on quality claims provisions are: the nature of the claim, the quantifiable varianc- es 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 re- spond 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 determin- ing and applying fair market prices, which sig- nificantly changed transfer pricing (“TP”) regu- lations in Ukraine. The Group exports skimmed milk powder and performs intercompany trans- actions, which is in the scope of the Ukrainian TP regulations. The Group has submitted the controlled transaction report for the year ended 31 December 2018 within the required deadline, and has prepared all necessary documentation on controlled transactions for the year ended 31 December 2019 as required by legislation and plans to submit report. Management believes that the Group has been in compliance with all requirements of effective tax legislation. (h) Impairment of non-financial assets Management assesses whether there are any indicators of possible impairment of non-finan- cial assets at each reporting date. If any events or changes in circumstances indicate that the current value of the assets may not be recov- erable or the assets, goods or services relating to a prepayment will not be received, the Group estimates the recoverable amount of assets. If there is objective evidence that the Group is not able to collect all amounts due to the orig- inal terms of the agreement, the corresponding amount of the asset is reduced directly by the impairment loss in the consolidated statement of comprehensive income. Subsequent and unforeseen changes in assumptions and esti- mates used in testing for impairment may lead to the result different from the one presented in the consolidated financial statements. (i) Fair value of financial instruments The fair value of financial assets and liabilities is determined by applying various valuation meth- odologies. Management uses its judgment to make assumptions based on market conditions existing at each balance sheet date. Where the fair values of financial assets and financial lia- bilities recorded in the consolidated statement of fi- nancial position cannot be derived from active markets, they are determined using valuation techniques including the discounted cash flows model. (j) Fair value measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value mea- surement is based on the presumption that the transaction to sell the asset or transfer the lia- bility takes place either in the principal market for the asset or liability, or in the absence of a principal market, in the most advantageous mar- ket for the asset or liability. The principal or the most advantageous market must be accessi- ble to the Group. A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic ben- efits 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 val- ue is measured or disclosed in the consolidated financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement. ANNUAL RЕPORT 2019ANNUAL RЕPORT 2019 60 61 4. ADOPTION OF NEW AND REVISED IFRS Ap- plying of new standards IFRS 16 Leases IFRS 16 was issued in January 2016. IFRS 16 is effective for the annual periods beginning on or after 1 January 2019. The Group used the modified retrospective ap- proach - IFRS 16 was adopted retrospectively from 1 January 2019, and hence has not restat- ed comparatives for the 2018 reporting period, as permitted under the specific transitional pro- visions in the standard. There was no change in the opening consolidated statement of chang- es in equity. The Company has recognized as at 01 January 2019: • right-of-use assets under ” lands and build- ing”, ”machinery” and ”other equipment’s” categories of Property, plant and equipment in the amount of GBP 88 thousand; • lease liabilities were recognized in the amount of GBP 88 thousand, which were included in “Other long-term liabilities” and “Other current liabilities”; • these adjustments did not affect deferred tax liabilities and retained earnings. For the year ended 31 December 2019: • depreciation costs increased by GBP 29 thousand due to the depreciation of recog- nized additional right-of-use assets, this led to an increase in “Other operating expenses” by GBP 29 thousand; • financial costs increased by GBP 15 thou- sand due to interest costs on recognized ad- ditional lease liabilities. On adoption of IFRS 16, the Group recognised lease liabilities in relation to leases which had previously been classified as ‘operating leases’ under the principles of IAS 17 Leases. Con- tracts that were not identified as leases under IAS 17 and IFRIC 4 were not reassessed for whether there is lease. Therefore, the definition of a lease under IFRS 16 was applied only to contracts entered into or changed on or after 1 January 2019. The Group also elected to use the recognition exemptions for lease contracts that, at the commencement date, have a lease term of 12 months or less and do not contain a purchase option, and lease contracts for which the underlying assets is of low value. The right-of-use assets were measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised as at 31 December 2018. The following changes in presentation of the consolidated statement of comprehensive in- come took place: - In 2018 reporting period land lease expens- es were included in Cost of sales as Rent, in 2019 – one part was included in Cost of Sales as Depreciation and amortisation and other part was recognised as Effect of lease of right-of-use assets. - In 2018 reporting period office rent expens- es were included in Administrative expenses as Third parties’ services, in 2019 – one part was included in Administrative expenses as Depreciation and amortisation and other part was recognised as Effect of lease of right- of-use assets (as it relates to financial inter- ests). - The following changes in presentation of the consolidated statement of cash flow: - In 2018 reporting period rent expenses were not included to adjustments for Cash flows from operating activities before changes in working capital. Rent payments were includ- ed in Cash flows from operating activities as Cash flows from operations. - In 2019 reporting period lease expenses adjusted Cash flows from operating activ- ities before changes in working capital as Depreciation and amortisation and as Effect of lease of right-of- use assets. Payments were divided into Interest paid in Cash flows from operating activities and Repayment of long-term and short-term borrowings in Cash flows from financing activities. Adoption of IFRS 16 has no impact on the Group’s finance leases. In applying IFRS 16 for the first time. The Group has used the following practical expedients permitted by the standard: - The use of a single discount rate to a port- folio of leases with reasonably similar char- acteristics; - The accounting for operating leases with a remaining lease term of less than 12 months as at 1 January 2019 as short-term; - The exclusion of initial direct costs for the measurement of the right-of-use asset at the date of initial application; - The use of hindsight in determining the lease term where the contract contains op- tions to extend or terminate the lease. IFRIC 23 Uncertainty over Income Tax Treat- ment The Interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of IAS 12 Income Taxes. It does not apply to taxes or levies outside the scope of IAS 12, nor does it specifically include requirements relating to in- terest and penalties associated with uncertain tax treatments. The Group determines whether to consider each uncertain tax treatment separately or together with one or more other uncertain tax treatments and uses the approach that better predicts the resolution of the uncertainty. The Group applies significant judgement in identifying uncertainties over income tax treat- ments. Since the Group operates in a complex multinational environment, it assessed wheth- er the Interpretation had an impact on its con- solidated financial statements. Upon adoption of the Interpretation, the Group considered whether it has any uncertain tax positions, particularly those relating to trans- fer pricing. The Group determined, based on its tax compliance and transfer pricing study, that it is probable that its tax treatments (including those for the subsidiaries) will be accepted by the taxation authorities. The Interpretation did not have an impact on the consolidated finan- cial statements of the Group. Amendments to IFRS 9: Prepayment Features with Negative Compensation Under IFRS 9, a debt instrument can be mea- sured at amortised cost or at fair value through other comprehensive income, provided that the contractual cash flows are ‘solely payments of principal and interest on the principal amount outstanding’ (the SPPI criterion) and the instru- ment is held within the appropriate business model for that classification. The amendments to IFRS 9 clarify that a financial asset passes the SPPI criterion regardless of an event or cir- cumstance that causes the early termination of the contract and irrespective of which par- ty pays or receives reasonable compensation for the early termination of the contract. These amendments had no impact on the consolidat- ed financial statements of the Group. Amendments to IAS 19: Plan Amendment, Curtailment or Settlement The amendments to IAS 19 address the ac- counting when a plan amendment, curtailment or settlement occurs during a reporting peri- od. The amendments specify that when a plan amendment, curtailment or settlement occurs during the annual reporting period, an entity is required to determine the current service cost for the remainder of the period after the plan amendment, curtailment or settlement, using the actuarial assumptions used to remeasure the net defined benefit liability (asset) reflect- ing the benefits offered under the plan and the plan assets after that event. An entity is also required to determine the net interest for the remainder of the period after the plan amend- ment, curtailment or settlement using the net ANNUAL RЕPORT 2019ANNUAL RЕPORT 2019 62 63 defined benefit liability (asset) reflecting the benefits offered under the plan and the plan assets after that event, and the discount rate used to remeasure that net defined benefit lia- bility (asset). The amendments had no impact on the consolidated financial statements of the Group as it did not have any plan amendments, curtailments, or settlements during the period. Amendments to IAS 28: Long-term interests in associates and joint ventures The amendments clarify that an entity applies IFRS 9 to long-term interests in an associate or joint venture to which the equity method is not applied but that, in substance, form part of the net investment in the associate or joint venture (long-term interests). This clarification is rele- vant because it implies that the expected credit loss model in IFRS 9 applies to such long-term interests. The amendments also clarified that, in applying IFRS 9, an entity does not take account of any losses of the associate or joint venture, or any impairment losses on the net investment, rec- ognised as adjustments to the net investment in the associate or joint venture that arise from applying IAS 28 Investments in Associates and Joint Ventures. These amendments had no impact on the con- solidated financial statements as the Group does not have long term interests in its associ- ates and joint ventures. Annual Improvements 2015-2017 Cycle • IFRS 3 Business Combinations The amendments clarify that, when an entity ob- tains control of a business that is a joint operation, it applies the requirements for a business combi- nation achieved in stages, including remeasuring previously held interests in the assets and liabili- ties of the joint operation at fair value. In doing so, the acquirer remeasures its entire previously held interest in the joint operation. An entity applies those amendments to busi- ness combinations for which the acquisition date is on or after the beginning of the first an- nual reporting period beginning on or after 1 January 2019, with early application permitted. These amendments had no impact on the con- solidated financial statements of the Group as there is no transaction where joint control is obtained. IFRS11 Joint Arrangements An entity that participates in, but does not have joint control of, a joint operation might obtain joint control of the joint operation in which the activity of the joint operation constitutes a busi- ness as defined in IFRS 3. The amendments clarify that the previously held interests in that joint operation are not remeasured. An entity applies those amendments to trans- actions in which it obtains joint control on or after the beginning of the first annual reporting period beginning on or after 1 January 2019, with early application permitted. These amendments had no impact on the con- solidated financial statements of the Group as there is no transaction where a joint control is obtained. • IAS 12 Income Taxes The amendments clarify that the income tax consequences of dividends are linked more di- rectly to past transactions or events that gener- ated distributable profits than to distributions to owners. Therefore, an entity recognises the income tax consequences of dividends in profit or loss, other comprehensive income or equi- ty according to where it originally recognised those past transactions or events. An entity applies the amendments for annual re- porting periods beginning on or after 1 January 2019, with early application permitted. When the entity first applies those amendments, it applies them to the income tax consequences of dividends recognised on or after the begin- ning of the earliest comparative period. The management do not expect that the adop- tion of the Standards listed above will have a material impact on the consolidated financial statements of the Group in future periods. An analysis of some of amendment is given below: Since the Group’s current practice is in line with these amendments, they had no impact on the consolidated financial statements of the Group. Amendments to References to Conceptual Framework in IFRS Standards • IAS 23 Borrowing Costs The amendments clarify that an entity treats as part of general borrowings any borrowing originally made to develop a qualifying asset when substan- tially all of the activities necessary to prepare that asset for its intended use or sale are complete. The entity applies the amendments to borrow- ing costs incurred on or after the beginning of the annual reporting period in which the entity first applies those amendments. An entity ap- plies those amendments for annual reporting periods beginning on or after 1 January 2019, with early application permitted. Since the Group’s current practice is in line with these amendments, they had no impact on the consolidated financial statements of the Group. At the date of authorization of these Consoli- dated financial statements the following inter- pretations and amendments to the Standards in issue but not yet effective: Standards and Interpretations Together with the revised Conceptual Framework, which became effective upon publication on 29 March 2018, the IASB has also issued Amend- ments to References to the Conceptual Frame- work in IFRS Standards. The document contains amendments to IFRS 2, IFRS 3, IFRS 6, IFRS 14, IAS 1, IAS 8, IAS 34, IAS 37, IAS 38, IFRIC 12, IFRIC 19, IFRIC 20, IFRIC 22, and SIC-32. Not all amendments, however, update those pro- nouncements with regard to references to and quotes from the framework so that they refer to the revised Conceptual Framework. Some pronounce- ments are only updated to indicate which version of the Framework they are referencing to (the IASC Framework adopted by the IASB in 2001, the IASB Framework of 2010, or the new revised Framework of 2018) or to indicate that definitions in the Stan- dard have not been updated with the new definitions developed in the revised Conceptual Framework. Amendments to IFRS 3 – Definition of a business The amendments clarify that while businesses usually have outputs, outputs are not required Amendments to IAS 1 Presentation of Financial Statements: Classification of Liabilities as Current or Non-current IFRS 17 Insurance Contracts Amendments to References to Conceptual Framework in IFRS Standards Amendments to IFRS 3 – Definition of a business Amendments to IAS 1 and IAS 8 – Definition of Material Amendments to IFRS 9, IAS 39 and IFRS17: Interest Rate Benchmark Reform Effective for annual period beginning on or after 1 January 2022 1 January 2021 1 January 2020 1 January 2020 1 January 2020 1 January 2020 ANNUAL RЕPORT 2019ANNUAL RЕPORT 2019 64 65 for an integrated set of activities and assets to qualify as a business. To be considered a busi- ness an acquired set of activities and assets must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. Additional guidance is provided that helps to determine whether a substantive process has been acquired. The amendments introduce an optional con- centration test that permits a simplified as- sessment of whether an acquired set of activ- ities and assets is not a business. Under the optional concentration test, the acquired set of activities and assets is not a business if sub- stantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar assets. Amendments to IAS 1 and IAS 8 – Definition of Material The amendments are intended to make the defini- tion of material in IAS 1 easier to understand and are not intended to alter the underlying concept of mate- riality in IFRS Standards. The concept of ‘obscuring’ material information with immaterial information has been included as part of the new definition. The threshold for materiality influencing users has been changed from ‘could influence’ to ‘could reasonably be expected to influence’. The definition of material in IAS 8 has been re- placed by a reference to the definition of mate- rial in IAS 1. In addition, the IASB amended other Stan- dards and the Conceptual Framework that con- tain a definition of material or refer to the term ‘material’ to ensure consistency. secured funding, in a particular combination of currency and maturity and in a particular interbank term lending market. Recent market developments have brought into question the long-term viability of those benchmarks. The amendments published deal with issues affecting financial reporting in the period be- fore the replacement of an existing interest rate benchmark with an alternative interest rate and address the implications for specific hedge accounting requirements in IFRS 9 Financial Instruments and IAS 39 Financial Instruments: Recognition and Measurement, which require forward-looking analysis. (IAS 39 is amended as well as IFRS 9 because entities have an ac- counting policy choice when first applying IFRS 9, which allows them to continue to apply the hedge accounting requirements of IAS 39). There are also amendments to IFRS 7 Financial Instruments: Disclosures regarding additional disclosures around uncertainty arising from the interest rate benchmark reform. *The Board of Directors is currently analyzing the impact of the adoption of these financial re- porting standards on the financial statements of the Group. 5. FINANCIAL RISK MANAGEMENT The principal risks facing the Group’s business are credit risk, liquidity risk and market risk, in- cluding 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 sharehold- ers. 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. Amendments to IFRS 9, IAS 39 and IFRS17: In- terest Rate Benchmark Reform (a) Principal financial instruments Interbank offered rates (IBORs) are interest reference rates, such as LIBOR, EURIBOR and TIBOR that represent the cost of obtaining un- 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 fol- lows: The Board has overall responsibility for the de- termination of the Group’s risk management objectives and policies and, whilst retaining ul- timate responsibility for them, it has delegated the authority for designing and operating pro- cesses that ensure the effective implementa- tion of the objectives and policies to the Group’s Year ended 31 De- cember 2019 £ ‘000 Year ended 31 De- cember 2018 £ ‘000 Financial assets Financial assets at amortised cost - trade and other receivables (excluding non-finan- cial assets) - cash and cash equivalents - other financial assets Financial liabilities Financial liabilities at amortised cost: - non-current bank loans - long-term payables - short-term payables - current bank loans - trade and other payables (excluding non-financial liabilities) - interest payable 6 794 231 31 7 056 - - 441 7 213 7 570 171 15 395 2 960 181 24 3 165 5 208 467 - 2 455 3 808 151 12 089 (b) General objectives, policies and processes The Group’s overall risk management pro- gramme recognises the unpredictability of financial markets and seeks to minimise po- tential adverse effects on the Group’s financial performance. Risk management is carried out by the Group Chief Executive Officer (CEO) un- der policies approved by the Board of Directors (the “Board”). The Group CEO identifies and evaluates financial risks in close co-operation with the Group’s operating units. The Board provides broad guidance and oper- ating principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest-rate risk, credit risk, and investing excess liquidity. finance function. The overall objective of the Board is to set polices that seek to reduce risk as far as possible without unduly affecting the Group’s competitiveness and flexibility. Further details regarding these policies are laid out be- low. (c) Credit risk Credit risk is the risk that a counterparty will not be able to meet its obligations in full when due. The Ukrproduct Group is mainly exposed to credit risk from credit sales to customers in Ukraine. The Group manages its credit risk through the Group’s risk assessment policy by evaluating each new customer before signing a contract using the following criteria: trading history and the strength of own balance sheet. The Group attempts to reduce credit risk by ANNUAL RЕPORT 2019ANNUAL RЕPORT 2019 66 67 (c) Credit risk (continued) conducting periodic reviews which includes obtaining external ratings and in certain cases bank references. According to the Group’s risk assessment poli- cy, implemented locally, every new customer is appraised before entering contracts; trading his- tory and the strength of their own balance sheet being the main indicators of creditworthiness. While starting the commercial relationship with the Group, a new customer is offered the terms that are substantially tighter than those for the existing customers and stipulate, as a rule, the cash-on-delivery payments terms and no-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 maxi- mum open amount without requiring approval from the CEO. These limits are reviewed quar- terly. 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 expo- sure in relation to trade and other receivables, which are neither past due nor impaired, are made in Note 18. The Group does not rate trade receivables by category or recoverability, as the Group’s historical default rates have been neg- ligible in the past (less than 5%); essentially all trade receivables due to the Group had been recovered. In the future, the default rate on trade receiv- ables overdue is expected to remain stable or even fall because in Ukraine the Group deals increasingly with the modern-format retailers whose creditworthiness is conducive to the payment discipline required by the Group. Maximum exposure to the trade and other re- ceivables component of credit risk at the re- porting date is the fair value of trade and other receivables. There is no collateral held as secu- rity or other credit enhancements. The Group’s credit controllers monitor the utili- sation of the credit limits on a daily basis by cus- tomer and apply the delivery stop orders imme- diately if the individual limits are exceeded. The Group’s procedure for recovery of the trade re- ceivables past due includes the following steps: - identification of the date and exact amount of the receivable past due, termination of all further deliveries and forwarding to the cus- tomer 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 con- trol department to the customer premises- 2 weeks thereafter; - filing a claim to the commercial court for repayment of the amount overdue and late payment fees - 2 weeks thereafter; - obtaining a court order for repayment of the amount due and collaboration with bailiff - 2 weeks thereafter. As a result of the credit control and risk assess- ment 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 equiv- alents and deposits with banks and financial in- stitutions. The Group reviews the banks and fi- nancial institutions it deals with to ensure that standards of credit worthiness are maintained. Maximum exposure to the cash and cash equivalents and deposits with banks and finan- cial institutions component of credit risk at the reporting date is the fair value of the cash bal- ances due from such banks and financial insti- tutions. There is no collateral held as security or other credit enhancements. Cash at bank and short term deposits are kept on the accounts in the following banks: Bank JSC OTP Bank Bank of Cyprus PJSC Raiffeisen Bank Aval CreditWest Other Year ended 31 December 2019 Rating uaAA B- A3.ua uaAA+ Caa3 Year ended 31 December 2018 Rating uaAA B- A3.ua uaAA+ Caa3 Year ended 31 December 2019 £ ‘000 2 - 28 189 4 223 Year ended 31 December 2018 £ ‘000 2 - 21 151 5 179 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 2019 £ ‘000 Carrying Value Cash and cash equiva- lents Trade receivables Other financial assets 231 6 664 31 6 926 Year ended 31 December 2019 £ ‘000 Maximum exposure (unsecured) 231 6 664 31 6 926 Year ended 31 December 2018 £ ‘000 Carrying Value 181 2 865 24 3 070 Year ended 31 December 2018 £ ‘000 Maximum exposure (unsecured) 181 2 865 24 3 070 ANNUAL RЕPORT 2019ANNUAL RЕPORT 2019 68 (d) Liquidity risk Liquidity risk is a function of the possible diffi- culty 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. Detailed information is con- tained in Note 24. The Group’s operating divisions (plants) have different liquidity requirement profiles. As the Group’s products have short-cycled and long-cycled production, the liquidity risk of each plant is monitored and managed centrally by the Group Treasury function. Each plant has a cash facility based on cash budgets with the Group Treasury. The cash budgets are set lo- cally and agreed by the CEO in advance. The CEO (and the Board, if requested) receives rolling quarterly cash flow projections on a month- ly basis as well as information regarding the dai- ly cash balances at each plant and overall. In the ordinary course of business, the Group relies on a combination of the available overdraft facilities and cash balances to fund the on-going liquidity needs. Capital expenditures are usually funded through longer- term bank loans. In case of the inadequate cash balances and the overdraft facil- ities close to the agreed ceilings, the Group is ex- pected to revert to the emergency funding made available through temporary freeze to the current portion of capital spending, immediate operating cost reductions, postponement of payments to the third parties, and expansion of the overdraft ceilings. Although undesirable and never occur- ring in the past, such emergency funding is the last resort on which the Group may have to draw while ensuring the ongoing continuity of the business. (e) Market risk Market risk may arise from the Group’s use of interest bearing, tradable and foreign currency financial instruments. Market risk comprises fair value interest rate risk, foreign exchange risk and commodity price risk and is further as- sessed below: (i) Interest-rate risk The Group’s interest-rate risk arises only from short-term credits, and is considered to be in- significant. The Group analyses the interest rate exposure on a year basis. Detailed infor- mation is contained in Note 24. A sensitivity analysis is performed by applying various interest rate scenarios to the borrow- ings. A change of interest rate by 1 percentage points (being the maximum reasonably possi- ble expectation of changes in interest rates) would cause a decrease in interest expense by GBP -23,000 (decrease 2018: - 1%-GBP 18,500). (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 ma- terials (vegetable fats), packaging materials, energy resources and fuel. The Group does the best to minimise this risk by replacing raw ma- terials and other components. An increase in export 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 repre- sented in hryvnia. All Group’s outstanding bal- ances of the trade accounts payable are in UAH. Currency analysis is provided in Note 29. The Group has a long-term loan from Euro- pean Bank of Reconstruction and Develop- ment (“EBRD”) for the purpose of modernising Starokonstantinovskiy Molochniy 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) appre- 69 ciation 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 230 thousand (2018 by 3%: GBP 169 thousand). (iii) Commodity price risk The Ukrainian economy has been character- ised 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 salaries and rents, fuel costs that are sensitive to rises in the gen- eral price level in Ukraine. The management of the Group believes there exists high risk of Ukrainian minimum wage growth. In this situ- ation, due to competitive pressures, it may not be able to raise the prices charged for products and services sufficiently to preserve operating margins. Accordingly, high rates of inflation in Ukraine could increase the Group’s cost and decrease its operating margins. Minimization of risk can be achieved by means of rapid re- sponse to the market-growth rates and the timeliness of raising prices for finished prod- ucts. The Group controls the prices for branded products through timely changes of sales pric- es according to the market development and competition. The Group is also exposed to commodity price risk for skimmed milk powder (“SMP”). The price for this product is determined by the world and domestic market. The profitability of SMP was adversely affected by higher raw milk prices. (f) 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 le- gal 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, personnel training, and valua- tion procedures. 6. CAPITAL MANAGEMENT POLICIES The Group’s definition of the capital is ordinary share capital, share premium, accumulated re- tained earnings and other equity reserves. The Directors view their role as that of corporate guardians responsible for preservation and growth of the capital, as well as for generation of the adequate returns to shareholders. The Group’s objectives when maintaining and growing capital are: - to safeguard the Group’s ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders; - to identify the appropriate mix of debt, equi- ty and partner sharing opportunities in order to balance the highest returns to sharehold- ers overall with the most advantageous tim- ing of investment flows; - to provide an adequate return to sharehold- ers by delivering the products in demand by the customers at prices commensurate with the level of risk and expectations of share- holders. The Group sets the amount of capital it requires in proportion to risk. The Group manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the current trad- ing environment. The Group’s core assets con- sist predominantly of the property, plant and equipment – the resources that have proven their ability to withstand the competitive ero- sion and inflationary pressure. In order to maintain or adjust the capital struc- ture, the Group may issue new shares, adjust the amount of dividends paid to shareholders, ANNUAL RЕPORT 2019ANNUAL RЕPORT 2019 70 71 7. SEGMENT INFORMATION At 31 December 2019, the Group was organ- ised internationally into five main business seg- ments: 1) Branded products – processed cheese, hard cheese, packaged butter and spreads 2) Beverages – kvass, other beverages 3) Non-branded products – skimmed milk pow- der, other skimmed milk products 4) Distribution services and other –resale of third-party goods and processing services 5) Supplementary products – grain crops repay the debt, return capital to shareholders or sell assets to improve the cash position. His- torically, the first three methods were used to achieve and support the desired capital struc- ture. The Group monitors capital on the basis of the net debt to equity ratio (D/E ratio). This ratio is calculated as net debt to shareholder equity. Net debt is calculated as total debt (as shown in the 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%) max- imum. 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 2019, the D/E ratio consists of approximately 2.23. Year ended 31 December 2019 £ ‘000 7 654 (231) Year ended 31 December 2018 £ ‘000 8 130 (181) 7 423 3 160 234,9% 7 949 964 824,6% Total debt Less: Cash and cash equivalents Net debt Total equity D/E ratio The segment results as presented to the Group`s Chairman and Chief Executive for the year end- ed 31 December 2019 are as follows: Branded products Bever- ages Non- branded products £ ‘000 27 255 4 697 £ ‘000 1 647 823 £ ‘000 7 214 (1 534) Distribu- tion ser- vices and other £ ‘000 1 942 403 Supple- mentary products Un-allo- cated Total £ ‘000 11 903 339 £ ‘000 - - £ ‘000 49 961 4 728 (894) (155) (1 985) (406) - - 293 618 - (77) (64) (240) (1 137) (170) (143) (89) (2 175) - - 74 74 1 818 262 (623) 156 132 (255) 1 490 - - - - - - 1 818 - 1 818 13 927 262 - 262 1 423 (623) - (623) 3 922 - - - 13 927 8 266 1 423 - 3 922 - - - 8 266 - - - - - - 349 52 235 - - 156 - 156 - - - 267 - - 267 - - - 132 - 132 - - - - - - - - (578) (578) 1 081 1 081 248 38 286 - 1 993 38 2 031 19 272 1 115 1 115 1 115 - 20 387 8 533 8 166 8 166 242 242 8 408 16 941 - 636 Sales Gross profit Administrative ex- penses Selling and distribu- tion expenses Other operating ex- penses Profit from opera- tions Finance expenses, net Loss from exchange differences Profit before taxation Taxation Profit for the year Segment assets Unallocated corpo- rate assets Consolidated total Segment liabilities Unallocated corpo- rate liabilities Unallocated deferred tax Consolidated total liabilities Depreciation and amortisation The unallocated corporate liabilities represent bank loans, overdrafts and accruals. ANNUAL RЕPORT 2019ANNUAL RЕPORT 2019 72 73 7. SEGMENT INFORMATION (CONTINUED) 7. SEGMENT INFORMATION (CONTINUED) The segment results as presented to the Group`s Chairman and Chief Executive statement for the year ended 31 December 2018 are as follows: Secondary reporting format - geographical segments: Branded products Bever- ages Non- branded products £ ‘000 21 537 3 040 £ ‘000 1 261 656 £ ‘000 4 792 (1 417) Distribu- tion ser- vices and other £ ‘000 2 774 671 Supple- mentary products Unallo- cated Total £ ‘000 6 564 227 £ ‘000 - - £ ‘000 36 928 3 177 (747) (154) 293 (153) (43) (257) (1 061) (1 844) (402) 1 028 (429) (152) - (1 799) 449 - 449 8 818 100 - 100 1 318 (96) - (96) 3 338 - - - 8 818 1 318 3 338 4 169 - - 4 169 - - - - - - - - 301 42 182 89 - 89 - - - 184 - - 184 - 32 - 32 - - - - - - - - (484) - (484) - 915 90 - 90 13 474 915 915 14 389 - 4 353 8 798 8 798 274 274 9 072 13 425 - 525 Sales Gross profit Administrative ex- penses Selling and distribu- tion expenses Profit before taxation Taxation Profit for the year Segment assets Unallocated corpo- rate assets Consolidated total assets Segment liabilities Unallocated corpo- rate liabilities Unallocated deferred tax Consolidated total liabilities Depreciation and amortisation Sales by country (consignees) Urkaine Singapore Kazakhstan Poland Azeibaijan Denmark Egypt UAE Moldova Holland Turkey Georgia Uzbekistan Other countries Total Year ended 31 December 2019 £ ‘000 43 517 1 021 1 012 965 796 717 523 374 299 260 144 105 85 143 49 961 Sales by country (consignees) Urkaine Azerbaijan Kazakhstan Kongeriget Danmark Mexico Holland Moldova Turkmenistan Egypt Georgia Nigeria Poland Canada Other countries Total Year ended 31 December 2018 £ ‘000 28 535 2 189 1 337 1 062 876 845 692 434 333 301 165 156 - 3 36 928 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 conse- quently resell the milk powders to other countries worldwide. The Group has no single customers that exceed 10% of total sales. ANNUAL RЕPORT 2019ANNUAL RЕPORT 2019 74 8. REVENUE 9. EXPENSES BY NATURE 75 For the years ended 31 December 2019 and 31 December 2018, sales revenue was presented as follows: For the years ended 31 December 2019 and 31 December 2018, items of expenses were present- ed as follows: Branded (including bonuses) Beverages (including bonuses) Non-branded products Distribution services (including bonuses) Supplementary products General revenue Charge of bonuses Total revenue (excluding bonuses) Year ended 31 December 2019 £ ‘000 28 626 1 942 7 214 1 942 11 903 51 627 (1 666) 49 961 Year ended 31 December 2018 £ ‘000 22 466 1 450 4 791 2 856 6 566 38 129 (1 201) 36 928 Bonuses are compensation granted to the Group’s main customers within its distribution net- work. 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. Cost of sales Including: Raw materials and consumables used, cost of goods sold, manufacture overheads 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 Amortisation and depreciation Audit fees Taxes and compulsory payments Communication IT materials, household expenses, reading materials Other Selling and distribution expenses Including: Promotion Delivery costs Wages and salaries, social security costs (Note 12) Impairment of inventories Lease and current repair and maintenance Packaging Amortisation and depreciation Veterinary certificates, medical examination, permits Other Other operating expenses Including: Impairment of inventories Impairment of trade receivables Penalties Profit / (loss) on disposal of non-current assets Amortisation and depreciation Wages and salaries, social security costs (Note 12) Other Year ended 31 December 2019 £ ‘000 (45 233) Year ended 31 December 2018 £ ‘000 (33 751) (42 089) (31 068) (2 649) (495) (1 137) (486) (183) (95) (73) (69) (54) (46) (43) (40) (18) (30) (2 175) (622) (587) (390) (150) (148) (97) (76) (73) (32) 183 (62) (32) (29) 7 (11) (2) 312 (2 264) (419) (1 061) (438) (209) (90) (65) (49) (22) (38) (34) (44) (16) (56) (1 799) (417) (517) (394) (72) (131) (82) (78) (75) (33) (131) (42) (53) (19) (4) (4) (9) ANNUAL RЕPORT 2019ANNUAL RЕPORT 2019 76 10. NET FOREIGN EXCHANGE GAIN (LOSS) For the years ended 31 December 2019 and 31 December 2018, net foreign exchange gain (loss), consists of: Exchange difference in trade and other receivables Exchange difference in trade and other payables Exchange difference in short and long credits Effect of exchange rate changes and restatements on cash and cash equivalents Total net foreign exchange gain (loss) (14) 46 1 093 (44) (10) 72 362 (26) 1 081 398 11. NET FINANCE EXPENSES For the years ended 31 December 2019 and 31 December 2018, financial income/(expenses) were presented as follows: Year ended 31 December 2019 £ ‘000 Year ended 31 December 2018 £ ‘000 Finance expense Interest expense on bank loans Interest expense on lease liabilities Finance income Interest income Net finance expense recognised in the statement of comprehensive income (564) (15) 1 (578) 12. EMPLOYEE BENEFIT EXPENSES (494) (494) For the years ended 31 December 2019 and 31 December 2018, employee benefit expenses were presented as follows: Wages and salaries (including key management person- nel) Total Average number of employees Year ended 31 December 2019 £ ‘000 Year ended 31 December 2018 £ ‘000 (2 929) 844 (3 527) 852 77 Year ended 31 Decem- ber 2019 £ ‘000 (2 649) (486) (390) (2) Year ended 31 Decem- ber 2018 £ ‘000 (2 264) (438) (394) (9) (3 527) Wages and salaries of operating personnel Wages and salaries of administrative personnel Wages and salaries of distribution personnel Wages and salaries of personnel related to other operating expenses Total Wages and salaries of key management personnel: For the year ended 31 December 2019, remuneration of the Group’s key management personnel amounted to GBP 132,3 thousand (2018: GBP 131,4 thousand). Key management personnel received only short term benefits during the years ended 31 Decem- ber 2019 and 31 December 2018. The key management personnel are those persons remunerat- ed 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 2019 and 31 December 2018, income tax expenses were pre- sented as follows: Current tax charge - Ukraine Current tax charge - non-Ukraine Deferred tax relating to the origination and reversal of temporary dif- ferences Total income tax expenses Year ended 31 Decem- ber 2019 £ ‘000 25 1 (64) Year ended 31 Decem- ber 2018 £ ‘000 2 6 (8) (38) - Differences in treatment of certain elements of financial statements by IFRS and Ukrainian stat- utory taxation regulations give rise to temporary differences. The tax effect of the movement on these temporary differences is recognised at the rate of 18% (2018: 18%). ANNUAL RЕPORT 2019ANNUAL RЕPORT 2019 78 79 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 2019 £ ‘000 Year ended 31 December 2018 £ ‘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 in- come not subject to tax and expenses not deductible for tax purposes Ukraine Cyprus Tax charge Ukraine Cyprus The weighted average applicable tax rate Ukraine Cyprus BVI, Jersey 3 137 67 (1 102) 2 102 565 7 572 (604) (6) (610) (39) 1 (38) 18% 8% Nil 26% - 14 76 90 - 1 1 (6) 5 (1) (6) 6 - 18% 8% Nil 26% There are a number of laws related to various taxes imposed by both central and regional gov- ernmental 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, docu- mented with a sufficient degree of clarity and adhered to by the taxpayers. Nevertheless, there remain certain risks in relation to the Ukrainian tax system: few court precedents with regard to tax related issues exist; different opinions regarding legal interpretation may arise both among and within government ministries and regulatory agencies; tax compliance practice is subject to review and investigation by a number of authorities with overlapping responsibilities. Generally, tax declarations remain subject to inspection for an indefinite period. In prac- tice, however, the risk of retroactive tax as- sessments 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 sub- sequent inspection of that year. The Group’s management believes that it has adequately provided for tax liabilities in the accompanying financial statements; howev- er, the risk remains that those relevant au- thorities could take different positions with regard to interpretative issues. During the period under review, the Ukrainian companies within the Group paid royalties and interest charges on the outstanding cred- its to another Group company – Solaero Glob- al Alternative Fund Limited (Cyprus). These payments were not taxable in Ukraine due to the existing Double Taxation Treaty between Ukraine and Cyprus. 14. PROPERTY, PLANT AND EQUIPMENT In accordance with IAS 16 “Property, Plant and Equipment”, the Group carries out revalu- ations, with sufficient regularity to ensure that the carrying amount does not differ material- ly from fair value. An independent valuation of the Group’s property, plant and equipment was undertaken by BGS Assets LLC as at 31 December 2015. As at 31 December 2019, 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 as- sets for butter, cheese, protein and skimmed dairy products: - Production assets of SE Starokostyantynivs- ki Dairy Plant and two other units in Zhytomir and Letychiv; - 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 value in use calcu- lation Value in use calculation for production both dairy products and beverages is sensitive to the following assumptions: Gross profit margin – Gross profit margin is based on 2020 budget value and takes into con- sideration trends of value indexes for 2019-2022. Discount rate – Discount rate assumes cur- rent market estimates risks, specific for each CGU, inclusive of cash cost and individual risks and corresponding assets excluded from the cash flow valuation. Discount rate calculation based on specific Group 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 capi- tal is calculated on the basis of predicted re- turn on investment of Group investors. Specific segment risks are included in usage of separate facts of beta-testing. Beta fac- tors are estimated annually using generally accessible market data. The WACC used in the model for both CGUs is 21.5%. Production value increase – is derived from pub- lished consumer price index for Ukraine or world price tendencies for export product groups. ANNUAL RЕPORT 2019ANNUAL RЕPORT 2019 80 81 14. PROPERTY, PLANT AND EQUIPMENT (CONTINUED) Increase of raw material price – forecast is obtained got from published consumer price index for Ukraine. Predicted increase data – the data are based on published industry research in Ukraine and management esti- mates. Assumption regarding business segment – in so far as the directors are aware, forecasts in relation to the growth rate of each business seg- ment are based on a comparison with the fore- cast 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”, “Ar- seniivskyi” and “Molendam”. These brand gave more than 50% of revenue. Industry forecast is not used for kvass (bever- age) 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 management’s forecasts including sensitivity analysis. Brand development plans include: - Extension of brand presence in distribution networks; - Kvass in kegs sales increase; - Extension of beverage product range (pro- duction of white kvass); The given product is dependent on weather conditions. 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 considerations have been included in the valuation. 14. PROPERTY, PLANT AND EQUIPMENT (CONTINUED) As at 31 December 2019 and 31 December 2018, property, plant and equipment were pre- sented as follows: 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 Cost or valuation At 1 January 2019 Additions Transfers to/from AUC Disposals Exchange differences on translation to the presentation currency At 31 December 2019 Accumulated depreciation At 1 January 2019 Depreciation charge Disposals Exchange differences on translation to the presentation currency At 31 December 2019 Net book amount at 31 December 2019 Net book amount at 31 December 2018 Net book amount at 31 December 2017 r e d n u s t e s s A n o i t c u r t s n o C d n a d n a L s g n d i l i u B d n a t n a P l i y r e n h c a M s e l c i h e V , s t n e m u r t s n I - h t o d n a s l o o t t n e m p u q e r e i l a t o T 2 246 3 739 £ ‘000 £ ‘000 £ ‘000 £ ‘000 £ ‘000 £ ‘000 7 236 139 - 540 19 139 (121) 2 662 - 2 49 570 - 33 43 - 54 279 - 32 167 39 - - - - 2 445 4 069 372 242 186 118 (2) - 35 22 - 39 261 (234) - 5 382 591 2 445 4 069 - 35 - 418 - 109 (7) 568 71 - - - - - 71 39 19 2 898 4 739 591 382 241 140 (8) - 85 91 613 909 2 285 3 830 2 063 3 478 2 004 3 367 643 195 103 (1) 17 314 643 - 45 (79) 85 694 314 119 (43) 45 435 259 329 375 696 139 58 (23) 11 185 696 - 45 (10) 92 823 185 71 (16) 34 274 549 511 523 7 892 948 465 (26) 85 1 472 7 892 261 - (96) 1 168 9 225 1 472 571 (67) 255 2 231 6 994 6 420 6 288 ANNUAL RЕPORT 2019ANNUAL RЕPORT 2019 82 83 14. PROPERTY, PLANT AND EQUIPMENT (CONTINUED) As at 31 December 2019 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 2019 (2018: GBP 4,872 thousand) were pledged as collateral for loans. As at 31 December 2019 any prepayments for property, plant and equipment were in- cluded within Assets under construction in the amount of GBP 28 thousand (2018: GBP 16 thousand). As at 31 December 2019 fully depreciated assets have been included within property, plant and equipment with the original cost of GBP 287 thousand (2018: GBP 143 thou- sand). It’s impracticable to provide information about the carrying amounts of all classes of assets, except office equipment, as they were measured using the cost model with- out undue cost and effort. 15. INTANGIBLE ASSETS As at the reporting dates intangible assets were presented as follows: Computer software £ ‘000 Trademarks £ ‘000 Total £ ‘000 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 Cost or valuation At 1 January 2019 Additions Disposals Exchange differences on translation to the presentation currency At 31 December 2019 Accumulated amortisation At 1 January 2019 Amortisation charge for the year Disposals Exchange differences on translation to the presentation currency At 31 December 2019 Net book amount at 31 December 2019 Net book amount at 31 December 2018 Net book amount at 31 December 2017 25 11 (2) 2 36 24 - (1) 2 25 36 36 (8) 5 69 25 1 - 3 29 40 11 1 841 - - 50 891 299 58 - 21 378 891 - - 60 951 378 64 - 56 498 453 513 542 866 11 (2) 52 927 323 58 (1) 23 403 927 36 (8) 65 1 020 403 65 - 59 527 493 524 543 The remaining amortisation periods of the intangible assets are as follows: - Computer software 1-10 years; - Trademarks 11-18 years; ANNUAL RЕPORT 2019ANNUAL RЕPORT 2019 84 85 15. INTANGIBLE ASSETS (CONTINUED) The Group performed its annual impairment test in December 2019 and 2018. The Group considers the relationship between its market capitalisation and its book value, among other factors, when reviewing for indicators of im- pairment. As at 31 December 2019, the mar- ket capitalisation of the Group was below the book value of its equity, indicating a potential impairment of goodwill and impairment of the assets of the operating segment. In addition, the overall decline in construction and devel- opment activities around the world, as well as the ongoing economic uncertainty, have led to a decreased demand in both the trademark “Zhyviy Kvas” and the trademarks within the “Dairy segment” CGUs. Trademark “Zhyviy Kvas” The recoverable amount of the trademark “Zhyviy Kvas” CGU, GBP 2 926 thousand as at 31 December 2019, has been determined based on a value in use calculation using cash flow projections from financial budgets approved by senior management covering a five-year period. The projected cash flows have been updated to reflect the recovering demand for products and services. The dis- count rate applied to cash flow projections is 16.7% (2018: 17.2%). 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 trade- marks within the “Dairy segment” CGU, GBP 1 949 thousand as at 31 December 2019, is also determined based on a value in use calculation using cash flow projections from financial bud- gets approved by senior management covering a five-year period. The projected cash flows have been updated to reflect the decreased re- covering for products and services. The pre-tax discount rate applied to the cash flow projec- tions is 16.7% (2018: 17.2%). The growth rate used to extrapolate the cash flows of the unit beyond the five-year period is 0 %. As a result of the analysis, management did not identify an impairment for this CGU. 16. DEFERRED TAX ASSETS AND LIABILITIES For the year ended 31 December 2019, deferred tax assets and liabilities were presented as fol- lows: As at 31 Decem- ber 2019 £ ‘000 As at 31 Decem- ber 2018 £ ‘000 - - 274 262 (25) 26 (39) (32) 18 - 32 - 242 274 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 amortisation Exchange differences on translation to the presentation currency Deferred tax assets at the end of the year Deferred tax liability at the end of the year 17. INVENTORIES As at the reporting dates inventories were presented as follows: Finished goods Raw materials Work in progress Other inventories Total As at 31 December 2019 £ ‘000 3 269 877 240 685 5 071 As at 31 December 2018 £ ‘000 2 379 479 282 595 3 735 During 2019, GBP 28,774 thousand (2018: GBP 22,895 thousand) was recognised as an expense in cost of sales. Inventories with a net book value of GBP 2 thousand at 31 December 2019 (2018: GBP 2 thousand) were pledged as collateral for loans. 18. TRADE AND OTHER RECEIVABLES Trade receivables Other receivables Prepayments Total As at 31 December 2019 £ ‘000 6 664 130 463 7 257 As at 31 December 2018 £ ‘000 2 865 95 196 3 156 The Group’s management believes that the carrying value for trade and other receivables is a reasonable approximation of their fair value. Maturity of trade receivables as at 31 December 2019 and 31 December 2018 is presented as follows: Total £ ‘000 6 664 2 865 Neither past due nor impaired £ ‘000 6 073 2 429 <30 days £ ‘000 325 259 2019 2018 Past due but not impaired 61-90 days £ ‘000 2 - 30-60 days £ ‘000 22 29 91-120 days £ ‘000 3 3 >120 days £ ‘000 239 145 ANNUAL RЕPORT 2019ANNUAL RЕPORT 2019 86 87 18. TRADE AND OTHER RECEIVABLES (CONTINUED) 21. CASH AND CASH EQUIVALENTS (EXCLUDING BANK OVERDRAFTS) Provisions were created for impaired trade and other receivables and holiday allowance. As at the reporting dates cash and cash equivalents were presented as follows: As at 31 December 2019 £ ‘000 As at 31 December 2018 £ ‘000 Impaired trade and other receivables at the begin- ning 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 220 61 (1) (29) 251 19. CURRENT TAXES 222 65 (314) 247 220 Cash on hand - on UAH Cash in bank - on UAH Cash in Bank - in other currencies Total 22. SHARE CAPITAL As at 31 December 2019 £ ‘000 8 168 55 231 As at 31 December 2018 £ ‘000 2 173 6 181 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 2019 £ ‘000 210 77 23 310 As at 31 December 2018 £ ‘000 250 94 5 349 As at 31 December 2019 £ ‘000 - 24 7 31 As at 31 December 2018 £ ‘000 - 15 9 24 Loans issued are short term in nature, repayable on demand and are interest free. As at the reporting dates share capital was presented as follows: Ordinary shares of 10p each Ordinary shares of 10p each At beginning of the year Own shares acquired At end of the year (exclud- ing shares held as treasury shares) Authorised As at 31 De- cember 2019 Number ‘000 60 000 As at 31 De- cember 2019 £ ‘000 6 000 As at 31 De- cember 2018 Number ‘000 60 000 As at 31 De- cember 2018 £ ‘000 6 000 Issued and fully paid at beginning and end of the year As at 31 De- cember 2019 Number ‘000 As at 31 De- cember 2019 £ ‘000 As at 31 De- cember 2018 Number ‘000 As at 31 De- cember 2018 £ ‘000 39 673 3 967 39 673 3 967 39 673 3 967 39 673 3 967 Treasury shares As at 31 De- cember 2019 Number ‘000 As at 31 De- cember 2019 £ ‘000 As at 31 De- cember 2018 Number ‘000 As at 31 De- cember 2018 £ ‘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 2019 and 31 December 2018 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 RЕPORT 2019ANNUAL RЕPORT 2019 88 23. OTHER RESERVES At 1 January 2018 Depreciation on revaluation of property, plant and equipment Reduction of revaluation reserve Exchange differences on transla- tion to the presentation currency At 31 December 2018 Depreciation on revaluation of property, plant and equipment Reduction of revaluation reserve Exchange differences on transla- tion to the presentation currency At 31 December 2019 Share premi- um £ ‘000 4 562 - Translation reserve £ ‘000 (14 894) - Revaluation reserve £ ‘000 3 769 (150) Total other reserve £ ‘000 (6 563) (150) - - - (8) - - - (8) 4 562 - (14 902) - 3 619 (182) (6 721) (182) - - - 165 - - - 165 Impact of reclassification on balance sheet Bank loans Long-term payables Liabilities of rent assets Deferred tax liabilities Current liabilities Bank loans Short-term payables Trade and other payables Other taxes payable TOTAL LIABILITIES 4 562 (14 737) 3 437 (6 738) Impact of reclassification on P&L 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 state- ment of comprehensive income. Amount of all foreign exchange differences arising from the translation of the financial information of Group entities to presentation currency. 24. BANK LOANS AND OVERDRAFTS As at 31 December 2019 the Group has two loans: the loan from Creditwest Bank in the amount of 2 073 thousand GBP (UAH 65,0 mil- lion) and the loan from EBRD in the amount of 5 140 thousand GBP (EUR 6,036 thousand). During the year to 31 December 2019, the Group continued to breach certain loan cove- nants in relation to the EBRD debt. The bank has not issued a waiver for the breach. As a consequence the loan is reclassified as a Cur- rent Lability. However, the Company continued to settle certain amounts to EBRD according to an agreed schedule. The Group completed in- stallments of payments and in accordance with an agreement between all parties, the payment of the tranche in December was postponed to subsequent periods. Profit from operations Profit before taxation Profit for the year Impact of reclassification on Cash flow Cash generated from operating activities Cash used in investing activities Cash generated from financing activities Effect of exchange rate changes on cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash at the end of the year 89 Adjusted 000,GBP - - 68 242 7213 441 9 245 18 17 227 Adjusted 000,GBP 1 490 1 993 2 031 Adjusted 000,GBP 918 (272) (898) 302 181 231 Before reclassifica- tion 000,GBP 4 913 441 68 242 Impact of reclassifica- tion 000,GBP (4 913) (441) - - 2 300 0 9 245 18 17 227 4 913 441 - - - Before reclassifica- tion 000,GBP 1 599 2 102 2 140 Impact of reclassifica- tion 000,GBP (109) (109) (109) Before reclassifica- tion 000,GBP 1 033 (272) (898) Impact of reclassifica- tion 000,GBP (115) - - 187 181 231 115 - - ANNUAL RЕPORT 2019ANNUAL RЕPORT 2019 90 91 24. BANK LOANS AND OVERDRAFTS (CONTINUED) The currency profile of the Group’s financial liabilities is as follows: Fixed assets with a net book value of GBP 3,177 thousand at 31 December 2019 (2018: GBP 4,872 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 trademarks. Bank Curren- cy Type Opening date Termination date Inter- est rate Limit EUR Loan 31.03.2011 30.11.2024 £ ‘000 5-7% 7 070 As at 31 Decem- ber 2019 £ ‘000 5 140 As at 31 Decem- ber 2018 £ ‘000 5 813 UAH Credit line 05.02.2018 5.02.2021 15,89% 2 095 2 073 1 850 7 213 7 663 EBRD Credit- west Bank Ukraine Total Floating rate lia- bilities £ ‘000 - 5 140 5 140 Fixed rate liabili- ties £ ‘000 2 073 - 2 073 As at 31 December 2019 £ ‘000 2 073 5 140 7 213 As at 31 December 2018 £ ‘000 1 850 5 813 7 663 UAH EUR Total The book value and fair value of financial liabilities are as follows: Book value as at as at 31 Decem- ber 2019 £ ‘000 7 213 - 7 213 Fair value as s at 31 December 2019 £ ‘000 7 213 - 7 213 Book value as at as at 31 December 2018 £ ‘000 7 663 - 7 663 Fair value as s at 31 December 2018 £ ‘000 7 663 - 7 663 Bank loans Bank overdrafts Total The average interest rate as at 31 December 2019 was 11% (2018: 6,15%). Reconciliation of liabilities arising from financing activities Maturity of financial liabilities On demand In less than 1 year In more than 1 year Total Interest rate profile of financial liabilities As at 31 December 2019 £ ‘000 - 5 140 2 073 7 213 As at 31 December 2018 £ ‘000 - 2 455 5 208 7 663 On demand Expiry within 1 year Expiry in more than 1 year Total Floating rate £ ‘000 - 5 140 - 5 140 Fixed rate £ ‘000 - - 2 073 2 073 As at 31 December 2019 £ ‘000 - 5 140 2 073 7 213 As at 31 December 2018 £ ‘000 - 2 455 5 208 7 663 As at 31 December 2018 Financ- ing cash flow Accrual of inter- est Foreign exchange movement £ ‘000 £ ‘000 £ ‘000 £ ‘000 Effect from translation to presen- tation cur- rency £ ‘000 As at 31 December 2019 £ ‘000 7 213 540 7 664 (7 768) (9) 741 7 655 (7 027) 7 753 Bearing loans and borrowings Interest Interest-bearing loans and borrow- ings 7 663 151 (346) (391) 7 814 (737) - 48 48 25. TRADE AND OTHER PAYABLES At the reporting date trade and other payables were presented as follows: Trade payables Prepayments received Accruals Interests payable Provisions Other payables Total As at 31 December 2019 £ ‘000 7 364 1 171 195 171 138 206 9 245 As at 31 December 2018 £ ‘000 3 546 807 140 151 102 262 5 008 The Group’s management believes that the carrying value for trade and other payables is a rea- sonable approximation of their fair value. ANNUAL RЕPORT 2019ANNUAL RЕPORT 2019 92 93 25. TRADE AND OTHER PAYABLES (CONTINUED) 29. CURRENCY ANALYSIS For the year ended 31 December 2019, provisions were presented as follows: Currency analysis for the year ended 31 December 2019 is set out below: 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 26. EARNINGS PER SHARE As at 31 December 2019 £ ‘000 102 217 (197) 16 138 As at 31 December 2018 £ ‘000 79 180 (164) 7 102 Basic earnings per share have been calculated by dividing net profit attributable to the ordinary shareholders by the weighted average number of shares in issue. Net profit/loss attributable to ordinary sharehold- ers Weighted number of ordinary shares in issue Basic earnings per share, pence Diluted average number of shares Diluted earnings per share, pence 27. DIVIDENDS As at 31 December 2019 £ ‘000 2 031 As at 31 December 2018 £ ‘000 90 39 673 5,12 39 673 5,12 39 673 0,23 39 673 0,23 Due to the business circumstances dictating prudence and cash conservation, the Board has de- cided not to pay a final dividend in respect of the year ended 31 December 2019. 28. SHARE-BASED PAYMENTS The Company operates an equity-settled share based remuneration scheme for employees. During 2019, the Group did not issue options to the third parties. They were not exercised. UAH USD GBP EUR Total 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 6 659 260 31 228 7 178 2 073 7 862 - 18 9 953 135 50 - 2 187 - 18 - - 18 - - - 1 1 - 72 - - 72 - - - - - 5 140 122 - - 5 262 6 794 310 31 231 7 366 7 213 8 074 - 18 15 305 Currency analysis for the year ended 31 December 2018 is set out below: UAH USD GBP EUR Total 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 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 5 813 289 - - 6 102 2 960 349 24 181 3 514 7 663 4 201 - 13 11 877 14 % strengthening of Hryvnia rate against the following currencies as at 31 December 2019 and 2018, would increase /decrease the amount of profits /or losses for the period by the amounts mentioned below. This analysis was conducted based on the assumption that all other variables, in particular, interest rates, remained unchanged. The change of GBP exchange rate does not have impact on the result as all the balances in GBP are attributable to the Group’s companies where GBP is a functional currency. ANNUAL RЕPORT 2019ANNUAL RЕPORT 2019 94 95 Increase/ decrease in rate USD EUR USD EUR 3% 18% -3% -18% Effect on income before tax in 2019 £ ‘000 5 (947) (5) 947 Effect on income before tax in 2018 £ ‘000 (72) (1 091) 72 1 091 30. RELATED PARTY TRANSACTIONS 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 per- son has control, joint control, or significant in- fluence 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 subsidiary, associate, or joint venture of the reporting entity, or it is controlled, jointly controlled, or significantly influenced or man- aged by a person who is a related party. Transactions and balances between the Group companies and other related parties are set out below. Remuneration of key management personnel is disclosed in Note 12. Sales of goods and services to related parties and purchases from related parties are sum- marised 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 As at 31 December 2019 £ ‘000 - - - - As at 31 December 2018 £ ‘000 - 3 14 4 Balances due from/(to) related parties at each period end are shown below. Receivables and prepayments Other financial assets Trade and other payables In 2019, the Group’s commercial relationships with the related parties comprised sales, pur- chases, provision. The terms and conditions for the contracts with the related parties were similar to the terms and conditions applied in dealings with unrelated parties. There were no guarantees given to or provided by the Group to related parties and vice versa. The ultimate controlling owners and beneficia- ries of the related parties were Mr. Alexander Slipchuk and Sergey Evlanchik. 31. COMMITMENTS AND CONTINGENCIES (a) Economic environment The Group carries out most of its operations in Ukraine. Laws and other regulatory acts affect- ing the activities of Ukrainian enterprises may be subject to changes and amendments within a short period of time. As a result, assets and operating activity of the Group may be exposed to the risk in case if any unfavourable changes take place in political and economic environ- ment. (b) Retirement and other liabilities Employees of the Group receive pension ben- efits from the Pension Fund, a Ukrainian Gov- ernment organization in accordance with the applicable laws and regulations of Ukraine. The Group is required to contribute a specified percentage of the payroll to the Pension Fund to finance the benefits. The only obligation of the Group with respect to this pension plan is to make the specified contributions from salaries. As at 31 December 2019 and 2018 the Group As at 31 December 2019 £ ‘000 - - 14 As at 31 December 2018 £ ‘000 25 - 13 had no liabilities for supplementary pensions, health care, insurance benefits or retirement in- demnities to its current or former employees. (c) Compliance with covenants The Group is subject to a covenant related pri- marily to its borrowings. Non-compliance with such covenants may result in negative con- sequences for the Group. As at 31 December 2019 and as at 31 March 2020 the Group had been in breach of certain covenants regarding the loan with EBRD. The bank has not issued a waiver for the breach. As a consequence, the loan is reclassified as a Current Liability (for the impact of such reclassification on the fi- nancial statements please see page 84). There has been no demand for repayment of the loan. The Company continues to communicate with EBRD and loan repayments are being met with as they fall due. (d) Litigations and claims The Group’s operations and financial position will continue to be affected by Ukrainian po- litical developments including the application of existing and future legislation and tax reg- ulations. Management believes that the Group has complied with all regulations and paid or accrued all taxes that are applicable. In the or- dinary course of business, the Group is subject to various legal actions and complaints. Man- agement believes that the ultimate liability, if any, arising from such actions or complaints will not have a material adverse effect on the financial condition or the results of the Group’s operations. Where the risk of outflow of re- ANNUAL RЕPORT 2019ANNUAL RЕPORT 2019 96 97 larly keg sales, given it is primarily sold from retail street vendors. As a result, the Board is considering opportunities to increase bottled kvass sales in light of the challenging environ- ment for keg sales. Nevertheless, the Board is hopeful that the Group can meet the annu- al budget expectations for bottled kvass and other beverages and expects keg sales to start picking up again in H2 2020. As stated above, as of 11 May 2020, lockdown restrictions in Ukraine have started to ease and the Board will continue to monitor the changing conditions on an ongoing basis. We continue to maximize sales efforts across the Group and implement measures to drive profitability in order to generate value for share- holders. sources is probable, the Group has accrued lia- bilities based on management’s best estimate. 32. SUBSEQUENT EVENTS (a) EBRD – breach of loan covenants As at 31 December 2019, the Group was in breach of the Debt Service Coverage ratio cov- enant in the loan facility in place with Europe- an Bank for Reconstruction and Development (“EBRD”). The Group remained in breach of this covenant as at 31 March 2020 and EBRD has not issued a waiver in respect of this breach. There has been no demand for repayment of the loan. The Company continues to commu- nicate with EBRD and the agreed loan repay- ments are being met as they fall due. (b) Installment In Q1 2020, the Company, under the terms of its agreement with EBRD, agreed to defer pay- ment of 200 000 EUR, resulting in a payment of 14 752.75 EUR plus an interest payment of 37 906 EUR. In Q2 2020, the Company, under the terms of its agreement with EBRD, agreed to defer payment of 200 000 EUR, resulting in a payment of 32 934,57 EUR plus an interest payment of 38 671,92 EUR. edented global impact on economic activities in most countries, including Ukraine. Neverthe- less, Ukrproduct has taken all of the steps it can in order to safeguard the wellbeing of its employees and ensure continued stable oper- ations. Prior to the lockdown period commencing in Ukraine in March 2020, Ukrproduct began im- plementing a number of measures aimed at preventing the spread of COVID-19 amongst the Group’s employees and their families. The Company is pleased to report that, as at the date of this report, these measures have result- ed in relatively few employees, in the context of the Group’s workforce of over 800 personnel, showing symptoms of the virus. As such, so far, the impact on the Group’s operations has been limited. Looking ahead, whilst COVID-19 creates significant economic uncertainty, the Group expects to utilise the experience gained during the pandemic, most notably from re- mote working, to streamline and optimise cer- tain administrative and operational processes. As would be expected in the context of a glob- al pandemic, the onset of COVID-19 has had a number of connotations for the Group’s busi- ness: (c) Foreign exchange rates Exports 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 Na- tional Bank of Ukraine the following are key ex- change rates: Currency UAH/GBP UAH/USD UAH/EUR 26 June 2020 33.18 26.70 29.91 (d) Impact of COVID-19 pandemic The outbreak of COVID-19 has had an unprec- Since the implementation of the lockdown in Ukraine, whilst the sales price achieved by the Group for SMP has been higher than the Com- pany had expected given the lockdown, large- ly driven by the sale of SMP to CIS countries, such as Kazakhstan and Moldova, unfortunate- ly, such prices are lower than budgeted at the beginning of the year. However, with regard to the export of other products (butter and spreads), pleasingly the lockdown experienced in the Group’s target markets has not had a significant impact on sales prices. In addition, Ukproduct has man- aged to sign contracts for butter with new cus- tomers with significant sales volumes, which the Company expects should positively impact profitability in H2 2020. Imports The imposition of the lockdown in the Ukraine has had a negative impact on the imports of butter and other products, with such imports reducing significantly as a result of, firstly, an initial depreciation in the Hryvnia against the dollar, and, secondly, lockdown-related logisti- cal issues in relation to customs activities. The Board is of the view that the situation is improving as a result of lockdown restrictions easing from 11 May 2020 combined with the recent appreciation of the Hryvnia against the dollar. Domestic market The impact of the lockdown period in Ukraine has not, overall, had a significant impact on sales, as a result of the strong brand recog- nition and market share of the Group’s prod- ucts. In addition, the Group sells its products in supermarkets and other stores that have re- mained open during the lockdown, thereby pro- viding a stable retail channel. Moreover, the sale of the Group’s products via outlets that have remained open has offered a competitive advantage, such that the Group has been able reduce milk prices in order to maintain volumes (with many competitors experiencing vastly reduced volumes) and in- crease the profitability of milk processing via access to cheaper raw materials and the ability source raw materials directly. However, sales of kvass and other beverages (both bottled and in kegs) have suffered signifi- cantly as a result of the lockdown period. For bottled kvass and other beverages, the season started later than expected notwithstanding lockdown, however, the lockdown has predict- ably negatively impacted kvass sales, particu- ANNUAL RЕPORT 2019ANNUAL RЕPORT 2019 98 Corporate advisers Group secretary Ocorian Ltd 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 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 Principal bankers UBS SA 40 rue du Rhône CH-1211 Geneva Switzerland ANNUAL RЕPORT 2019