Appendix No. 1. Consolidated financial statements under IFRS for the year that ended on December 31, 2018

(a) Group and its activity

The primary activities of PJSC IDGC of Siberia (hereinafter referred to as the PJSC IDCG of Siberia or Company) and its subsidiaries (hereinafter together referred to as the Group) are provision of services for transmission and distribution of electricity for power grids, as well as the provision of services for technological connection of consumers to the network.

The parent company is PJSC “Russian Grids”.

(b) Business environment

The Group’s operations are located in the Russian Federation.

Russia continues to implement economic reforms and develop legal, tax and administrative infrastructure that would meet the requirements of a market economy. Stability of the Russian economy in the future will largely depend on success of these reforms, as well as on effectiveness of measures taken by government in economic, financial and monetary policies.

Sanctions imposed on Russia by some countries have a negative impact on the Russian economy. Interest rates in rub. remain high. Combination of these factors led to decrease in the availability of capital and increase in its value, as well as increased uncertainty regarding further economic growth, which could adversely affect the Group’s financial position, results of operations and economic prospects. The management of the Group believes that it is taking appropriate measures to maintain the economic sustainability of the Group in the current environment.

The consolidated financial statements presented reflect management’s views on the impact of business conditions in the Russian Federation on operations and financial position of the Group. Actual impact of future business conditions may differ from their management’s estimates.

(с) Relations with State

The Russian Government, through the Federal Agency for the Management of State Property, is the ultimate controlling party of the Company.

As of December 31, 2018 share owned by the Russian Federation in the authorized capital of PJSC IDGC of Siberia amounted 0.05%, including common voting shares of 0.05%, privileged shares of 0%. As of December 31, 2017 share owned by the Russian Federation in the authorized capital of PJSC IDGC of Siberia amounted 0.05%, including common voting shares of 0.05 %, privileged shares of 0%.

The Russian Government directly affects the Group’s operations through tariffs regulations. In accordance with the Russian legislation, the Group’s tariffs are regulated by executive authorities of the constituent entities of the Russian Federation in the field of state regulation of tariffs. The number of consumers of the Group’s services includes a large number of enterprises under state control.

(а) Application on preparation of IFSR

These consolidated interim condensed financial statements were prepared in accordance with IAS 34 Interim Financial Reporting (IFRS).

Each subsidiary of the Group individually maintains its own books of accounts and prepares its statutory financial statements in accordance with the Russian Accounting Standards (RAS). The Group’s consolidated financial statements are based on the statutory records with adjustments and reclassifications recorded in the consolidated financial statements for the fair presentations in accordance with IFRS.

(b) Base for cost determination

The consolidated financial statements are prepared on the historical cost basis, expect for:

• financial assets at fair value through profit or loss
• financial assets at fair value through other comprehensive income.

(c) Functional and presentation currency

The national currency of the Russian Federation is the Russian rouble (RUB), which is the Group’s functional currency and the currency in which these consolidated financial statements are presented. All financial information presented in RUB has been rounded to the nearest thousand, unless otherwise stated.

(d) Use of estimated and professional judgements

The preparation of consolidated financial statements in conformity with IFRS requires management to make a number of professional judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

The management continuously reviews estimates and assumptions made based on experience and other factors that were used to determine the book value of assets and liabilities. Changes in estimates and assumptions are recognized in the period in which they were taken if the change affects only that period or are recognized in the period to which the change relates and in subsequent periods if the change affects both the given and for future periods.

Professional judgements that have the most significant effect on the amounts recognized in these Consolidated Financial Statements and estimates and assumptions that may require significant adjustment to the carrying amounts of assets and liabilities within the next financial year include:

Impairment of fixed assets

At the end of each reporting period, the Group assesses whether there are any indicators that an asset may be impaired. Such indicators include changes in business plans, tariffs and other factors that may lead to unfavorable conditions for the Group’s activities. When calculating the value of use, management estimates the expected cash flows from the asset or group of cash-generating assets and calculates an acceptable discount rate to calculate the present value of these cash flows. Detailed information is presented in the Note “Property, plant and equipment”.

Impairment of accounts receivable

Allowance for impairment of accounts receivable is based on management assumptions of debt recovery made for each debtor individually. For the goal of allowance for expected credit losses the Group consistently takes into account all reasonable and verified information about past events, current and forecasted events, which is available without undue effort and is relevant to the assessment of receivables. The experience gained in the past based on the date currently available to reflect current conditions that did not have an impact on previous periods and in order to exclude the impact of past conditions that no longer exist.

Pension liabilities

The costs of the defined benefit pension plan and the related costs of the pension program are determined using actuarial calculations. Actuarial estimates provide for the use of assumptions regarding demographic and financial data. Since this program is long-term, there is considerable uncertainty about such estimates.

Deferred tax asset recognition

At each reporting date management assesses the amount of deferred tax assets and determines the amount to be reflected to the extent in which it is likely to be used as tax allowances. When determining future taxable profit and related tax allowances management uses estimates and assumptions based on prior periods’ taxable profit and expectations related to the future profit that are reasonable under the circumstances.

(е) Change in accounting policies

The Group has applied the following new standards since January 1, 2018:

(i) IFRS 15 Revenue from Contracts with Customers

The Group recognizes revenue when (or as) the performance obligation is fulfilled by transferring the promised good or service (i. e. an asset) to customer. Revenue is measured at the transaction price or its part equal to the amount of consideration to which the Group expects to be entitled in exchange for transferring promised assets to a customer, excluding amounts collected on behalf of third parties (for example, net of recoverable taxes).

Trade receivables

Trade receivables shall be a rights of the Group to reimburse which is unconditional (a moment when such compensation becomes payable is conditioned only by passage of time).

Contractual obligations

The contractual obligation is an obligation to transfer goods or services to buyer for which the Group received compensation (or compensation for which is payable) from buyer. If buyer pays compensation before the Group transfers goods or service to the buyer, contractual obligation is recognized at the time payment is made or at the time the payment becomes payable (whichever is earlier). Contractual obligations are recognized as revenue when the Group fulfills its contractual obligations. Contractual obligations are recorded in the line “Advances received” in a composition of long-term and short-term trade and other payables.

Services for Power Transmission and Sale

Revenue from electricity transmission and sale is recognized during the period (accounting month) and is estimated by the output methods (cost of transferred volumes of electric energy). The tariffs for the electricity transmission (in respect to all subjects of the Russian Federation) and sale of electricity and capacity on the regulated market (in respect of constituent entities of the Russian Federation, not united in price zones of the wholesale electricity market) are approved by the executive authorities of subjects of the Russian Federation in the field of state regulation of tariffs (hereinafter – regional authority) within the limit minimum and (or) maximum levels approved by the Federal Antimonopoly Service.

Services for Technological Connection

Revenue recognition from this type of services is performed at the beginning of electricity supply and connection of the consumer to the power grid on the basis of the act on technological connection.

Payment for technological connection for an individual project, the standardized tariff rates, the rates for unit of maximum capacity and the form of payment for technological connection are approved by the regional energy commission (the department of prices and tariffs of the corresponding region) and do not depend on the proceeds from the provision of electricity transmission services. Payment for technological connection to the unified national electric network is approved by the Federal Antimonopoly Service.

The Group applied judgment that technological connection is a separate performance obligation that is recognized when the related services are provided. The technological connection agreement does not contain any further obligations after the provision of the connection service. According to the established practice and laws governing the electricity market, technological connection and transmission of electricity are subject to separate negotiations with different consumers as different services with different commercial purposes without connection in pricing, intentions, recognition or types of services.

Other services

Revenue from installation, repair and maintenance services and other sales is recognized when the customer receives control of the asset.

In accordance with IFRS 15 transition requirements, the Group has chosen to apply the standard retrospectively with the recognition of the cumulative effect of the initial application as part of the retained earnings opening balance as at January 1, 2018. The application of this standard had no a material impact on the Group’s consolidated interim condensed financial statements, respectively, the opening balance of the retained earnings as at January 1, 2018 was not adjusted.

In result of simplification of a practical character provided by IFRS 15, the Group does not adjust the promised sum taking into account influence of a significant component of financing, should as of the moment of agreement making the Group expect that the period between transfer of the goods or service and payment for such goods or service shall not exceed one year.

(ii) IFRS 9 Financial instruments

The standard introduces new requirements for classification and measurement of financial instruments, impairment and hedge accounting. As the Group does not apply hedge accounting, the main changes relevant to the Group impacted its accounting policies for classification of financial instruments and impairment of financial assets.

According to IFRS 9, the financial assets are classified in the following measurement categories: those to be measured subsequently at amortized cost, those to be measured at fair value through profit or loss, and those to be measured at fair value through other comprehensive income. The classification depends on the Group’s business model for managing the financial assets and the contractual terms of the cash flows.

Financial assets are classified as at amortized cost only if both of the following criteria are met: the asset is held within a business model with the objective of collecting the contractual cash flows, and the contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal outstanding.

In respect of impairment, IFRS 9 replaced the incurred loss model used in IAS 39 Financial instruments: Recognition and Measurement with a new expected credit loss (ECL’) model that requires a timely recognition of expected credit losses. An allowance for expected credit losses shall be recorded for financial assets classified as at amortized cost.

According to IFRS 9, reserves under depreciation are evaluated or on the grounds of 12-month's Under IFRS 9, loss allowances are measured on either of the following bases: 12-month ECLs that result from possible default events within the 12 months after the reporting date; and lifetime ECLs that result from all possible default events over the expected life of a financial instrument. For trade receivables the Group measures loss allowances applying a simplified approach at an amount equal to lifetime ECLs. For other financial assets classified as at amortized cost loss allowances are measured as 12-month ECLs unless there has been a significant increase in credit risk since origination, in which case the allowance is based on the lifetime ECLs.

In accordance with the transition provisions in IFRS 9, the Group applied the new rules retrospectively, except for the items that have already been derecognized at the date of initial application, which is January 1, 2018. The Group also used an exemption in IFRS 9 allowing not to restate prior periods presented as a result of adoption of the new classification and measurement requirements, but rather recognize any differences in the opening retained earnings as at January 1, 2018. The initial application of the standard did not result in any material changes in the financial Instruments measurement.

On January 1, 2018 (the date of the initial application of IFRS 9 Financial Instruments), The Group assessed the business models it uses to manage financial assets and classified the financial instruments held at that date onto appropriate IFRS 9 measurement categories. The main effects of the classification were the following.

Classification and estimation of financial instruments as of January 1, 2018 did not influence capital of the Group.

(f) Change in presentation

Reclassification

Certain amounts of the previous year have been adjusted to conform to the current year disclosures.

(g) Application of new and revised standards and interpretations

Except for changes in accounting policies described in Note 2 (e), the following amendments to standards and interpretations effective from January 1, 2018 did not have an impact on these consolidated interim condensed financial statements:

• Classification and Measurement of Share-based Payment Transactions (Amendments to IFRS 2)
• Transfers of Investment Property (Amendments to IAS 40)
• IFRIC 22 Foreign Currency Transactions and Advance Consideration
• Investments in Associates and Joint Ventures (Amendments to IAS 28)
• Application of IFRS 9 Financial Instruments together with IFRS 4 Insurance Contracts (Amendments to IFRS 4)

The following new standards and interpretations have been issued and become effective for annual periods beginning on or after January 1, 2019 and have not been early adopter by the Group.

IFRS 16 “Leases”

The IFRS 16 “Leases” was issued in January 2016 and it replaces IAS 17 Leases, IFRIC 4 Determining whether an Arrangement Contains a Lease, SIC-15 Operating Leases Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model similar to the accounting for finance leases under IAS 17. The standard includes two recognition exemptions for lessees leases of ‘low-value’ assets (e.g., personal computers) and short-term leases (i. e., leases with a lease term of 12 months or less). The Group intends to apply both exemptions.

At the commencement date of a lease, a lessee will recognize a liability to make lease payments (i. e., the lease liability) and an asset representing the right to use the underlying asset during the lease term (i. e., the right-of-use asset). The Group will be required to recognize separately the interest expense on the lease liability and the depreciation expense on the right-of-use asset.

In accordance with the transitional provisions of IFRS 16, the Group chose to apply the new rules retrospectively with cumulative effect of the initial application of the standard recognized as at January 1, 2019, recognizing the lease liability in the present value of the remaining lease payments using the additional interest rate borrowed funds at the date of initial application and the recognition of assets in the form of right of use by a value equal to the lease liability, adjusted for the amount of rental payments made in advance or accrued.

Also the Group plans to use allowed practical simplifications and not apply the new standards to lease agreements that expire within twelve months from the date of transaction.

The main objects of the Group’s lease are electric grid facilities (electricity transmission networks equipment for electricity transmission, etc.) and land. Land lease agreements were concluded in previous periods in respect of the plots on which their own electricity transmission networks, equipment for electricity transmission and other assets of the Group are located. In addition, the Group leases non-residential real estate and vehicles.

The Group is in the process of recalculating the effects of applying IFRS 16 and expects that the effect of applying IFRS 16 may have the following impact on the Group’s assets and liabilities:

Depreciation of assets and liabilities as of January 1, 2019 is not expected.

In March 2018, the IASB issued a new edition of the Conceptual Framework for Financial Reporting. The new edition comes into force for mandatory application, starting from annual periods after January 1, 2020. At present, the Group is analyzing the impact of the new edition on the consolidated financial statements.

The following standards, amendments to standards and explanations are not expected to have a significant impact on the Group’s consolidated financial statements:

• IFRIC 23 Uncertainty over Income Tax Treatments
• Amendments to IFRS 9 Early repayment terms with potential negative reimbursement
• Business Combinations (Amendments to IFRS 3)
• Joint Arrangements (Amendments to IFRS 11)
• Income Taxes (Amendments to IAS 12)-Tax consequences of payments for Financial Instruments classified as Equity
• Borrowing Costs (Amendments to IAS 23)
• Long-term investments in associates and joint ventures (Amendments to IAS 28)
• Making changes to a program, reducing a program, or paying off program commitments (Amendments to IAS 19)
• IFRS 17 Insurance Contracts
• Amendments to IFRS IO IAS 28 “Sale or contribution of assets in transactions between an investor and its associate or joint venture”

The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, with the exception of changes in accounting policies disclosed in Note 2 (d) and related to commencement from January 1, 2018 IFRS 15 “Revenue from Contracts with customers” and IFRS 9 “Financial Instruments”.

(a) Basis of consolidation

(i) Subsidiaries

Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to risks connected to variable returns from its involvement with the entity or has the right to those returns and has the ability to affect those returns through its power over the entity the Financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.

The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Group. Losses attributable to the non-controlling interests in a subsidiary are allocated to non-controlling interests, even if doing so causes the non-controlling interests to have a deficit balance.

(ii) Business combinations

The Group measures goodwill at the acquisition date as:

1. The fair value of the consideration transferred; plus
2. The recognized amount of any non-controlling interests in the acquire; plus
3. The fair value of the pre-existing equity interest in the acquire if the business combination is achieved in stages; less
4. The net recognized amount (generally fair value) of the identifiable assets acquired and liabilities assumed.

When the excess is negative, a bargain purchase gain is recognized immediately in profit or loss.

The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognized in profit or loss for the period.

Transaction costs that the Group incurs in connection with a business combination, other than those associated with the issue of debt or equity securities, are expensed as incurred.

Any contingent consideration payable is recognized at fair value at the acquisition date. If the contingent consideration is classified as equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes in the fair value of the contingent consideration are recognized in profit or loss for the period.

(iii) Accounting for acquisitions of non-controlling interests

Acquisitions of non-controlling interests are accounted for as transactions with owners in their capacity as owners, and there for no goodwill is recognized as a result. Adjustments to non-controlling interests are based on a proportionate amount of the net assets of the subsidiary.

(iv) Acquisitions from entities under common control

Business combinations arising from transfers of interests in entitles that are under the control of the shareholder that controls the Group are accounted for by the method of the predecessor. The acquired assets and liabilities are recognized at the carrying amounts recognized previously in the consolidated financial statements of the acquired entities. Any cash or other contribution paid for the acquisition is recognized directly in equity.

(v) Investments in associates (equity accounted investees)

Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies.

Investments in associates are accounted for using the equity method and are recognized initially at cost. The cost of the investment also includes transaction cost. The consolidated financial statements include the Group’s share of the profit or loss and other comprehensive income of equity accounted investees, after adjustments to align the accounting policies with those of the Group, from the date that significant influence commences until the date that significant influence ceases. When the Group’s share of losses exceeds its interest in an equity accounted investee, the carrying amount of that interest (including any long-term investments) is reduced to nil and the recognition of further losses is discontinued, except to the extent that the Group has an obligation or has made payments on behalf of the investee.

(vi) Transactions eliminated on consolidation

Intra-group balances and transactions, and any unrealized income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealized gains arising from transactions with equity accounted investees are eliminated against the investment to the extent of the Group’s interest in the investee. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment.

(b) Authorized capital

Ordinary shares and non-redeemable preference shares are both classified as equity.

(c) Property. plant and equipment

(i) Recognition and measurement

Items of property, plant and equipment are measured at cost less accumulated depreciation and impairment losses. The deemed cost of property, plant and equipment as at January 1, 2007, the date of transition to IFRS, was determined by using its fair value (deemed cost) at that date.

Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self constructed (built) assets includes the cost of materials and direct labor, any other costs directly attributable to bringing the asset to a working condition for its intended use, and the costs of dismantling and removing the items and restoring the site on which they are located and capitalized borrowing costs. Purchased software that is integral to the functionality of the related equipment is capitalized as part of that equipment.

If significant parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment.

The gain or loss on disposal of an item of property, plant and equipment is determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment, and is recognized net in the item Net other income, within the profit or loss for the period.

(ii) Subsequent expenses

The cost of replacing part (major component) of an item of property, plant and equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably. The carrying amount of the replaced part is derecognized. The costs of the day-to-day servicing of property, plant and equipment are recognized in the statement of profit or loss and other comprehensive income as incurred.

(iii) Depreciation

Depreciation is recognized in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Leased assets are depreciated over the shorter of the lease term and their useful lives, unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. Land is not depreciated.

The estimated useful lives of property, plant and equipment for the current and comparative periods are as follows.

• Buildings 1-99 years
• Power Transmission Lines 1-91 years
• Power Transmission Equipment 1-91 years
• Other assets 1-97 years

Estimated useful lives and residual values are reviewed at each reporting date and adjusted if appropriate.

(d) Intangible assets

(i) Goodwill

Goodwill (negative goodwill) arises on the acquisition of subsidiaries, associates, and joint ventures. Evaluation of goodwill at initial recognition in described at Note Business Combination Transactions.

Subsequent evaluation

Goodwill is measured at cost less accumulated impairment losses. With respect to associates, the carrying amount of goodwill is included in the carrying amount of the investment, and an impairment loss on such an investment is not allocated to any asset, including goodwill, that forms part of the carrying amount of the equity-accounted investee.

(ii) Other intangible assets

Other intangible assets that are acquired by the Group, which have finite useful lives, are measured at cost less accumulated amortization and accumulated impairment losses.

(iii) Subsequent expenditure

Subsequent expenditure is capitalized only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is recognized in profit or loss as incurred.

(iv) Amortization

Amortization expense on intangible assets, other than goodwill is recognized in profit or loss on a straight line basis over the estimated useful lives of intangible assets from the date that they are available for use, since this most closely reflects the expected pattern of consumption of future economic benefits embodied in the asset. The estimated useful lives of intangible assets for the current and comparative period are as follows.

Software 5-19 years

Amortization methods, useful lives and residual values are reviewed at each financial year end and adjusted if appropriate.

(e) Leased assets

Leases in terms of which the Group assumes substantially all the risks and rewards of ownership are classified as financial leases. Upon initial recognition, the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum (discounted) lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset.

Other leases are operating leases and the leased assets are not recognized in the consolidated statement of the Group’s financial position.

(f) Inventories

Inventories are measured at the lower of the cost or net realizable value. The cost of inventories is determined on the weighted average cost method, and includes expenditure incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing location and condition.

Net realizable value is the estimated selling price in the ordinary course of business of the Group, less the estimated costs of completion and selling expenses.

(g) Advances issued

Advances given are classified as non-current if they are connected with the acquisition of an asset which will be classified as non-current upon initial recognition. Advances given for the acquisition of an asset are included in its carrying amount upon the acquisition of control over the asset, and when it is probable that the Group will obtain economic benefit from its usage.

(h) Vale added tax

Output value-added tax (VAT) related to sales is payable to the tax authorities on the earlier of (a) collection of receivables from customers or (b) delivery of goods or services to customers. Input VAT is generally recoverable against output VAT upon receipt of the VAT invoice. Amounts of VAT related to advances received and given as well as VAT prepayment are recognized in the consolidated statement of financial position on a net basis and disclosed as an asset within accounts receivable (VAT recoverable). Amounts of VAT to be paid to the tax authorities are presented separately within short-term accounts payable. Where a provision has been made for the impairment of receivables, impairment loss is recorded for the gross amount of the debtor, including VAT.

(i) Impairment of assets

(i) Financial assets

Allowance for expected credit losses on a financial instrument is estimated at each reporting date in an amount equal to the expected credit losses over the entire term, if the credit risk of this financial instrument has increased significantly since the moment of initial recognition, taking into account all reasonable and corroborated information, including forward-looking. For receivables, allowance for expected credit losses is always estimated at an amount equal to the lifetime expected credit losses.

As indicators of a significant increase in credit risk, the Group considers actual or expected difficulties of the issuer or debtor on the asset, actual or expected violation of the terms of the contract, expected revision of the terms of the contract due to the financial difficulties of the debtor under unfavorable conditions for the Group circumstances. Based on the usual practice of credit risk management, the Group defines default as the counterparty’s inability to fulfill its obligations (including repayment of funds under the contract) due to a significant deterioration in its financial position.

The impairment loss on a financial asset is reflected by recognizing an allowance for impairment. For a financial asset carried at amortized cost, the amount of the impairment loss is calculated as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the original effective interest rate.

If in subsequent periods the credit risk of the financial asset decreases as a result of an event that occurred after the loss was recognized, the previously recognized impairment loss is reversed by reducing the corresponding estimated reserve. As a result of the restoration, the carrying amount of the asset should not exceed its value, at which it would be reflected in the statement of financial position if the impairment loss was not recognized.

(ii) Non-financial assets

The carrying amount of the Group’s non-financial assets, other than inventories and deferred tax assets are reviewed at each reporting date then the asset’s recoverable amount is estimated. For goodwill and intangible assets that have indefinite lives or that are not yet available for use, the recoverable amount is estimated at each reporting date. An impairment loss is recognized if the carrying amount of an asset or its related cash generating unit (CGU) exceeds its recoverable amount.

The recoverable amount of an asset or cash-generating unit (CGU) is presented as the greater of its two values: value in use of the asset (this unit) and its fair value less cost to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset to CGU, For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of CGU. The goodwill acquired in a business combination, for the purpose of impairment testing, is allocated to cash-generating units which it related to.

The Group’s corporate (general) assets do not generate separate cash inflows and are utilized by more than one CGU. Costs of corporate assets are allocated to CGUs on a reasonable and consistent basis and tested for impairment as part of the testing of the CGU to which the corporate asset is allocated.

Impairment losses are recognized in profit or loss. Impairment losses recognized with respect to cash generating units are allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to reduce the carrying amount of other assets in the CGU (group of CGU) on a pro rata basis.

An impairment loss with respect to goodwill is not reversed. With respect to other assets, impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined (net of depreciation or amortization) if no impairment loss had been recognized.

(j) Employee remuneration

(i) Defined contribution plans

A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate (independent) entity and will have no further (legal or constructive) obligation to pay further amounts. Obligations for contributions to defined contribution pension plans, including Russia’s State Pension Fund, are recognized as an employee benefit expense in profit or loss in the periods during which services are rendered by employees. Prepaid contributions are recognized as an asset to the extent that a cash refund or a reduction in future payments is available.

(ii) Defined benefit plan

The defined benefit program is a program for the payment of employee benefits at the end of an employment relationship with them, different from the defined benefit program. The liability recognized in the consolidated statement of financial position in respect of defined benefit pension schemes is the discounted liability at the reporting date.

The discount rate is the yield at the reporting date on government bonds that have maturity dates approximating the terms of the Group’s obligations and that are denominated in the same currency in which the benefits are expected to be paid. The calculation is performed annually by a qualified actuary using the projected unit credit method.

Remeasurements of the net defined benefit liability, which comprise actuarial gains and losses and the effect of the asset ceiling (if any, excluding interest), are recognized immediately in other comprehensive income. The Group determines the net interest expense on the net defined benefit liability for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the then-net defined benefit liability, taking into account any changes in the net defined benefit liability during the period as a result of contributions and benefit payments. Net interest expense and other expenses related to defined benefit plans are recognized in profit or loss. Actuarial gains and losses arising from changes in actuarial assumptions are recognized in other comprehensive income/expense.

When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss on curtailment is recognized immediately in profit or loss. The Group recognizes gains and losses on the settlement of a defined benefit plan when the settlement occurs.

(iii) Other non-current employee benefits

The Group’s net obligation with respect to long-term employee benefits other than pension plans is the amount of future benefit that employees have earned in return for their service in the current and prior periods. That benefit is discounted to determine its present value. The discount rate is the yield at the reporting date on government bonds that have maturity dates approximating the terms of the Group’s obligations and that are denominated in the same currency in which the benefits are expected to be paid. The calculation is made using projected unit credit method.

(iv) Short-term benefits

Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided.

A liability is recognized for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably and it is highly probable that there will be an outflow of economic benefits.

(k) Provisions

A provision is recognized if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it its probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognized as finance cost.

(l) State subsidies

State subsidies are recognized where there is reasonable assurance that the grant will be received and all attached conditions will be complied with. When the grant relates to an expense item, it is recognized as income on a systematic basis over the periods that the related costs, for which it is intended to compensate, are expensed. When the grant related to an asset, it is recognized as income in equal amounts over the expected useful life of the related asset.

State subsidies that compensate the Group for low electricity tariffs (lost income) are recognized in the consolidated statement of profit or loss and other comprehensive income in the same periods in which the respective revenue is earned.

(m) Other expenses

(i) Lease payments

Payments made under operating leases are recognized in profit or loss on a straight-line basis over the term of the lease. The amount of lease incentives received reduces the total lease expenses over the term of the lease.

Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.

Determining whether an arrangement contains a lease

At the inception of an arrangement, The Group determines whether such an arrangement is or contains indicators of a lease. A specific asset is the subject of a lease if fulfilment of the arrangement is dependent on the use of that specified asset. An arrangement conveys the right to use the asset if the arrangement conveys to the Group the right to control the use of the underlying asset.

At inception or upon reassessment of the arrangement, the Group separates payments and other considerations required by such an arrangement into those for the lease and those for other elements proportionately to their fair values. If the Group concludes for a finance lease that it is impracticable to separate the payments reliably, then as asset and a liability are recognized at an amount equal to the fair value of the underlying asset contract. Subsequently the liability is reduced as payments are made and an imputed finance expense is recognized.

(ii) Social expenditure

To the extent that the Group’s contributions to social programs benefit the community at large and are not restricted to the Group’s employees, they are recognized in profit or loss as incurred. The Group costs related to the financing of social programs, without making a commitment with respect to such financing in the future date are recognized in consolidated statement of profit or loss and other comprehensive income as they arise.

(n) Financial income and expenses

Finance income comprises interest income on funds invested (including available-for-sale financial assets), dividends income, gains on the disposal of available-for-sale financial assets, discounts on financial instruments, and foreign currency gains. Interest income is recognized as it accrues in profit or loss, using the effective interest method. Dividend income is recognized in profit or loss on the date that the Group’s right to receive payment is established.

Finance costs are comprised of interest expense on borrowings, financial leasing, foreign currency losses, discounts on financial instruments and impairment losses recognized on financial assets other than trade receivables. Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognized in profit or loss using the effective interest method.

(o) Income tax expense

Income tax expense is comprised of current and deferred tax. It is recognized in profit or loss for the period, except to the extent that it relates to a business combination, or items recognized in other comprehensive income or directly in equity.

Current income tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable with respect to previous years.

Deferred tax is recognized with respect to temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for:

Temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination, and that affects neither accounting nor taxable profit or loss

Temporary differences relating to investments in subsidiaries and associates to the extent that the Group is able to control the timing of the reversal of the temporary differences and it is probable that they will not reverse in the foreseeable future

Taxable temporary differences arising on the initial recognition of goodwill

The measurement of deferred tax reflects the tax consequences that would follow the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

Deferred tax is measured at the tax rate that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.

In determining the amount of current and deferred tax, the Group takes into account the impact of uncertain tax positions and whether additional taxes, penalties and late-payment interest may be due. The Group accrues tax liabilities for open tax years based on its assessment of many factors, including interpretations of tax law and prior experience. This assessment relies on estimates and assumptions, and may involve a series of judgments about future events. New information may become available that causes the Group to change its judgment regarding the adequacy of existing tax liabilities; such changes to tax liabilities will impact the tax expense in the period that such a determination is made.

Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax assets and liabilities, and they relate to income tax levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.

A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which temporary difference can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

(p) Earnings per share

The Group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period. Profit attributable to ordinary shareholders is calculated by adjusting profit attributable to owners of the Company by profit attributable to holders of preference shares.

A number of the Group’s accounting policies and disclosures require the measurement of fair value for both financial and non-financial assets and liabilities.

When measuring the fair value of an asset or liability, the Group uses observable market data as much as possible. Fair values are categorized into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows:

Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i. e. as prices) or indirectly (i. e. derived from prices).

Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

If the inputs used to measure the fair value of an asset or a liability might be categorized in different levels of the fair value hierarchy, then the fair value measurement is categorized in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement.

The Group recognizes transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred.

The Management Board of PJSC IDGC of Siberia is the supreme body that makes decisions on operating activities.

The primary activities of the Group are provision of services for transmission and distribution of electricity for power grids, as well as the provision of services for technological connection of consumers to the network, as well as the sale of electricity to the end consumer in a number of regions of the Russian Federation.

The internal management system is based on segments (branches formed on a territorial basis) related to transmission and distribution of electricity, technological connection to electric grids and electricity sales to the end user in a number of regions of the Russian Federation.

Revenue indicators and EBITDA are used to reflect the performance of each reportable segment, since they are included in internal management reporting prepared on the basis of RAS reporting data and are regularly analyzed and evaluated by the Management Board. EBITDA is calculated as profit or loss before interest expenses, taxation and depreciation. The Management Board believes, that these indicators are most relevant when assessing the performance of certain segments in relation to other segments and other companies that operate in these industries.

In accordance with the requirements of IFRS 8 the following reportable segments were identified based on segment revenue, EBITDA and the total amount of assets submitted to the Management Board:

Altayenergo branch, Buryatenergo branch, Gorno-Altayskiye Power Grids, Kuzbassenergo REG, Krasnoyarskenergo, Omskenergo, Khakasenergo, Chitaenergo, Tyvaenergo;

other segments.

Unallocated indicators include general indicators of Company’s executive body that is not an operating segment in compliance with requirements of IFRS 8.

Segment indicators are based on management information which is prepared on the basis of RAS financial statements and may differ those presented in the financial statements prepared in accordance with IFRS. The reconciliation of the indicators in the evaluation to the Management Board and similar indicators in these consolidated financial statements includes those reclassifications and adjustments that are necessary for reporting in accordance with IFRS.

(a) Information about segments

As of December 31, 2018 and for a year that ended on December 31, 2018:

As of December 31, 2017 and for a year that ended on December 31, 2017:

(b) The reconciliation of key segment items measured as reported to the Management Group with similar items in these consolidated financial statements

The reconciliation of segment revenue:

The reconciliation of reportable segment EBITDA

The reconciliation of reportable segment total assets is presented below.

The reconciliation of reportable segment total liabilities is presented below.

(c) Major customer

The Group operates in the Russian Federation. The Group does not receive revenues from foreign customer and does not have non-current assets abroad.

For the year ended December 31, 2018 and December 31, 2017, the Group had a few counterparties, each of which accounted for more than 10% of the Group’s total revenue.

Total revenue received from PJSC Krasnoyarskenergosbyt for 2018 amounted 9,019,045 thsd rub., or 15.8% from total revenue of the Group (in 2017 8,269,648 thsd rub., or 15.4%). Revenue received from contractor is reflected in statements of operating segment of Krasnoyarskenergo.

Total revenue received from JSC Chitaenergosbyt for 2018 amounted 6 760 512 thsd rub., or 11,8% from total revenue of the Group (in 2017 – 6,648,141 thsd rub., or 12.4%). Revenue received from the specified contractor is represented in statements of operating segments: Chitaenergo, Buryatenergo.

Total revenue received from LLC Rusenergosbyt for 2018 amounted 6,229,771 thsd rub., or 10.9% form total revenue of the Group (in 2017 – 5,775,310 thsd rub., or 10.8%). Revenue received from the specified contractor is represented in statements of operating segments: Altayenergo, Buryatenergo, Gorno-Altayskiye Power Grids, Kuzbassenergo REG, Omskenergo, Khakasenergo, Chitaenergo.

There were no contributions to the defined contribution plan for the year ended December 31, 2018 and for the year that ended on December 31, 2017.

Remuneration to key management personnel is disclosed in the Note Related Parties.

In a year ended December 31, 2018, PJSC IDGC of Siberia in accordance with provisions of Art. 54 of the Tax Code of the Russian Federation recalculated tax base and amount of income tax for 2015, including recalculation in connection with settlement of disputes with counterparties for the main type of activity at court and pre-trial procedure. As a result of tax base recalculation and submission of revised tax return to tax authorities, the amount of income tax excessively assessed for the tax period 2015 amounted to 165,512 thsd rub. (the revised tax declaration for 2015 states a loss in the amount of 16,833 thsd rub., which, after the completion of tax audit, can be credited to reduction of the tax base of subsequent tax periods).

Income tax recognized in other comprehensive income

In 2018 and 2017 PJSC IDGC of Siberia and its subsidiaries applied the standard rate of corporate profit tax of 20%. This rate has been used in the calculation of deferred tax assets and liabilities.

The profit before taxation is correlated to income tax expenses as follows.

As at December 31, 2018 advance payments for property, plant and equipment include in construction in progress in the amount of 157,036 thsd rub. (December 31, 2017: 332,943 thsd rub.), also materials for the construction of property, plant and equipment in the amount of 340,841 thsd rub. (as of December 31, 2017: 434,977 thsd rub.).

For a year that ended on December 31, 2018 capitalized interest amount is 489,824 thsd rub. (December 31, 2017: 380,058 thsd rub.), capitalization rate used to determine the amount of borrowing costs to be capitalized was 8.20% (December 31, 2017: 10.25%).

Depreciation charges were capitalized in the value of capital construction in the amount of 55,289 thsd rub. (December 31, 2017: 46,430 thsd rub.).

No fixed assets are pledged as collateral for loans and borrowings as of December 31, 2018 and December 31, 2017.

Leased property, plant and equipment

Property, plant and equipment includes a number of facilities received under finance lease.

Impairment property, plant and equipment

As the indicators of impairment were revealed, the Group performed an impairment test of the non-current assets as at December 31, 2018. For this purposes, cash flows were analyzed and the calculated replacement cost was compared to the carrying amount of non-current assets.

The majority of the Group’s property, plant and equipment is specialized in nature and is rarely sold on the open market other than as part of a continuing business. The market for similar property, plant and equipment is not active in the Russian Federation and does not provide a sufficient number of sales transactions for use of a market-based approach for determination of the fair value.

Therefore, the values in use for property, plant and equipment as at December 31, 2018 were determined using projected cash flows method. This method considers the future net cash flows expected to be generated through the usage of property, plant and equipment in the process of operating activities up to its ultimate disposal to determine the recoverable amount of the assets of the Group.

Each cash-generating unit (CGU) is determined by the Group based on the geographical location of the Company’s branches and subsidiaries which is the smallest identifiable group of assets that generates cash inflows that are independent of the cash inflows from other groups of assets.

The following key assumptions were used in determining the recoverable amounts of each of the cash-generating units:

Forecast cash flows were prepared for the period 2019-2023 for all the CGU and were based on the best estimate of the Group’s Management in respect of the transmission volumes, operating and capital expenditures and tariffs approved by regulatory bodies for 2019.

Tariffs for electricity transmission services for forecasted period were estimated using business plans, which were based on the tariff models prepared taking into account annual average growth of tariffs for electricity transmission services in accordance with The socio-economic development of the Russian Federation until 2024 (base option) before October 1, 2018. Tariffs growth rates in 2019-2023 are restricted by inflation rates according to Ministry of Economic Development of the Russian at the rate of 4%.

Forecasted electricity transmission volumes for all CGU were determined based on the Company’s business plans for 2019-2023.

The cash flow forecasts were discounted to their present value at the nominal weighted average cost of capital of 10.00%.

Long-term growth rate amounted to 4.00% for all CGUs in the post-forecasted period 4%.

Following the results of testing as of December 31, 2018 a loss from impairment was recognized in the amount of 3,380,827 thsd rub., including loss for CGU of Altayenergo of 2,660,465 thsd rub., for CGU of Gorno-Altayskiye Power Grids of 720,362 thsd rub.

As of December 31, 2018 loss from impairment recognized in previous report periods in the amount of 2,437,989 thsd rub., including CGU of Buryatenergo of 1,157,163 thsd rub., CGU of Kuzbassenergo – REG in the amount of 44,700 thsd rub., CGU of Khakasenergo 1, 236,126 thsd rub.

When reducing growth rate in terminal period for 1% impairment amounts to 2,595,102 thsd rub. (including recognition of a loss in the amount of 4,959,434 thsd rub., re-impairment of 2,364,332 thsd rub.).

Amortization of intangible assets included in operating expenses in the consolidated statement of profit or loss and other comprehensive income amounted to 166,658 thsd rub. (for the year ended December 31, 2017 – 162 484 thsd rub.). In 2018, 2017, depreciation was not capitalized in the value of intangible assets.

Intangible assets are amortized on a straight-line basis.

Sum of expenses for research and development, recognized as part of operating expenses for 2018, amounted to 4,604 thsd rub. (2017 – 2,937 thsd rub.).

The amount of capitalized interest for a year that ended on December 31, 2018 was 397 thsd rub. (for the year ended December 31, 2017 – 861 thsd rub.). The capitalization rate for a year that ended on December 31, 2018 was 8.2% (for a year ended on December 31, 2017 it was 8.42%).

Other intangible assets include cost of website developing for JSC Power Service Company of Siberia in the amount of 150 thsd rub. (initial cost) as of December 31, 2018 (as of December 31, 2017 are not present).

Financial assets at fair value which changes are reflected in other comprehensive income as of December 31, 2018 include shares of PJSC Krasnoyarskenergosbyt (available-for sale assets as of December 31, 2017). Fair value of these shares calculated on the basis of market quotation being published amounted 27,382 thsd rub. and 36,851 thsd rub. respectively.

Differences between IFRS and Russian tax legislation lead to temporary differences between the carrying value of certain assets and liabilities for financial reporting targets, on the one hand, and for tax targets on income tax, on the other.

(a) Recognized deferred tax assets and liabilities

Deferred tax and liabilities are attributable to the following items.

(b) Unrecognized deferred tax assets

Deductible temporary differences and tax losses do not have a statute of limitations in current tax legislation. Deferred tax assets in respect of tax losses and temporary differences were not recognized, because number of loss-making companies of the Group have no high probability of future taxable profit against which corresponding temporary differences and tax losses can be realized.

Unrecognized deferred tax assets in the Group as of December 31, 2018 and at December 31, 2017 are missing.

(c) Movement in temporary differences during the year

The Group had no reserves that would have been pledged under credit or other contracts as at December 31, 2018 and December 31, 2017.

For a year that ended on December 31, 2018 3 128 225 thsd rub. were recognized as expenses (December 31, 2017: 2 831 815 thsd rub. in operation expenses under item Other material expenses.

The Group’s exposure to credit and currency risk and impairment losses related to trade and other receivables is disclosed in Note Management of Financial Risks and Capital.

Balance with related parties is disclosed in Transactions with related parties.

Cash equivalents include short-term contribution to bank deposit.

As of December 31, 2018 and December 31, 2017 all cash balance and cash equivalents are nominated in rub.

(a) Authorized capital

(b) Ordinary and privileged shares

According to Company’s Charter:

Shareholders owning ordinary shares of the Company have a right to vote at the General Meeting of Shareholders on all issues, receive dividends declared by the Company, exercise other rights and obligations provided by legislation of the Russian Federation and Company’s Charter.

Shareholders owning preferred shares of the Company are entitled to receive dividends along with shareholders owning ordinary shares of the Company.

Shareholders owning preferred shares of the Company do not have a right to vote at the General Meeting of Shareholders, except for the following issues:

on Company’s reorganization and liquidation;

on applying to Bank of Russia for dismissal of Company’s obligation to disclose or provide information under legislation of the Russian Federation on securities;

on making amendments and additions to Company’s Charter limiting rights of shareholders owning preferred shares. A decision is considered adopted if at least three quarters of shareholders owning voting shares participating in the General Meeting of Shareholders vote for such decision, except for those shareholders who own preferred shares, and three quarters of all shareholders owning preferred shares;

on applying for delisting of preferred shares. A decision is considered adopted if at least three quarters of shareholders owning voting shares participating in the General Meeting of Shareholders vote for such decision, except for those shareholders who own preferred shares, and three quarters of all shareholders owning preferred shares.

Company’s preferred shares are not convertible.

(c) Dividends

Basis for distribution of Company’s profits among shareholders in accordance with legislation of the Russian Federation is net profit according to the financial statements prepared in accordance with the Russia accounting and reporting standards.

Following the results of 2017 it was decided to pay dividends under Company’s common shares in the mount of 369,579 thsd rub., therewith, 363,423 thsd rub. (following the result of 2017) were paid in 2018.

(d) Additional issue of securities

In 2018 Company did not hold additional issues of securities.

(e) Treasury stock

There are no treasury stock.

The calculation of basic earnings per share for the year that ended on December 31, 2018 was based on revenue attributable to owners of common shares for 2018 in the amount of 429,363 thsd rub. (2017: revenue of 2,352,168 thsd rub.) and average-weighted number of common shares in circulation for 2018 – 94,815 mln pcs. (2017: 94,815 mln pcs.).

Company has no dilutive financial instruments.

All balance of loans and borrowings are denominated in rub. as at December 31, 2018 and December 31, 2017.

The Group does not use hedging instruments to manage interest rate risk. Information on the Group’s exposure to interest rate risk is disclosed in Note Financial Risk and Capital Management.

The Group has a defined benefit pension and other long-term defined benefit plans that cover most full-time and retired employees. Defined post-employment benefits consist of several unfunded plans providing for lump-sum payments upon retirement, financial support for current pensioners, death benefits and anniversary benefits.

On October 3, 2018 the President on the Russian Federation signed the Federal Law “On amendments to certain legislative acts of the Russian Federation on the payment and purpose of pensions”. The law comes into force on January 1, 2019 and provides for a gradual increase in the retirement age. The net value of pension obligations as of December 31, 2018 is reflected in the light of the impact of changes in pension legislation.

Amounts of defined benefit obligations recognized in the consolidated statement of financial position are presented below.

Change in the value of assets related to employee benefit obligations:

Assets related to pension plans and defined benefit plans are administrated by JSC Non-State Pension funds of Power Industry. These assets are not the defined benefit plans assets, because according to the conditions of the fund the Group has right to use the contributions paid under defined benefit plans to fund its defined contribution pension plans or transfer to another fund on the Group’s own initiative.

Movements in the present value of defined benefit liabilities:

Expenses recognized in profit or loss for the period:

(Income)/costs recognized in other comprehensive income for the period:

Movements in allowance for remeasurement of employee benefit obligations in other comprehensive income during the year:

The key actuarial assumptions are as follows:

A sensitivity of total employee benefits obligations to changes in the key actuarial assumptions is as follows:

Expected payments under the defined long-term employee benefit plans to employees in 2019 are 58 430 thsd rub., 58 430 thsd rub. thsd under the defined benefit plans, including non-state pension schemes.

The Group’s exposure to liquidity risk related to payables is disclosed in Note capital and Financial Risk Management.

Long-term advances of customers include advance for service of technological connection to electric grids in the amount 46,753 thsd rub. as at December 31, 2018 (as at December 31, 2017: 143,322 thsd rub.).

Provisions relate mainly to legal proceedings and claims against the Group on ordinary activities.

In the normal course of its business the Group is exposed to a variety of financial risks, including but not limited to: market risk (currency risk, interest rate risk and price risk), credit risk and liquidity risk.

This note provides information on the Group’s exposure to each of these risks, examines the goals, policies and procedures for assessing and managing risks and the Group’s capital management system. More detailed quantitative information is disclosed in the relevant sections of these consolidated financial statements.

In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, return capital to shareholders or issue new shares.

(a) Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations.

(i) Trade and other receivables

In order to manage credit risk, The Group uses a prepayment system in relations with customers, whenever possible. As a rule, the prepayment for the technological connection services of customers to the networks is stipulated by the contract. The Group doesn’t require collateral for receivables.

The Group’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. The Group takes appropriate measures for the timely collection of receivables. In order to implement measured to reduce and prevent the growth of accounts receivables, the debt is divided mainly in to current, overdue, doubtful and bad. When monitoring credit risk, buyers are grouped by type of receivables and maturities.

The Group creates an allowance for expected credit losses on trade and other receivables, the estimated value of which is determined based on the model of expected credit losses weighted by the degree of probability of a default and can be adjusted upwards or downwards. To do this, the Group analyzes the creditworthiness of customers, the dynamics of debt repayment, takes into account changes in the terms of payment, the availability of letters of guarantee about debt repayment, the current general economic conditions.

Level of credit risk

The carrying amount of financial assets reflects the Group’s maximum exposure to credit risk. At the balance sheet date the maximum level of credit risk was:

At the balance sheet date the maximum level of credit risk in respect of trade receivables (excluding other receivables) by customer groups was as follows:

Carrying amount of trade receivables attributable to the ten largest debtors of the Group amounted 8 929 851 thsd rub. as of December 31, 2018 (December 31, 2017: 11,100,308 thsd rub.).

Allowance for expected credit losses of trade and other receivables

The aging of trade and other receivables is provided below:

The Group believes that the overdue unimpaired accounts receivables are highly recoverable at the Financial Statement date.

The movement in the allowance for expected credit losses (the allowance for impairment of trade and other receivables in accordance with IAS 39) was as follows.

Offset agreements or similar agreements

The Group may enter into procurement and sales agreements with the same counterparties in the progress of routine business conditions. Respective amounts of receivables and payables do not always meet the criteria for offsetting in the statement of financial position. This is connected with a fact that the Group may not currently have a legally enforceable right to set-off recognized amounts, since a right to set-off may have legal force only when certain events occur. In particular, in accordance with the civil law in Russia an obligation can be settled by offsetting a uniform claim a term of which has come or not specified or determined as of the moment of demand.

The following table represents a carrying value of recognized financial instruments that are a subject of the above agreements.

(b) Liquidity risk

Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due.

Management of liquidity risk involves maintaining sufficient cash and the availability of financial resources by securing credit lines. The Group adheres to a balanced model of financing working capital by using both short-term and long-term sources. Basically temporarily free funds invested in the short-term financial instruments such as Bank deposits.

The Group’s approach to managing liquidity is to ensure, that it will always have sufficient liquidity to meet its liabilities when due, without incurring unacceptable losses or risking damage to the Group’s reputation. This approach is used to analyze payment dates associated with financial assets, and also to forecast cash flows from operating activities.

As of December 31, 2018 amount of free limit for open but unused credit lines of the Group amounted 30,836,398 thsd rub. (17,012,267 thsd rub. as of December 31, 2017). The Group has an opportunity to attract additional financing within appropriate limits, including financing for security of short-term obligations

Information about the contractual maturities of financial liabilities, including estimated interest payments and without influence of netting, is provided below. With respect to the cash flows included in the maturity analysis, it is not expected that they can arise much earlier in time or in significantly different amounts.

(c) Market risk

Market risk is the risk of changes in market prices, such as foreign exchange rates, interest rates, prices of goods and equity prices that will affect the Group’s financial results or the value of its financial instruments owned. The objective of market risk management is to manage and control market risk exposures within acceptable parameters while optimizing the return.

(i) Currency risk

The majority of the Group’s revenues and expenditures, monetary assets and liabilities are denominated in RUB, and as such financial results are insignificantly impacted by changes in exchange rates.

(ii) Interest rate risk

Changes in interest rates mainly affect loans and borrowings, since they change either their fair value (for loans and borrowings with a fixed interest rate) or future cash flows (for loans and borrowings with a floating interest rate). The Group Management does not have a formal policy of determining how much of the Group’s exposure should be to fixed or floating interest rates. However, making a decision about new loans and borrowings, the Management of Group gives priority to loans and borrowings with fixed interest rates and as a result, the Group is exposed to interest rate risk to a limited extent.

As a rule, loan agreements entered into by the Group do not contain and charges for the early repayment of loans on the borrower’s initiative, which facilitates additional flexibility in relation to optimizing interest rates in the current economic environment.

Fair value sensitivity analysis for fixed rate instruments

The Group does not account for any fixed rate financial assets and liabilities at fair value through profit or loss for the period. Therefore, a change in interest rates at the reporting date would not affect profit or loss.

The Group does not have a cash flow from financial instruments with a floating interest rate.

(iii) Other market price risk

Risk of change in price of equity instruments arises in relation to equity securities measured at fair value through other comprehensive income. Management of the Group monitors changes in value of the investment portfolio based on market indices. Significant investments in this portfolio are managed separately, and all decisions on buying and selling are approved by management of the Group.

As of December 31, 2018 financial assets measured through other comprehensive income exposed to a risk of change in price of security amounted 38,775 thsd rub. (December 31, 2017: 35,851,35,851 thsd rub.). If prices of shares were 10% higher (lower) at constant values of all other variables other comprehensive income would increase (decrease) by 3,878 thsd rub.

(d) Fair value and carrying amount

Below is a comparison of the fair and book value of the Group’s financial instruments, excluding those financial instruments whose book value corresponds to their fair value.

During the year ended December 31, 2018, there was no transfer between the levels of the fair value hierarchy.

Reconciliation of the carrying amount of financial assets at fair value through other comprehensive income at the beginning and end of the reporting period is presented in the table below.

(e) Capital management

The main goal of capital management for the Group is to maintain a consistently high level of capital that allows investors, creditors and market participants to remain in trust and ensure sustainable business development in the future.

The Group monitors the dynamics of indicators of the capital structure (borrowed and owned), including the ratio of borrowed funds (the objective limit for the financial lever), calculated on the basis of the date of the accounting statements under RAS. In accordance with credit policy the Groups’ companies must maintain the loan ratio, calculated as the ratio of the total amount of borrowed funds to the total amount of capital at a level no higher than 1.

The Company and its subsidiaries are required to comply with the statutory requirements for adequacy of equity capital, according to which the value of their net assets, determined in accordance with Russian accounting principles, must constantly exceed the amount of the authorized capital.

As of December 31, 2018 indicators of associated company Tyvaenergo did not meet the abovementioned requirements. As of the moment Management of the Group takes measures in order to ensure compliance with all requirements of the legislation as soon as possible. The Management believes that violation of the terms does not significantly influence consolidated financial statements of the Group.

Operating leases

Expenses for operating leases for a year that ended on December 31, 2018 are represented as a part of operating expenses in the amount of 278,604 thsd rub. (for the year that ended on December 31, 2017 – 253,983 thsd rub.).

Payments under operating lease agreements are payable in the following order.

As of December 31, 2018, The Group has outstanding commitments under contract for the purchase and construction of property, plant and equipment items for 9,444,302 thsd rub. inclusive of VAT (as at December 31, 2017: 3,257,324 thsd rub. inclusive of VAT).

(a) Insurance

The Group has unified requirements in respect of the volume of insurance coverage, reliability of insurance companies and about procedures of insurance protection organization. The Group maintains insurance of assets, civil liability and other insurable risks. The main business assets of the Group have insurance coverage in case of damage or loss assets. However, there are risks of negative impact on the operations and the financial position of the Group in the case of damage caused to third parties, and as a result of damage or loss of assets, insurance protection of which is non-existent or not fully implemented.

(b) Taxation contingencies

Russian tax and customs legislation is subject to varying interpretations regarding the operations and activities of the Group. Accordingly, management’s interpretation of tax legislation and its formal documentation can be successfully challenged by the relevant regional or federal authorities. Tax administration in Russia is gradually increasing. In particular, the risk of checking the tax aspect of transactions without obvious economic sense or with counterparties that violate tax laws is increasing. Tax audits may cover the three calendar years preceding the year of the decision on the tax audit. Under certain conditions, earlier periods may also be subject to verification.

New transfer pricing legislation came into force since January 1, 2012, which significantly changed the rules for transfer pricing, bringing them closer to the principles of the organization for economic cooperation and development (OECD), but also to create additional uncertainty in connection with practical application of tax legislation in individual cases.

The practice of applying new rules on transfer pricing by tax authorities and laws is absent, since tax inspections for compliance with new rule of transfer pricing have recently begun. However, it is expected that transactions that are governed by transfer pricing rules will be subject to detailed verification, which could potentially have an impact on these consolidated financial statements.

As the practice of applying taxation rules for property tax, tax authorities and courts can be challenged, the criteria for classifying property as movable or immovable property used by the Group may be challenged. The management of the Group cannot predict the outcome and amount of potential costs to settle potential tax risks.

At December 31, 2018, management believes that the relevant provisions of the law are interpreted correctly, and the position of the Group in terms of compliance with tax, currency and customs legislation can be justified and protected.

(c) Litigations

The Group is a party to a number of litigations (both as a plaintiff and as respondent) arising in the ordinary course of business. In the opinion of Management, there are currently no outstanding claims or other claims that could have a material impact on the Group’s results of operations or financial position and would not be recognized or disclosed in the consolidated financial statements.

(d) Environmental matters

The Group has operated in the electric transmission industry in the Russian Federation for many years. The enforcement of environmental regulations in the Russian Federation continues to evolve, responsibilities of authorized Government bodies to oversee are being reconsidered. Potential environmental liabilities arise from changes in interpretations of existing legislation, lawsuits or changes in legislation can be assessed. In the opinion of management under the existing control system and under current legislation, there are no probable liabilities that could have a material adverse effect on the financial position, results of operations or cash flows of the Group.

(a) Control relationships

Related parties are shareholders, affiliates and entities under common ownership and control of the Group, members of the Board of Directors and key management personnel of the Company. The Company’s parent as ofDecember 31, 2018 and December 31, 2017 was PJSC “Russian Grids”. The final controlling party is the state represented by the Federal Property Management Agency, which owns a controlling stake in PJSC “Russian Grids”.

(b) Transactions with the parent company, its subsidiaries and associates

Transactions with the parent company, its subsidiaries and associates include operations with PJSC “Russian Grids”, its subsidiaries and associates:

The debt to the parent company for the payment of dividends is absent as of December 31, 2018.

(c) Transactions with key management personnel

In order to prepare these consolidated financial statements, the key management personnel are members of the Board of Directors, the management Board, General Directors of subsidiaries and other key management personnel.

The Group has no transactions or balance with key management and close family members, expect for their remuneration in the form of salary and bonuses.

The amounts of remuneration to key management personnel disclosed in the table represent the current period expenses for key management personnel reflected in employee benefits.

As of December 31, 2018 current value of the defined benefit obligation is shown in the consolidated statement of financial position and includes liabilities for key management personnel in the amount of 21,067 thsd rub.(as of December 31, 2017: 58,149 thsd rub.).

(d) Transactions with state-related companies

In the course of its operating activities, the Group is engaged in many transactions with state-controlled entities. These transactions are carried out in accordance with regulated tariffs or based on market prices.

Revenue from state-related companies amount to 7.41% from total revenue of the Group for the year that ended on December 31, 2018 (for the year that ended on December 31, 2017: 42.91%), including 5.68% of revenue from transfer of power (for the year that ended on December 31, 2017: 42.1%).

Power transmission costs (including compensation of technological losses) for state-controlled entities for the year ended December 31, 2018 constitute 82.6% (for the year ended December 31, 2017: 91.9%) of total electricity transmission costs.

Interest accrued for credits and loans from state-related banks for the year that ended on December 31, 2018 amounted 73.16% from total amount of interests (for the year that ended on December 31, 2017 – 100%).

As of December 31, 2018 balance of cash and cash equivalents held with state-controlled banks is 259,012 thsd rub (December 31, 2017 – 799,255 thsd rub.)

As of December 31, 2018 there are no deposits with initial offering period of more than three months place in state-controlled banks.

Loans and borrowings received from state-controlled banks are disclosed in “Credits and loans”.

On January 1, 2019 PJSC IDGC of Siberia and JSC Ulan-Ude Energo made and agreement under which accounts receivable of JSC Ulan-Ude Energo to JSC IDGC of Siberia in the amount of 1,539,036 thsd rub. under power service agreement was setoff as an advance payment under agreements on lease of movable and immovable property made on December 28, 2018 between PJSC IDGC of Siberia and JSC Ulan-Ude Energo.

Other events that could significantly influence Company’s financial positions after December 31, 2018 did not take place.